! ! I 
 
 iiiii
 
 THE LIBRARY 
 
 OF 
 
 THE UNIVERSITY 
 
 OF CALIFORNIA 
 
 LOS ANGELES 
 
 GIFT OF 
 
 Fhili^ D. Suins
 
 THERE ARE SEVERAL TYPOGRAPHICAL 
 ERRORS IN THIS BOOK WHICH WILL 
 NOT OCCUR IN THE NEXT EDITION.
 
 STRANGLE HOLD 
 
 By 
 H. C. CUTTING 
 
 
 1921 
 M. A. DONOHUE & CO. 
 
 CHICAGO
 
 Copyright 
 
 H. C. CUTTING 
 
 1921 
 
 Published April, 1921 
 
 Copyrighted in Great Britain
 
 1^1 
 
 TABLE OF CONTENTS 
 
 CHAPTER PAGE 
 
 I The Bar to Prosperity 1 
 
 II Evolution of Our Exchange System . . 16 
 
 III The Medium of Exchange a Public Utility 31 
 
 IV The Industrial Strait-jacket .... 46 
 
 V "Frozen Credits" 63 
 
 VI A Perfect Exchange System .... 84 
 
 VII 100% Safety and Elasticity .... 101 
 
 VIII Breaking the Strangle Hold . . . . 128 
 
 IX Modern Feudalism 151 
 
 X Interest 163 
 
 XI The Geld Standard 175 
 
 XII Speculation 188 
 
 XIII Rural Credits 198 
 
 XIV The Federal Reserve 214 
 
 XV The Conservative Banker 
 
 and His Reserve Joke 232 
 
 XVI Foreign Exchange 247 
 
 XVII National Efficiency 266 
 
 XVIII Conclusion 275 
 
 Appendix 297 
 
 Index 319 
 
 ^~s«r> r^ -f^ r:< -^
 
 CHAPTER I 
 
 THE BAR TO PROSPERITY 
 
 AVE you ever had a door slammed in your face? 
 If so, surprise was your first emotion, no doubt, 
 then astonishment that such an unexpected thing should 
 happen. This feeling probably gave way to one of 
 anger, of resentment at being so imcivilly treated. 
 Especially would such an occurrence irritate you if the 
 weather were cold and your overcoat were behind the 
 door. 
 
 After a while a question would probably spring up. 
 Who slammed the door? Why was it done.'' There 
 was no one you could think of who might have a reason 
 for closing the door against you. Perhaps it was done 
 unintentionally. Or, perhaps it was the wind that 
 slammed the door. 
 
 Suppose this door were the door to success and pros- 
 perity ! Would it not be interesting to know what closed 
 it and why it was closed.'' And would it not be much 
 more interesting to know how to open it and how to keep 
 it from being closed.'' 
 
 Well that is just what we are talking about — the door 
 to prosperity. And our object is to answer both these 
 questions. First we must see clearly what shuts the door 
 and then we can devise a means for keeping it open. It 
 will be shown that success and prosperity can be made 
 accessible to all at all times.
 
 2 THE STRANGLE HOLD 
 
 Of the several millions of business men who have had 
 occasion to seek a loan from a bank, it is likely that a 
 large majority have had the bank door slammed in 
 their faces at some time or other during their career. 
 
 The time generally comes to most business men when 
 they need more cash; and to get it they naturally go to 
 the logical place — the bank. Perhaps you have been 
 there and offered to put up maybe three or four to one 
 in security for a loan. 
 
 After explaining the plan and showing the security 
 you are fortvmate if you have never received from the 
 banker the following answer: "Your securities are good, 
 and your enterprise is a worthy one. We will admit it 
 is a success and we would like to help you by making 
 this loan, but YOUR SECURITIES ARE NOT 
 BANKABLE." 
 
 If you have received this answer you were perhaps 
 angered and applied at another bank. Probably the 
 same answer was received from the next banker, and the 
 next, although you sought to make the loan more at- 
 tractive each time by increasing the bonus or seciirity 
 offered. 
 
 If you are a merchant or broker, and have never at- 
 tempted to borrow except upon self-liquidating security, 
 you may not have had an experience comparable to this ; 
 but, if you are a manufacturer or producer of any kind 
 — and especially a farmer desirous of extending your 
 enterprise — you wiU certainly recognize the above an- 
 swer as a set formula. 
 
 But it may be that you are not engaged in business 
 and that you have never tried to borrow money from a
 
 THE BAR TO PROSPERITY $ 
 
 bank and that you never expect to. So, you may think, 
 bank loans do not concern you. 
 
 It will soon appear, however, that we are all interested 
 in every bank loan for the bank door is the door td 
 prosperity. 
 
 Real prosperity is not the piling up of wealth by a 
 few, but the giving of the best to the majority with the 
 least effort on the part of the individual — it is the satis- 
 faction of the community's wants as completely as pos- 
 sible at the lowest cost. This needs no argument. 
 
 Now, in the above example where the loan was refused 
 by the banlc, it has been admitted by all that the enter- 
 prise is a good one. The bankers all said: "Your en- 
 terprise is a worthy one." In other words, it is one 
 which would result in more efficient production — in the 
 end it would lead to a more complete satisfaction of 
 society's wants at a lower cost. It would lead to greater 
 prosperity. And the one thing that was still necessary 
 to the success of this enterprise was a loan from the 
 bank. The loan was refused although the security was 
 good. The enterprise could not be carried out because 
 a good security was not bankable. The only conclusion 
 is that the banker acted as a hindrance to prosperity. 
 
 It seems then that something is wrong, and that thi^ 
 something is concerned with the bank. But do not pro- 
 ceed at once to blame everything upon the banker. Re- 
 member, it may have been the wind that slammed the 
 dooi*. 
 
 Let us proceed further, and see if there is anything 
 more to be noted which will show us wh^l'fe the fault is; 
 
 Since the farmer is one of the most ihaportant mero-
 
 4 THE STRANGLE HOLD 
 
 bers of our industrial organization, food being the 
 first of our necessities, and it being the farmer's busi- 
 ness to supply it, let us take his case. 
 
 When the farmer is in need of a loan, and applies for 
 it at tlie bank, what happens ? He is willing to give 
 perfectly good security — a mortgage on his farm. The 
 loan is nevertheless refused, because the security, while 
 good, is not bankable. 
 
 Unable to get the necessary facilities for carrying on 
 business the farmer cannot carry out his projected im- 
 provement, and society suffers from a lesser degree of 
 prosperity thaa would otherwise have been possible. 
 
 An effort was made to assist the farmer through the 
 adoption of the Farm Loan Act in 1916. Without en- 
 tering extensively into this matter, it will be sufficient 
 at this point to say that this act was of some assistance. 
 It provided a cumbersome means by which the farmer 
 could obtain some of the capital necessary for per- 
 manent improvements. But while it did some good, it 
 was at best very deficient. And furthermore, the passing 
 of a special law to give financial relief to the farmer 
 is in itself a confession that the banking system, the 
 ordinary means of supplying credit, is inadequate. 
 
 That the Farm Loan Act did not overcome the in- 
 adequacy of the banking system as regards the farmer 
 is proved by the fact that Congress has recently re- 
 instated the War Financing Corporation. 
 
 This institution was erected during the war for the 
 purpose of financing industry made necessary by war 
 but now it has been rehabilitated as another means of 
 taking care of the farmer's financial needs. It will not
 
 THE BAR TO PROSPERITY 5 
 
 do the work required of it for it cannot reach the "sore 
 spot" as will presently be shown. 
 
 WTien the exporter's troubles began to get on our in- 
 dustrial nerves Congress passed what is known as the 
 Edge Act as an amendment to the Federal Reserve Act. 
 Under this law a large group of bankers is now attempt- 
 ing to form a Foreign Trade Financing Corporation with 
 the hope of reviving our drooping export and shipping 
 business. There is no hesitancy in saying that even if 
 they succeed in putting it together it will not solve the 
 problem. In fact its influence will hardly be noticeable. 
 The reason for this statement will appear in the chapter 
 on "Foreign Exchange." 
 
 All these various acts and the Federal Reserve Act 
 itself, as it stands today, are but patches on a financial 
 system that can be made practically perfect by a small 
 dose of American common sense properly administered. 
 
 What is necessary and how to do it in order to set 
 the wheels of industry humming and restore prosperity 
 will be clearly shown as we progress. 
 
 The case of automobile dealers at the present time is 
 another example that is to the point. The Federal Re- 
 serve bank will rediscount no "automobile paper" except 
 that based on machines used for commercial purposes. 
 All other dealers are, as a result, unable to obtain the 
 facilities to carry on business for the banks will not dis- 
 count paper secured by their stock-in-trade of automo- 
 biles. 
 
 Here is another instance in which our present banking 
 system is not only inadequate but works a very great 
 hardship. It is another instance in which the banks fail
 
 6 THE STRANGLE HOLD 
 
 to supply all the needs of the community which they 
 should satisfy. Automobiles are today a recognized need 
 of the community. The automobile dealer is, therefore, 
 a necessary factor in our commercial organization. But 
 these dealers cannot obtain the commercial facilities 
 they need in order to carry on business. 
 
 The present selling plan for automobiles, where the 
 dealer takes a cash payment of about a third of the price 
 and the balance in notes running from ten to twelve 
 months, was built up through the cooperation of the 
 banks. The banks were glad to discount this paper 
 especially after the automobile dealers had gotten in- 
 surance companies to insure the automobile against theft, 
 fire and embezzlement. 
 
 It took several years and much thought and energy 
 on the part of the automobile trade to build up this 
 selling plan and to educate the public to use it. All the 
 dealers' calculations were based on this selling plan and 
 the factory depended upon it for its funds. 
 
 Unless the banker continues to discount this paper 
 the dealer cannot pay the manufacturer for his goods 
 except he cashes his paper by paying excessive discount 
 to private parties, and the manufacturer is not in a 
 position to wait for payment vmtil the cars are paid for 
 in full by the purchaser. 
 
 Here we have the proper scope for the functions of 
 the bank — to lend money upon good security. The 
 security offered is the stock-in-trade itself — the automo- 
 biles. Such security has proved to be good but the bank 
 will not or cannot carry the paper and the comxmmity 
 puffers.
 
 THE BAR TO PROSPERITY 7 
 
 No one, calling to mind our present industrial tur- 
 moil, business uncertainty, and social unrest, will be dis- 
 posed to doubt that a wrong exists. It also seems quite 
 clear that this wrong is intimately concerned with our 
 banking system. It cannot be denied that there is a 
 flaw in a system which refuses the farmer a loan be- 
 cause his security is one of property. It is also clear 
 that a system which disrupts the second largest business 
 in the country — the automobile trade — ^without warning 
 and with very harmful results is dangerous and ineffi- 
 cient. The present state of our foreign trade and ship- 
 ping business is another glaring example. But before 
 proceeding further in our search of the flaw, let us con- 
 sider the commonly accepted explanation of present bad 
 conditions. 
 
 As usual, laborers are blaming the capitalists, and 
 capitalists the laborers, although neither party is very 
 sure of what the other is, nor why it is responsible for 
 present bad conditions. 
 
 The manufacturers and jobbers are complaining of a 
 "Buyers Strike," the financiers say the trouble is due 
 to "Frozen Credits," the economists tell us "Liquidation" 
 must take place before prosperity returns, and the press 
 says we must get back to "Normalcy." 
 
 These high sounding phrases, at present popular with 
 financial writers, will be explained later but first let us 
 examine what is, or rather was, given as the most popular 
 explanation for bad conditions. 
 
 For a year or so after the close of the war the com- 
 mon disturber of the peace and happiness of the country
 
 8 THE STRANGLE HOLD 
 
 was said to be the "High Cost of Living." Everything 
 that was wrong was due to the "H. C. L." 
 
 This "High Cost of Living" is another catchy phrase. 
 It seems to invite and hold hostility, like the word 
 "witch," or "hobgoblin," and like those words, it has no 
 exact meaning. Another good thing about all such terms 
 is that they do not accuse anyone in particular of 
 wrong-doing, so they are convenient for our statesmen 
 and other economic doctors to use in describing a patho- 
 logic condition of the social organism. 
 
 In the recent campaign against the "High Cost of 
 Living," it became generally accepted that the H. C. L. 
 was the result of a large group of men doing business 
 at a profit, and who consequently were kno^vn as "profi- 
 teers." This group was so large and scattered that it 
 took in a good percentage of the people of the L'nited 
 States. But the politicians had to make a pretence of 
 hurting some of the big fellows, in order to appease the 
 public; so five packers of Chicago were chosen, by com- 
 mon consent, to be the object of Congressional investiga- 
 tion. While this action may not seem entirely fair to 
 the packers, no sympathy need be wasted on them, for 
 they were not greatly hurt. 
 
 In spite of all this campaigning there was no break 
 in the price of commodities. The High Cost of Living 
 remained until the banks decided it was time to "de- 
 flate," that is, shut the door. This action brought down 
 some prices in a hurry and is now bringing down wages 
 so it is not giving general satisfaction. It has also caused 
 business stagnation and unemployment with a decrease 
 in bank clearings and an increase in business failures.
 
 THE BAR TO PROSPERITY 9 
 
 so the lowering of prices has aggravated rather than 
 solved the problem. 
 
 Although no one has a very clear idea of what the 
 term "High Cost of Living" means, everyone will say 
 that it has something to do with high prices. The re- 
 tailer says he has to charge high prices because of high 
 expenses, and because of high prices charged him by the 
 manufacturer. The manufacturer says he has to charge 
 high wholesale prices because of the high wages he has 
 to pay and because of the high cost of raw material and 
 everything else he has to buy. 
 
 In general, then, the social and commercial disturb- 
 ance and unrest is blamed upon high prices, as being 
 the cause of the high cost of living. 
 
 During President Cleveland's second administration, 
 back in the '90s, there was no complaint about high 
 prices. Com was so cheap it was being used as fuel. 
 Eggs could be bought for ten cents per dozen. Clothing 
 and shoes were about one half of their present price. 
 However, there was great business depression and a 
 similar amount and degree of social unrest. At that 
 time conditions were the reverse of what they are now or 
 were recently. When the H. C. L. was the topic of the 
 day wages were high, there was a job for everybody, who 
 wanted one, business was good and high prices prevailed. 
 During Cleveland's time when prices were low, we had 
 starvation wages, unemployment, business failures, soup 
 kitchens, Coxey armies and panic. And as a result, 
 what we recently blamed upon the High Cost of Living, 
 was then blamed upon the Low Cost of Living. 
 
 Just as conditions during the '90s were the reverse of
 
 10 THE STRANGLE HOLD 
 
 what they were when the H. C. L. was the great bugaboo^, 
 so the remedies proposed then were the reverse of those 
 proposed to overcome the H. C. L. 
 
 It will be remembered that !Mr. Bryan made a presi- 
 dential campaign in 1896 on a platform that declared 
 for the free and unlimited coinage of silver at the ratio 
 of sixteen to one. The argument was that the price of 
 wheat followed the price of silver, and as the price of 
 wheat was the barometer of all prices the way to raise 
 prices was to restore the price of silver to $1.29 per 
 ounce. Raising the price of silver would raise the price 
 of wheat correspondingly, and all prices would follow 
 the upward trend. 
 
 In other words, prices then were low, and the remedy 
 proposed was one designed to raise prices. When prices 
 were high, it was almost universally believed that the 
 only efficacious remedy was to lower prices. 
 
 The theory when Bryan ran for president the first 
 time was that a low price for commodities caused low 
 wages and business stagnation, which was an economic 
 calamity to be avoided, and the remedy suggested was 
 to raise prices. 
 
 The theory during the extreme high price period 
 seemed to be that high prices, with their accompanying 
 effects of good wages, plenty of work, profitable business 
 and a high standard of living produced a bad economic 
 condition which should have been remedied by lowering 
 prices through government regulation or by deflation. 
 
 If the H. C. L. were the cause of industrial turmoil 
 our condition now should be most serene for many prices 
 have recently taken a violent fall. This fall in prices.
 
 THE BAR TO PROSPERITY 11 
 
 however, does not seem to be giving satisfaction. The 
 agricultural interests are making continuous efforts to 
 secure credit for the purpose of holding their crops for 
 higher prices. They have pleaded with the banks, the 
 Federal Reserve Board and the President for help. 
 They asked that the war tinje Government financing cor- 
 poration be reinstated to save them from financial ruin. 
 They are now forming marketing associations and the 
 bankers are trying to form foreign trade corporations 
 under the "Edge Act" with the avowed purpose of rais- 
 ing prices. The situation makes the argument that our 
 economic condition is due to prices ridiculous. 
 
 It is illogical to blame at one time the High Cost, and 
 at another the Low Cost of Living, for the same results, 
 and to suggest identically opposite remedies. 
 
 And, as a matter of fact, if we compare our conditions 
 under high prices, with those that existed a few years 
 back under low prices, we are forced to admit that the 
 majority were really better off under high prices than 
 when prices were low. Never was there a time when 
 the majority of the people enjoyed so many comforts 
 and luxuries with so little expenditure of time and 
 effort as they did when prices were the highest. Things 
 which the most humble citizen of today regards as neces- 
 sities were but a few years ago regarded either as the 
 greatest of luxuries, or else were unobtainable. Present 
 living and working conditions are so improved for the 
 majority of the people that it is hard to realize that the 
 old adage: "Man works from sun to sun, but a woman's 
 work is never done" expressed the literal truth as to 
 conditions existing only a short time ago.
 
 12 THE STRANGLE HOLD 
 
 On the other hand, if we compare the prices current 
 today with those current a few years ago, we must admit 
 that they are much higher now. And if we compare 
 them with those of some time ago, we shall see that they 
 have gone up tremendously. 
 
 This condition and the fact that both in the case of 
 the Low Cost of Living and of the High Cost of Living 
 the remedies proposed were concerned with alterations 
 in prices, all point to the same solution. The trouble 
 seems to be in the dollars themselves, and not in the 
 living. If prices remained at a constant level, whether 
 that level were low or high, wages and prices would ad- 
 just themselves. For prices are nothing more than the 
 exchange ratios of all commodities and services, ex- 
 pressed in terms of money. Any disturbance of these 
 ratios leads to a need for readjustment, and it is the 
 friction incident to this readjustment that is the real 
 cause of our troubles. 
 
 Let us see how this works out in regard to conditions 
 we have experienced. 
 
 The war caused a pressing demand for large quanti- 
 ties of various commodities at a time when a great num- 
 ber of men were withdrawn from productive pursuits. 
 The demand for labor increased at a time Avhen the 
 supply of labor had been decreased. This condition 
 caused wages to go up. High wages in "war-industries," 
 drew labor from other industries, thus lessening the 
 supply, and tending to raise wages in these industries 
 too. As a result, there was a twofold tendency to 
 raise prices: in the first place, higher prices had to be 
 charged in order to make it possible to pay the increased
 
 THE BAR TO PROSPERITY 13t 
 
 wages; and in the second place, the workers were able 
 to buy more with their increased wages — their effective 
 demand increased, resulting in better business and higher 
 prices. 
 
 At the same time large quantities of credit were issued 
 in this and in other countries in order to pay for the 
 goods made necessary by the war. The effect of these 
 new issues of credit was to "inflate" the medium of ex- 
 change — there were now more dollars in circulation; in 
 consequence of which the "price of the dollar," that is,^ 
 the amount of other commodities one dollar would ex- 
 change for, decreased. Prices rose. 
 
 The war, therefore, had a twofold effect in raising 
 prices, and the result was consequently doubly great. 
 As a result, there was all the more friction in the at- 
 tempted readjustment, and it is the lack of adjustment; 
 that is the cause of our present troubles. 
 
 If every exchangeable ratio moved simultaneously and 
 to an equal extent — that is, if prices, wages, interest,, 
 profits, and rents rose and fell equally, there would be 
 no such trouble. But they do not; nor is the readjust- 
 ment equal in all branches of our social organization. 
 Those who produced the commodities, and those wha 
 rendered the services which were not directly affected 
 by the demands of war — the public service corporations, 
 landlords, preachers, teachers, actors, and government 
 employees — all were losers by the rise in prices at first 
 because the readjustment of income to expenses was 
 slower in their cases. 
 
 Such are the troubles of inflation of the currency, 
 the troubles of the High Cost of Living. The troublesi
 
 14 THE STRANGLE HOLD 
 
 of the Low Cost of Living are concerned with contrac- 
 tion of the currency. Both inflation and contraction 
 change the purchasing power of money and therefore 
 effect prices. More definitely, they are concerned with 
 the varying price of the dollar — or the changing value 
 of the dollar. The only way to remove these troubles 
 is to make the dollar a constant measurement of value — 
 to have a medium of exchange that can neither be in- 
 flated nor contracted. 
 
 An illustration will make this clear. Suppose the 
 length of a foot-rule were to vary with the supply of and 
 demand for wood. What havoc would be caused in all 
 our dealings ! Luckily a foot is always twelve inches, 
 whatever the price of wood, for it is the same whether 
 measured by a foot-rule of wood, steel, or tape. Simi- 
 larly if a dollar were always the same, whether mea- 
 sured in gold, silver, wheat, or any other commodity, 
 the greatest of our social evils would disappear. 
 
 The problem, then, is not to meddle with the High 
 Cost of Living, nor with the Low Cost of Living, but to 
 remove industrial and social friction by removing their 
 cause. This cause is the varying price of the dollar, 
 and is due to a defect in our monetary system. 
 
 The purpose of this somewhat extensive digression, 
 now becomes clear. In the earlier pages of this chapter 
 it was demorstrated that the fullest development of 
 prosperity was prevented by some flaw in our banking 
 system. In the latter half it has been shown that the 
 great social and industrial vmrest that is continually 
 making itself felt is due to a flaw in our monetary sys- 
 tem. It follows, then, that all these troubles can be
 
 THE BAR TO PROSPERITY 15 
 
 removed by correcting these flaws. The purpose of this 
 book is to show definitely where these flaws are, and to 
 suggest a practical way of removing them. 
 
 It is clear that this task would be simiDlified if it 
 could be shown that both these flaws are really one: 
 that they are results from the same causes, and can be 
 corrected by the same remedy. 
 
 As a matter of fact, this is the case. It is a common 
 belief that banks are largely, if not altogether, con- 
 cerned with money. This idea may require revision, but 
 if it can be proved that the banks are in entire control 
 of the medium of exchange, then it will follow that 
 the flaw in our monetary system is a part of the flaw 
 in our banking sj'stem, and that to correct the latter 
 will correct the former. 
 
 Before showing where the flaw is, therefore, we will 
 see how both faults are inextricably bound up with each 
 other, so that both problems are really one. 
 
 The first step then is to show that the banks have sole 
 control over our medium of exchange — and this will be 
 the purpose of the next chapter.
 
 CHAPTER II 
 EVOLUTION OF OUR EXCHANGE SYSTEM 
 
 BEFORE we go further in our search for a solu- 
 tion of our problem let us by a glance at world 
 conditions today note the need for a solution. 
 
 In Europe we find unemployment and want in prac- 
 tically every country. In Asia want extends to starva- 
 tion for thousands, even millions of people. 
 
 In the United States warehouses are filled with wheat, 
 other food products, cotton, wool, copper and practically 
 everything the rest of the world wants. And yet 
 business lags and labor is unemployed. 
 
 Consider these facts and ask yourself: "What is the 
 trouble?" 
 
 Europe and Asia are suffering from a lack of supply 
 while our business slump is due to a lack of demand. 
 There is plenty of desire for what we have to sell but 
 not much demand. 
 
 The rest of the world want to buy our goods and we 
 want to sell them. Our harbors are filled with ships 
 falling to decay for want of a cargo. Our railroads are 
 seeking to cut wages because of lack of business due to 
 a falling off in freight. 
 
 With our warehouses full, with plenty of transporta- 
 tion facilities, with people all over the world crying, 
 even dying, for what we have for sale, why do we not 
 sell, revive business and bring back prosperity } WHY ? 
 
 16
 
 EVOLUTION OF EXCHANGE SYSTEM 17 
 
 That is the question we must answer. And it must b« 
 a practical common sense answer that can be put into 
 effect, so as to overcome these conditions and bring- 
 peace and prosperity to a troubled world. 
 
 The trouble is plainly in our exchange system. It ha§ 
 broken doAvn. The means by which we carry on busi-. 
 ness, our financial system, is at fault. It is inadequate 
 to facilitate the exchange which makes business possible 
 so the whole world suffers. 
 
 A few cases wherein our present system fails to sup- 
 ply the needs of business such as that of the farmer and 
 others have been pointed out. In this and the following 
 three chapters the reasons for this failure will be shown 
 and in chapters VII and VIII a simple way of over- 
 coming the trouble will be given. 
 
 Now that we recognize that our prosperity and the 
 reconstruction of the world depend on a correct solution 
 of this exchange problem we can proceed. 
 
 As was stated in the last chapter, the next step in 
 solving the problem before us is to show that all the 
 evils resulting from the varying price of the dollar, 
 and all the hindrances to progress resulting from lack 
 of credit facilities are due to some defect in our banking 
 system. Also that both these defects owe their origin 
 to one and the same cause. 
 
 In the one case we saw that the evils were due to a 
 defect in the monetary system, and in the other case to 
 a defect in the banking system. If it can be shown 
 that our circulating medium — our money — is entirely in 
 the control of our bankers, it will follow that the evil" 
 are all due to the same cause.
 
 18 THE STRANGLE HOLD 
 
 In order to do this we must have a clear idea of what 
 our monetary system is, so it will be necessary first to 
 touch upon the more important phases in the history of 
 the development of money. 
 
 Primitive exchange, it is easy to see, proceeded by 
 means of barter. One man would exchange that which 
 he had directly for that which he wanted. But this 
 method had great disadvantages. For instance, one 
 might find that the man who owned that which he de- 
 sired did not wish to exchange it for that which he had 
 to offer. Suppose one man had a bear-skin, which he 
 wished to exchange for food. Another man might have 
 some surplus food, but he might not want a bear-skin. 
 
 And even if he did desire a bear-skin, he might not 
 have enough food to exchange for one. Or the man 
 with the bear-skin might desire only half a bear-skin's 
 worth of food, desiring in addition something else which 
 the other man did not possess. Such an example, crude 
 as it is, serves to indicate some of the great difficulties 
 of barter. 
 
 Sometimes, however, a man would be willing to take 
 in exchange for something he had, some object which 
 he did not want himself, but which he could be sure 
 some one else would want. This was the first step taken 
 in the development of a medium of exchange. For 
 instance, the man would be willing to take the bear-skin 
 in exchange for his food, if he could be practically cer- 
 tain that some one else would want such a skin, and 
 would give in exchange for it something which its pos- 
 sessor wanted more than he wanted the skin. 
 
 Naturally those things which were most in demand
 
 EVOLUTION OF EXCHANGE SYSTEM 19 
 
 came to be accepted most readily. Shells, teeth, and 
 other articles prized for ornamental purposes would 
 pass from hand to hand in exchange for things that were 
 desired more urgently. Even more perishable commodi- 
 ties have been used in this way, such as dried fish and 
 tobacco — but obviously these could not remain in cir- 
 culation very long. Consequently the more lasting ar- 
 ticles took the place of the more perishable as a medium 
 of exchange. 
 
 From this situation it is easy to understand how the 
 metals, on account of their durability, and the more 
 precious metals especially, on account of the convenience 
 in carrying them, came to be used almost exclusively in 
 acts of exchange. Gold and silver came to be used 
 universally to carry on trade. A subsequent develop- 
 ment was the process of coining, by which certain 
 weights of these metals were struck with a stamp to sig- 
 nify their weight and fineness. 
 
 Since everybody was willing to accept gold or silver 
 in return for goods, gold and silver became the most 
 convenient "storehouses of value." Whoever had more 
 goods than he needed, would exchange the surplus for 
 gold or silver and the metal being non-perishable and 
 always acceptable could be put by against a time when 
 he would need other goods for which he could exchange 
 the metals. And in order to guard against theft, he 
 would look around for the safest place to keep them. 
 
 Goldsmiths, since they worked in the precious metals, 
 always had to have a supply of gold and silver on hand, 
 so they had strong-boxes in which to store them safely. 
 It became a custom for them to oblige their patrons by
 
 '20 THE STRANGLE HOLD 
 
 also storing the gold of these patrons. In return for 
 the metal deposited with them they would give a receipt. 
 
 Since gold could be had to the amount called for upon 
 presentation of these receipts, people came to look upon 
 them as being as valuable as the metal itself. The 
 goldsmith was trustee for the gold which gave the re- 
 ceipts their value, and so peojDle began to transfer them 
 or came to use these receipts as money instead of the 
 metal. Since gold could be had in exchange for them for 
 the asking, people were ready to accept these receipts 
 the same as gold in return for their wares. They were 
 even more acceptable, sometimes, on account of the 
 greater ease of handling, consequently the gold itself 
 was seldom demanded. 
 
 Meanwhile the goldsmith, finding that no one came 
 to ask for the gold which had been deposited, or at any 
 rate, that very few did, began to issue receipts against 
 which no gold had been deposited. People would ac- 
 cept these receipts as willingly as those for which gold 
 had been deposited, for they did not know the difference. 
 And so long as the goldsmith could pay metal in ex- 
 change for all receipts that might be tendered, so long 
 it did not matter whether there was a full amount of 
 gold behind the notes or not. The only thing the gold- 
 smith had to do in order to keep his receipts passing as 
 money was to keep people thinking that there was gold 
 behind them, and this he could do so long as he was 
 able to pay gold on demand. 
 
 The very same principle is behind all our issues of 
 paper money today. As long as people are confident 
 that they can get value in return for paper money, they
 
 EVOLUTION OF EXCHANGE SYSTEM 21 
 
 will accept the paper as readily as gold, and in some 
 cases even more readily. And a similar principle lies 
 at the bottom of our bank check system. If only people 
 are confident that they will be able to get money in 
 payment of the check, they will be willing to accept the 
 check in return for their wares. 
 
 Most people today think that business is carried on 
 by means of money. Some there are, indeed, who 
 think that it is really carried on by means of gold, 
 since the paper money that is used calls for gold, and 
 gold can sometimes be had for it on demand. 
 
 But as a matter of fact this is not the case. Bank 
 Credit is almost entirely our medium of exchange. To 
 be more exact, the report of the Comptroller of the Cur- 
 rency of the United States for 1919 shows that we do 
 about 95% of all our business by the use of checks. 
 The report says (Page 36, Vol. 2), that our medium 
 of exchange is made up as follows: 
 
 Gold 60% 
 
 Silver 40% 
 
 Paper (all paper money of govern- 
 ment issue) 4.90% 
 
 Bank Credit (bank deposits trans- 
 ferred by check) 94,10% 
 
 100.00% 
 
 This table was made up in 1909 before the Federal 
 Reserve System was established. Since its establish- 
 ment our paper money consists almost entirely of federal 
 reserve notes and national bank notes, both of which are
 
 22 THE STRANGLE HOLD 
 
 in reality bank credit, so our medium of exchange now is 
 more than 99% bank credit. 
 
 From the foregoing it is evident that BANK CREDIT, 
 or credit on the bank's books, is practically our sole 
 medium of exchange. Government money consists of 
 change only and is used for the lesser transactions where 
 it would be inconvenient to draw a check, as for instance, 
 to pay for a lunch or car fare. 
 
 Since bank credit then is the medium by which trade 
 is conducted and which moves and controls all our indus- 
 tries and through them regulates our lives, it should not 
 only be interesting and profitable, but it is essentially 
 necessary, that we should understand clearly what bank 
 credit is, and how it comes into existence. To do this 
 let us follow the operations of a bank. 
 
 After obtaining its charter, our bank begins business 
 with, we will say, a paid up capital of $10,000. The 
 people of the community then deposit gold or other cash 
 to the am.ount of $50,000. This fifty thousand dollars 
 becomes the property of the bank, subject to the right 
 of withdrawal by the depositor, and the bank statement 
 appears as follows: 
 
 RESOURCES LIABILITIES 
 
 Cash $60,000 Capital .. .$10,000 
 
 Deposits . . 50,000 
 
 $60,000 $60,000 
 
 The banker knows from experience that some of his 
 customers will bring in, on an average, as much money 
 as others draw out, so the sixty thousand dollars in cash
 
 EVOLUTIOX OF EXCHANGE SYSTEM 23 
 
 is usually on hand all the time. If his customers would 
 continue to draw out money he would have to close his 
 doors. We will therefore assume that the $60,000 re- 
 mains constant. From this fact the banker naturally 
 infers, as did his predecessor the goldsmith, that if the 
 bank's ten thousand dollars are accepted by the public 
 as a guarantee for fifty thousand dollars, then the whole 
 sixty thousand dollars in cash will serve as a guarantee 
 for a much larger sum. So the bank begins to "lend 
 money." 
 
 In this transaction the regular procedure is as fol- 
 lows. The would-be borrower makes out an application 
 for a loan in which he states the amount desired and 
 the time for which it is wanted. He enumerates the 
 securities he proposes to furnish with his note and 
 states the use he intends to make of the money. The 
 banker hands this list of securities to the bank appraiser 
 for valuation. Accompanied by the appraiser's report, 
 the application then goes before the finance or loan 
 committee of the bank for action. This committee is 
 usually composed of five or more members of the board 
 of directors, who meet at least once a week to pass on 
 applications for loans, especially on those of new bor- 
 rowers. This committee may accept or reject the loan 
 applied for, or it may allow only a portion of it. Let 
 us say that the report of the bank appraiser is satis- 
 factory and the action of the loan committee favorable, 
 so that a loan of one thousand dollars at six per cent 
 for ninety days is made to the applicant. 
 
 The loan is consummated by the bank taking the note 
 of the borrower and his security and -writing on the
 
 24 THE STRANGLE HOLD 
 
 credit side of his pass book, "$985.00," representing 
 one thousand dollars discounted at six per cent for 
 ninety days. On the debit side of the bank's books 
 appears the entry: "Loans and Discounts, $1,000;" on 
 the credit side "Deposit, $985.00" and "Discoimt, 
 $15.00." The bank statement now reads: 
 
 RESOURCES LIABILITIES 
 
 Cash $60,000 Capital $10,000 
 
 Loans and Deposits 50,985 
 
 Discounts... 1,000 Discounter 
 
 Profit 15 
 
 $61,000 $61,000 
 
 Here it is seen that the loan appears as an asset on 
 one side of the ledger under the head of "Loans and 
 Discounts" (and properly so, because the bank has the 
 borrower's note and security), and on the other side of 
 the account it appears as a liability, being added in with 
 the cash deposits, just as if it were $985.00 in gold that 
 the borrower had deposited. The other fifteen dollars 
 discount or interest is profit to the bank on the trans- 
 action. An analysis of this transaction shows that the 
 banker has done exactly what the goldsmith used to do. 
 He has given the borrower a receipt for a deposit of 
 money though no money has been deposited. 
 
 The fiction is that the banker has handed the bor- 
 rower $985.00 in money for his note, payable in ninety 
 days, and the borrower has gone to the receiving teller's 
 "window and deposited the money. The result in the 
 bank's records and in the borrower's pa^s book is
 
 EVOLUTION OF EXCHANGE SYSTEM 25 
 
 exactly the same as if that had actually been. done. 
 Even if the borrower had taken the cash out of the 
 bank and deposited it in some other bank, or after 
 receiving credit for the deposit had withdrawn it and 
 spent the money in the community, it or its equivalent 
 would soon return to the first bank, and the bank's cash 
 and deposits would therefore remain about the same. 
 
 Let us suppose the borrower in this case draws a 
 check for the full amount of the loan in favor of some 
 creditor or to pay for goods. The loan is still a deposit 
 although it is no longer to the borrower's credit. The 
 deposit is transferred to the credit of the person receiv- 
 ing the check. If that person keeps his account in the 
 same bank the transfer consists merely of charging the 
 borrower's account and crediting the new owners and 
 giving credit in the new owner's pass book. But if the 
 new owner of the credit keeps his accoimt in another 
 bank he deposits the check there and receives credit for 
 a deposit. The credit is then transferred from the 
 lending bank to the second bank. 
 
 The transfers between banks made necessary by such 
 operations are made by what is called a clearing. That 
 is, the orders or checks against bank No. 1 presented by 
 tank No. 2 are cancelled against the orders or the checks 
 on bank No. 2 in favor of bank No. 1 and only the bal- 
 ance left after the cancellation is complete is paid in 
 money. For instance if the checks on bank No. 1 pre- 
 sented by bank No. 2 amount to, we will say, $916.50 
 and the checks on bank No. 2 presented by bank No. 1 
 amount to $1,075.50 then the clearing or cancellation 
 would show a balance of $1,075.50 minus $916.50 or
 
 26 THE STRANGLE HOLD 
 
 $159.00 due from bank No. 2 to bank No. 1 which is pay- 
 able in money. 
 
 The more nearly all the business of the community is 
 carried on by checks and drafts the less money is 
 required to pay balances. If all the business were car- 
 ried on by checks all transactions would cancel and 
 there would be no balances, just as a set of double 
 entry books must balance when they are correct. It 
 would be simply a transfer of credits from one account 
 to another and all the banks would constitute just one 
 big bank. 
 
 The point to be particularly noted is that while the 
 loan we are examining is stated in terms of money no 
 money is used in the transaction. It is credit and while 
 it may sometimes be turned into money, or what we call 
 money, at least 95% of it never is, but is transferred 
 from one to another by means of checks and always re- 
 mains a bank credit or deposit. This fact is shown by 
 the statement already given from the Comptroller's re- 
 port. 
 
 The popular idea that the bank lends the depositors' 
 money is in fact a delusion. "What really happens is 
 that the bank lends its credit to whomsoever it will, tak- 
 ing in exchange for it the borrower's less known credit 
 plus his security. The bank turns out its credit in two 
 general forms — bank notes and bank deposits. 
 
 The fiction by which the banker gives the borrower 
 credit for a deposit is convenient, and, in itself, harm- 
 less. But like any other fallacy, when the fact that it 
 is a fiction is lost sight of, and this transaction is mis- 
 taken for a money transaction, then it becomes danger-
 
 EVOLUTIOX OF EXCHANGE SYSTEM 27 
 
 ous. We will return subsequently to a discussion of the 
 eiFects of this fiction^ continuing for the present with 
 the analysis of this bank's operations. 
 
 The bank^ up to this stage^ has coined but $1,000 of 
 our medium of exchange, of which $15 is profit. Now 
 it goes on making loans in the same way up to say two 
 hundred thousand dollars. It does not seem possible for 
 a bank with but ten thousand dollars capital and fifty 
 thousand dollars cash deposits to lend two hundred 
 thousand dollars. However, this is not only possible, 
 but, what is still more remarkable, the bank will still 
 have left the sixty thousand dollars in cash and probably 
 more. Our bank's statement would then be: 
 
 RESOURCES LIABILITIES 
 
 Cash $ 60,000 Capital $ 10,000 
 
 Loans and Deposits 247,000 
 
 Discounts . . 200,000 Profit 3,000 
 
 $260,000 $260,000 
 
 Like any other sleight of hand this magic is very 
 simple when explained. The banker is not lending the 
 depositors' money, as is commonly supposed, nor any 
 other money. He is lending the bank's credit. 
 
 The amount of credit which our little ten thousand 
 dollar bank with its fifty thousand dollars of real money 
 in deposits can lend, depends upon whether it is a state 
 or a national bank, and upon the nature of its deposits. 
 Most state laws, like the national bank law, require 
 each bank to carry a certain cash reserve, the amount of 
 which depends upon the law governing the bank, the 
 kind of accounts the bank carries, and whether it is a
 
 28 THE STRANGLE HOLD 
 
 country or a city bank. This money is called the legal 
 reserve, and represents a certain percentage of the 
 deposits which must be held either in the bank's own 
 vaults in the form of cash or approved securities, or to 
 its credit by a reserve agent. This cash reserve is nec- 
 essary as a bulkhead against the loss of public con- 
 fidence. It is ready money with which payment can be 
 made in case of a sudden demand from frightened de- 
 positors. For this reason, bank laws require a larger 
 reserve against demand deposits than against savings 
 deposits, because the latter are protected by the require- 
 ment of notice before withdrawal. The time given by 
 this notice gives the bank an opportunity to realize upon 
 its assets, should such need arise. The legal reserve 
 ranges from nothing in some states to twenty per cent 
 in others. 
 
 Let us assume that our little bank is required to keep 
 a 10% reserve. Then for every dollar it has in cash 
 or on deposit with a reserve agent it can carry $10 in 
 deposits. We have assumed that the bank has $60,000 
 so with this amoimt as reserve it can run its deposits up 
 to ten times that amount or $600,000. Of this amount 
 fifty thousand dollars are deposits of cash, which, de- 
 ducted from the $600,000 fixed by the legal reserve law 
 as the limit of deposits, leaves a balance of five hundred 
 and fifty thousand dollars of deposits which the bank 
 can create by making loans. The deposits — bank credit 
 — created by these loans passes for money in the shape 
 of checks and drafts and are in no way distinguishable 
 from the dpeosits — bank credit — created by deposits of 
 cash. If the legal reserve requirement then is ten per
 
 EVOLUTION OF EXCHANGE SYSTEM 29^ 
 
 cent, for every dollar of real money deposited or paid 
 in for stock and held, the bank can issue or lend nine 
 dollars of its credit for use as money. 
 
 And even bank reserves, it may be said, are not always 
 money. Some states permit banks to count as reserves 
 the bonds of that particular state and the notes of 
 national banks. Neither of these are money, but only 
 promises to pay money. 
 
 In the first chapter we saw that the causes for the 
 social unrest of today and its attendant evils arise out 
 of that defect in our monetary system which is 
 responsible for the varying price of the dollar — or, in 
 other words, for varying prices. The phenomena known 
 as the High Cost of Living and the Low Cost of Living, 
 and the distressful conditions that are the result of 
 these phenomena are due in their entirety to the vmstable 
 value of the dollar. 
 
 In this chapter we have seen that the greater part 
 of our money is bank credit. We have seen that at least 
 ninetj'^-five per cent of our circulating medium — of our 
 money — exists in the form of bank deposits. And we 
 have furthermore investigated the way in which this 
 bank credit is created, and have seen that bankers are 
 alone responsible for its issuance, that they can increase 
 it by granting loans or curtail it by refusing them as they 
 see fit. They can also grant a loan to one and refuse it 
 to another at will. 
 
 Putting the conclusions of these two chapters to- 
 gether, it at once follows that the industrial evils 
 described are due to some defect in our banking system.
 
 so THE STRANGLE HOLD 
 
 since it is this system which controls our circulating 
 medium. 
 
 Furthermore, we saw that under the present system 
 the banker is acting as a brake on the wheels of pros- 
 perity; we noted, however, that this was not necessarily 
 the banker's fault, but may be due to a defect in the 
 system which does not permit him to extend credit 
 wherever credit should be extended in the furtherance 
 of the best interests of society. 
 
 We have now shown what we started out to show. It 
 is now clear that both series of problems and defects 
 referred to in the first chapter have a common origin. 
 They are both due to a defective system of issuing bank 
 credit. The problem, then, which at first seemed a two- 
 fold one, is now seen to be one — the problem of cor- 
 recting the defect in our banking system. It is the 
 problem of devising a remedy that can be applied to 
 existing institutions without disturbing business or up- 
 setting commercial relations. 
 
 Sut before doing this, it is necessary to see clearly 
 what the defect is. This is our next step.
 
 CHAPTER III 
 
 THE MEDIUM OF EXCHANGE 
 A PUBLIC UTILITY 
 
 IN the preceding chapter it was seen that aU but a 
 relatively insignificant percentage of our commerce 
 today is carried on by means of bank credit — in other 
 words, that bank credit is our present medium of 
 exchange. 
 
 And it was shown that in the development of com- 
 merce, one means of changing ownership after an- 
 other came to be used. As commerce outgrew the means 
 in use another had to be supplied. 
 
 It was noted that primitive barter, because it was too 
 cumbersome and unsatisfactory, gave way to the practice 
 of using one or two commodities as a medium of 
 exchange. Gradually the commodities that were best 
 adapted to this use — gold and silver — ' came to replace 
 other commodities, shells, tobacco, iron, copper, and so 
 forth. Subsequently gold largely took the place of 
 silver on account of its higher value and consequent 
 greater efficiency. We saw finally how bank credit, 
 based on gold, arose and that on account of its greater 
 convenience and adaptability to the needs of modern 
 industry and commerce, it has reached the position that 
 it now occupies, practically all of our exchange trans- 
 action being carried on through the use of this medium. 
 
 And we have also looked into a few of the most 
 31
 
 32 THE STRANGLE HOLD 
 
 obvious of our industrial ills today, and have seen, that 
 they are connected with, or rather that they spring 
 from, some defect in our monetary and banking system. 
 
 The most natural conclusion to be drawn from these 
 premises is, that, just as commerce outgrew each former 
 medium used for exchange, so it has now outgrown the 
 present one. 
 
 Commerce stands in need of a medium that will give 
 it freer scope for its possibilities. It must be enlarged 
 so that industry wiU no longer be hampered by a medium 
 of exchange that restricts and represses business, that 
 turns it inward like an ingrowing nail, there to rankle 
 and fester and breed all the economic trouble and 
 industrial turmoil that afflict us today. 
 
 Because our present system has been outgrown does 
 not prove that there is anything inherently bad in the 
 development of bank credit. Its use was a natural step, 
 a step in advance, and by no means a step in the wrong 
 direction. Its use gave industry wider scope, and so 
 contributed to the advancement of civilization. 
 
 And if now it has been outstripped by industry, this 
 does not necessarily imply that it must be cast aside, 
 or that a search for a new and entirely different ex- 
 change medium is necessary to be instituted. 
 
 The case is really quite the contrary. No radical 
 change is necessary. All that is required will be to 
 modify the method of issuing our present medium in 
 order to put it on a firmer, more logical basis, and by 
 removing the fault that hampers it adapt it to present 
 conditions. 
 
 It is only necessary to modernize bank credit, and set
 
 MONEY A PUBLIC UTILITY 33 
 
 it upon a more scientific footing. Wlien this has been 
 done, it will be fully adequate to all our needs. Industry 
 will no longer be "limited, cribbed, confined," but will 
 be free to develop the immense possibilities that are 
 latent within it. 
 
 It is a most natural result that enlarged business re- 
 quires enlarged facilities for doing business. All our 
 efforts in achieving this improvement, by reorganizing 
 our methods, will be repaid a thousand-fold. 
 
 But before attempting such a task, we must see more 
 clearly just where our present system is at fault; we 
 must look more closely into bank credit, as it exists 
 today, and determine precisely where it is inadequate. 
 Then, and only then, can we seek to apply a practical 
 remedy. With this purpose in mind, let us look once 
 more into the way in which bank credit is created. 
 
 Bank credit may be created in either of the following 
 two ways: 
 
 When a customer deposits money, the banker gives 
 him credit in like amount on the books, and makes a 
 memorandum to that effect in the customer's pass-book. 
 The money deposited becomes the property of the bank, 
 in exchange for which the customer receives the bank's 
 promise to repay the amount on demand. In other 
 words, credit on the bank's books is bank credit, and is 
 created first by bank deposits. 
 
 When a customer goes to a bank and "borrows money," 
 he puts up his note with his securities, if the note be 
 secured, and the banker gives him credit for the amount 
 he has borrowed in the same way as he gives the cash 
 depositor credit for his deposit. The banker makes the
 
 34 THE STRANGLE HOLD 
 
 same memorandum in a Borrower's pass book that he 
 does in a depositor's. Bank credit, then, is also created 
 by bank loans. 
 
 The point in both these cases is not that bank credit 
 is created by two entirely different methods, but that 
 in each method the question as to whether the bank credit 
 shall or shall not be created is left entirely to tlie banker. 
 He may make the loan, or he may refuse to make it. 
 If he refuses no one can compel him to alter his de- 
 cision, regardless of what may be the borrower's just 
 deserts. 
 
 In the other method too, he may refuse the deposit if 
 he so desires. It is not often that a banker refuses to 
 let a customer make a deposit, but it is quite possible 
 that he may regard some particular person's account as 
 undesirable, and in that case there is no means of com- 
 pelling him to accept the deposit. 
 
 The credit thus created on the bank's books is trans- 
 ferred from one to the other by checks and trade is car- 
 ried on almost exclusively by its use, it is our money, so 
 the bank has virtually become our mint and its operation 
 is a matter of vital interest to all of us. A full analysis 
 of the effect of this usurpation of a great government 
 function by the bank will reveal the cause of our finan- 
 cial ills. 
 
 We have seen that THE POWER TO GRANT OR 
 DENY A LOAN, AND SO THE POWER TO CON- 
 TROL THE MEDIUM OF EXCHANGE, RESTS 
 WITH THE FINANCE COMMITTEE OF THE 
 BOARD OF DIRECTORS OF THE BANK. This 
 simple act of routine business is performed every day
 
 MONEY A PUBLIC UTILITY 35 
 
 by hundreds of good citizens, who would indignantly 
 resent any suggestion that by this act they are usurping 
 one of the most vital functions of our government — that 
 of issuing our money by minting private credit into the 
 medium of exchange. 
 
 But because the bank's credit, which this committee 
 controls, is our medium of exchange, and because the 
 use of the medium is necessary in every walk of life, 
 it is clear that on the decision of this committee depends 
 individual liberty, success, and happiness, as well as 
 national efficiency and progress. 
 
 The great importance of its decisions make this little 
 assemblage of business men a powerful group of auto- 
 crats. Their power is the more dangerous because of the 
 fact that their acts are protected from even the slightest 
 public protest or criticism. Both the committee and its 
 victims fail to realize the power that it wields. 
 
 Right here, in these committees, lies concealed the 
 "Money Trust" of which we hear so much. The control 
 of the greatest public utility is in their hands. 
 
 This is the clue to our entire problem. The PRI- 
 VATE CONTROL OF THE MEDIUM OF EX- 
 CHANGE SUBJECTS THE WHOLE COMMUNITY 
 TO THE WILL OF THE FEW. 
 
 Many will note a resemblance here to another great 
 problem — the railroad problem. As many will remem- 
 ber, the private, irresponsible control of the mediimi of 
 transportation by a small group placed the entire com- 
 munity within their power. 
 
 Since a similar trouble was overcome in that public 
 utility, a review of the problem presented there, and of
 
 •36 THE STRANGLE HOLD 
 
 the means by which it was solved should prove of con- 
 siderable help in the present problem. 
 
 In the days when railroads were entirely in private 
 hands, and subject to no public control and regulation, 
 the principle which governed all rates was to charge that 
 rate, both for passenger and freight service, which would 
 yield to tlie railroad lines the largest net returns, re- 
 gardless of the community's interests in the matter. 
 
 For those who remember this period in our history, no 
 explanation is necessary. Our sad experience with com- 
 plicated and unjust railroad tariffs, unpublished and 
 secretly administered, and with rebates, drawbacks, ter- 
 minal rates, quantity classifications, and an rmtold num- 
 ber of similar abuses, will not easily be forgotten. But 
 for the benefit of the yovmger generation, let us take 
 an example. 
 
 When railroads were privately controlled, California's 
 supply of kerosene came from the East. Let us say it 
 cost fifteen cents per gallon to produce kerosene in, we 
 will say, Ohio, and that it sold regularly in California at 
 forty cents. Then the railroad would figure perhaps a 
 profit of five cents for the producer in Ohio, and perhaps 
 another ten cents profit for the seller in California. It 
 would then fix its rate at the difference between the cost 
 plus the two profits allowed, and the selling price of 
 forty cents, that is, ten cents. 
 
 The only principle governing this rate was, "at what 
 rate can that particular business be made to pay the 
 railroad the most money?" 
 
 Different rates were quoted to different sliippers. 
 Business success depended more on "pull" than on
 
 MONEY A PUBLIC UTILITY 37 
 
 "push." A little pull with the railroad was worth any 
 amount of energy and business ability. 
 
 To demonstrate this last statement, let us continue our 
 illustration a little further. 
 
 Suppose the railroad raised the rate on kerosene from 
 Ohio to California by ten cents, making it twenty cents. 
 It is not likely that this increased rate would be absorbed 
 by either producer or retailer. It would be shifted to 
 the consumer, who would have to pay fifty instead of 
 forty cents per gallon. This would result in decreased 
 consumption, and consequently decreased business both 
 for producer and railroad. 
 
 But now suppose that certain of the interests produc- 
 ing kerosene in Ohio also possessed a sufficient control 
 over the railroad to cause the latter to rebate eight 
 cents per gallon of the freight rate on kerosene to them. 
 In other words, these producers would pay the railroad 
 the full twenty cents per gallon rate, and later the rail- 
 road would pay back to them eight cents per gallon. 
 Then instead of only five cents per gallon these interests 
 would make thirteen — a good compensation for the 
 diminished sales. The extra two cents per gallon from 
 these producers, coupled with the extra ten cents per 
 gallon from other producers, who did not enjoy the 
 rebate, would amply repay the railroad for the shrink- 
 age in traffic due to shrinkage in consumption. 
 
 The favored kerosene producers and the railroads 
 would both be pleased with the arrangement, even though 
 the demand for kerosene had diminished. 
 
 But how about the producer in Ohio who was not 
 favored, and had no compensation for the decreased
 
 88 THE STRANGLE HOLD 
 
 business due to the increased price? And how about 
 the consumer, who now had to pay fifty instead of forty 
 cents per gallon, and consequently had to content him- 
 self with a smaller quantity of kerosene than before? 
 
 Since that time railroad service has come xinder public 
 control. No longer are railroads permitted to increase 
 rates arbitrarily, nor to favor some shippers in prefer- 
 ence to others. All shippers are entitled to the same 
 services, and prices no longer fluctuate at the will of 
 the railroad interests. And right here let us point out 
 that neither in the case of the railroads, nor in the case 
 of the banks, are we interested in the operation of either 
 of these public utilities, except in so far as their opera- 
 tion affects the quality of the services they render. 
 
 It is in the services that we are interested, and so long 
 as all customers may know at all times what service they 
 may expect, and may be sure of receiving the same 
 treatment as any other customer, it is of little importance 
 to us, the public, as to how that service is produced. 
 
 Banks as well as railroads should be privately owned 
 and operated, but their SERVICES should be under 
 public control and regulation so that everyone may be 
 certain of obtaining the most efficient service at the 
 fairest cost and a service equal to that of any other user. 
 
 Because the banks issue our medium of exchange the 
 banking and railroad businesses are both public utilities. 
 
 The only essential difference between the services 
 rendered by these two utilities is that the cars of the 
 railroad are employed to change the location of goods 
 while the credit of the bank is used to change their 
 ownership.
 
 MONEY A PUBLIC UTILITY 39 
 
 In abstract principle both are the same, and the effect 
 of private or public control of either has the same result. 
 
 It is evident that as long as a privately controlled 
 railroad could charge "all the traffic would bear," and 
 could then rebate a portion to favored shippers, or could 
 favor them in other ways, that it was practically denying 
 to those shippers not favored the right to use the rail- 
 roads. 
 
 Precisely the same thing happens when a bank denies 
 a customer a loan for which the customer can offer 
 security. It is denying to that customer the right to 
 use a medium which is much more important to him than 
 the railroad. 
 
 It is in the fact that the bank can deny anyone the 
 use of this great public utility that the greatest fault 
 of our present financial, industrial and social system lies. 
 
 In order to make the analogy still clearer, we may 
 compare the security offered and the rate of interest 
 paid by the customer of the bank to the freight-rate 
 paid by the customer of the railroad — the shipper. 
 
 Under public control every railroad is now required to 
 give every shipper, who can pay its rate, the same 
 treatment as every other shipper receives. It cannot 
 deny its service to any particular shipper on account 
 of the prejudice or the personal interests of any person 
 or group of persons who may happen to be in control of 
 the railroad. 
 
 And the medium of exchange, the service offered by 
 the bank, should be under similar public control, so 
 that every bank will be required to give identical treat- 
 ment to every customer who can comply with require-
 
 40 THE STRANGLE HOLD 
 
 mcnts — who is able, in other words, to offer good secur- 
 ity and pay the rate of interest. The decision, whether 
 to make the loan or not, should not be permitted to lie 
 in the hands of private persons, who may decide accord- 
 ing to their own personal prejudices or private interests. 
 
 It may perhaps occur to some here that the force of 
 competition will overcome the effect of personal pre- 
 judices and private interests of the bankers. In answer 
 to such an argument it is merely necessary to say that 
 the force of competition does not operate, and to prove 
 this statement we will again call upon our analogy to 
 the railroad. 
 
 It was thought that the free play of competition 
 untouched by public regulation, would be sufficient to 
 insure fair play to all shippers. The countless instances 
 of rebates, secret tariffs, and similar abuses that char- 
 acterized the day of unregulated railroad competition, 
 proved beyond all doubt the necessity for public regtila- 
 tion. 
 
 If we desire to benefit by past experience — and who 
 does not.'' — we must apply the same rule to our other 
 great public utility. 
 
 Just as the argument that since it was the railroad's 
 business to secure the transportation of goods, the 
 railroad would afford the best possible treatment to all 
 customers, was found to be invalid, so the argument 
 that, since it is the banker's business to extend loans 
 wherever possible, he will extend equal services to all 
 customers, will also be found fallacious. 
 
 There is one more point of striking similarity be- 
 tween the two public utilities, the railroad business and
 
 MONEY A PUBLIC UTILITY 41 
 
 the banking business, that should be referred to before 
 our analogy between the services of these two utilities is 
 completed. This point is the similarity in effect upon 
 the community of a denial of, or break down in, the 
 services of either. 
 
 The effect of a breakdown in railroad service was 
 illustrated with gripping force in Mexico during the 
 Carranza regime, when thousands of Mexicans died from 
 actual starvation. Beset by bandits and lacking credit, 
 the government was unable to obtain adequate rolling 
 stock for its railways, which were, ■with minor exceptions, 
 federally owned. Owing to this lack of rolling stock, 
 the crops could not be moved. In the agricultural dis- 
 tricts corn was cheap, for it could not be sent to other 
 markets, and so glutted the local markets. Business 
 stopped from lack of transportation. On the other 
 hand, in the mining districts, many people died from 
 sheer starvation, for owing to the lack of adequate 
 means of transportation, corn could not be brought in 
 from agricultural districts. What corn there was con- 
 sequently rose to so high a price, and was so scarce that 
 many could not get it at all, and died from famine. 
 
 Just as "contraction" of the medium of transportation 
 caused hard times, so "contraction" in the medium of 
 exchange causes hard times, as will be sho^vn in the 
 following illustration. 
 
 A man, let us say, owns an unimproved farm worth 
 $10,000, and is desirous of improving it. He needs, 
 say, $2,500 for barns and sheds, and $3,500 for imple- 
 ments, seed and running expenses until he can harvest 
 his crop. He has no other means of raising the money
 
 42 THE STRANGLE HOLD 
 
 except on the land. He is willing to give a mortgage 
 for the $6,000 needed, agreeing to spend the money on 
 improvements as stated, which will make the security 
 offered, the farm, worth from twelve to fifteen thousand 
 dollars. A good security for the loan of $6,000. 
 
 The lumber agent will not let him have the lumber, 
 the carpenters will not put in their work, the tractor 
 men will not furnish the tractor, and the implement and 
 seed dealers will not furnish his other necessities unless 
 he is able to pay them. He will not be able to pay them 
 until he gets his crops, perhaps not until he has sold the 
 crops of a number of years. But if he succeeds in rais- 
 ing the loan from his bank, he will be able to raise the 
 crops and pay it back. 
 
 If he is granted the loan, then he will be able to carry 
 out his proposed improvements. The result will be in 
 the immediate future, a demand for lumber, farm imple- 
 ments, and labor to the extent of $6,000, and prices and 
 wages will rise or be maintained as a result. In the 
 slightly more distant future, the result will be larger 
 and better crops, and so society will twice be benefited, 
 once in increased business and again in a better supply. 
 
 But if the loan is refused, the result will be the op- 
 posite. The demand for the commodities and for labor 
 will be lessened to the extent of $6,000, thus depressing 
 prices and wages. And the farmer, finding no other 
 outlet for his energies, and no other means of getting a 
 living, will have to go to work for somebody who can 
 get the use of the medium of exchange. Not only will 
 the goods which he would have bought and the labor 
 which he would have employed remain on the market to
 
 MONEY A PUBLIC UTILITY 43 
 
 depress prices but also his labor will be thrown on the 
 market, thus further depressing the wages of all labor. 
 In general, then, if the loan is for any reason refused it 
 is not a personal matter between the would be farmer 
 and the banker for the result will be a tendency toward 
 hard times and loss for the whole community. 
 
 This denial of the use of the medium of exchange, 
 then, produces "contraction," which unfailingly results 
 in falling prices, lower wages, lessened production, 
 fewer comforts, and a decrease in happiness just as 
 inadequate railroad service does. 
 
 Financial writers formerly blamed such evil conditions 
 upon "over production." 
 
 They calmly told us that the reason prices fell and 
 business slumped was because the market was over 
 supplied. 
 
 But now, with want and starvation crying for our 
 surplus, with our ships tied to the dock and the rail- 
 roads suffering for lack of freight the term, "over pro- 
 duction," would sound ridiculous so the same condition 
 is described as, "lack of demand." 
 
 The latest term is, "a buyers' strike." This term 
 aptly describes the condition for of course all buyers 
 strike, that is they do not buy, when they have nothing 
 to buy with, and we have just described how the farmer, 
 unable to get his loan, "struck" and went to work. 
 
 The term "Buyers' Strike," however, is not well 
 chosen, for it puts the blame in the wrong place. As 
 we have seen in the farmer's case, the failure to buy was 
 no fault of the buyer but was due to the banker's refusal 
 to make the loan, so this failure to buy and our present
 
 44 THE STRANGLE HOLD 
 
 bad condition would bo rnucli more accurately described 
 if termed a "bankers' strike." 
 
 All such terms as, "Over Production," "Lack of De- 
 mand" and "Buyers' Strike" are misleading for there 
 can be no over production and buyers will not strike so 
 long as desire remains unsatisfied. The fact that present 
 unsatisfactory business conditions are caused entirely by 
 bankers and not by buyers will soon be clearly estab- 
 lished. 
 
 This condition will be explained more fully in the 
 next chapter, in which we will examine closely the 
 reasons for, and the results of, a denial of the use of the 
 medium of exchange to whoever deserves to have its use 
 extended to him. And it will be shown that the denial is 
 due entirely to the private control of our greatest public 
 utility. 
 
 The farmer should have the same right to the use of 
 the medium of exchange that a shipper has to the use 
 of the medium of transportation. 
 
 In the case of the shipper, the value of his shipment 
 is a guarantee that he will pay for the use of the rail- 
 road. With the farmer, land and crop insure payment 
 for the use of the bank. And any abridgment of this 
 natural right not only denies him freedom of action, but 
 results in loss to the entire community. 
 
 Due to this denial the lumber, implements, seed and 
 labor the farmer would have bought remain on the market 
 to depress the prices of those commodities because he 
 could not buy what he wanted to buy and the crops 
 which he would have raised are not raised for the same 
 reason. Society, therefore, instead of enjoying a double
 
 MONEY A PUBLIC UTILITY 45 
 
 gain, suffers a double loss on account of the denial. 
 
 This is just a statement, in particular form, of what 
 we have demonstrated in this chapter, namely, that the 
 fault of our present financial system lies in the fact that 
 the banks control the greatest public utility; a utility 
 which all must use is held in private hands, and from this 
 source springs practically all of our present financial, 
 industrial and social troubles. 
 
 Let us now proceed to examine in greater detail the 
 effects of this private control so as to see how it pro- 
 duces the hardships from which the country suffers. 
 
 If it is proved that our present business depression is 
 due to this cause our problem is then fast approaching 
 solution. This fact will be clinched in the next two 
 chapters.
 
 CHAPTER IV 
 THE INDUSTRIAL STRAIT-JACKET 
 
 IN the last chapter it was shown, by analogy with a 
 similar problem in the ease of the railroads, that the 
 private control of bank credit lies at the root of our 
 present industrial troubles. 
 
 In this chapter it is proposed to further investigate 
 this proposition in order to show conclusively, the evils 
 of private control of the medimn of exchange, and 
 secondly, in order to gain a more definite and a clearer 
 conception of the fault so that we may be aided in our 
 search for a remedy and may better appreciate the 
 remedy when it is found. 
 
 In the early part of this book we saw how a great 
 part, if not all, of the evils which afflict industry, and, 
 in fact, society as a whole, at the present time, are evils 
 connected with the changing cost of living. In other 
 words, they are due to the fluctuating general level of 
 prices, or differently expressed, to the variation in the 
 purchasing power or price of the dollar. 
 
 This variation in the value of the dollar is due to the 
 phenomena called expansion and contraction or inflation 
 and deflation, which condition arises from the fact that 
 the volume of the medium of exchange does not vary 
 in accordance with the needs of business. 
 
 It is clear that if the volume of business remains 
 constant and the medium of exchange is doubled, prices 
 
 46
 
 THE INDUSTRIAL STRAIT- JACKET 47 
 
 ■will in the long run be doubled — that is, they will tend 
 to be doubled. For now there will be two dollars to do 
 the work that formerly one dollar did. 
 
 On the other hand, if the volume of the medium of 
 exchange remains the same, and the amount of business 
 done, the total amount of goods produced and handled 
 is doubled, then prices will tend to be cut in half. For 
 now there will only be one dollar to do what two dollars 
 did before; each dollar will have to be twice as effec- 
 tive as before. 
 
 But if the medium of exchange varies hand in hand 
 with the volume of business, then there will be no 
 fluctuation in prices as a whole. 
 
 That is to say, if the volume of business is doubled, 
 and the medium of exchange is doubled at the same 
 time, each dollar will have to do just the same amount 
 as before, and prices in that case will remain constant. 
 The same condition will result if the medium of exchange 
 and the volume of business are both halved. 
 
 This is the object of practically every monetary re- 
 form. It is the object, for instance, of the Federal 
 Reserve System. But it is an object that has not been 
 accomplished, for we still have our varying general price 
 levels. The cost of living has not ceased to rise and 
 fall since the introduction of the Federal Reserve Sys- 
 tem, as has been clearly demonstrated in the past few 
 years. 
 
 It should be held in mind during this discussion that 
 we are speaking, not of the variations in price of par- 
 ticular com.modities, but of variations in the general 
 level of prices as a whole. Variations in the price of
 
 48 THE STRANGLE HOLD 
 
 particular commodities are due to variations in the 
 demand for, and the supply of these commodities. 
 
 But variation in the general price level, the price of 
 all the commodities consumed by a community taken as 
 a whole, are due to variations in the price of the dollar, 
 that is in the purchasing power of the dollar. The 
 dollar value varies with the ratio between the volume of 
 the medium of exchange — the number of dollars in circu- 
 lation, and the volume of business transacted. 
 
 Variations in the purchasing power of the dollar are 
 the cause of industrial and social unrest and of the 
 hardships connected with the fluctuating cost of living. 
 These variations in living cost result in the adjustments 
 of the mode of living to income, made necessary when 
 changing from one price level to another. 
 
 It is, as stated, the object of almost all banking and 
 monetary reforms to do away with these fluctuations in 
 the general level of prices. It is evident that the only 
 way to accomplish this object is by an arrangement so 
 that the purchasing power of the dollar shall remain 
 uniform. But this end will never be accomplished tmtil 
 control of the volume of the medium of exchange is 
 taken out of the private hands of the banker, for it i3 
 owing to his control that the volume of the medium of 
 exchange does not vary in accordance with the volume of 
 business. One reason for this lack of elasticity in our 
 medium is because the private control of the banker 
 always results in a tendency toward contraction. 
 
 In order to demonstrate this fact it will be necessary 
 first of all to show clearly what we mean by the terms 
 contraction and expansion. This can be most easily
 
 THE INDUSTRIAL STRAIT- JACKET 49 
 
 done hy having recourse once more to our analogy to the 
 railroad. 
 
 Contraction of the medium of transportation means 
 that there are not enough railroad facilities to carry on 
 the business of transportation. This situation occurred 
 in Mexico during the Carranza regime as related in the 
 last chapter. The result of this contraction in railroad 
 facilities was a stagnation of business in all regions 
 affected. In agricultural districts there were low prices 
 for food and high prices for everything else. In the 
 mining districts the mine products^ if they had been in 
 demand at all in those districts, would have been very 
 low, but the prices of all other commodities which had 
 to be brought into the district by railroads were very 
 high. As these other commodities included food, many 
 people starved owing to an insufficient supply of food. 
 
 Contraction of the medium of exchange has the same 
 result. It implies an insufficiency of the medium to 
 properly carry on the volume of business offered. A very 
 serious result of such a condition will be described in 
 the chapter on "National Efficiency" where the case of 
 China will be discussed. 
 
 Referring again to an illustration in the last chapter 
 we saw that if the farmer could not get a loan, his pro- 
 jected improvement could not be carried out. The refusal 
 of the loan was an act contracting the medium of ex- 
 change. Such acts tend towards business stagnation, 
 for if many are placed in the same position as the 
 farmer, so that they are prevented from carrying out 
 the business ventures they have contemplated, business 
 will stagnate.
 
 50 THE STRANGLE HOLD 
 
 Juat such a condition happened in Mexico owing to 
 lack of transportation facilities — stagnation of business. 
 And it is found to happen always as a result of con- 
 traction of the medium of exchange. 
 
 The only way industry can be carried on is by means 
 of the medium of exchange, so with every expansion of 
 industry the demand for credit becomes greater and im- 
 less its volume increases in the same proportion, busi- 
 ness lags, industry hesitates and hard times and want 
 follow as a result. 
 
 An increase in the demand for credit raises its price, 
 or in other words, the discount or interest rates go up, 
 and they continue to go up until they get so high credit 
 cannot be used profitably. Contraction then results, 
 which, of course, stops business expansion. This condi- 
 tion always means curtailment of production, resulting 
 in curtailed employment and reduced wages. In this 
 way any movement toward increased production results 
 finally in the contraction of the medium by means of 
 which business is carried on. 
 
 Several reasons will be noted why, under private con- 
 trol, the medium cannot expand to keep pace with the 
 productive energy of all the people, so the final result of 
 private control is that prosperity must invariably be 
 followed by what we call "hard times." 
 
 Expansion, or inflation, of the medium of transporta- 
 tion and of the medium of exchange are the opposites 
 of contraction, and the results of expansion in both cases 
 are similarly analogous. 
 
 If more transportation facilities are supplied to a com- 
 munity than required, they will not all be used until the
 
 THE INDUSTRIAL STRAIT- JACKET 51 
 
 community has had a chance to grow up to them. Mean- 
 while, however, such a condition would have the effect 
 of lowering transportation rates, which would be a bid 
 for greater production and greater consumption — that is 
 — a better standard of living. 
 
 The same is true of the medium of exchange. 
 
 The community can use just so much credit, and if 
 more is offered it will drive down interest rates ; which 
 in turn will invite increased business actiWty. 
 
 Inflation, then, is in itself simply a bid for increased 
 energy of production and increased comforts and hap- 
 piness for the members of the community. 
 
 These results are certainly not evil. But with our pres- 
 ent system the indirect results of inflation are bad, for 
 due to private control of bank credit, inflation is invari- 
 ably followed by a period of deflation, or contraction. 
 
 The sequence of the phenomena of inflation and defla- 
 tion can easily be seen. 
 
 Industry expands only by means of an expansion in 
 the medium of exchange. When the medium expands, 
 that is to say, is inflated, industry expands the more 
 easily. But production soon outstrips the expansion of 
 the medium and demands further expansion in propor- 
 tion to the increased production. If this fails we have 
 once more the sequence of increased demand for credit 
 increasing the interest or discount rates until they are 
 so high that credit cannot be profitably used, and so we 
 come down again to a period of lowering prices and hard 
 times. 
 
 Under private control of the railroads we had the same 
 result.
 
 52 THE STRANGLE HOLD 
 
 Great demand for transportation service would raise 
 the rates until the high rates would curtail shipment. 
 
 The reason just referred to is a very potent one 
 ■why, under the present system of private control of bank 
 credit, there is always a tendency towards contraction — 
 that is, there is always a tendency toward deflation or 
 restriction of credit and hence against the expansion of 
 industry. 
 
 We saw the result of this in the very beginning of 
 this book, in the case of the automobile dealers, who are 
 now unable to obtain the credit necessary to carry on 
 their business. 
 
 The private control of the medium of exchange is a 
 constant bid for credit restrictions which invariably 
 brings on recurring periods of hard times, and until the 
 medium of exchange is freed from private control, the 
 dominating private interests will continue periodically 
 to disrupt and oppress business through the curtailment 
 of bank loans. 
 
 It may seem to be a matter of no particular interest 
 that a business man a thousand miles away cannot get 
 a loan from the bank, or that the bank will no longer dis- 
 count the automobile dealers' paper. However, when a 
 large number of such loans are refused, the effect on 
 the private business man whose loan is refused is not the 
 only effect. 
 
 A merchant for instance fails to order goods because 
 the banker will not grant him proper credit facilities for 
 handling them; the manufacturer then curtails produc- 
 tion because of the lack of orders; in consequence of 
 which working-men are thrown out of employment. Hard
 
 THE INDUSTRIAL STRAIT- JACKET 53 
 
 times for industry and business as a whole are the result. 
 
 It is now quite clear that the grant or denial of a bank 
 loan is not a private affair between the banker and the 
 borrower^ since the result directly affects all business 
 activity and the prosperity of the whole community. For 
 just so long as we allow the volume of the medium of 
 exchange to be controlled by a few men we are not only 
 permitting those men to dictate our individual success 
 but to control all the wheels of industry. 
 
 One reason, then, for the bad effect of private control 
 over the medium of exchange is due to the fact that the 
 banker invariably tends to cause contraction in the vol- 
 ume of bank credit. This tendency springs from three 
 separate causes. 
 
 The iSrst reason is that it is to the interest of those in 
 control of the banks to contract the medium of exchange 
 for, as we have seen, a contraction in the exchange me- 
 dium relative to the volume of business results in a 
 lowering of prices: for one dollar must now do more 
 work than it did before. 
 
 The creditor interests are the ones in control of the 
 banks, and since their loans are expressed in terms of 
 dollars, it is to their interest to make those dollars worth 
 as much as possible to them. That is, they want the dol- 
 lar to buy as much as possible — in other words, they 
 desire low prices. 
 
 If the price of wheat is one dollar a bushel, the cred- 
 itor, who is in control of the bank, will get twice as much 
 wheat for his money as he would if the price of wheat 
 were two dollars a bushel. Therefore, it is to the bank- 
 er's interest to curtail the medium of exchange, since such
 
 54 THE STRANGLE HOLD 
 
 curtailment lowers prices of commodities and thereby in- 
 creases the purchasing power of his dollars. 
 
 Not alone does it accomplish that purpose but it in- 
 creases the interest or discount rate he charges for their 
 use, so those who control the banks not only increase 
 their fortunes but their incomes at even a greater rate by 
 a process which decreases business and increases debt. 
 
 The present system causes producers and debtors to 
 suffer while the non-producing creditors may fatten. 
 
 The second reason for contraction is due to the bank- 
 er's timidity, and his timidity is largely due to the fact 
 that gold is at present the only commodity which is sup- 
 posed to form a basis for the credit which is our medium 
 of exchange. 
 
 The banker, as we have seen, has to keep a reserve 
 behind his deposits, and this reserve must either be in the 
 form of gold or other money supposed to be redeem- 
 able in gold. On this account the banker is interested in 
 the country's gold supply, and consequently whenever 
 gold is shipped out of the country in any considerable 
 amount or prosperity makes a demand for the expansion 
 of credit the banker gets into a state of panic and begins 
 to refuse and to call loans. 
 
 The irony of the situation is that every naove he makes 
 to escape an approaching imaginary financial storm 
 hastens the approach of a real one and adds to its fury 
 when it breaks. His fear of a possible panic produces 
 genuine panic. 
 
 Such panics occurred on an average of once every ten 
 years during the eighty years preceding 1907, but in 
 spite of their frequency they were not understood.
 
 THE INDUSTRIAL STRAIT- JACKET 55 
 
 The banker, as we have seen^ began to refuse and to 
 call loans, fearing an impending calamity. This reduc- 
 tion of loans meant a shrinking in the volume of the 
 medium of exchange. As a result money became tight, 
 trade decreased, prices fell, production diminished and 
 the value of the security behind the still outstanding 
 loans shrunk. In consequence of this condition the banker 
 became still more afraid. 
 
 He refused loans in the first place because of a be- 
 lief that some change was going to take place in the 
 financial world that would make it unwise for him to 
 extend credit. He became still more afraid when he 
 saw the result of his action and then he began to call 
 more loans. This action caused still tighter money, 
 greater stringency, and a further decline in prices, se- 
 curities, and wages. 
 
 Then there followed business failures, caused by the 
 restriction of credit. Bank runs resulted, bringing in 
 their train bank failures, and the commercial world was 
 prostrated in a delirium of fear. All of which resulted 
 from the banker being afraid of his own shadow. 
 
 The Federal Reserve System now tends to protect the 
 banks so that the financial panics that occurred every ten 
 years up to 1907 seem to be overcome, but it does not 
 protect the rest of the community from loss because of 
 falling prices due to deflation nor does it remove the 
 inevitability of periods of contraction, business stagna- 
 tion, and industrial turmoil following prosperity. 
 
 In the chapter devoted to the "Federal Reserve Sys- 
 tem" an entirely new light will be thrown on that much 
 misunderstood institution. Periods of depression will
 
 56 THE STRANGLE HOLD 
 
 continue to follow periods of prosperity until their cause, 
 the private control of bank credit, is removed. 
 
 In former years after the decennial panic just de- 
 scribed had finally exhausted itself, confidence would 
 begin to return, and credit would slowly become read- 
 justed. Soup kitchens would close, and those who had 
 the courage and health to start life anew would get to 
 work, and again deposit their savings with the banks. 
 
 And then the banker, ignorant of the fact that he was 
 the cause of the panic, would assert that it was the effect 
 of tariff tinkering, politics interfering with big business, 
 over production, overspeculation, or anything else he had 
 a particular aversion for. And the public thought "Yes, 
 I guess that was it," for the banker ought to know. 
 While the fact was, as we have seen, that the banker was 
 the unconscious cause of the whole trouble. 
 
 A closer examination of the situation will disclose yet 
 another fact, namely, that he just as unconsciously over- 
 ruled the will of the people. 
 
 For the purpose of analysis, we will take a cause which 
 was formerly used as a scapegoat more often, perhaps, 
 than any other — ^tariff changes due to change in national 
 administration. 
 
 This change in administration, could come about only 
 by means of more votes being cast for low tariff prin- 
 ciples than for high tariff; that is, more than fifty per 
 cent of the voters of the country must have expressed a 
 desire for such a change in the government policy. But 
 when the change in tariff was made or threatened, 
 the banker began to get pessimistic as to its effect on 
 business.
 
 THE INDUSTRIAL STRAIT-JACKET 57 
 
 He told his fears to customers applying for loans 
 and advised them to wait a little to see how the change 
 was going to affect them before they bought more goods 
 or enlarged their business. 
 
 Although a customer might disagree entirely with the 
 banker as to the effect of the legislation, the important 
 fact remained that the customer did not get his loan, 
 because loans were, and still are, issued solely on the 
 banker's judgment. 
 
 A difference in opinion between the banker and more 
 than fifty per cent of the voters of the country had thus 
 denied to a responsible business man the right to use a 
 needed amount of medium of exchange. He could not 
 obtain the goods he intended to buy or increase his 
 business. 
 
 The wheels of commerce were stopped to such an ex- 
 tent that this stoppage was reflected back through the 
 whole complicated fabric of business. This condition 
 forced other business men to curtail business and cancel 
 orders, creating what economists now describe as a 
 "Buyers' Strike." It required comparatively few set- 
 backs like this to shock the commercial structure to its 
 foundation. 
 
 It should be carefully noted that his refusal of the use 
 of the exchange medium was not the effect of the judg- 
 ment of the banker, but the effect of his timidity. Thus 
 it is seen that the banker's fear of impending disaster 
 following a political change not only prevented the pro- 
 posed or enacted tariff change from having a fair trial, 
 but it falsely charged politics with causing panic or 
 hard times.
 
 58 THE STRANGLE HOLD 
 
 It could hardly be more certain that through control 
 of the medium of exchange, the banker thus nulified 
 the will of the people and refuted the claim that our 
 government is one of the people by the people and for 
 the people. 
 
 Now we have seen two reasons why private control of 
 bank credit will always tend toward contraction of the 
 medium of exchange with its bad results. 
 
 These reasons are, in the first place, the fact that it is 
 to the banker's interest to curtail the medium of ex- 
 change, thereby lowering prices and making the debts 
 owing him the more valuable, as well as increasing his 
 income by raising the interest rate. 
 
 In the second place, on account of the banker's tim- 
 idity, causing curtailment of loans as we have seen 
 which caused business depression, and before the pass- 
 ing of the Federal Reserve Act, also caused periodi- 
 cally recurring financial panics. 
 
 But there is still a third reason why our medium of ex- 
 change, as it is constituted today, will invariably tend to 
 contract when prosperity increases the demand for it and 
 this reason hinges upon two circumstances. 
 
 The one is the gold standard, by which gold forms 
 the basis of our' medium of exchange, coupled with the 
 fact that the price of gold is fixed at $20.67 per fine 
 ounce. That is, the amount of gold worth one dollar 
 is fixed by law at 23.22 grains which amounts to the 
 same thing. The second circumstance is the increas- 
 ing difficulty in the production of gold. 
 
 Gold is a commodity in all respects similar to any other 
 commodity, with the exception that its price is fixed by
 
 THE INDUSTRIAL STRAIT- JACKET 59 
 
 law. It has to be produced, by the process of mining, 
 and it has a varying cost of production. 
 
 As with every other commodity, when the cost of pro- 
 duction increases, the price should also increase. Take 
 coal, for instance. As mines become gradually exhausted, 
 and the producers have to dig deeper and deeper, the 
 cost of producing coal increases. Then, unless other 
 sources of coal are found, where the coal is more easily 
 and more cheaply obtainable, the price will increase. 
 
 When the cost of producing gold increases, the same 
 thing should happen — the price of gold should increase. 
 But we see that the price of gold is set by law, which 
 says that 23.22 grains shall be worth one dollar by 
 saying that the dollar shall consist of that amount of 
 pure gold. The law does not set the price of any other 
 commodity, it does not say, for instance, how many dol- 
 lars a pair of shoes are worth. But it does fix the price 
 of gold. 
 
 Now bank reserve requirements make a reserve of gold 
 behind paper money and, therefore, of deposits neces- 
 sary. The banker must keep his reserve either in money, 
 or in credit supposed to be redeemable in gold. Con- 
 sequently, the amount of gold held restricts the amount 
 of the medium of exchange that can be issued. 
 
 As industry expands, the medium of exchange should 
 expand, or we will have contraction, with its evil con- 
 sequences. But the expansion of the medium of ex- 
 change is limited by the amount of gold and gold is 
 limited by production. 
 
 The cost of gold increases with the cost of mining 
 and milling.
 
 60 THE STRANGLE HOLD 
 
 Consequently if prosperity raises the price of labor 
 and the commodities entering into gold production then 
 production will decrease because the price of gold is 
 fixed by law and cannot increase with the cost of pro- 
 duction. 
 
 Here once more we see an inevitable tendency towards 
 contraction. 
 
 But there is a paradox here, too, which shows that 
 not only because the price of gold is fixed, but also 
 because gold alone is used as the basis for our medium 
 of exchange, we have this tendency toward contraction. 
 
 Expansion of industry under our present financial sys- 
 tem invariably means a period of rising prices. Ex- 
 pressed in gold, it means a fall in the price of gold. 
 And we have seen that in order to increase the volume 
 of the medium of exchange so as to keep pace with in- 
 creased business it was necessary to increase the amount 
 of gold produced. 
 
 As with other commodities, this can be done only by 
 increasing the price of gold as its cost of production in- 
 creases. Unless the price increase keeps pace \vith the 
 cost increase gold production decreases and thus com- 
 pells contraction which strangles business. 
 
 Could anything be more absurd than a system which 
 causes prosperity to check prosperity? 
 
 Such a system is on a par with the building of an auto- 
 mobile and putting the reverse gear where the high speed 
 should be. Every time the gears are thrown into high 
 the machine backs up. 
 
 Even the slightest acquaintance with machinery must 
 show that such an arrangement would throw a very
 
 THE INDUSTRIAL STRAIT- JACKET 61 
 
 great strain on the whole mechanism and but little re- 
 flection is required to show that our financial system is 
 so arranged that it is an automatic reverse on our indus- 
 trial and business activities. Consequently the whole so- 
 cial system is shocked instead of benefited by a wave of 
 prosperity. The bad eiFect which such an arrangement 
 has on the system is sho^vn in industrial turmoil and 
 social unrest. 
 
 It begins to be clear that there is something radically 
 wrong with the gold standard. Further consideration 
 in the chapter on "The Gold Standard" will strengthen 
 this conclusion. 
 
 We have seen that the control of the medium of ex- 
 change is in the hands of the banks and banks are largely 
 controlled by the "vested interests," or non-producing 
 creditors to whose advantage it is that prices shall fall. 
 For this reason the result of private control is always a 
 tendency toward contraction of the medium of exchange. 
 And we have also seen that the gold standard aids in 
 that tendency. 
 
 We must conclude then that the gold standard is the 
 ally of the vested interests, since its tendency is in the 
 direction most profitable to those interests. 
 
 The gold standard and the "vested interests" are but 
 phases of the faiilt that is at the bottom of our trouble. 
 Private control of the medium of exchange is the real 
 fault. Basing our medium of exchange upon one com- 
 modity, gold, makes the private control of bank credit 
 still more efi'ective, in as much as the bankers are en- 
 abled to gain control also of the gold. And so long as 
 our medium of exchange is controlled by a gold reserve
 
 62 THE STRANGLE HOLD 
 
 and is in the hands of private interests, prices and 
 wages must come down and debts go up whenever the 
 gold production falls off. It is an automatic break on 
 national efficiency and personal prosperity. 
 
 Although this defect is but another phase of the gen- 
 eral fault, and serves only to intensify the evil effects of 
 private control, it is, nevertheless worthy of special study. 
 The gold standard idea, through a fallacy, is deep rooted 
 and while of no consequence in our remedy it should be 
 understood just because it is fallacious. 
 
 The next step, therefore, will be to study the gold 
 standard, not exhaustively, but only to see how it arose, 
 and to note some of its present deficiencies, and also to 
 understand how it adds to the evils of private control of 
 our real medium of exchange — bank credit.
 
 CHAPTER V 
 "FROZEN CREDITS" 
 
 IN TRACING the development of our present medium 
 of exchange, we saw how, for purposes of greater 
 convenience, one or two commodities came to be used 
 almost exchisively. Gold and silver had the advantages 
 of possessing great value in small bulk; they were, 
 therefore, convenient to carry. Their scarcity also gave 
 them a more or less steady value, and so they came to be 
 selected instead of other commodities as the medium to 
 be used in changing the ownership of goods. 
 
 Gold possesses, even to a greater extent than silver, 
 the qualities enumerated above and so naturally became 
 the more important medium, or money, while silver to a 
 great extend lost this dignity. 
 
 Both of these steps were part of a natural develop- 
 ment and each was an improvement over the former. By 
 the use of something with a fairly definite value as a 
 medium, a much greater amount of trading and commerce 
 could be carried on than under the cumbrous form of 
 direct barter, or by the use of a medium of uncertain 
 value. But a time came when even this improved method 
 of transacting business became inadequate for the needs 
 of commerce. 
 
 The amount of the commodity was limited. Gold does 
 not increase as population increases or as business activ- 
 ity increases, but only through the discovery of new 
 sources or of better methods of production. 
 
 63
 
 64. THE STRANGLE HOLD 
 
 Consequently, since its use was necessary in order to 
 effectuate the exchange of goods and services, just as 
 rolling-stock is necessary for transportation, increased 
 business called for more gold. This increased demand 
 for gold as a medium for carrying on business resulted 
 in the community bidding higher for its use. 
 
 Thus, a man who had one thousand bushels of wheat 
 which he wanted to trade for improvements, clothing, etc., 
 would offer more and more wheat for the use of the 
 medium of exchange according to its scarcity and accord- 
 ing to how pressing were his demands for the things he 
 wanted or the debts he had to pay. 
 
 In other words, if the supply of gold were not in- 
 creased to meet the needs of an increased volume of 
 business, prices would keep going down until business 
 stagnated and production fell off to such an extent that 
 the community suffered. 
 
 As industry increased, then, a greater amount of the 
 medium of exchange became necessary. The supply of 
 gold did not increase with sufficient rapidity to supply 
 this need, and so some other medium had to be used in 
 addition to gold. Credit arose to meet this necessity, and 
 credit has since then grown and expanded until today 
 it forms almost the entire amount of our medium of ex- 
 change. 
 
 This use of credit was a natural development, and as 
 in the case of those mediums that preceded it, one 
 that was an improvement over former conditions. Per- 
 haps for the reason that it was a natural step it did not 
 take the form that would have been most suitable. At 
 any rate from the defects already mentioned it would
 
 "FROZEN CREDITS" 66 
 
 seem that once more we have come to such a stage in 
 industrial progress that a further improvement is nec- 
 essary. 
 
 This does not mean that something other than credit 
 is required to serve as a medium of exchange. Nor does 
 it mean that we must discard gold. V/hat is necessary is 
 to put credit on a broader basis. Increase its carrying 
 capacity just as we increased the carrying capacity of 
 our railroads to keep pace with our idustrial develop- 
 ment. Reorganize it, bringing out its immense possibil- 
 ities. Once this has been done, it will become an adequate 
 instrument of exchange. One so perfect, in fact, that it 
 will satisfy all the demands of trade and industry. 
 
 In order to broaden the basis of our credit and accom- 
 plish the desired result, it will merely be necessary to put 
 bank credit upon a basis of truth. Its evolution shows 
 it developed upon a false basis and it still rests on a 
 promise of gold redemption which we all know cannot 
 be fulfilled. Let us see what this statement means. 
 
 We have seen that the earliest development of credit 
 or rather bank credit, as we use it, was in the hands of 
 the goldsmiths. It started when they made a practice of 
 accepting deposits of gold and silver and giving receipts 
 therefore. These receipts, on account of their ready con- 
 vertibility into gold, became negotiable. In other words, 
 these notes or receipts began to circulate as money, be- 
 cause of the goldsmith's reputation for reliability in pay- 
 ing gold on demand for his notes. 
 
 As a result of this reputation, the goldsmith found 
 that the people, for reasons of convenience, would rather 
 have his notes than metal money.
 
 66 THE STRANGLE HOLD 
 
 Soon he accumulated a great store of the precious 
 metals that was seldom called for. The better his reputa- 
 tion for prompt payment, the less frequently he was 
 asked to pay. So he began deliberately to trade on this 
 public confidence, and sell his credit for use as money. 
 
 As long as he could retain the confidence of the people 
 by always paying on demand, there was no limit to the 
 receipts that he might issue. 
 
 Thus we see the development of a practice which con- 
 tinues today and which causes the basic defect in our 
 present financial system. The goldsmith's deception is 
 still continued by our banking system and it will soon 
 be shown how it causes our trouble. 
 
 The goldsmith issued credit, pretending it was backed 
 up by gold. He gave a receipt for gold which had not 
 been deposited. 
 
 Although, on accovmt of the necessity for some im- 
 provement, the growth of credit in this way did some 
 good, nevertheless the fact that it is founded upon decep- 
 tion has hampered it and kept it from functioning as 
 perfectly as it will when put upon a foundation of truth. 
 
 Banknotes and government paper money form one 
 part of our credit today. They are promises to pay in 
 gold. Yet, as will be shown subsequently, it would be 
 physically impossible to fulfill this promise, for the 
 simple reason that there is not enough gold obtainable 
 to do so. This form of credit is, therefore, based upon a 
 fallacy. 
 
 Similarly with bank credit. The fallacy in this case 
 takes a somewhat difi'erent form, but in effect it is the 
 same. The depositor thinks that he is handing money
 
 "FROZEN CREDITS" 67- 
 
 to the banker which will be kept for him. The borrower 
 thinks he is borrowing money from the bank. Both of 
 these ideas are incorrect. 
 
 When a customer deposits money with a bank, the 
 banker does not become a trustee for this money, prom- 
 ising to take care of it for the customer. The money 
 deposited becomes the property of the bank, in exchange 
 for which the bank gives its promise to pay back that 
 amount on demand. 
 
 As we have seen in a previous chapter, the banker uses 
 this money just as the goldsmith did. He holds it and 
 uses it to pay whenever he is called upon to pay. As 
 long as he can pay when demand is made his promise 
 to pay is good so he trades his promise to pay to those 
 who want to borrow in return for their promise to pay 
 him. 
 
 It has been shown that these bank "loans" are made by 
 giving the borrower credit for a "deposit." The borrower 
 has made no deposit but has simply traded his promises 
 to pay in the shape of a promissory note for the bank- 
 ers promise to pay in the shape of a credit on the bank's 
 books. 
 
 The very fact that when the banker makes a loan he 
 gives the borrower credit for a deposit the same as he 
 gives the depositor credit shows that the banker is not 
 a trustee for money deposited but is a debtor of the 
 depositor. 
 
 Like everyone else he will pay when he can and the 
 system is framed for the purpose of making the cus- 
 tomer think that he can always pay. 
 
 The object of the Federal Reserve System, explained
 
 68 THE STRANGLE HOLD 
 
 later, is to increase credit by increasing public confidence 
 in tbe banks. Its purpose is to keep the customer 
 believing the banker can pay. By so doing the system 
 prevents too many customers from demanding payment 
 at the same time and so prevents bank runs and panics. 
 
 Just as in former times people accepted the gold- 
 smith's receipts as money because they thought that there 
 was an equivalent amount of gold behind them, so today 
 people accept banknotes and other bank credits because 
 they think that they can get money or gold in exchange 
 for them if they so desire. 
 
 Now it is true that during normal times, when there is 
 little demand for gold, it is possible to get both bank 
 credit and paper money redeemed in gold. But in ab- 
 normal times and whenever there has been really a de- 
 mand for money, when people most urgently need gold, 
 then they could not get it. And the reason why they 
 were presented from having their notes and checks re- 
 deemed in gold was because there was not enough gold 
 to supply the demand. 
 
 The promise to redeem in gold still continues while 
 fulfillment of the promise has become more and more im- 
 possible until now it is little less than a joke. The extent 
 to which tliis joke has been carried by a complicated 
 reserve system will be pointed out later. The fact that 
 there is not enough gold to fulfill the promises to pay 
 in gold is so well known to every one that were it not 
 that the human race has worshiped this false god 
 gold for so many generations the mere statement that 
 the promise is false would be sufficient. But the promise 
 still persists and what is more strange it is accepted in
 
 -"FROZEN CREDITS" 69 
 
 spite of the many, many times that it has been proved 
 to be false. We still give it credence and use it as the 
 basis of our financial system. 
 
 Figures serve only to confuse and there are more 
 potent proofs than the mere recital of figures that the 
 gold redemption promise is false. Conclusive proof is 
 based upon what everybody knows to be true — many, 
 indeed, from bitter experience. This proof is the evi- 
 dence afforded by the panics that have so often occurred, 
 during which payment in gold was demanded but refused. 
 
 Other evidence of the fallacy of the gold standard is 
 found in every issue of clearing house loan certificates 
 that has been made. 
 
 Clearing house loan certificates were first issued 
 in 1860, owing to a demand on the banks for money. 
 Subsequent issues occurred in 1861, 1863, 1864, 1873, 
 and in 1893. In recent years there have been wide ex- 
 tensions of their use. 
 
 In 1907 industry had outgrown the currency system, 
 and to supply the need, over one hundred millions of cer- 
 tificates were issued against four hundred and fifty mil- 
 lions of collateral. These were in public circulation from 
 October, 1907, to January, 1908. In 1914 over two hun- 
 dred millions of dollars in clearing house certificates 
 were issued, and got into public circulation, in addition 
 to other emergency money issued by the National Cur- 
 rency Association. 
 
 We will discuss here the issues that got into circula- 
 tion, because they afford the most complete proof that 
 the gold standard, with its promise to redeem credit in 
 gold, is fallacious.
 
 70 THE STRANGLE HOLD 
 
 From the Comptroller's Report for 1919 we learn that 
 bank deposits in the United States amounted to about 
 thirty-three billions of dollars, while the reserve held 
 against them was just a trifle over one billion dollars. 
 That is, in the richest country in the world, the banks, in- 
 cluding the Federal Reserve, has less than three dollars 
 for every hundred they promise to pay. This reserve 
 is sufficient to take care of the demand for payments in 
 money in normal times, but when an abnormal demand 
 comes, it is found inadequate. 
 
 Similar conditions existed in 1907. Business failiires 
 and other causes had precipitated a panic, which became 
 general. The result was an abnormally large demand 
 for money from the banks — depositors clamored to with- 
 draw their deposits. And there were only about two or 
 three dollars in the country to pay each hundred dollars 
 the banks had promised to pay. 
 
 There was only one way out of the difficulty, and the 
 banks took it. They put their credit in tangible form, 
 and in such shape that it looked like money. They issued 
 clearing house certificates, in appearance similar to 
 government issued paper money, and the public accepted 
 it. 
 
 In fact they had to accept it. There was no other 
 alternative, for legal relief was impossible. State gov- 
 ernors declared every day a legal holiday until the scare 
 was over. As the courts are closed on holidays and as 
 no one could bring an action against a bank the certifi- 
 cates had to be accepted. 
 
 Several inferences are possible from these issues of 
 clearing house certificates.
 
 "FROZEN CREDITS" 71 
 
 In the first place their issuance was positive proof 
 that the reserve system is founded upon fallacy. Their 
 issuance also demonstrated the immense power of the 
 banking interests. But for the moment we will set these 
 matters aside, to come back to them later, after showing 
 how the events above related prove the fallacy of the 
 gold standard. 
 
 Under the gold standard, all credit is supposed to be 
 a promise to pay in gold. A check or draft is looked 
 upon as an order for real money which is supposed to 
 be held by the bank in trust for the depositor. The 
 words on the check make it an order for money. But the 
 money is not there. While there is sufficient money held 
 in reserve to take care of the normal demand for money, 
 the moment the demand becomes abnormal, the system 
 breaks down. 
 
 When the abnormal demand of the panic of 1907 oc- 
 curred, the banks could not fulfill their obligations, for 
 the money to do so did not exist. To get out of the dif- 
 ficulty, they presented their credit in a difi"erent form, 
 and forced the people to accept this new form of credit 
 as money, at its face value. 
 
 While the public was fooled or forced into accepting 
 the certificates it is obvious, among other things, that 
 the very act of issuing them proved that banks were un- 
 able to carry out their promises. The obligation of the 
 gold standard, to pay in gold was clearly proved to be 
 impossible of fulfillment. 
 
 In fact the greatest concern of our financiers today is: 
 "How can we juggle this promise of gold redemption 
 around so as to keep the people believing in it?" It is
 
 72 THE STRANGLE HOLD 
 
 the same old question that bothered the banker's pre- 
 decessor, the goldsmith. In the chapter on "The Gold 
 Standard" it will be proved by the words of a former 
 Secretary of the Treasury that this question is the bank- 
 er's principal study. 
 
 Were the matter not so serious it would be a joke and 
 there is also a bit of comedy behind the clearing house 
 certificate which savors of the slapstick. 
 
 Panic occurred because the public lost faith in 
 bank credit. Perhaps someone realized that the banks 
 were not able to fulfill their promise to pay in gold. For 
 they had in all kinds of money only about three dollars 
 with which to pay a hundred, and so some one became 
 nervous. But our financiers were equal to the occasion. 
 They got together in their clearing house and dished 
 up the same credit in a little different form and the 
 public swallowed it. 
 
 No pomp or show of power in this — ^just a little sleight 
 of hand. Our prince of leger-de-main, the banker, issued 
 bank credit as money in defiance of the law of the land 
 and in the face of public distrust, and the people came 
 away satisfied. 
 
 The people were hoodwinked, the infraction of the 
 law was permitted to pass unnoticed, and its soothing 
 effect was mistaken for a real cure ; so the same principle 
 was used in the Emergency Currency Act of May thir- 
 tieth, 1908, and was later formulated into law by the 
 Federal Reserve Act. Both acts are attempts to escape 
 the consequences of a promise that cannot be fulfilled. 
 
 Could anytliing demonstrate more conclusively the 
 weakness and fallacy of our financial system.^
 
 "FROZEN CREDITS" 73 
 
 The gold standard which promises that all credit 
 shall be redeemed in gold is a falsehood, consequently 
 our whole system is false, for it is based on this prom- 
 ise. There is not enough gold in existence to redeem even 
 a small fraction of the outstanding credit. Whenever it 
 becomes necessary to fulfill the promise of gold redemp- 
 tion, that promise cannot be fulfilled, and it is necessary 
 to resort to tricks and subterfuge. 
 
 Now let us turn to this other phase of the same prob- 
 lem, and look into the fallacy of the reserve system. 
 
 To cash depositors and to borrowers alike the banker 
 extends his credit, in the form of a promise to pay 
 money, either on demand, or subject to certain condi- 
 tions, such as notice before withdrawal. 
 
 In order to gain public confidence and in a measure to 
 safeguard the interests of the depositor, the law re- 
 quires the bank to keep a certain proportion of its 
 deposits in reserve. In some countries the proportion 
 required is left entirely to the discretion of the banker, 
 but in this country it is fixed by law both for national 
 and for most state banks. 
 
 The actual proportion required depends upon whether 
 the bank is a state or national bank, and upon whether 
 the deposit is a time or demand deposit — a savings 
 account, or a commercial account. Commercial deposits 
 may be withdrawn at any time, but notice of intention 
 to withdraw must be given some days ahead in the case 
 of a savings account. Most banks, indeed, will pay even 
 savings accounts on demand, if times are normal, and 
 provided the depositor is willing to forego his interest. 
 
 The above, in brief, are the factors that control the
 
 74 THE STRANGLE HOLD 
 
 proportion of deposits required to be held in reserve. A 
 member of the Federal Reserve System is required to 
 keep in reserve from seven to thirteen per cent of its 
 demand deposits^ according to its location, and three per 
 cent of its time deposits. These reserves must be depos- 
 ited with the Federal Reserve Bank of the district which 
 in turn must keep thirty-five per cent of these deposits 
 (which are reserves themselves), in reserve. 
 
 Now this system is workable only so long as times are 
 normal, and there is no great demand for cash — in other 
 words, so long as industry and commerce are in such a 
 condition of confidence that bank credit is accepted with- 
 out hesitation. But where an average of about ten per 
 cent is all that is kept in reserve by primary banks, 
 and where the Federal Reserve Bank only keeps about 
 one-third of this in reserve, so that in fact only about 
 three to four per cent of demand deposits are kept in the 
 form of a cash reserve, then it is obvious that the moment 
 a demand for payment of deposits that is only slightly 
 greater than normal occurs, the whole system breaks 
 down. 
 
 To cover up the gold redemption lie and to furnish, 
 as the Federal Reserve Act says an "elastic currency," 
 that act provides that the thirty-five percent the Federal 
 Reserve Banks must retain as reserve against deposits 
 may be carried in gold or "lawful money." Greenbacks 
 are "lawful money" and it will be shown in a later chap- 
 ter that the banks may issue about ten billion dollars of 
 credit with no reserve behind it except greenbacks. 
 
 In addition the Federal Reserve Act provides that all 
 reserve requirements may be suspended by the Federal
 
 "FROZEN CREDITS" 75 
 
 Reserve Board at any time and this provision puts the 
 country on an unlimited paper money or bank credit 
 basis. 
 
 If the financiers who framed the Federal Reserve Sys- 
 tem believed that the promise to redeem in gold could be 
 fulfilled why did they provide these means of avoid- 
 ing fulfillment? 
 
 They knew, as all thinking men know, that the gold 
 standard promise is nothing but an ancient fetish and 
 so in reality they have discarded it. 
 
 However, instead of establishing a better system based 
 on truth they still try to cover up the basic falsehood of 
 the gold standard by a complicated system of reserves. 
 
 This bit of jugglery has so far accomplished the pur- 
 pose of deception, but greatly to the detriment of all con- 
 cerned, as is evidenced by our present slump in business 
 the exact cause for which will soon appear. 
 
 The issuance of clearing house certificates, aff"ords 
 proof that the gold reserve is a fiction. Every panic, 
 in fact, was abundant testimony. When banks had to 
 close their doors, when legal holidays were declared to 
 relieve them from payment, when a thousand and one 
 other subterfuges have had to be employed to escape from 
 the promise of gold redemption is it not marvelous that 
 the foolish promise still continues to be the basis of our 
 credit system? 
 
 It was formerly the custom of the English Banks, 
 when a run was being made upon them by frightened 
 depositors, to pay in sixpences. The long time required 
 to pay any considerable sum in this shape gave them lee- 
 way, and a chance to tide over the critical period until
 
 76 THE STRANGLE HOLD 
 
 the panic was over. Such a custom is merely illustra- 
 tive of many other devices that have been used and al- 
 ways will have to be employed as long as the false idea 
 of a reserve system is maintained. 
 
 It is hardly necessary to proceed further in this as the 
 falsity of the system of cash reserves behind deposits is 
 sufficiently clear. Let us now sum up the points we have 
 offered, and proceed further in our search for the cause 
 of our present troubles. 
 
 It has been shown, in the first place, that credit, as it 
 exists today, is founded upon a fallacy. The problem 
 was divided into two phases, and the fallacy in each 
 case has been demonstrated. There is no alternative but 
 to accept the truth that our present credit system, and, 
 consequently, our banking system, which controls our 
 credit, is founded upon a lie. It is no "white" lie either, 
 for it causes any amount of trouble. 
 
 In order to emphasize this fact let us digress for a 
 moment, and see what are some of the results of this 
 fallacious system. 
 
 In the early part of this book an example was given 
 of how the bankers refused to extend credit for an enter- 
 prise which would have benefited society and which was, 
 therefore, deserving of credit. And from this fact we 
 reasoned that the banker, by obstructing the fullest prog- 
 ress of industry, had acted against the best interests of 
 society. 
 
 At the same time it was hinted that this might per- 
 haps not be the banker's fault. 
 
 Let us now take the case of a banker who has ex- 
 tended his loans to such a degree that his cash on hand
 
 "FROZEN CREDITS" 77 
 
 and his credit with the Federal Reserve are only suf- 
 ficient to cover the reserves required to be held against 
 deposits. 
 
 Then, although the project above mentioned were de- 
 serving of credit, and although good security were offered 
 and the banker wanted to make the loan he could not 
 grant it, for he would not have any cash to hold or 
 fufcds to deposit with the Federal Reserve Bank as a 
 reserve against the deposit that the loan would create. 
 
 In other words the bank has arrived at its limit. It 
 has let out all the credit that the reserve requirement will 
 permit. 
 
 For instance take the little bank we started business 
 with at the beginning of this book. It had in cash from 
 the sale of its stock and from deposits $60,000, and it 
 was required to keep a 10% reserve which means that 
 it had to have 10% of its deposits in cash or on deposit 
 with the Federal Reserve. So this little bank could have 
 $600,000 in deposits. As was shown all but $50,000 of 
 these deposits or $550,000 was created by the bank mak-* 
 ing loans. Now, when a bank arrives at this point, unless 
 it gets in more cash or paper that it can deposit with the 
 Federal Reserve, it can make no more loans without ex- 
 ceeding its reserve limit. When a bank's business reaches 
 this state it must refuse to make loans. Its credit is no 
 longer "liquid" — it has arrived at the zero point where 
 bank credit "freezes." 
 
 Although we hear much of "Frozen Credits" today the 
 objection may still be made that we are here taking an 
 extreme case, and one that does not often exist. The 
 answer to this, if any be required, is that the banker's
 
 78 THE STRANGLE HOLD 
 
 fear of going too near the margin of his reserves, has a 
 similar effect, so that even in cases which are not so ex- 
 treme, there is the tendency to refuse loans where loans 
 should, in the interests of industrial progress, be ex- 
 tended. Consequently, there is the tendency to hamper 
 progress. 
 
 The extreme case is selected for illustration, because 
 it shows the matter in the clearest manner, but the 
 tendency is there and has a very strong influence whether 
 the case is an extreme one or not. 
 
 It becomes clear then that credit "freezes" because 
 it is based on gold and that "frozen credits" which are 
 the cause of our present business slump are in reality 
 "guilded credits." That is the gold redemption promise 
 is the element that causes bank credit to freeze. 
 
 Now it is also clear that credit is necessary to trade 
 and since trade creates industry, as credit freezes, so in- 
 dustry slows down. This condition makes our present 
 system very awkward, for since prosperity increases the 
 demand for credit, the more prosperous business becomes 
 the quicker bank credit freezes for the sooner it arrives 
 at the zero point set by the reserve. 
 
 So, as long as we continue a financial system where 
 credit is based on reserves, prosperity will always check 
 prosperity. 
 
 It is akin to the automobile previously referred to with 
 the reverse gear where the high speed should be. If 
 you can imagine yourself trying to operate or even ride 
 in such a machine you will have a mental picture of our 
 present social system and will understand the cause of 
 its worries and disappointments. As soon as business
 
 "FROZEN CREDITS" 79 
 
 speeds up a little the "reverse gear/' that is the reserve 
 requirement^ gets in its work and back we go. 
 
 Succeeding chapters will show how this "reverse 
 gear" may be removed or in other words how to do away 
 with the false promise of gold redemption which causes 
 bank credit to "freeze." When we perform the slight 
 operation suggested prosperity will return and it will be 
 continuous- 
 
 Now in addition to showing clearly one of the harm- 
 ful effects of a false system of credit^ the foregoing il- 
 lustration gives a hint at the fault that lies behind all 
 the other faults, and which must be taken into account 
 before a remedy can be devised that will really be a 
 remedy. 
 
 Briefly, the banker could not, Ln the above case, ex- 
 tend the loan, because, although the security offered was 
 good, it was not a liquid security or a form of security 
 required for rediscount at the Federal Reserve. 
 
 In the development of commerce from barter to ex- 
 change by means of money, a few commodities, and 
 finally only one commodity, came to be chosen as the 
 medium of exchange. 
 
 In the development of exchange by means of credit, 
 the superiority of this one commodity — gold — was not 
 assailed. 
 
 But commerce has now outgrown credit based on one 
 commodity, and requires a system of credit based on all 
 commodities of value and one which will always have 
 a full measure of public confidence. 
 
 But before we discuss the remedy, we mnst see clearly 
 •what must be remedied. We will continue, therefore.
 
 80 THE STRANGLE HOLD 
 
 with our inquiry into the defects of our present system 
 of exchange. 
 
 In discussing the issue of clearing house certificates, 
 we stated that those issues which got into public circula- 
 tion afforded a powerful instance of the immense power 
 of the banking interests. 
 
 In issuing these certificates, and allowing them to get 
 into public circulation, these interests committed an in- 
 fraction of the law, and escaped unpunished. 
 
 The Constitution reserves the right — "to coin money'* 
 — to the Federal Government. Money is the medium of 
 exchange, and clearing house certificates became part 
 of the medium of exchange while they were in public 
 circulation. There was no legal sanction to the issuing 
 of those certificates, and in issuing them, therefore, the 
 clearing houses, and through them the bankers, infringed 
 the law. 
 
 Now there is no doubt that the expedient of issuing 
 those certificates prevented further disaster, but this 
 does not lessen the fact that it was an infraction of the 
 law. And it is perfectly obvious that no lesser power than 
 the banking interests would have been permitted to 
 justify an infraction of the law by the plea of expe- 
 diency. 
 
 That they were allowed to do so, therefore, and escaped 
 unpunished, indicates the extent of their power. 
 
 We have had many evidences of the existence of a bid- 
 den power which is superior to government authority, but 
 probably no occurrence has ever pointed out more dis- 
 tinctly the extent of this power, and at the same time the 
 exact source from which it springs.
 
 "FROZEN CREDITS" 81 
 
 And furthermore, the plea of expediency is in itself 
 an indictment of the system which makes such an expe- 
 dient necessary. For the plea of expediency implies 
 that the method resorted to was illegal. 
 
 Would anyone be disposed to deny that a system which 
 requires the use of an illegal expedient to avoid the harm- 
 ful results of its inadequacy is a faulty system, and 
 therefore one which should be revised? 
 
 Here we have at one time an illustration showing 
 that our medium of exchange is entirely inadequate to 
 perform the service required of it, and also a glimpse of 
 the tremendous power the group which controls it has 
 acquired. 
 
 These, then, are the faults of our present medium of 
 exchange. 
 
 Primarily, it is in the control of private interests, who 
 can determine its amount, and whose control inevitably 
 tends toward a restriction in volume, so that industry is 
 continually hampered and every period of prosperity is 
 invariably followed by a period of contraction in the 
 medium of exchange resulting in depression of business. 
 
 Secondly, the medium of exchange, as it exists today, 
 rests upon a false foundation, one that is too narrow, one 
 which, although usable during the earlier stages of the 
 development of bank credit, has become outgrown, 
 and, lastly, one which contributes to the destructiveness 
 of the private control of bank credit. 
 
 This foundation is the gold standard, under which all 
 credit is based upon gold, and the medium of exchange 
 is supported by a gold reserve rather than by sound 
 credit based on real value.
 
 82 THE STRANGLE HOLD 
 
 The whole purpose of this discussion has been to 
 point a way to a remedy. 
 
 Now that we see clearly where the present system falls 
 short, and where it is necessary to apply correction, we 
 can understand what features the remedy must possess, 
 in order to satisfy the present demands of commerce. 
 
 We are consequently now ready to proceed in our 
 search for an improvement which will do away with these 
 shortcomings in our financial system and which will 
 not only restore the country to a condition of prosperity 
 but which will permit prosperity to continue. 
 
 But there is another point that we must bear in mind, 
 and that is to make the remedy practical. We must take 
 things as they are today, and devise a means which, 
 while effectual in abolishing the trouble, does not necessi- 
 tate such wide-sweeping changes as to be practically im- 
 possible of application. 
 
 We cannot reach far without standing on the shoulders 
 of our predecessors, and we, therefore, should seek to 
 preserve the good qualities of the present order, while 
 modifying it only so far as is necessary to eradicate the 
 shortcomings. In this way only can a practical and per- 
 manent change for the better be hoped for. 
 
 With this in mind, our next step is to inquire more 
 closely into what might be called the philosophy of 
 money — to see exactly what the nature of our medium 
 of exchange is, what place it should fill, and what its 
 functions should be. Then we may proceed to our in- 
 quiry as to what actual measures must be taken to modify 
 the present system in such a way that our exchange 
 medium will fulfill its proper functions.
 
 "FROZEN CREDITS" 83 
 
 Then the next step after that, the last step, will be to 
 suggest tlie actual means by which these measures can 
 be practically applied to our present system and finally 
 we must show that they accomplish the desired result.
 
 CHAPTER VI 
 A PERFECT EXCHANGE SYSTEM 
 
 IN ORDER to determine what sort of medium of ex- 
 change would best be suited to existing conditions of 
 modern industry and commerce, the first step is to gain 
 a definite idea of the proper functions of a medium of 
 exchange. 
 
 For this purpose let us first of all make a distinction 
 which, while somewhat arbitrary, may help us to obtain 
 a better understanding of the subject; that 'S the dis- 
 tinction between money and the medium of exchange. 
 
 Money is a measure of value, while the medium of 
 exchange is the means used to transfer the ownership of 
 goods and to compensate services. 
 
 In order to make this distinction clear, let us compare 
 the conceptions of value and length. Both value and 
 length express a ratio between different objects. We 
 say, this is longer or shorter than that, and, this is more 
 or less valuable than that. And in order the more easily 
 to compare the length of different objects, an arbitrary 
 table of standards has been fixed. A certain absolute 
 length is called a foot. One-twelfth of this length is an 
 inch. A length equal to three feet is a yard. 
 
 A similar table of standards is made as regards value. 
 In the United States this money table for measuring 
 value is as follows: 
 
 84.
 
 A PERFECT EXCHANGE SYSTEM 85 
 
 Ten mills make one cent. 
 Ten cents make one dime. 
 Ten dimes make one dollar. 
 
 And just as a certain definite length was arbitrarily- 
 set and called a foot, so was it also intended that a cer- 
 tain arbitrary amount of value should be called a dollar. 
 
 In itself, then, money is not value, but the measure of 
 the exchangeable ratios between various goods and serv- 
 ices — that is, money is the measure of value. 
 
 What the foot is to the measure of length, the dollar 
 is to the measure of value. The foot is that unit in which 
 we express length and the dollar is the unit in which we 
 express value or price. 
 
 In order, therefore, to determine what are the qual- 
 ities essentially required in an ideal medium of exchange, 
 it is necessary first to determine exactly what are the 
 functions of money. Having determined this, it is then 
 possible to proceed and determine what qualities a 
 medium of exchange should have in order to fulfill those 
 functions in an adequate manner. 
 
 The object of transportation is to add value to goods 
 by changing their location; the railroads are one of the 
 most important factors in carrying out this object. Sim- 
 ilarly, the object of money is to add value to goods by 
 facilitating a change in their ownership, so that they 
 will be owned by someone to whom they are worth more ; 
 this object is carried out by means of the medium of ex- 
 change. 
 
 Just as the ideal transportation medium is the medium 
 which will change the location of goods, whenever neces-
 
 86 THE STRANGLE HOLD 
 
 sary, with the least possible effort and trouble, so the 
 ideal medium of exchange is the medium which will 
 change the ownership in goods with the least possible 
 friction, trouble, and loss, and whenever necessary. 
 
 The medium of exchange, then, is not an end in itself, 
 but only a means to an end. It is a means by which 
 people may exchange what they have for something 
 which they are more desirous of having. 
 
 This exchange could be made directly, by means of 
 bartering one goods for another, but at best barter is a 
 very cumbersome and unsatisfactory method. Exchange 
 carried on by barter is practiced only in the early stages 
 of civilization. Even the smallest advancement in civil- 
 ization requires some sort of a medium of exchange in 
 order to carry on trade. 
 
 People, therefore, are interested in getting money for 
 what they have only in order that they may get what 
 they want at some future time in exchange for what- 
 ever they accept as money. 
 
 Immediately we see one essential requirement of any 
 medium of exchange, acceptability. People will not give 
 up their goods for a medium unless they are sure that in 
 turn they can get in exchange for that medium what they 
 want. They must feel sure that other people will accept 
 from them the medium of exchange in return for the 
 goods they have to sell. 
 
 "Safety First" or confidence then in the medium of 
 exchange is the first necessary requisite. 
 
 Furthermore, people are interested not only in getting 
 something in exchange for what they give up — they are 
 interested also in getting an equal amount of value and
 
 A PERFECT EXCHANGE SYSTEM 87 
 
 having what they get retain its value. Here we have 
 the element of time. 
 
 Some time must elapse from the moment when a per- 
 son gives up the goods he possesses — or the services he 
 renders, his labor — in exchange for a quantity of the 
 medium of exchange, and the moment that he uses it, or 
 a part of it, to purchase the goods he desires. This time 
 may be longer or shorter, but irrespective of its length, 
 it is essential that the medium of exchange shall not 
 shrink in value while it is in his hands. 
 
 The reverse is also essential — the medium of exchange 
 must not swell in value. For while this would benefit the 
 person who possesses a quantity of the medium of ex- 
 change, it would work just as great an amount of harm 
 to some other person who is not holding the medium of 
 exchange, and who finds it more difficult to obtain the 
 same in exchange for his goods. 
 
 These then are the two essentials of the ideal medium 
 of exchange. The people must have absolute confidence 
 in it, so that it will be accepted by everybody without 
 question. This condition prevails only when everybody 
 feels quite sure that he will be able to get what he de- 
 sires in exchange for it. 
 
 And secondly, it must have an absolutely stable value. 
 The dollar must not grow larger or smaller. 
 
 Think of what would happen if the standard of other 
 measures should fluctuate. 
 
 Suppose the yardstick were shortened one inch. Then 
 the creditor who had due him ten yards of cloth would 
 lose ten inches. And on the other hand, if the yard stick 
 were lengthened one inch, the creditor would gain ten
 
 88 THE STRANGLE HOLD 
 
 inches this time, but the debtor, the man who had to hand 
 over ten yards of cloth, would have to hand over a 
 length equal to ten inches longer than he had bargained 
 to hand over. The debtor in this case would lose ten 
 inches of cloth, or an amount of value corresponding to 
 the value of ten inches of cloth. Think of the havoc and 
 confusion such an occurrence would give rise to. 
 
 And this is precisely what does happen to the meas- 
 ure of value. 
 
 Commercially, value is price. The exchangeable value 
 of anything is its price. If we shorten the value meas- 
 ure prices go up for it takes less goods to equal a certain 
 sum and if we lengthen the value measure it will take 
 more goods so prices will go down. An example will 
 make this clear. 
 
 In the early days of colonial Virginia the colonists, 
 for want of coins of precious metals, used tobacco as a 
 medium of exchange. When tlie tobacco crojj was large, 
 the volume of the medium of exchange became inflated, 
 and it took more tobacco to buy a bolt of cloth, a keg of 
 rum or a sack of potatoes than it did when the crop was 
 normal. In other words, a heavy crop of tobacco meant 
 that prices would be high. This favored the debtor for 
 it shortened the measure of value and thereby reduced 
 the amount of goods or services he must render to pay 
 his debts just as the shortening of the yard stick would 
 reduce the amount of cloth the seller would give for a 
 yard. 
 
 Conversely, when the tobacco crop was small, the 
 volume of the medium of exchange contracted, and the 
 same articles could be bought with less tobacco. A bad
 
 A PERFECT EXCHANGE SYSTEM 89 
 
 crop of tobacco meant low prices or the lengthening of 
 the measure of value. 
 
 Tobacco, although a clumsy medium of exchange, in 
 principle is not different from gold and silver, which 
 are mined in unequal quantities yearly. 
 
 It was the discovery of gold in Alaska and the conse- 
 quent enlargement of this medium that allayed the free 
 silver talk of the nineties, not any law passed by 
 Congress. Increase in the volume of gold brought down 
 its price, and relieved the evil of contraction and low 
 prices. 
 
 In the above discussion, by prices we mean the general 
 level of prices, or the purchasing power of the dollar. A 
 change in the general level of prices is in reality a 
 change in the value of the dollar and such a change is 
 just as great an evil as a change in the measure of 
 length would be. It is a change in the value unit and is 
 analogous to a change in the length of the yardstick. 
 
 When a man exchanges his goods for any medium of 
 exchange, his only concern is that what he receives shall 
 be accepted from him at the same value measured in 
 dollars and cents. 
 
 A stable value for the dollar does not mean that indi- 
 vidual prices should remain constant. We have no right 
 to ask that a given amount of the medium of exchange 
 shall exchange for the same amount of flour or clothing 
 or labor the next year as it does this. Individual prices 
 of individual commodities must be determined by the 
 demand for and supply of the particular article or 
 service. 
 
 The sole object of any medium of exchange is to
 
 90 THE STRANGLE HOLD 
 
 keep track of credits. It is a system of book-keeping, 
 and the book-keeper should be on the square, so that a 
 given credit shall mean the same thing from one time 
 to another. 
 
 The unit of value — the dollar in the United States, 
 should transfer the same amount of value at all times. 
 The amount of value commanded by the different com- 
 modities may vary, and must vary, with changing condi- 
 tions of supply and demand of those commodities, but 
 the amount of value which the dollar measures must be 
 expressed in unvarying units. 
 
 Value is divided into fixed units only for purposes of 
 comparison — in order that we may compare the worth of 
 one commodity with that of another — and of what use 
 are those units unless they mean the same thing at all 
 times the same as do other measures? The value of the 
 dollar must not fluctuate. That is, the average price 
 level must remain constant. 
 
 This is in nowise affected by the substance out of 
 which the measure of value happens to be made. There 
 is no more need to make an eagle out of gold, a dollar 
 out of silver, and a cent out of copper, than to make a 
 yardstick out of gold, a foot rule out of silver, and an 
 inch measure out of copper. 
 
 We are interested in the thing measured and not in 
 the measure itself. Convenience is the only rule to be 
 followed here. 
 
 These then are the two requirements which the ideal 
 medium of exchange must possess : confidence, or unvary- 
 ing acceptability, and stability, or unvarying value. 
 
 The value or price of the dollar depends upon two
 
 A PERFECT EXCHANGE SYSTExM 91 
 
 factors and their relation to each other. These are, the 
 volume of the medium of exchange — the number of dol- 
 lars in circulation — and the volume of business trans- 
 acted by that medium — the number and amount of the 
 exchanges which those dollars must effect. 
 
 Convenience alone dictates the actual relation between 
 these two, that is, the number of dollars which are best 
 adapted to effect the exchange of a given amount of 
 value, but once this relation has been set, it should remain 
 fixed, and not fluctuate, as it does today. 
 
 The fluctuation of this relation — the number of dollars 
 to a given amount of value — occurs only because the 
 medium of exchange does not vary hand in hand with 
 variations in the volume of business. 
 
 As we have already seen, if the volume of business 
 increases while the volume of the medium of exchange 
 remains unchanged, then each unit of the medium of 
 exchange, each dollar, will have to exchange a larger 
 amount — will have to do more work. Prices will go 
 down, that is, the price of money will go up. The value 
 of the measure of value has increased, and the results 
 are analogous to the results of an increase in the length 
 of the measure of length. When the dollar stretches 
 it takes more wheat to make a dollar's worth and if the 
 yardstick would be stretched it would take more cloth 
 to make a yard. If the volume of the medium of ex- 
 change was normal before the volume of business in- 
 creased, then it is insufiicient now, and the community 
 is suffering from contraction. 
 
 The very same thing happens if the volume of business 
 remains the same and the medium of exchange shrinks.
 
 92 THE STRANGLE HOLD 
 
 Inflation, as we have seen, has the opposite effect. It 
 is the result either of a decreased volume of business with 
 the same volume of the medium of exchange, or of an 
 increased volume of the medium of exchange with an 
 unchanged volume of business. Its effects are similar to 
 those which would follow if we squeezed the yardstick 
 down, so that it became shorter. The value of each unit, 
 each individual dollar, decreases, and the general level 
 of prices increases. 
 
 Inflation raises prices and deflation lowers them. 
 This change occurs without any change in the supply of 
 or demand for the various commodities other than as the 
 demand is affected by the volume of money. It really is 
 not that the prices of any commodities have changed, but 
 that the value of the dollar has fluctuated. 
 
 And now we see that the only way to stop the dollar 
 from fluctuating in value is to tie the medium of exchange 
 in such a way to the volume of business that the two 
 will always vary together. 
 
 If the volume of business is cut in half, the volume 
 of the medium of exchange will then also be cut in half, 
 and a single dollar will express the same amount of value 
 as before. 
 
 And if the volume of business doubled, then the volume 
 of the medium of exchange would be doubled, and a 
 dollar would still be worth just as much as, and not more 
 than, before. 
 
 We require a medium of exchange, then, that is elastic, 
 and, furthermore, this elasticity must be governed by 
 the volume of business, so that the relation or ratio 
 between the volume of business and the volume of the
 
 A PERFECT EXCHANGE SYSTEM 93 
 
 medium of exchange shall always remain the same. 
 When this is done, the value of the dollar will not 
 fluctuate. 
 
 An apparently natural question that would arise at 
 this point is, what volume of medium of exchange is 
 suited to a given volume of business? What amount of 
 money is necessary to a community ? 
 
 Economists in the seventeenth century attempted to 
 answer this question in definite terms. 
 
 For instance^ Sir William Petty set the amount of 
 money necessary as one half the rent of land, one fourth 
 the amount of the building rent, and one fifty-second 
 part of the annual wages of labor — this last indicating^ 
 that wages were paid weekly on the average. 
 
 The philosopher Locke's view was that the amoimt of 
 money necessary in any community was one-fifth of the 
 laborer's wages, one-fourth of the land owners* revenues, 
 and one-twentieth of the traders' yearly returns. 
 
 Modern economists have had the good sense not to 
 venture a guess at this question, which in fact, is an 
 unanswerable one. 
 
 But while no attempt is made by modern writers to 
 fix the volume of the medium of exchange required for 
 business the idea still persists that there is some fixed 
 ratio or amount. The idea shows itself in such expres- 
 sions as, "Business will revive when we get back to 
 NORMAL," "Good times will return when prices come 
 to normal;' "NORMALCY will bring prosperity," 
 etc. 
 
 All such expressions suggest that the user believes 
 there is a normal condition to be reached under our
 
 94 THE STRANGLE HOLD 
 
 present system. That is they suggest that there is a 
 certain fixed volume for our medium of exchange or at 
 least that there is a certain fixed ratio between the 
 volume of business and that of the medium of exchange. 
 
 If there ever was or could be such a ratio it is evident 
 that it is impossible of attainment under our system so 
 long as it is based on a fictitious reserve and is privately 
 controlled. The truth of this statement should be per- 
 fectly apparent for it has been demonstrated beyond 
 question that under our present system the volume of 
 the medium of exchange controls the volume of business. 
 When the private control lets out credit and allows busi- 
 ness to get into a prosperous condition the demand for 
 credit increases and runs bank credit up against the re- 
 serve, the "freezing" point, and "Frozen Credits" cause 
 a slump. Consequently our condition is never normal 
 and never can be so long as these defects remain. The 
 fever of prosperity produces the subnormalcy of slump. 
 So we are always looking for "NORMALCY/' meaning 
 a condition of peace and good will, but "NOR]MALCY" 
 never arrives. Our exchange system makes our normal 
 condition one of uncertainty, worry and turmoil. 
 
 A normal condition, however, can be reached when by 
 public control we tie the volume of the medium of 
 exchange to the requirements of business so that the 
 demands of business will control. Then normalcy will 
 arrive, for if the medium of exchange were placed under 
 such conditions the volume would take care of itself, it 
 would be automatically regulated to the correct amount, 
 being neither more nor less than necessary and the dollar 
 "would not fluctuate in value.
 
 A PERFECT EXCHANGE SYSTEM 95 
 
 Since the medium of exchange is only a means to 
 an end and not an end in itself — the end being to facili- 
 tate trade, that is to permit one to obtain what one de- 
 sires in return for what one has, the simplest medium 
 of exchange would be one from which all concrete at- 
 tributes were taken away. 
 
 That is to say, it would be merely a process or system 
 of book-keeping, and entirely abstract. 
 
 Whoever sold anything would receive from the pur- 
 chaser his I. O. U. for the amount of the price. Who- 
 ever bought anything would give his I. O. U. to the 
 seller for the amount of the price. These I. O. U.s 
 would be sent to a central clearing house, where those 
 taken by any particular person would be cleared against 
 those given out by that person, and the balance would 
 be charged or credited to him according to whether the 
 amount of those received fell short of or exceeded the 
 amount given out. 
 
 This arrangement would be an ideal financial system. 
 By such a system the facility for exchanging goods and 
 services would be practically perfect. The medium of 
 exchange would be perfectly elastic, for its amount would 
 vary in exact proportion to variations in the volume of 
 business. Such a system would allow perfect freedom 
 in the exchange of goods and services, and would not 
 control or hamper trade and production. 
 
 But, while such a medium would fulfill one of the 
 two necessary requisites of an ideal medium of exchange, 
 it would not satisfy the other. It would answer the need 
 of stability by proper elasticity, but it would not fulfill 
 the need of confidence.
 
 96 THE STRANGLE HOLD 
 
 The illustration is fcunded upon a false assumption, 
 tlie assumption that every one is honest and capable 
 of fulfilling every obligation, and that every one knows 
 that every one else is honest and capable. In other 
 words, it assumes one hundred per cent confidence in 
 one another among all the individuals of the community. 
 This is a false assumption, since the human race is not 
 invariably honest, and probably even less capable of ful- 
 filling every obligation. The entire supposition, there- 
 fore, is false, and such a financial system could not bo 
 instituted. 
 
 The system is at one extreme. It satisfies one require- 
 ment, the requirement of stability in value, but it falls 
 entirely short of the other requirement, that of con- 
 fidence. 
 
 The metallic system is at the other extreme, it ful- 
 fills the requirement of confidence, but does not fulfill 
 the requirement of elasticity, and consequently of 
 stability. 
 
 The metallic system is one in which certain metals 
 [form the medium of exchange. Such a system would 
 iexist if gold alone formed the entire medium. 
 
 Owin'^j to its scarcity, and universal desirability, gold 
 possesses ccmething in the nature of an intrinsic value, 
 and this quality gives to it the necessary requirement of 
 confidence. But the other requirements of elasticity and 
 stability, would be absent, in a metallic system. For, as 
 was shown in preceding chapters, the quantity of the 
 metal does not vary with the variations in the volume 
 of business. On the contrary, as commerce and industry 
 increases, the production of gold tends to decrease.
 
 A PERFECT EXCHANGE SYSTEM 97 
 
 The metallic system then is at the other extreme. 
 The requirement of confidence is fulfilled, but the re- 
 quirement of stability through proper elasticity is not 
 fulfilled. 
 
 Let us now examine the medium of exchange which 
 we actually do use, bank credit, in order to determine 
 what requirements are necessary to make it a better 
 medium. 
 
 The requirement of confidence is partly fulfilled, for 
 people to a great extent are willing to accept bank 
 credit in return for their goods. But it is only partly 
 fulfilled, a fact which is at once illustrated by the neces- 
 sity for keeping monetary reserves behind bank deposits. 
 
 The requirement of elasticity is also partly fulfilled by 
 a complicated system of reserves, for the volume of bank 
 credit can be increased or decreased without entire 
 reference to any particular commodity; but this is only 
 within certain limits, partly because it is still tied to one 
 commodity — gold. 
 
 Upon examination it appears, however, that our pres- 
 ent medium of exchange is not essentially difi'erent from 
 the ideal arrangement mentioned, where perfect confi- 
 dence was assumed, and personal I. O. U.s were the 
 medium of exchange. 
 
 The chief difference is that, not having entire confi- 
 dence in one another, our I. O. U.s, instead of being 
 used directly, are traded for the banker's I. O. U., in 
 the form of a bank credit or deposit, which is trans- 
 ferred back and forth among us by means of checks. 
 
 It does not necessarily follow that the banker is any 
 more honest or capable than any other individual in the
 
 98 THE STRANGLE HOLD 
 
 community, but the increase of the banking habit haa 
 made his credit better known, and our banking laws 
 have promoted public confidence. Therefore, bank credit 
 is more acceptable than private or personal credit. 
 
 Bank credit, then, fulfills both essential requirements, 
 to a limited extent. 
 
 By this limitation, bank credit falls short of being 
 an ideal medium of exchange, as it is constituted today. 
 
 But this does not necessarily prove that bank credit 
 could not be made the ideal medium of exchange. In 
 fact, it points rather to the opposite conclusion. 
 
 Since it possesses both qualities to a certain degree, 
 it is probable that a proper means of creating and using 
 this medium of exchange would make it an ideal medium. 
 
 This conclusion is still further strengthened by the 
 fact that the reasons for its limitations are not reasons 
 necessarily bound up with the medium itself. 
 
 For instance, the reason why bank credit, as we have 
 it today, does not fluctuate in volume with variations in 
 the amount of business activity, is because the control 
 of the volume of bank credit is in private hands, and 
 because it is based on a false standard, — gold converti- 
 bility. Neither of these faults are inseparable from 
 bank credit, and consequently these bad qualities can be 
 exchanged for qualities that will enable the volume of 
 bank credit to fluctuate according to the needs of busi- 
 ness. 
 
 The problem, then, is comparatively a simple one. No 
 radical change is necessary. The present system needs 
 but slight alteration and reformation in certain features 
 in order to give us the ideal medium of exchange.
 
 A PERFECT EXCHANGE SYSTEM 99 
 
 The alterations required are such as will, in the first 
 place, put one hundred per cent confidence behind bank 
 credit, and in the second place, take the control of its 
 volume out of private hands. 
 
 It must be issued so all will know it is safe. Control 
 must be placed where variation in volume will be regu- 
 lated by business activity, so that at no- time will there 
 be too little of the medium of exchange in circulation, 
 and likewise never too much, but always the exact 
 amount required for the needs of business. 
 
 Bank credit is no different from any other credit and 
 consists of confidence and time. The greater the confi- 
 dence the longer the time. 
 
 One hundred per cent confidence is confidence which 
 will extend for practically an unlimited time. This con- 
 fidence the present financial system lacks, as is shown by 
 the SO, 60 and 90 day limit placed on bank loans. It is 
 the lack of public confidence in the bank that causes this 
 lack of time in bank credit and prevents our banks from 
 carrying the long time credits necessary for agriculture 
 and foreign trade. 
 
 A practical remedy must supply the 100% confidence 
 necessary for the perfection of our medium of exchange. 
 Then reserve requirements, the gold standard, and all 
 similar makeshifts used for the purpose of holding con- 
 fidence would disappear, and the banks could carry any 
 good credit for any length of time. 
 
 All good securities would be liquid assets. They would 
 be bankable securities. Industry would no longer suffer 
 from short time credits or from periodical setbacks, 
 because credit had frozen up. The cause of "Frozen
 
 100 THE STRANGLE HOLD 
 
 Credits/' "Bayers' Strikes" and recurring periods of 
 depression would then be removed and progress and 
 prosperity would go ahead without interruption. 
 
 The other part of the problem is to ensure the proper 
 variation in the volume of the medium of exchange, so 
 that expansion and contraction of the medium will not 
 affect the value of the dollar but will occur only as 
 business espacds or contracts and industry will be 
 allowed full swing. 
 
 Both these objects can be accomplished by taking 
 bank credit, the medium of exchange, out of private 
 hands and putting it under the proper public control. 
 
 The next step then is to show how this can be done in 
 a practical way.
 
 CHAPTER VII 
 100% SAFETY AND ELASTICITY 
 
 NOW that we have come to a point M-here we can 
 seek to apply a remedy for the situation, we 
 see that the problem is a double one, that it has two 
 parts. 
 
 In the first place, it is necessary so to tie the volume 
 of the medium of exchange to trade and industry that it 
 will correspond to variations in the volume of business. 
 This regulation is necessary in order to stabilize the 
 value of the dollar and to provide a constant general 
 level of prices. 
 
 Secondly, we have the problem of gaining and holding 
 full public confidence in the medium; so it will be readily 
 accepted by all. 
 
 The system must be such that everyone will know that 
 he in turn will be able to get rid of the medium of ex- 
 change in payment for what he wants ; without a shrink- 
 age in value. 
 
 In short, the medium of exchange must be such as 
 will possess stability through proper elasticity, and 
 safety through full confidence. 
 
 With regard to the first requirement, we see that it 
 is based, of course, upon the method in which the medium 
 of exchange comes to vary in volume, and we see that, 
 since bank credit is our medium of exchange, and the 
 banker has full power to extend bank credit or withold 
 
 101
 
 102 THE STRANGLE HOLD 
 
 it, the variations in volume are today entirely in the 
 hands of the bankers. 
 
 Since the power to refuse or to grant a loan determines 
 the volume of the medium of exchange, the elasticity of 
 that medium depends upon this power. 
 
 We have here the kernel to the solution of one part 
 of our problem. This power, to grant or refuse a loan, 
 must be so placed that it will operate only when business 
 demands it. It must operate so that the medium of ex- 
 change will always be there for use when trade and 
 industry demand it. The question of whether a loan 
 should be granted or refused should be answered only by 
 the demands of business in such a way that tlie medium 
 of exchange will vary in volume directly as the amount 
 of business offered may vary. 
 
 As begins now to be clear, and, as will be shown more 
 forcefully very soon, the arrangement necessary to ac- 
 complish the desired end, involves the taking of the 
 power to decide loans out of private hands. 
 
 Confidence in bank credit depends upon the security 
 behind the loans made by the banks and, therefore, the 
 methods used in granting loans determines the amount 
 of confidence or safety in our medium. 
 
 When people know that there is full value behind any 
 medium of exchange, then they are willing to accept it 
 at full value. 
 
 "VMien they do not know whether or not there is full 
 value behind it, they are always in fear of it or they 
 will accept it only at a lesser rate, depending upon the 
 degree of certainty or uncertainty. 
 
 This lack of knowledge as to what is behind bank
 
 100% SAFETY AND ELASTICITY 103 
 
 credit is the reason why, when anything occurs to shake 
 the confidence of the people, they rush to withdraw their 
 deposits from the banks. They feel uncertain as to the 
 value behind their money in the form of bank deposits, 
 or bank credit, whereas they always feel perfectly cer- 
 tain about the value of gold. 
 
 It follows, from the foregoing, that if people could be 
 made to feel quite certain that there is full value behind 
 every dollar's worth of bank credit demand would never 
 be made for payment of bank deposits in money. The 
 people would accept it at full value without fear, and 
 panics and bank runs would be abolished. 
 
 With one hundred per cent confidence in bank credit 
 gold reserves and in fact no legal reserves would be 
 necessary. 
 
 The remedy involves, then, the substitution of a more 
 logical security than the promise to pay gold as the 
 value behind the medium of exchange in circulation. 
 
 This security must be of such a value as will bring 
 with it absolute, one hundred per cent confidence in the 
 medium, so that it will always be acceptable. People 
 must never feel doubtful as to the likelihood of their 
 getting value in return for it. 
 
 These principles then, are the general points that are 
 to guide us in fitting the remedy to the conditions re- 
 quiring reform. 
 
 For greater convenience in proceeding, we may divide 
 the process of creating the medium of exchange, bank 
 credit, into three steps or phases. 
 
 The first phase is, whether the credit shall be created 
 or not, whether the loan shall be advanced or not.
 
 104 THE STRANGLE HOLD 
 
 The second step is the appraisement of the value of 
 the security offered for the loan. 
 
 The third step is to determine what percentage of the 
 appraised value can be safely loaned against the security. 
 
 These demarcations are not very important in them- 
 selves. All the steps are always present in making a 
 loan, but they are not clearly marked off from each 
 other. However, owing to the greater ease and simplicity 
 of dealing with the problem in this manner, we may fol- 
 low the demarcation, keeping in mind that it is neither a 
 very pronounced nor a very important one. 
 
 Our present method of issuing bank credit is as fol- 
 lows: 
 
 When a person applies to a bank for a loan, the first 
 thing the banker does is to appraise the security. Since 
 this is the customary order, we will discuss this step first. 
 
 In the case of personal property the value is easily 
 ascertained from market reports or discount sheets, but 
 in many cases an appraisement of real property is but 
 a guess at the value, and a one-sided guess at that. Not 
 only does the result depend upon the banker's limited 
 information, but his self-interest, personal friendship 
 and prejudices, may also enter into the transaction. In 
 fact some loans are made without security. The public 
 knows that these conditions exist and, consequently, the 
 people cannot have full confidence in the medium of 
 exchange that is created by the loan. 
 
 Here, then, we see the first particular need of reform 
 and that is in the matter of appraising the value of the 
 security offered for the loan. 
 
 At this point we may recall the banker's set formula.
 
 100% SAFETY AND ELASTICITY 105 
 
 "The security is good but not bankable." Our first step 
 is to ascertain just how good the security is and t'lls 
 must be determined in such a way that every member 
 of the community will accept the appraisement of the 
 security as being the true value. 
 
 Our system must be such as will determine the true 
 value of every kind of property, both real and personal, 
 and the method used must be such as will impress the 
 people with the fact that it is the real value. Every 
 member of the community must accept and believe in 
 every security and every good security must be a bank- 
 able security. 
 
 The farmer's land, the merchant's goods and the bond 
 holder's bonds, must all be equally "liquid" and all 
 equally acceptable as security for a bank loan; the 
 percentage of the loan to the value depending on the 
 stability of the value of the security offered, that is on 
 the fluctuation in its price. 
 
 Now it so happens that we already have two separate 
 systems of public appraisal which cover all property. 
 With a slight and simple change in one of these systems 
 they both become excellently adapted to the appraisal 
 of securities oIFered for bank loans. And at the same 
 time by the change in one of these systems it will 
 operate all the more satisfactory in its present field. 
 
 Practically all personal property such as stocks, bonds, 
 wheat, cotton, leather, etc., is appraised every day by 
 sales on the various exchanges or in the markets where 
 such goods are handled. The actual value is established 
 daily and the price is published so this system needs no 
 revision.
 
 106 THE STRANGLE HOLD 
 
 And, as every taxpayer knows, the machinery for the 
 public appraisement of all private property operates 
 throughout the country. All private property is ap- 
 praised for taxes by the public assessor. It is true that 
 this system at present has its faults. In some parts of 
 the country it is laxly or unfairly regulated and admin- 
 istered. In others, however, it is carefully handled. 
 With a slight change in state laws, which will place no 
 added burden on the taxpayers, the assessor's records 
 can be made to serve with entire satisfaction in the ap- 
 praisal of securities, not otherwise appraised. And what 
 is more, these records will on that account become the 
 more accurate and satisfactory as a basis of taxation. 
 
 It is obvious that, at present, it is to the personal 
 interest of the tax-payer to have as low a valuation as 
 possible placed upon his property, since a low assess- 
 ment cuts down the amount of taxes he has to pay. And 
 even though he be perfectly honest, the desire to save 
 taxes will nevertheless have a tendency, even if an un- 
 conscious one, to make him lower the valuation. 
 
 Precisely the opposite is the case, on the other hand, 
 when the property holder is seeking to obtain a loan 
 from the bank with the same property as security. Then 
 his interest is to make the valuation as high as possible, 
 thereby increasing the loan that he may negotiate upon 
 it as a basis. 
 
 It follows then that if the same appraisal is used 
 to determine the value of property both for one purpose 
 and for the other, the two conflicting tendencies will 
 operate against and so neutralize each other. 
 
 In consequence of this conflict the very force of self-
 
 100% SAFETY AND ELASTICITY 107 
 
 interest will be the cause of a just valuation. For as a 
 tax-payer the property-holder will seek the lowest valu- 
 ation, and as a person desiring a loan the same property 
 holder will seek the highest valuation. Where one valu- 
 ation is made to serve for both purposes, the conflicting 
 tendencies will counteract one another, and a fair or just 
 valuation must be the result. 
 
 The tax laws generally provide that property shall be 
 assessed at its "true value." At present the value of 
 property for tax purposes is set arbitrarily by the 
 assessor, and is subject to revision only by a board of 
 equalization. 
 
 This method of appraising property is fiilly as re- 
 liable as the method of appraisement used by a bank. 
 However, in neither case is the true value arrived at. 
 Both systems are based on the opinions or guesses of a 
 few men, whose views are often colored by prejudice, 
 personal interest, and favoritism. 
 
 A system for the appraisal of securities for bank loans 
 must be entirely beyond the reach of any personal in- 
 terest or human weakness. Guess work and prejudice 
 must be overcome and it must be made apparent to the 
 whole community that the true value has been de- 
 termined. 
 
 Now, as we have just seen, if valuations given on the 
 tax-rolls were made to serve as valuations of security 
 for bank loans, tax-payers and borrowers, caught be- 
 tween their conflicting interests, would strike a mean, 
 or true, value. Over-valuing the property would secure 
 no advantage to a borrower, for the banker would insist 
 on cutting down the amount loaned — the percentage of
 
 108 THE STRANGLE HOLD 
 
 the loan to tlie value. The net result of over-valuing 
 then would only tend to a loss for the property owner 
 through increased taxes. 
 
 Under-valuing would cease also, for since the tax rate 
 is fixed by dividing the amount to be raised for govern- 
 ment purposes by the whole amoimt on the assessment 
 roll, under-valuation would be of no advantage to the 
 community, for it would result only in raising tlie tax 
 rate and would not affect tlie amount paid as taxes. 
 
 Assessment values mean comparatively little today 
 but, if those values were to become the true value and 
 were accepted as such by the banks and the community 
 it would be a very different situation. Comparison of 
 value is so easy that the boosting of value by the would- 
 be borrower and the under-rating of the tax evader would 
 cease. 
 
 The effect of the slight change suggested would be 
 very far reaching. It would compel honesty and square 
 dealing. Personal interest would force the community 
 as a whole to give its support to an honest valuation of 
 all property for all purposes. 
 
 It is a matter of common knowledge that there is no 
 system of appraisement in use today which can be 
 relied upon to give the true value of real property for 
 any purpose. However, by a slight change involving no 
 expense, the tax system of any state can be made to de- 
 termine the true value on every piece of property both 
 for tax and security purposes. 
 
 Self interest operates automatically so the result of 
 all the interests in the community operating at once 
 would give an impersonal or automatic result.
 
 100% SAFETY AND ELASTICITY 10» 
 
 The legislation necessary to establish a system which 
 would secure an automatic appraisement acceptable as 
 a basis for loans is quite simple. 
 
 Existing law provides that an aggrieved taxpayer 
 may submit his grievance to the board of equalization and 
 review for adjustment. However, the result of an ap- 
 peal to this board at the present time is seldom satis- 
 factory, and if the complainant succeeds in getting the 
 relief sought it does not accrue to the benefit of those 
 who do not complain. Justice is consequently not at- 
 tained. 
 
 But were a law adopted which would make the assessed 
 value of a property also its security value, the tincer- 
 tainty and injustice in our present method of levying 
 taxes would be rectified. Personal interest, as we have 
 seen, would soon fix the true value of every property. 
 
 The assessor today is placed in a peculiar position. 
 The law says he must assess all property at the "true" 
 value, but taxpayers are always seeking low assessments, 
 and there is no way to determine the true value, so the 
 assessor while in a difficult position exercises a more 
 or less arbitrary power. 
 
 The assessor's difficulties as well as his arbitrary pow- 
 er can both be done away with by giving the taxpayer a 
 right to appeal from his assessment and also from the 
 decision of the board of equalization. A practical meth- 
 od of hearing this appeal and deciding the question will 
 be shown later. And what is still another good point 
 about this suggestion, the change that would have to be 
 made necessitates only a trifling one in existing law, and 
 involves no dangerous experiment. The only radical
 
 110 THE STRANGLE HOLD 
 
 thing about the whole affair would be in the result, which 
 would be a very radical change for the better in all coa- 
 ditions affected. 
 
 Let us suppose that a law were enacted making tiae 
 assessed value of every property also its value as a 
 security, and a taxpayer then felt a grievance over the 
 assessment — ^he felt that an incorrect valuation had been 
 placed upon his property, either for the purpose of pay- 
 ing taxes or of securing a loan, that is, he thought it 
 was assessed either too high or too low. 
 
 The legal remedy now would be to appeal from the 
 assessor's decision to the board of equalization and re- 
 view for relief. Under the methods in use today the 
 relief, if any, obtained from this board is seldom satis- 
 factory but, with a slight change in existing law, perfect 
 satisfaction could be assured. The true value of every 
 piece of property for both tax and security purposes 
 could be obtained with little trouble. 
 
 Give to every taxpayer the further right to appeal 
 from the decision of the board of equalization and re- 
 view. Then pass a law authorizing the clerk of the 
 board of equalizati&n to subpoena witnesses, call jurors 
 and conduct hearings. Then if the board's decision 
 should fail to satisfy, the aggrieved tax-payer or ap- 
 plicant for a loan he would have the right to appeal 
 from the board's decision and have the value of his 
 property fixed by a jury. 
 
 Only those especially qualified should be eligible as 
 jurors. If personal property is to be appraised this 
 qualification should include only such as are well versed 
 in the value of the kind of property in question. In
 
 100% SAFETY AND ELASTICITY 111 
 
 the case of real property, it should include only those 
 who ovm property of the same kind, or similar property 
 in the neighborhood. A two-thirds verdict of such a jury 
 of arbitration would settle the dispute. 
 
 The right to submit all questions of assessment to such 
 a jury would entirely overcome all arbitrary power of 
 the assessor and completely do away with the present 
 inefficiency of the board of equalization. Without doubt 
 the decision of such a jury could be relied upon, because 
 the jurors, being property owners themselves, would be 
 deciding the value of their own property by their verdict. 
 Self interest would dictate the verdict. 
 
 The owners of similar property, who did not want 
 to sell their property or borrow money on it, would 
 naturally favor a low valuation in order to cut down 
 their taxes; while on the other hand, those who did 
 want to sell or borrow would be inclined to favor a 
 higher valuation. 
 
 Again, we have a conflict of personal interest, and 
 once more the result of this conflict would be a more 
 just valuation. 
 
 This conflict of personal interest among the jurors 
 would compel a compromise in the verdict such as would 
 result in showing the true value of the property. It 
 would, consequently, be a guarantee of justice to all, 
 both to borrowers and taxpayers. Taxation and loans 
 would both be on the "True value." 
 
 Here, then, we already have the machinery for ap- 
 praising property which, with only a few slight changes, 
 could be used most satisfactorily in obtaining a proper 
 and just valuation of all property. It would supply a
 
 112 THE STRANGLE HOLD 
 
 long felt want for reliable appraisement for all purposes, 
 especially for real property. 
 
 And the publicity of this appraisal, together with the 
 acquiescence of the public in its result, would cause en- 
 tire public confidence to be placed in the medium of 
 exchange, the bank credit, which would be created aa a 
 result of the ensuing loan. 
 
 While this method of appraisal would apply more 
 particularly to real property, we have another system of 
 machinery, as previously stated, already in operation 
 which would continue to determine the valuation of mcst 
 personal property. The values set by it would be 
 accepted just as they are now. 
 
 It is a matter of common knowledge that the price 
 of practically all property, except real estate, is set every 
 day in the various central markets such as the stock ex- 
 change, cotton exchange, wheat pit, and the wholesale 
 and packing house districts. These prices are printed 
 daily on the financial pages of every metropolitan news- 
 paper and are generally accepted by the banks and 
 everyone else as the true value. 
 
 Prices of manufactured products are to be found in 
 the price lists and discoimt sheets of manufacturers and 
 jobbers. 
 
 For all personal property, therefore, there would be 
 little need to institute an assessment, board of equaliza- 
 tion and a jury to fix a valuation. We already have a sys- 
 tem of machinery which fixes the true value of such prop- 
 erty every day. Under our proposed system we would 
 take these valuations as the security-value for bank 
 loans, the same as they are now taken.
 
 100% SAFETY AND ELASTICITY 113 
 
 At present these values are affected by the contrac- 
 tion and expansion of the medium of exchange but, since 
 our remedy would entirely do away with the fluctuation 
 of the value of the dollar due to such phenomena, the 
 value of all property would then be much more stable. 
 
 It is very probable that the need for appraisals of 
 real property by jury would also soon diminish. In 
 order to settle real estate values, several arbitrations in 
 a neighborhood might at first be necessary, but they 
 would result in the establishment of stable values which 
 would change but gradually. 
 
 The provision which requires the jurors to be specially 
 versed in the value of the kind of property under dis- 
 cussion, or to be owners of similar property in the same 
 neighborhood, would secure the best judgment of the 
 community as to value. Afterwards established values 
 would be constantly checked against sales and net in- 
 comes. 
 
 The method of appraisal suggested here as applied 
 to real property, would be extended so as to cover all 
 property, not at present valued in a satisfactory way. 
 This method of appraisement, by opposing the personal 
 interests of the whole community to the personal in- 
 terests of the individual, makes itself proof against in- 
 dividual favoritism. It rests upon the solid' rock of the 
 self-interest of the majority, and consequently the 
 system would work automatically. 
 
 In this way the desired result would be obtained. For 
 with such publicity, and such a method of appraisal, in- 
 suring a proper valuation of all property used as se- 
 curity against which bank credit could be issued, the
 
 114 THE STRANGLE HOLD 
 
 public would have full confidence in the resulting medium 
 of exchange. 
 
 So much then for one step, the safe public appraise- 
 ment of property for bank loans. Now let us proceed 
 to the next step, the determining of the percentage of 
 loan to value, that is the amount which could be loaned 
 on any particular kind or piece of property. 
 
 Just as the placing of the actual appraising of prop- 
 erty in public hands would give public confidence to the 
 resulting valuation, so would placing the authority to 
 say on what terms a bank may make a loan and how 
 much it may lend on any property. This fixing of the 
 percentage of the loan is a simple matter and requires 
 neither technical knowledge nor special information. 
 
 The relative safety of various securities is quite well 
 established. The less the fluctuation in the price of a 
 securit)^, the safer it is as a basis for a loan, and con- 
 sequently, the higher should be the percentage of the 
 loan to the actual appraised value. 
 
 Thus good bonds, and business property in well estab- 
 lished communities come under the heading of gilt edged 
 security, and command the highest percentage. From this 
 mark, which may run as high as eighty or even ninety, 
 the percentage will shade down to twenty or even ten 
 per cent on a hazardous security. 
 
 Here again the proposed plan would involve no great 
 change in present-day methods, except to the extent of 
 taking the determining of this percentage out of the 
 private hands of the banker, and placing it in public 
 hands. By so doing we would do away with favoritism 
 and at the same time insure the safety of the loan and>
 
 100% SAFETY AND ELASTICITY 115 
 
 consequently gain public confidence in the resulting me- 
 dium, the bank credit that is created by the loan. 
 
 What is required in this phase of the matter of crea- 
 ting bank credit, then, is a proper authority in whose 
 hands may be placed the function of establishing a table 
 of percentages of loan^ to value for various kinds of 
 property. 
 
 This duty would not call for expert knowledge. The 
 present banking practice, which is the result of experi- 
 ence, would be a sufficient and a safe guide for the au- 
 thority to whom this duty might be intrusted. And the 
 advantage of such a method would rest not only in its 
 simplicity but in the fact that, since the resulting per- 
 centages would be determined publicly and would have to 
 be published, everyone would become familiar with them. 
 
 If they should be placed too high the banks would 
 not make the loans and if they were too low those 
 affected would agitate until they were raised. These per- 
 centages would have to be fixed at a point where both 
 bankers and the public would agree that they were safe 
 and just. The public would then have full confidence in 
 the bank credit issued for all would know there was 
 ample security behind every bank loan. 
 
 And once more we find that we have a system of ma- 
 chinery for this operation also, that is already at hand, 
 and which, with a few changes, can be admirably adapted 
 to the new purpose. 
 
 The banking laws of the nation and of the various 
 states now provide a public authority whose duty it is to 
 supervise the banks established imder those laws. In the 
 hands of this authority, whether a Federal Reserve
 
 116 THE STRANGLE HOLD 
 
 Board, or a State Superintendent of Banks, we find the 
 proper place to entrust the power and duty now under 
 consideration. 
 
 The plan needs little explanation. It consists mainly 
 in giving to the public authority the right to regulate 
 bank loans which would include the power to determine 
 the percentage the loan may bear to the valuation set 
 on the security ; these percentages would be set by means 
 of rules, which, of course, must be general in application 
 and should be published before becoming operative. 
 
 The rules to be made by the public board would be 
 suggested by the present banking system and should 
 follow the best banking practice, and be changed only as 
 experience dictates. 
 
 Special interests could not be favored, for all rules 
 would have to be general and would have to be published. 
 
 We have now dealt with two of the three phases of 
 extending loans and so creating bank credit, the medium 
 of exchange. We have seen that the solution in each 
 case involves the placing of the fixing of value, and of 
 the loanable percentage of all property in public hands 
 in such a way as to insure both just methods and public 
 confidence. 
 
 Now let us look into the third phase, that of granting 
 or refusing a loan. 
 
 The authority, to say yes or no to a would-be borrower, 
 now rests entirely with the bank. And so long as it is 
 left entirely to the judgment of private persons it will 
 be tinged with favoritism. 
 
 If a man complies with the rules for the use of any 
 other public utility, he is entitled to impartial treat-
 
 100% SAFETY AND ELASTICITY 117 
 
 ment. If he buys a railway ticket he has the right to 
 ride regardless of whether the conductor favors or dis- 
 likes him. 
 
 To accomplish justice, so that all may use this, the 
 greatest of all oiir public utilities, upon fair and equal 
 terms, the final power of granting or denying the use of 
 the medium should then also be enforced by public 
 authority and applied impartially to all applicants. 
 
 The question is likely to arise — Do not the banks com- 
 pete with each other in getting business, and is not lend- 
 ing money the most important source of bank revenues; 
 therefore, do not bankers exercise the greatest liberality 
 in their dealings with borrowers, vmless perhaps in a 
 remote community controlled by a narrow-minded 
 banker ? 
 
 The answer to this question is in the negative. The 
 objection will seem valid only to the uninitiated person 
 who has never done business with banks. For the truth 
 is that banks do not compete in making loans. Take 
 the case of a business man, for instance, who has a going 
 business and desires a loan. He approaches the First 
 National Bank say with which he has an account. The 
 bank officials may have been offended by his political 
 activities or business methods, or his interests may run 
 counter to those of some of the bank directors. So he is 
 informed that the bank is not prepared to extend its 
 loans. 
 
 Knowing that he is deserving of credit, the business 
 man then goes to the Merchant's National Bank and ap- 
 plies for a loan. He is asked by officials there who 
 his bankers are. When the answer is made that he has
 
 118 THE STRANGLE HOLD 
 
 been doing business with the First National, the reply 
 to his application for a loan will probably be the stereo- 
 typed one: "We would appreciate your business, but it 
 is against our policy to open an account with a loan." 
 
 The foregoing is but a single instance of the dis- 
 crimination which prevails in the matter of extending or 
 refusing bank loans, and so of permitting or denying 
 the use of the medium of exchange, under our present 
 system of unrestricted private control. The removal of 
 this discrimination is possible only by placing the use 
 of the medium of exchange under public control. 
 
 However, public control of bank loans should not be 
 effected in any such manner as to hurt the banks, or 
 to take just profits or powers away from the banker. 
 Any reform should be dictated solely by the desire to 
 make the bank more serviceable to the community. 
 
 The only object of any suggested change should be 
 to secure the fair and equal use of the medium of ex- 
 change, upon safe and equal terms, by all members of the 
 community who can comply with the conditions and pay 
 for the privilege of using it. While divesting the 
 banker of all power to show favoritism he must be left 
 free to protect himself against loss and should, there- 
 fore, be assisted in making all loans safe. He should 
 be encouraged to refuse a loan so long as there is any 
 doubt as to its safety, but he must not be permitted to 
 refuse one on any other grounds. 
 
 Bankers are inclined to lay stress on the "moral 
 hazard" of a loan which suggests that some men are 
 more reliable than others. The fact that there is a 
 difference in reliability among men may be admitted
 
 100% SAFETY AND ELASTICITY 119 
 
 but that the banker has any means of knowing which 
 are and which are not reliable is not admitted. 
 
 His surmise in this direction is due altogether too 
 much to favoritism or personal interest. And even if 
 the banker were infallible and did know who are and 
 who are not reliable all loans must not only be safe 
 beyond question, but the people must know they are 
 safe. There is therefore, but one basis, safe security. 
 
 The safety of our medium of exchange is a matter 
 of such importance to all that we cannot let it rest 
 even in a slight degree on the guess of anyone as to 
 the reliability of a borrower. "Moral hazard," while 
 not denied, must be disregarded. 
 
 The present practice of banks lending without security 
 to those well and favorably known to them could prob- 
 ably be continued under proper restrictions provided the 
 bank does not lend in this way more than the bank's 
 paid up capital and surplus. 
 
 The capital and surplus of the bank may be con- 
 sidered as private property and subject to private con- 
 trol the same as other private funds. If the stockhold- 
 ers see fit to give the bank management the right to 
 exercise their judgment as to "moral hazard" up to 
 the amount of the capital and surplus that may be con- 
 sidered a private matter. 
 
 But when the bank goes beyond its capital and sur- 
 plus in making loans it becomes a public matter, for the 
 bank is then trading solely on public laws and public 
 confidence. It is performing a public function, that of 
 issuing our medium of exchange, and favoritism must 
 be eliminated.
 
 120 THE STRANGLE HOLD 
 
 For its own protection, and in order to insure safety 
 to our medium of exchange, every bank must be allowed 
 to refuse loans under certain conditions. But in order 
 to guard against imreasonable refusals, resulting only 
 from personal prejudice, partiality or personal interest, 
 the banks should be required to give with all refusals 
 a written statement of their reasons for such refusal. 
 The borrower should then be given a chance to remove 
 the objections or to protest this refusal before the pub- 
 lic bank supervising authority, and if it should appear 
 that the loan was refused for any other reason than to 
 guard against a bad loan the bank should be severely 
 penalized. 
 
 If found necessary to insure fairness to all, the bor- 
 rower might be given the right to go direct to the 
 Federal Reserve Bank when refused by private banks. 
 
 Here, then, we have all three phases of making a 
 loan covered by adequate remedies. 
 
 In effect, the remedy, as we have suggested it, would 
 be to take out of private hands and place under public 
 control the right; first, to determine the value of the 
 property offered as security for the loan; second, the 
 right to determine the percentage of the loan to the 
 value of the security; and third, the right to refuse or 
 grant the loan, so that all may have the use of the 
 medium of exchange on exactly the same terms. 
 
 In the foregoing pages it has been clearly established 
 that bank loans are not a personal matter between 
 the banker and the borrower because they effect the 
 welfare of the whole community. 
 
 It, therefore, follows that their use is a public right
 
 100% SAFETY AND ELASTICITY 121 
 
 and all must be entitled to enjoy that right upon fair 
 and equal terms, and no one should be given an un- 
 fair preference, or receive any unjust advantage. 
 
 Let us see how this plan would fulfill the two re- 
 quirements we have seen to be essential to an ade- 
 quate system of exchange; first, stability through proper 
 elasticity, and second, acceptability through public con- 
 fidence. 
 
 In the first place, the medium of exchange, would, 
 under the proposed plan, vary according to the needs of 
 business. For, since the determination of the volume of 
 the medium of exchange would no longer be in the 
 hands of private persons, the restriction on that medium, 
 which we have seen inevitably accompanies private con- 
 trol would no longer exist. The use of the medium of 
 exchange would be a RIGHT and not a PRIVILEGE 
 as it is now. Every one who could comply with the 
 requirements would have equal opportunity to use the 
 bank when and as desired. In other words, contraction, 
 through private control, would not occur. 
 
 And on the other hand, inflation would not exist 
 either. For the plan would involve the necessity of hav- 
 ing adequate security behind each loan, and, therefore, 
 bank loans would not be extended beyond the needs of 
 business. No one would borrow unless he expected to 
 profit by so doing. 
 
 And, as we have seen, public confidence in bank credit 
 would exist to one hundred per cent. Public appraisal 
 of the value of security and the fixing of the percentage 
 of the loan would result in certainty that there was full 
 value behind every loan extended.
 
 122 THE STRANGLE HOLD 
 
 There would then be no necessity for gold reserves or 
 any other reserve to bolster confidence in the banks. The 
 fallacy of the gold reserve and the fiction that bank 
 credit calls for money could be discarded. Public con- 
 fidence in the banks would be gained and held by the fact 
 that every bank loan was amply secured and, conse- 
 quently, every bank deposit was perfectly safe. 
 
 The only reform suggested here comes to the simple 
 proposition of changing the basis of our medium of ex- 
 change so that it will rest on the truth and good security, 
 instead of on a false promise of gold redemption and a 
 fictitious reserve. 
 
 The point cannot be too strongly emphasized that 
 there is no change suggested in the whole system except 
 a change of base, from one of fallacy and fiction to one 
 of truth and honesty. The few details necessary to 
 make the suggested change are simple and practical, and 
 are now well understood. That the remedy would prove a 
 complete cure for our present ills, is evident, for it com- 
 pletely overcomes the defects in the present system. The 
 proposed method of dealing with bank loans would put 
 100% safety and 100% elasticity into our medium of 
 exchange. 
 
 A further advantage is that the changes necessary 
 to accomplish this end are but slight. They involve, 
 as we have seen, but a few changes in present laws to 
 alter existing institutions to a slight extent. 
 
 With laws in effect to accomplish the foregoing plan, 
 the method of obtaining a loan from a bank would be 
 practically the same as now. The rules laid down by 
 the public authority would in all probability preserve
 
 100% SAFETY AND ELASTICITY 123 
 
 the present banking practice regarding loans on business 
 statements and personal property in toto. About the 
 only change in the making of such loans would be that 
 all applicants would receive the same treatment. 
 
 Most business would be conducted, just as at present, 
 but with much greater certainty and satisfaction to both 
 borrower and banker. Business men could at all times 
 know just what amount of credit they were entitled to 
 use and bankers would know that every loan they made 
 was safe. Such a system would do away with the great- 
 est source of business worry for all. 
 
 Through the suggested method, the procuring of real 
 estate loans would be greatly simplified as well as 
 hastened and cheapened. The borrower would get from 
 the office of the Assessor a certificate setting forth the 
 assessed value of the property which he proposed to use 
 as security. This "certificate of assessment" would set 
 forth the ownership, the location, the amount and the 
 value of the property. 
 
 By multiplying the value of the property as set forth 
 in this certificate of assessment, by the percentage as 
 given in the official table of loan value, the loanable 
 value of any security would be obtained and every per- 
 son would know what amount could be borrowed from a 
 bank at any time. 
 
 For instance, suppose the security to be offered were 
 a farm of one hundred acres. The owner would get from 
 the Assessor's office his assessment certificate which 
 would show his farm was assessed at say $150 per acre. 
 Let us say the percentage established for such property 
 were 60%. The appraised value of the farm would then
 
 124 THE STRANGLE HOLD 
 
 be 100x150 or $15,000 and the loan obtainable on it 
 would be 60% of $15,000 or $9,000. 
 
 Or say the security were six automobiles priced at 
 $2,000 each. Then the six would be worth 6x2000 or 
 $12,000. Now, suppose that such security were listed 
 as being good security for 50% of its value. Then the 
 owner of the machines would be ent'Llcd to borrow from 
 the bank 50% of $12,000 or $6,000 on a bill of lading 
 or a proper warehouse receipt. 
 
 In either case, when the borrower presented his notes 
 and security to the bank in proper form, the loan would 
 be made. If it were not made, the banker would have 
 to state in writing why he refused to grant it. No trivial 
 reason would be acceptable, and if a good reason ex- 
 isted, it would be against public policy for the loan to 
 be made until the objection were removed. 
 
 The rules laid down would of course provide for the 
 discounting of acceptances, etc., and of automobile and 
 other paper on whatever terms have been found safe, so 
 that the various selling plans, which have been built up, 
 could be used without interruption. 
 
 There is no suggestion of any new way of making 
 loans or the use of any business forms or methods not 
 now in vogue. 
 
 No bank should be compelled to make a loan unless 
 the security were proven good and on the other hand 
 any bank which persistently refused to make a loan 
 because of personal feeling should have its charter 
 annulled. Good security for every loan and no favorites, 
 shoxild be an invariable rule. 
 
 The object of public control of the medium of ex-
 
 100% SAFETY AND ELASTICITY 125 
 
 change would always be to facilitate and not to hamper 
 business. Experience would probably develop many im- 
 provements on present methods but we must not lose 
 sight of the fact that the first requisite of a medium of 
 exchange is acceptability and that depends on its safety. 
 
 This statement, however, does not mean that bet- 
 ter methods than those in use may not be developed. 
 
 For instance, it would not be out of place to make 
 mercantile agencies such as Dun and Bradstreet public 
 institutions. By so doing their records would be more 
 valuable to the business world. By extending these rec- 
 ords to take in the work of merchants associations, those 
 who do not pay their bills as well as those who deal dis- 
 honestly could be eliminated from the community. 
 
 If paying one's debts and honest dealing were neces- 
 sary as a qualification for the use of credit it would put a 
 very high premium on honesty. At least the community 
 could be put on its guard against those who did not pay 
 their debts or deal fairly. 
 
 This idea is not suggested as being at all necessary 
 to this plan for putting bank credit under public control 
 but is merely offered as an improvement on present 
 conditions which might be considered later. 
 
 By making all bank loans conform to the rules laid 
 down by a public authority, and by basing them on se- 
 curity which the people themselves have appraised, every 
 bank depositor would know that every loan made by 
 every bank was good. By this means we would secure 
 to our medium of exchange the maximum of safety and 
 also the maximum of elasticity. 
 
 Thus a medium of exchange would result that would
 
 126 THE STRANGLE HOLD 
 
 fulfill all the functions required of it. No longer would 
 it be a hindrance to commerce and industry, but rather 
 the help it should be. 
 
 Production and trade would be allowed to expand to 
 their fullest extent, for they would control the medium 
 of exchange instead of that utility controlling them, and 
 the results would be beneficial to all. 
 
 Private control, which now has an automatic tendency 
 to cause our medium of exchange to contract and strangle 
 business as soon as prosperity makes a demand for 
 credit, would be gone. Prices would remain stable 
 except when affected by the laws of supply and demand. 
 
 Business would no longer be a gamble and success 
 would depend on efficiency and hustle and not on chance 
 or a pull with the banker. 
 
 A period of prosperity would not be followed by one 
 of depression ; all branches of industry could be financed ; 
 foreign trade could be carried to any degree of safety; 
 our shipping business would be rehabilitated and recon- 
 struction would bring peace and prosperity to a troubled 
 world. All the changes made would help not alone this 
 country but all humanity. 
 
 And the advantage accruing from the fact that the 
 changes required are but slight cannot be over-empha- 
 sized. The real change would be in the improved con- 
 ditions which would follow as a result of the change 
 and which would be to the benefit of all concerned, except 
 perhaps to a few who are today holding an unfair 
 advantage over their fellow-men. 
 
 The laws necessary in order to bring about the desired 
 change are given at length in the next chapter. These
 
 100% SAFETY AND ELASTICITY 127 
 
 laws are presented in legal form in order to show how 
 easily the reform may be put into effect, and in order 
 to point out definitely the way in which all the desired 
 advantages can be secured, so that our social system will 
 be freed from many of the evils that hamper and oppress 
 it today.
 
 CHAPTER VIII 
 BREAKING THE STRANGLE HOLD 
 
 WE HAVE now pursued our problem in logical or- 
 der. Taking up the known defects of our financial 
 system, as related to our industrial and social life, we 
 have shown that the same defect which has always ex- 
 cluded the farmer and has recently excluded the exporter 
 from the use of the bank has shut the bank doors on the 
 automobile dealer and may shut it on other industries 
 at any time. 
 
 It has been shown that because of the false foimda- 
 tion of our system of credit — the gold standard — our 
 present day industry has outgrown the system. 
 
 The gold redemption promise has outlived its useful- 
 ness and has become an automatic check on the wheels of 
 industry. 
 
 To continue to confine our credit system by a false 
 promise to redeem in gold would be like trying to carry 
 on the industry of the country while confining our trans- 
 portation system to a narrow gauge railroad. And then, 
 if private ownership of banks is going to be allowed to 
 deny the use of one public utility, why not permit those 
 who own the railroads the same privilege.'' 
 
 Such an arrangement could not help but check prog- 
 ress and cause industrial turmoil and social unrest. 
 
 Our present depressed condition is brought about 
 through industrial progress being checked for want of 
 proper credit facilities. 
 
 128
 
 BREAKING THE STRANGLE HOLD 129 
 
 We have already noted that the high cost of living 
 has recently been considered to be the cause of bad eco- 
 nomic conditions while the social unrest of a generation 
 ago was believed to be caused by the low cost of living. 
 We have seen that these conditions refer to the general 
 price level and are due to increase or decrease of the vol- 
 ume of the medium of exchange in use. We have noted 
 from our own experience or observation that high prices 
 stimulate production and trade while low prices produce 
 an opposite effect, but we have also noted, that a period 
 of high prices, good business and prosperity is invariably 
 followed by one of falling prices, business failures and 
 economic depression. The cause of this phenomena has 
 been definitely pointed out and has been shown to be due 
 to defects in our present banking system arising from its 
 private control. 
 
 Most countries have passed through a period of devel- 
 opment where the mint was in private hands. Only in 
 primitive times was this important function so admin- 
 istered and while it was in private hands it was subject 
 to all the abuses of private control of a public utility. 
 
 As a nation, we outgrew this national weakness, while 
 quite young so its bad effects are not remembered, but 
 Mexico, during the long period of internal disturbances 
 and bad government preceding the period of Porfirio 
 Diaz, adopted the disastrous plan of leasing her mints 
 to private citizens. 
 
 Freeing his country from the tentacles of the mint 
 lessees and restoring coinage to government control was 
 one of the greatest reforms carried out by Diaz, reaction- 
 ary as he was in many respects.
 
 130 THE STRANGLE HOLD 
 
 Here we see the evils of private manufacture of metal 
 coins. But metal coins are, in our modern system, but a 
 minute part of the entire circulating medium, which is 
 almost entirely composed of the credit manufactured by 
 banks. 
 
 Just as industrial and social advancement forced the 
 mint out of private into public hands so must industrial 
 progress and general enlightenment break the strangle- 
 hold of private interests on our individual and national 
 life by substituting public for private control of bank 
 credit. 
 
 The blighting effect of private control of this greatest 
 of public utilities, on both private and public interests 
 has been demonstrated many times and must not be lost 
 sight of. 
 
 The importance of the medium of exchange cannot be 
 over estimated. We have seen that, through it, by the 
 contraction or inflation of its volume, prices fluctuate 
 and with them fluctuates the value of our pay check, 
 our property and our fortunes. As prices fluctuate so 
 fluctuates our standard of living, our comforts, our hap- 
 piness and our whole aspect of life. Nothing then can 
 be of more importance to us as individuals and as citi- 
 zens than this matter of the medium of exchange. 
 
 It is because of the importance of the money function 
 that coinage has always been considered a government 
 duty and privilege. No privately issued medium could 
 gain and hold public confidence. Without confidence the 
 medium would not be accepted so it failed in efl5ciency 
 as an exchange medium in the same proportion as it 
 lost public confidence.
 
 BREAKING THE STRANGLE HOLD 131 
 
 History taught the business world that the medium of 
 exchange must not only hold public confidence but it 
 also taught that a mixed coinage within the same coun- 
 try checks material progress just as effectually as the 
 confusion of tongues checked the building of the Tower 
 of Babel. 
 
 A uniform medium is necessary for commercial devel- 
 opment and, therefore, it should have but one source of 
 issue and that should be through the government. Be- 
 cause of this knowledge, gained through human experi- 
 ence, the Constitution of the United States reserved to 
 the Federal government the right to coin money. At the 
 same time it jealously guarded this right when it denied 
 that privilege to the several States. 
 
 Section 8, Article 1, of the Constitution says: "The 
 Congress shall have power ... to coin money and 
 regulate the value thereof" and Section 10 of the same 
 article provides that, "No State shall . . . coin 
 money; emit bills of credit; make anything but gold 
 and silver coin a tender in payment of debts." There is 
 no other reference to money or to the medium of ex- 
 change in the Constitution. 
 
 That, by the foregoing, the framers of the Constitu- 
 tion intended to reserve to the Federal government the 
 sole right of money issue seems quite plain and the 
 general opinion is that our government really does issue 
 the medium of exchange. 
 
 We, however, have seen clearly that this is not the 
 case. We have seen that while the banks do not "coin 
 money" they do issue and control our medium of ex- 
 change which is the very function the Constitution by the
 
 132 THE STRANGLE HOLD 
 
 foregoing provision intends to reserve to the National 
 government. 
 
 The proviso that no state shall coin money or issue 
 bills of credit makes it quite plain that the framers of 
 the basic law intended to reserve the money function to 
 the Federal government. Otherwise the proviso would 
 reserve only the right to coin the change while the 
 banks issue our money. 
 
 If private institutions are permitted to issue their 
 credit to be used as a medium of exchange why should 
 not the state or the counties or for that matter, the vari- 
 ous cities have the same privilege.'* 
 
 How can government officials justify the present prac- 
 tice of permitting private institutions to issue credit to 
 be used instead of money in the face of this prohibition 
 against permitting the states to coin money or to issue 
 bills of credit? 
 
 The state's credit is certainly superior to that of any 
 bank, because the state possesses the right to tax the 
 bank as well as other property within its boundaries and 
 a state's promise to pay is a mortgage on all the prop- 
 erty within its confines, including that of the bank. If 
 no state may coin money or "emit bills of credit," cer- 
 tainly no corporation, the existence of which depends 
 upon state law, should be permitted to exercise this func- 
 tion either directly or indirectly. 
 
 It is equally certain that a national bank, being a pri- 
 vate institution, has no better constitutional standing 
 than the state bank as a source of money issue. The fact 
 that it is incorporated under a national law or that the 
 medium of exchange it issues is called "Credit" instead
 
 BREAKING THE STRANGLE HOLD 133 
 
 of money, or coin, or currency, gives it no right to usurp 
 an exclusive government function. 
 
 Consequently, it is plain that it was never contem- 
 plated by the framers of the Constitution, nor is it now 
 intended, that the circulating medium of this country 
 should have any source of issue other than that of the 
 Federal government. Regardless of these facts and of 
 these provisions we find that because of the constant in- 
 crease of the banking habit, all of our medium of ex- 
 change today, except the small change, is issued by 
 private institutions. 
 
 In plain but unmistakable language the constitution 
 reserves to the Federal Government alone the right to 
 issue money and prohibits the states from so doing but, 
 notwithstanding this direct reservation and prohibition, 
 state banks as well as national banks are substituting 
 their credit to be used as money. 
 
 It has already been shown that this is issued by the 
 bankers entirely at their will. In other words, com- 
 mercial development has substituted the credit of pri- 
 vate institutions for a medium of exchange controlled by 
 the government and by reason of this substitution the 
 banks have usurped the most important government 
 function. It is impossible to reconcile this state of 
 affairs with the provisions of our Federal Constitution 
 or with common sense. Our present practice then is 
 without doubt in violation of the basic law of the land. 
 Notwithstanding these constitutional provisions it will 
 be shown in a later chapter, devoted to the Federal 
 Reserve System, how Congress, through the Federal 
 Reserve Act, even went so far as to put the credit of
 
 134 THE STRANGLE HOLD 
 
 the United States behind the personal judgment and 
 private interests of the bankers with the avowed pur- 
 pose of turning their credit into government currency, 
 thus aiding and abetting this illegal practice. 
 
 Other attempts to use a privately issued medium of 
 exchange have been suppressed by the government. In 
 those instances the substitutes for money which were 
 used had no camouflage to conceal their true nature, so 
 they were plainly violations of the constitution and our 
 coinage laws. But the fiction by which the banker 
 credits the borrower with a deposit has concealed the 
 true nature of bank credit and permitted it not only to 
 nullify this provision of our fundamental and statute 
 law but even to command the aid of Congress in so 
 doing. 
 
 No one can be blamed for this state of affairs for it 
 comes about because of the general misconception con- 
 cerning our money. 
 
 All public officials, however, are sworn to uphold the 
 constitution and laws so when this violation is clearly 
 shown, as it has been, it now becomes their sworn duty 
 to see that the violation of the Constitution is stopped. 
 
 It has already been shown that it will not be a diffi- 
 cult task to recover the money function to the govern- 
 ment. No court proceedings will be necessary. The 
 remedy is constructive not destructive. 
 
 By a few slight changes in existing laws we can 
 comply with the Constitution and restore the money 
 issuing power to the people. 
 
 We have seen how this result can be accomplished 
 by a few simple changes without upsetting the present
 
 BREAKING THE STRANGLE HOLD 135 
 
 system of banking or changing our manner of doing 
 business, and without any risk of political inefficiency or 
 of personal loss. 
 
 A few words written into the Federal Reserve Act 
 would give the Federal Reserve Board power to define 
 the securities on which and the manner in which banks 
 may make loans. Since the Federal Reserve Board is a 
 government institution, like the United States Mint, our 
 medium of exchange would then be issued under Federal 
 authority and the constitutional provision for Federal 
 control of our money or medium of exchange would be 
 satisfied. 
 
 With the Constitution thus enforced, all institutions 
 that accept deposits and grant credit including state 
 banks and trust companies, should be compelled to be- 
 come members of the Federal Reserve system. 
 
 The rules laid down by this public authority would 
 then unify our medium of exchange and give public 
 control to our greatest public utility. 
 
 Besides such adjustments as would take from the 
 banker the arbitrary power to refuse loans for purely 
 personal reasons, we should do away with unnecessary 
 reserve restrictions and the regulations that prohibit 
 national banks from making loans on land. 
 
 With the suggested change in the Federal Reserve Act 
 accomplished, the states in self defence would be com- 
 pelled to make modifications in their appraisement ma- 
 chinery, so as to adjust the assessor's office to the fixing 
 of values of property on which loans might be sought 
 from the banks. Not a difficult task as has been shown 
 and will be sho^vn more definitely later on.
 
 136 THE STRANGLE HOLD 
 
 The reform should be national because the Federal 
 government should control the money function. How- 
 ever, it is not necessary to await congressional action. 
 It may be accomplished through the state banking sys- 
 tem, and, by bringing pressure on the Federal govern- 
 through the states, national action will follow. 
 
 Every state has its banking department under one op 
 more state officials. We here suggest a model law by 
 which any state may take control of the issuance of bank 
 credit under the state banking system. 
 
 The state banks would still violate the spirit of the 
 constitution, but not in as great a degree as the present 
 practice. 
 
 To secure public control of the state banking system 
 we suggest as an amendment, which will fit into the code 
 of practically any state, the following: 
 
 The State Banking Department shall, and there is 
 hereby vested in it, the power to make and publish 
 such rules and regulations and define such terms as 
 in its judgment may seem wise and expedient for the 
 government of all banking corporations, which rules 
 and regulations shall be general and shall not conflict 
 with any of the laws of this state or of the United 
 States; but which SHALL DEFINE THE SECUR- 
 ITY ON WHICH, AND THE MANNER IN 
 WHICH, SUCH CORPORATIONS MAY MAKE 
 LOANS AND INVESTMENTS OR BECOME 
 LIABLE ON ACCEPTANCES OR OTHER EVI- 
 DENCE OF DEBT: provided, however, that no such 
 corporation shall be compelled to make any loan or in- 
 vestment, nor become liable on any obligation or other
 
 BREAT^L.G THE STRANGLE HOLD 137 
 
 undertaking against its will ; nor shall any such corpo- 
 ration have any claim against the state banking de- 
 partment or a member thereof or against the State for 
 any loss which it may sustain because of any of the 
 rules and regulations so made and published. It shall 
 be the duty of said department at each regular meet- 
 ing and at any special meeting called for that purpose 
 to examine all reports made by said corporations re- 
 lating to their condition, and all reports of regular 
 and special examinations made by the state examiner 
 and deputy examiners and filed with said department 
 during the preceding quarter or such period as shall 
 have elapsed since the last meeting of said department 
 and to approve or disapprove the same, and to make 
 and enforce such orders as, in its judgment may be 
 necessary or proper to protect the public and particu- 
 larly the depositors or creditors of said institutions. 
 Said department and the state examiner and deputy 
 examiners shall have the power to subpoena witnesses, 
 administer oaths, and generally to do and perform 
 any and all acts and things necessary to the complete 
 performance of the duties herein imposed, and to 
 enforce all of the provisions of this act and for the 
 purjDOse of enabling them to perform all the duties 
 imposed upon them, the provisions for such purposes 
 shall be held as applicable to their proceedings. Any 
 and all orders made by said department shall be im- 
 mediately operative and may be enforced by a court 
 of competent jurisdiction. ^aid department shall 
 keep a full and complete record of all its proceedings 
 and of all orders made by it, and the records of the
 
 138 THE STRANGLE HOLD 
 
 state banking department of the state examiners and 
 of any and all reports made by or filed with the depart- 
 ment or the state examiner, shall, under proper re- 
 strictions, during regular business hours, be open to 
 inspection and examination. 
 
 The object sought by such a law is to standardize the 
 security on which banks may make loans, so as to prevent 
 discrimination and also to assure the public that all bank 
 loans are made on safe security in order to put full public 
 confidence behind the banks and keep it there. 
 
 The essence of the whole matter is but a slight change 
 in the present practice and is contained in the first few 
 lines, which give the state, through public officials, power 
 to make rules defining the SECURITY ON WHICH 
 AND THE MANNER IN WHICH BANKS MAY 
 MAKE LOANS. 
 
 The only way in which it would be possible for the 
 state banking department to profit by the power here 
 granted would be by making rules that would be satis- 
 factory to both the banks and the people. All rules 
 must be general and then must be published, so no per- 
 sonal interest in the public control could possibly be 
 served. The powers granted the state authorities are 
 broad enough to permit them to annul the charter of a 
 bank that would persist in refusing loans on personal 
 grounds. 
 
 Through public control all arbitrary power would be 
 wiped out and each element in the community, by look- 
 ing after its own interest, would check up and balance 
 the whole system. 
 
 Should the public authority which makes these rules.
 
 BREAKING THE STRANGLE HOLD 139 
 
 deem it advisable, banks might be left free to loan the 
 amount of their unimpaired capital without restriction. 
 
 As a means of explaining favoritism to certain bor- 
 rowers bankers have put forth the idea that personality 
 enters largely into the making of loans. Some men, 
 they say, are worthy of a loan without security. This 
 no doubt is true, and since the capital of the bank may 
 be looked on as private property, the public authority 
 making the rules might, if it thought best, allow the 
 banker to exercise his judgment or we should better say 
 show his favoritism to the extent of the bank's capital 
 but not beyond that. 
 
 As soon as the banker in making loans goes beyond 
 the bank's capital and surplus he is trading on public 
 confidence and that belongs to the people, so it must be 
 treated as public property. 
 
 The values of stocks and bonds are fixed daily by the 
 dealings on the stock exchange and of practically all 
 commodities by transactions in the various marts of trade 
 such as the wheat pit, cotton exchange, etc. 
 
 While real estate values are to a degree fixed by net 
 income and occasional sales we must have a sure method 
 of fixing such values. 
 
 As explained in the last chapter this object woidd be 
 accomplished by making the assessed value, that is the 
 value placed on the property by the assessor for tax pur- 
 poses, also the appraised value which the banks must 
 accept as the security value. 
 
 The following laws are for the purpose of arriving at 
 the true value of all assessable property. By the oper- 
 ation of these suggested laws we would not only arrive
 
 140 THE STRANGLE HOLD 
 
 at a safe basis of security for bank loans, but we would 
 
 put our assessments for taxation on a just and fair basis. 
 
 The two following suggested laws explain themselves: 
 
 AN ACT 
 To provide for the hearing of grievances caused by 
 assessments for taxation and for appeals from the de- 
 cision of boards of equalization and review. 
 
 BE IT ENACTED by the Legislative Assembly of 
 the State, etc., or whatever the enacting clause may be: 
 Section 1. Any person being aggrieved by the 
 return of any assessor of this State may submit such 
 grievance in writing to the clerk of the proper board 
 for the equalization and review of such assessment not 
 later than five days after the regular first meeting day 
 of such board; no such statement of grievance shall 
 be ignored by said board for lack of form, nor for 
 any other reason, provided, it is signed by the party 
 aggrieved or by some other person in his behalf, but 
 all such complaints shall be taken up and decided by 
 the board without delay; should the complainant or 
 any other person be aggrieved by the decision of any 
 board of equalization or review an appeal may be 
 taken by such party by filing a notice of appeal with 
 the clerk of said board and the payment to the clerk 
 of the required fee within three days after the rendi- 
 tion of such decision ; when an appeal is taken under 
 this section it shall be the duty of said board to sub- 
 mit all questions in dispute to a jury of arbitration 
 as in such cases provided. 
 
 Section 2. .For the purpose of enabling all boards
 
 BREAKING THE STRANGLE HOLD 141 
 
 of equalization and review and the clerks of said 
 boards to perform all the duties imposed upon them 
 they shall have, and the power is hereby given them, 
 to subpoena witnesses, call jurors, administer oaths 
 and to do and perform any and all acts and things 
 necessary to the complete performance of such duties. 
 
 To provide for a jury of arbitration and to regulate 
 appeals from the decision of boards of equalization 
 and review the following is suggested. 
 
 AN ACT 
 
 To provide for juries of arbitration in assessment 
 cases. 
 
 Enacting clause according to the state: 
 
 Section 1. All juries of arbitration in cases where 
 an appeal is taken from the decision of any board of 
 equalization and review shall be composed, drawn 
 and summoned in the same manner as juries in civil 
 actions in justices' courts, except that the clerk of the 
 board shall act instead of the justice, and for this 
 purpose, and to the extent necessary, said clerk is 
 hereby given all the power and authority of a justice 
 of the peace; provided, however, that for juries of 
 arbitration only those persons shall be listed or called 
 as jurors who may reasonably be supposed to possess 
 accurate knowledge of the value of the kind of prop- 
 erty in question, or who are ths owners of the same 
 kind or similar property in the neighborhood of the 
 property imder discussion. 
 
 Section 2. Fees in all cases for service on a jury
 
 142 THE STRANGLE HOLD 
 
 of arbitration shall be the same as in civil cases in 
 a justice's court and must be deposited with the clerk 
 before the jury is summoned. 
 
 Section 3. No person shall act on more than one 
 jury of arbitration during any one year, but there 
 shall be no other grounds for challenge, except lack 
 of knowledge of the value of the property, lack of 
 ownership of similar property, bias or undue interest 
 in the outcome of the arbitration. 
 
 Section 4. As soon as the required number of 
 jurors are selected the clerk shall administer the fol- 
 lowing oath: You and each of you do solemnly swear 
 that you will render a verdict according to your best 
 knowledge and belief. 
 
 Section 5. After the jurors are sworn they must 
 sit together and hear the allegations, evidence and 
 argument, which must be delivered in public, in the 
 presence of the clerk or his deputy who shall conduct 
 the proceeding as nearly as may be in accordance 
 with the practice of the District court, except that 
 the jury shall be given until two-thirty P. M. of the 
 day following the close of the hearing in which to 
 render a verdict and the jurors shall not be required 
 to stay together nor to refrain from talking about the 
 matter in hand. 
 
 Section 6. Two-thirds of the jury must agree in 
 order to render a verdict which must be in writing 
 and signed by each juror agreeing thereto and when 
 so signed the verdict must be accepted by the clerk 
 and the jury discharged; provided the said verdict 
 definitely settles the question or questions submitted.
 
 BREAKING THE STRANGLE HOLD 143 
 
 and as regards these questions, the verdict so ren- 
 dered shall be final, and shall be preserved and 
 treated as part of the proceedings of the board of 
 equalization and review. 
 
 Section 7. Any juror not agreeing to the verdict 
 may have his objections thereto recorded with the 
 verdict, and any juror not signing the verdict or 
 recording his signed objections thereto shall receive 
 no fees or other compensation. 
 
 Section 8. Any jury failing to render a verdict 
 within the time specified in this Act shall be dis- 
 charged and no fees shall be paid to any of the 
 members thereof; whereupon the clerk shall proceed 
 to draw another jury without delay and the same pro- 
 cedure shall be had until a verdict is rendered. 
 
 Section 9. No verdict nor the objections thereto 
 nor any record of the proceedings had shall be added 
 to, subtracted from or in any way changed after the 
 jury has been discharged. 
 
 Besides the foregoing laws there should be introduced 
 into the law prescribing the duties of Assessors a provi- 
 sion that, on application of or on an order from the 
 owner of any property on the assessment roll, the asses- 
 sor shall furnish a "certificate of assessment" in the 
 form prescribed by the State or National Banking De- 
 partment. A fee may or may not be charged for this 
 service. 
 
 While no law which will fit into the code of all of 
 the States can be laid down in exact terms, the fore- 
 going suggestions carry all the principles which are
 
 144 THE STRANGLE HOLD 
 
 necessary to put state bank credit under public control, 
 and the method of carrying them into effect has been 
 fully explained in the last chapter. 
 
 As previously stated, the national banks can be 
 brought under public control by giving to the Federal 
 Eeserve Board the same power over member banks as is 
 given over state banks by the first act presented here. 
 
 This can be accomplished by amending the Federal 
 Reserve Act as follows; 
 
 To Section 11 of that Act, after the words, "The 
 Federal Reserve Board shall be authorized and em- 
 powered:" add these words: 
 
 TO DEFINE THE SECURITY ON WHICH, 
 AND TO PRESCRIBE THE MANNER IN WHICH, 
 MEMBER BANKS MAY MAKE LOANS AND IN- 
 VESTMENTS OR BECOME LIABLE ON AC- 
 CEPTANCIES OR OTHER EVIDENCES OF 
 DEBT. 
 
 To fully satisfy the constitutional provision for Fed- 
 eral control of the medium of exchange all banks should 
 be compelled to join the Federal Reserve system. With 
 these two suggestions put into effect each state should 
 pass the suggested laws, providing for appeals from 
 boards of equalization and for a jury of arbitration. 
 Practically nothing more is necessary in order to put the 
 control of the money function into public hands. 
 
 As the rules governing bank loans would have to be 
 published and would apply to all alike, our whole finan- 
 citl system would then be unified. Applications for 
 loans would be treated on their intrinsic merits without 
 injustice or favoritism.
 
 BREAKING THE STRANGLE HOLD 145 
 
 This object can be accomplished without the least 
 upset to business and the improvement in our industrial, 
 social and political life which would follow the change 
 can hardly be estimated. 
 
 By means of a few words placed in the Federal Re- 
 serve Act the basic flaw would be removed from our 
 social system; our constitutional rights would be re- 
 gained and the last vestige of privilege would be de- 
 stroyed. 
 
 We have seen how the use of a commodity, as the 
 medium for carrying on exchange, subjects all trade and 
 through it the productive energy of the community to 
 the will of those who are able to control or corner that 
 commodity. 
 
 The use of one commodity as a medium of exchange 
 is the basic flaw in our civilization which has hampered 
 progress and stood in the way of the peace and happi- 
 ness of mankind from the very beginning of civilization. 
 
 It has been shown that when the commodity itself was 
 DO longer used as a medium of exchange the same condi- 
 tion was continued by a promise to pay that commodity. 
 
 When gold could no longer fulfill requirements as a 
 medium for carrying on trade there grew up a custom 
 of using for that purpose a promise to pay gold. And, 
 although this promise has been proved false by panics 
 and the many subterfuges used to escape its fulfillment, 
 we still cling to it without justification or reason as a 
 baby clings to a rattle. 
 
 Through the use of a commodity as a medium and by 
 confining credit to a promise to pay that certain com- 
 modity the present financial system gives into the hands
 
 146 THE STRANGLE HOLD 
 
 of those who control that commodity a power over the 
 daily life of the members of the community such as no 
 political ruler ever possessed. 
 
 This glaring defect in the very foundation of the 
 industrial system which supports civilization seems to 
 have been overlooked and man in his quest for liberty 
 and equality has always directed his efforts against 
 political instead of financial rulers. These misdirected 
 reforms could not reach the goal of personal liberty and 
 equality for they were not aimed at the power that 
 dictates personal welfare. 
 
 Mankind has been cheated out of those rights which 
 our Declaration of Independence says are inherent and 
 unalienable by the financial system and not by political 
 government. 
 
 As long as the money function is performed by a 
 certain commodity or the promise to pay that commodity 
 or as long as the control of credit remains in private 
 hands^ the success, prosperity and happiness of the mem- 
 bers of the community will be at the mercy of the few 
 who control that commodity or the credit resting on it. 
 
 This condition has been felt but not logically and 
 clearly noted, and resentment, though not clearly defined, 
 has given rise to such terms as Financial Oligarchy, 
 Moneyed Aristocracy, Plutocrats, etc. 
 
 These epithets have been hurled at the heads of prac- 
 tically all men who have been financially successful; 
 they are favorite terms with certain would-be reformers 
 and the purpose of their use is to excite class hatred. 
 
 It is not the part of intelligence to blame individuals 
 for the faults of a system.
 
 BREAKING THE STRANGLE HOLD 147 
 
 If a flaw in our economic system makes it possible for 
 the minority to gratify a natural desire for power at the 
 expense of the majority the attack should be on the 
 system and not on the men who take advantage of it. 
 
 A slight change in existing laws will cure this defect. 
 The improvement in national efficiency and personal 
 well-being which would follow the change would be im- 
 mediate and most gratifying. 
 
 There would be a decided gain in business freedom 
 and productive energy, because the medium for conduct- 
 ing business and carrying on industry would be open to 
 the use of all. Banks could then grant the long time 
 credits necessary to revive our foreign trade. 
 
 In our present system the use of this medium is re- 
 stricted both by the private interests in control and by 
 the limitations of the gold reserve requirements. 
 
 We might in a measure foresee this improvement by 
 noting the change which was brought about by placing 
 the railroads under public control through the interstate 
 commerce law. This comparison, however, is not a fair 
 one for several reasons. 
 
 For instance the medium of exchange is a much more 
 important public utility than the railroads and enters 
 more intimately into the life and activity of every indi- 
 vidual in the community. Every member of the com- 
 munity must use the medium of exchange and all are 
 directly affected by its fluctuation in value. 
 
 For these reasons then, the abuses due to its private 
 control have a much greater effect and are far more 
 harmful though not so easily seen as these incident 
 to railroad control. Finance is at the base of practically
 
 148 THE STRANGLE HOLD 
 
 every activity of life. No productive enterprise can start 
 or continue without the use of the exchange medium. 
 
 It has been shown here in detail how the fault in our 
 system can be removed. To follow out and show the 
 changes which would come about through this improve- 
 ment in our system is unnecessary. 
 
 It is enough to know that all these changes would be 
 for the better. This must follow as a natural result for 
 the suggested change puts into effect the principles on 
 which our government is founded. 
 
 Liberty and equality are the inherent rights of aU 
 citizens and neither can exist in a state where any man 
 or set of men controls that which others must use. 
 
 Bankers, as a class, are prone to criticise union labor 
 and the "closed shop" as being opposed to industrial 
 progress and American principles. But, may we ask, 
 if the "closed shop" is harmful and un-American, how 
 about the "closed banlc".'' 
 
 It is quite evident that so long as any set of men 
 possess the right to deny to other men the use of that 
 which they must use in order to make a living or attain 
 success and happiness neither liberty nor equality can 
 possibly exist. 
 
 A system which practically compels the banker to 
 refuse the use of the medium of exchange to a farmer 
 who by every right is entitled to use it and then permits 
 that banker to grant its use to the speculator for the 
 purpose of purchasing and holding, for profit, the farm- 
 er's crop, is contrary to every American principle and to 
 the best interests of every citizen.
 
 BREAKING THE STRANGLE HOLD 149 
 
 That our present system is inefficient, unjust and un- 
 American, cannot be denied. 
 
 Almost every economic factor, except the one which is 
 the real cause, has been blamed for our present ills such 
 as trusts, the stock exchange, wheat pit, profiteering, 
 labor unions, politics, etc. But we will see that the fault 
 in these factors is really due to the bad effects of a de- 
 fective system of exchange. 
 
 It will be shown in later chapters that the so called 
 "Trusts," for instance, are not the villains we have 
 thought them, but, that practically all the villainy is the 
 work of one trust — ^the "Money Trust" — which has 
 finally been located and which will be put out of busi- 
 ness when the remedy here suggested is put into effect. 
 
 Industrial turmoil and social unrest are the result of 
 the money power holding control over productive enter- 
 prise. Apply the "open shop" principle to the bank. 
 Open the bank door to all industry and keep it open. 
 Stabilize the value of the dollar, and the chasm between 
 capital and labor will be bridged. 
 
 In preceding chapters we have definitely located the 
 two glaring defects in our financial system — private 
 control and a false basis for credit. We have also dis- 
 cussed in sufficient detail a remedy which is practical, and 
 right in line with American ideas and which completely 
 eradicates these defects without disturbing business or 
 injuring any one. When this simple remedy is applied 
 prosperity will be restored in greater measure than 
 was ever before enjoyed and our national efficiency will 
 be greatly increased as will be shown in a later chapter.
 
 150 THE STRANGLE HOLD 
 
 The various attempts which have been made to coun- 
 teract the bad effects of these two weak points in our 
 system, especially the Federal Reserve Act and the Farm 
 Loan Act, can now be reviewed in a different light than 
 has heretofore been applied to them. 
 
 The chapter on the Federal Reserve System will war- 
 rant special attention for the functions of that institu- 
 tion are at present not well understood. It will be 
 shown that in its present form it is a decidedly un- 
 American institution. 
 
 Some of the mysteries of the New York stock ex- 
 change will be cleared up in the chapter on "Specula- 
 tion" and "Foreign Exchange" will be explained in a 
 chapter under that title. It will be sho\vn that the 
 faults existing in these various economic factors will 
 disappear when the remedy offered is applied. 
 
 Since the need for reform must be clearly established 
 before asking that present conditions be changed the 
 chapters immediately following are designed to show 
 that need. 
 
 The chapter on "Modern Feudalism" shows how un- 
 American our present system is, the one on "Interest" 
 shows how unjust and oppressive it has been and can be 
 and the "Gold Standard" chapter, by using the words 
 of an ex-Secretary of the Treasury shows how extremely 
 false it is. AMERICA stands for just the opposite of 
 all these and the suggestion here is to Americanize 
 America by making our financial system conform to 
 American ideals.
 
 CHAPTER IX 
 MODERN FEUDALISM 
 
 EVERYBODY is more or less familiar with the his- 
 torical epoch known as the Feudal Era, Every 
 school history contains a discussion of it. And so every- 
 body will perhaps remember how, in the ancient feudal 
 states, the king was supposed to own all the land; how 
 he distributed this land among his vassals, lords and 
 dukes, and how they in turn divided the land allotted to 
 them among their own vassals, the barons and knights; 
 and how each in turn acknowledged the authority of his 
 immediate master, and rendered services to him. 
 
 Below these various layers of vassalage and sub- 
 vassalage were the common people, who tilled the 
 soil, and supported the privileged classes, enabling the 
 latter to spend their time in feasting, fighting and enjoy- 
 ing life generally. 
 
 Such a system was one of a bye-gone era, and one 
 that has long passed out of existence; today we are 
 supposedly living in an era of individual liberty and 
 equality. 
 
 And yet, when one looks below the surface, it will 
 be seen — and those who have read this far already see — 
 that this freedom is more apparent than real. For 
 there exists in our financial system, the most important 
 institution of today, a system of feudalism which, while 
 less obvious, is thereby the more far-reaching. 
 
 151
 
 152 THE STRANGLE HOLD 
 
 With regard to the ownership of land, and the con- 
 trol of it, the system of feudalism has long passed out 
 of existence, but it finds a perfect counterpart ia our 
 present banking system. 
 
 The head of the feudal financial state resides in New 
 York, with headquarters in Wall Street; the dukedoms 
 are presided over by the banks of the reserve cities ; the 
 barons and knights who rule the lesser cities and towns 
 are tributary to these financial powers; and just as in 
 the old feudal system, the people though no longer called 
 serfs, are the subjects of this money power. 
 
 It is true that the old system has been refined some- 
 what. The autocrat no longer has the power to chop 
 ofi" the physical head of an inferior. Instead he has 
 the right only to cut off his financial head. Instead of 
 having the right to imprison his serfs, the financial lord 
 has the power only to withold from those who displease 
 him the means of conducting their business. That is, he 
 shuts the bank door in their face and denies them the 
 use of the medium of exchange. 
 
 This change is a refinement, perhaps, but it does not 
 help to free the serf. For in denying a man the use of 
 the greatest public utility, which is the means of car- 
 rying on his business, the financial master can cause just 
 as much loss and suffering as the old feudal master 
 could through a more apparent power. 
 
 Perhaps the newer feudalism has been made less hate- 
 ful than the old, since the outward signs rnd symbols of 
 power have been discarded. Names have clisnged, and 
 we no longer speak of king, vassal, and serf. The vis- 
 ible means of enforcing the master's will have disap-
 
 MODERN FEUDALISM 153 
 
 peared, and our financial kings, dukes, and barons do 
 not parade in regal costumes and waving plumes. And 
 the tokens and customs of serfdom, the forms in which 
 the serfs acknowledged openly their inferiority, and the 
 supremacy of their masters, are no longer required. 
 
 But for all this, the subjection is no less complete. 
 Indeed, on account of its invisibility it is the more 
 dangerous ; it is the more insidious. For the present- 
 day tyrant is no longer responsible to the court of public 
 opinion. Because the means of his power are not easily 
 seen, and the results of his tyranny will be charged to 
 other causes, he can use his power in the most cowardly 
 way, and yet escape all criticism. He can, for instance, 
 cause a failure in business by withholding deserved 
 credit, and then blame the failure to the unbusinesslike 
 methods of his victim. And instead of being censured 
 for such an act, the tyrant is praised for his foresight 
 and wisdom. 
 
 There is yet another way in which this modern feu- 
 dalism is a greater burden and a more serious danger 
 than was the old. Under the old system the interests of 
 master and serf at least tended in the same direction. 
 The more the serf produced, the more the master could 
 require from him, and so they both desired the greatest 
 production. But today the reverse is often the case, for 
 frequently the interest of the financial master is allied 
 with that cf the speculator, and so opposed to that of 
 the producer. Some may doubt this, but their doubts 
 will be removed in a subsequent chapter, where this 
 phase of the question will be more fully discussed. 
 
 Probably some people may resent this entire com-
 
 154 THE STRANGLE HOLD 
 
 parison; they think it ridiculous and absurd, or at least 
 untrue. If they are not convinced after reading what 
 the Comptroller of the Currency has to say in the next 
 chapter they would possibly change their minds upon 
 applying at any bank for a loan. 
 
 Let us suppose a man applies at his home bank for 
 a loan. Such an application would be a request to be 
 allowed to use the most important public utility. The 
 first question he would be called upon to answer would 
 be: "What are you going to do with the 'money'."*" So 
 customary has a question of this sort become that it 
 seems now perfectly natural. But when one thinks 
 about it a little, and sees what an assumption it makes it 
 will be resented. For does it not assume the relation- 
 ship of master and servant? Or at least that of guard- 
 ian and ward.'' 
 
 Where the security is not of the best, so that the loan 
 must be applied to that security in order to make it 
 good, the question is logically justifiable; but where a 
 man is offering ample security for the use of the medium 
 of exchange, the banker has no right to inquire into 
 his business. Under such circumstances the question is 
 virtually an insult, for it assumes that the banker is the 
 master or at least the guardian of the customer. 
 
 It is cheerfully admitted that neither the banker's 
 question, nor his refusal to make the loan, are prompted 
 by any feeling on his part of that of a master toward a 
 servant, but this in effect makes no difference, for the 
 result is the same. 
 
 Our analogy is also borne out by the fact that the 
 answer of a baron — the small banker — when asked for
 
 MODERN FEUDALISM 155 
 
 a loan, will depend very much upon how his overlord, 
 the reserve city banker, feels toward business conditions 
 and the future outlook; the latter's conclusions are in 
 turn drawn from the head of all national financial power, 
 otherwise known as "Wall Street." 
 
 In short, is there any practical difference between a 
 system where the master owns the land, and permits his 
 serf to work it under his direction, and one in which the 
 master controls the medium of exchange, which must be 
 used by the producer to carry on his business? 
 
 The feudal master controlled the basis of all industry, 
 the land, while the modern master controls the means of 
 carrying on all industry, the medium of exchange. 
 Is there any difference? 
 
 Perhaps this comparison of our modern financial sys- 
 tem to the feudal system of bye-gone days is liable to 
 become tedious with too long a discussion, so with one 
 more picture we will turn to further direct considera- 
 tions. 
 
 An old historian saw the evil effects of the old system 
 of feudalism, whereby one class worked in order to sup- 
 port the other in idleness; and, in order to show this 
 evil the more clearly, he drew a picture to represent the 
 conditions of the day. In this picture he showed the 
 king standing on the shoulders of his overlords these 
 overlords stood on the shoulders of their lesser lords, 
 who in turn stood on the shoulders of their own vassals, 
 the minor landholder; finally these stood directly on the 
 back of the poor peasant or serf, who tilled the land, 
 And so in addition to his work in tilling the soil and 
 bringing forth a produce from it, the serf had to bear
 
 156 THE STRANGLE HOLD 
 
 the burden of all these successive lords and overlords, 
 and the sovereign himself, upon his shoulders. Nat- 
 urally such a weight bore him down, so that he could not 
 even cultivate his fields properly. 
 
 The force of this picture was to show how the old 
 system, by placing all the weight upon the one class of 
 producers, tended to restrict the production of this class 
 itself. Precisely the same thing applies to our modern 
 financial feudalism. The entire weight and restriction of 
 a bad financial system rests upon the shoulders of the 
 producers, and hinders them, so that they are unable 
 to carry their production even with reasonable closeness 
 to its fullest development. 
 
 Since the object of civilization is to provide for the 
 wants of the community with the least effort on the part 
 of the members of the community, our present system is 
 directly opposed to the advancement of our civilization. 
 
 It is true that the individual banker cannot be blamed 
 for the difficulty the producer has in obtaining proper 
 credit; the fault is with the entire banking system. But 
 this does not lighten the gravity of the fault, nor remove 
 its bad effects. 
 
 The weakness of the system is shown when two dif- 
 ferent institutions had to be erected in an attempt to take 
 care of the farmers' need for credit. The Federal Farm 
 Loan Act is but one indictment of the inadequate, ineffi- 
 cient, and antiquated banking system that hinders the 
 forces of agriculture, industry, and commerce today. 
 The War Financing Corporation and the Edge Act are 
 recent indictments to the same effect. 
 
 And one of the chief phases of this inadequacy lies
 
 MODERN FEUDALISM 157 
 
 in the autocratic power of the banker which has been 
 the subject of discussion in the preceding pages. This 
 autocratic power is sometimes exercised very ruthlessly. 
 
 For instance, the lords of finance recently discovered 
 that credit inflation had caused extravagance. Even 
 working men were spending their money for automobiles. 
 Word was sent out that the credit situation demanded 
 curtailment. It was not an order; it was no more than 
 a suggestion, but no king's command could have been 
 more promptly obeyed. Credit was withdrawn from 
 the automobile dealers. As a result, sales contracts had 
 to be discounted through speculators at 15, 20, and 25%. 
 Orders for machines were cancelled. The automobile 
 business slumped and started our present business de- 
 pression. It was blamed to over-production, but it was 
 not over-production, for the demand had not been over- 
 satisfied. It was just the result of the automobile deal- 
 ers having been thrown out of the bank. 
 
 The question is now whether we shall erect a financial 
 asylum for them as we did for the farmers, and as is 
 being done for the exporter, or whether the problem 
 shall be solved in a logical, proper, and thorough way, 
 through public control of bank credit. This question 
 does not concern financial outcasts alone, for we are all 
 losers by the business depression and besides, no one 
 knows where the axe will fall next. 
 
 No personal liberty can exist so long as any public 
 utility so vital as the medium of exchange is allowed to 
 rest in private hands. The bad effects of private con- 
 trol of a great public utility were quite apparent in the 
 old days of unregulated railroad operation, when the
 
 158 THE STRANGLE HOLD 
 
 officials could show, and use, their authority by refusing 
 the shipper a car, or by charging an exorbitant rate, or 
 by giving a competitor a rebate, or using any other 
 means of unfair discrimination. The power of the auto- 
 cratic railroad official was then easily seen, and when 
 the evils in the private control of that public utility 
 became so obvious, it was soon done away with. 
 
 The chains by which the banker binds us are invisible, 
 and our rulers assume no apparent regal prerogatives; 
 we are, therefore, lulled into believing that we have a 
 freedom such as no people ever before enjoyed. How 
 the real state of affairs differs from this apparent state 
 is so obvious now to the reader that it needs no repeti- 
 tion. 
 
 If these evils were unchangeable, if the private control 
 of our medium of exchange could not be done away with, 
 if we were destined forever to live and carry on our 
 businesses under the autocratic supervision of the finan- 
 cial powers, it would be of no avail to point out the 
 truth. It would be better for us to blind ourselves to 
 the real facts of the case, and to live on in our apparent 
 freedom, suffering its evils patiently. But it can be 
 changed, and we have seen how easily the change can be 
 brought about. 
 
 The American people will certainly not permit this 
 strangle-hoid on liberty and on all productive energy to 
 continue when they know that thirty words properly 
 placed in the Federal Reserve Act will completely de- 
 stroy the feudal power of the "Money Trust." 
 
 It will not be difficult for business men to conceive of 
 the advantages that would accrue to them from such a
 
 MODERN FEUDALISM 159 
 
 change. By it they would be enabled to carry on their 
 business without being compelled to accept the judg- 
 ment and yield to the will of the banker. Such a con- 
 dition would be so foreign to present conditions that the 
 relief can hardly be imagined. Indeed, the thought of 
 being able to ignore the banker while using the bank's 
 credit is so inconceivable that it may even cause the 
 reader to doubt whether the proposed change is prac- 
 ticable. And yet it is, essentially practicable, and ex- 
 ceedingly simple to carry out, as a review will show. 
 
 The proposed measure would in essence only require 
 the banker to extend the use of the public utility in his 
 hands to anyone who would have a right to use it — 
 that is, to anyone who could give proper security for 
 a loan. 
 
 With such a change accomplished every business man 
 could know at all times his limit of credit. He would 
 certainly appreciate the right of being able to use his 
 credit when and as he pleased and to conduct his busi- 
 ness according to his own judgment without question or 
 hindrance from any one. And this improvement in 
 business conditions would all be accomplished through 
 public control, which is our present method of dealing 
 with all other public utilities. 
 
 There is no suggestion of a change in the kind of 
 money, the institution which issues it, or the method of 
 using it. 
 
 For if a banker today were going to make a loan on 
 personal property such as wheat, iron, hides, wool, etc., 
 he would accept as the value the price established by the 
 market where such goods are sold. No change in this
 
 160 THE STRANGLE HOLD 
 
 method is suggested. The only change desired is that 
 all must be treated alike by the banker. If one thou- 
 sand bushels of wheat is good security for a loan of one 
 thousand dollars to Jones, then it should be good security 
 for a loan of the same amount to Smith; and the way 
 the banker feels personally toward either Jones or Smith 
 should make absolutely no difference. 
 
 In the case of a loan on land, no change is suggested 
 except one in the method of appraising its value. 
 
 Instead of letting the banker or a bank appraiser 
 guess at the value and charge a good sum for the guess, 
 it is suggested that we make the personal interest of 
 the property owners of the commimity settle the value 
 through the Assessor's office in a simple and practical 
 way with little or no expense to anyone, but with perfect 
 safety and satisfaction to all. 
 
 These few changes are simple and obvious but once 
 they are made any business man may know at any time 
 how much he is entitled to borrow from the bank. He 
 would merely have to find the value set on his property 
 through these public agencies; then by applying to that 
 amount the percentage of loan to value established by 
 the state banking authority or the Federal Reserve Board 
 he would know exactly what amount he could borrow. 
 
 For instance let us suppose a manufacturer desired to 
 buy a thousand tons of iron. The iron, we will say, is 
 quoted at $60 a ton, and the percentage of loan to value 
 established on such a security is, say, 70%. The thou- 
 sand tons would cost $60,000. When put in a warehouse 
 the manufacturer would be entitled to borrow on the 
 warehouse receipt 70% of $60,000 or $42,000. Then
 
 MODERN FEUDALISM 161 
 
 to swing the deal he would only require of his own cash 
 $18^000 and enough to pay the freight. 
 
 There would be no guess-work about this deal, no 
 time wasted, no humility, no pandering to the banker. 
 He could figure it all out in his ofEce and then wire his 
 order. When the iron was shipped he would deposit 
 with the bank his note for $42,000 with the bill of lading 
 attached, and with this loan, plus the $18,000 he already 
 has, he pays cash for the iron, and is thus enabled to 
 take his discount or the transaction could be handled 
 through an acceptance. 
 
 Similarly a merchant who might want to buy a thou- 
 sand barrels of sugar, or other merchandise, could do it 
 in the same way, and without any uncertainty or worry 
 either for himself or the banker. 
 
 Since the use of the medium of exchange would be a 
 right which he could always take advantage of, so long 
 as the value of the security given did not fall, these 
 notes could be renewed indefinitely. The only requisite 
 would be that the margin of security be maintained and 
 the interest paid. 
 
 Such a procedure would probably seem strange for 
 business men. They would feel unaccustomed to their 
 new freedom, and hardly be able to realize that they 
 could go ahead without telling all their business plans 
 to the banker and then worrying whether he would let 
 them have the money. But the habit of deferring to 
 the banker would be overcome in time, and we would 
 gradually learn to get along without a guardian. And 
 what a relief it would be! Especially in the knowledge 
 that the banker would have to renew the note as long as
 
 162 THE STRANGLE HOLD 
 
 the security were kept at the required margin and the 
 interest paid when due. 
 
 As to the right or wrong of the proposed change, the 
 right is entirely on the side of public control. For bank 
 credit has gained its position as our medium of exchange 
 only through the laws which the people make. Through 
 our laws the banker is enabled to exercise a function 
 which properly belongs to the government. 
 
 Instead of the proposed change taking any property 
 or any rights from the banker it is just the reverse. 
 
 The banker is a trespasser on the peoples' rights. 
 Through the development of the banking habit, aided by 
 our banking laws, the banks have usurped the most im- 
 portant government function, that of money control. 
 
 There is no more reason for allowing the banker to 
 continue this trespass than there would be for permit- 
 ting any body of private citizens to move into one of 
 our public buildings and use it for their own purposes 
 to the exclusion and detriment of the public. 
 
 There is not the slightest justification for our present 
 banking system nor any reason why the banker should 
 continue to be our lord and master, and so there can be 
 no possible objection to the proposed change as a matter 
 of principle. Indeed, the very opposite is the case. 
 
 For since it is through our laws that bank credit has 
 become our greatest public utility, and since its value is 
 derived entirely from those laws, it is not only our right, 
 but our bounden duty, to put it under public control. It 
 is public property. It belongs to the people in common 
 and, therefore, it must be at the service of all on the 
 same terms.
 
 CHAPTER X 
 INTEREST 
 
 There may still remain some among those who read 
 these pages who doubt the validity of the indictment 
 contained in the preceding chapter. Perhaps they feel 
 that nothing sufficiently official or authentic has been 
 cited to prove the case. 
 
 If this be so then their doubts will soon be dispelled 
 in the succeeding few pages. Here they will find indis- 
 putable evidence of the feudalistic power now in the 
 hands of our present day masters, the banking interests, 
 and of the ruthless and destructive way in which the 
 power has been and still is exercised.* 
 
 This evidence is to be found in recent reports of Mr. 
 John Skelton Williams, Comptroller of the Currency of 
 the United States. Were it not for his official position 
 and the sound facts which called them forth some of his 
 statements would soimd like the ravings of a soap-box 
 reformer or the scare-headlines of a propagandist jour- 
 nal. Coming as they do, however, from such an authori- 
 tative and responsible source, they cannot but be accepted 
 as authentic. 
 
 Among the most recent of these is a statement given 
 by the Comptroller to the press — a statement which, as 
 would be expected, raised a howl of vigorous protest. In 
 this statement Comptroller Williams exposed the fact 
 
 *See Appendix Page 302. 
 
 163
 
 164. THE STRANGLE HOLD 
 
 that the rates for call money used by New York banks 
 are fixed by a committee of brokers on the New York 
 stock exchange. Among the evils resulting from this 
 practice he pointed out the fact that since the rate on 
 call money affects prices, especially the prices of bonds 
 and stocks, the committee is thereby enabled to deter- 
 mine the trend of prices and to quickly effect the prices 
 of securities. Having in this way an "inside" knowledge 
 of how security prices are going to move, or rather, 
 being thereby enabled to influence the movement of these 
 prices, this committee of brokers has the opportunity of 
 profiting largely, and without risk, by operations on the 
 stock market.* 
 
 Glaring as such a fault is, however, it is only one of 
 the lesser evils that result from this improper concen- 
 tration of power in the hands of a few. The Comptroller 
 pointed out a still greater objection to the practice in the 
 fact that, by raising the rate on call money in the finan- 
 cial center, money which otherwise would be used to 
 stimulate legitimate business and to foster production 
 in other parts of the country would be attracted to New 
 York and used for speculative purposes. In this way 
 the practice resulted in defeating one of the primary 
 purposes of the Federal Reserve Act, namely, the orderly 
 distribution of money throughout the country to meet 
 the needs of commerce and agriculture. 
 
 As was to be expected, this statement of the Comp- 
 troller raised a vigorous storm of protest from the 
 bankers. For doing his duty in pointing out a very 
 glaring defect in our financial system. Comptroller Wil- 
 
 ♦See Comptroller's statement printed in the Appendix.
 
 INTEREST 165 
 
 liams was severely taken to task at the meeting of the 
 American Bankers Association which condemned his 
 plain statement of facts, as a "dangerous attack on the 
 credit structure of the country." 
 
 If any comment is at all necessary here, it will be 
 sufficient to remark that, to an impartial observer, such 
 a condemnation indicates a very tottering condition of 
 the country's credit structure. If our banking system is 
 so shaky that a plain statement of what any one will 
 readily recognize as a very harmful and eminently unjust 
 practice, can be called "a dangerous attack on our credit 
 structure" it is about time to put that "credit structure" 
 upon a more solid basis. 
 
 The solicitation of those bankers for the safety of 
 our credit structure may have been influenced somewhat 
 more by personal interest than by patriotic motives. It 
 has been a rather common practice for the masters of 
 all ages to appeal to fear of national calamity or to hide 
 personal interest behind patriotic motives in order to 
 save their privileges. 
 
 Indeed, if the foregoing statements have such dan- 
 gerous possibilities, what must have been the danger of 
 other statements made by the same Comptroller, at an 
 earlier date. For not so very long ago the Comptroller 
 had occasion to call a number of banks to order for prac- 
 ticing usury. The idea of usury is generally connected 
 with the Middle Ages, when the exaction of any interest 
 at all on loans was unlawful; and where the money- 
 lenders, running as they did the risk of extreme punish- 
 ment, charged excessive rates to make up for the danger. 
 
 In the minds of most people, then, the practice of
 
 166 THE STRANGLE HOLD 
 
 usury is thought of as being one of the abuses of the 
 Dark Ages, together with such things as the Spanish 
 Inquisition, The Star Chaniber, and so forth. The facts, 
 however, are far from this. For not merely a few banks, 
 but more than one-third of all the national banks in the 
 United States were convicted on their own sworn state- 
 ments of charging usurious rates of interest, running, in 
 some instances, as high as two hundred per cent a month, 
 or more than two thousand four hundred per cent per 
 annum. 
 
 Certain parts of the reports of the Comptroller of the 
 Currency are so interesting that they are well worth 
 being reproduced here. 
 
 In regard to the City of New York, the financial 
 center of the country, the Comptroller of the Currency 
 said: 
 
 "It is the walled city from which the barons have 
 levied tribute on a territory and population vaster 
 than any king of the Middle Ages dreamed of, yet 
 sometimes using methods as ruthless and savage as 
 those of the robber nobles . . . forays and levies 
 devasting by scientific, artful methods ; pillaging under 
 form of law, smiting with swords that bite deep, 
 though we can not see them, consuming with fire which 
 comes invisible and unsuspected." 
 Does anybody need a stronger confirmation than this 
 of our indictment of the present financial system as 
 being a stronghold of feudal power and practice? 
 
 To proceed with the Comptroller's statement, he claims 
 that "there is no natural limit to greed and the ambition 
 to acquire," offering as proof thereof the following:
 
 INTEREST 167 
 
 "Sworn reports, made by the banks themselves, 
 show that on September 2, 1915, 2,743 national banks, 
 out of a total of 7,613, were guilty of usury. This 
 at a time when the Federal Reserve banks were offer- 
 ing money freely to national banks in every part of 
 the country at rates varying from three and a half 
 to five per cent. 
 
 "Such a policy is bad and dangerous, even in the 
 business centers where borrowers are men of experi- 
 ence and skilled in business, but the real brutality and 
 horror of it develops in the rural districts. Some 
 reports from the South and West, the Northwest and 
 the Southwest, are blood-curdling. They are like 
 stories from darkest Russia; like the ghastly wrongs 
 done the French country people by the old nobility. 
 The small farmer or planter is usually poor and with- 
 out money to employ lav/yers or the instruction to 
 understand his own rights. Because of this helpless- 
 ness, he falls an easy victim to the rapacity of the 
 unscrupulous money lender, and goes to a destruction 
 that his energy and honesty do not deserve." 
 Nor is this merely an empty indictment, nnsupported 
 by direct proof. In support of his statements the 
 Comptroller gives a few typical examples which are 
 interesting if for no other purpose than to prove that 
 greed has no natural limits. For instance he says: 
 
 "I have the record of the loans made by one Texas 
 national bank to a hard-working woman who owned a 
 little farm a few miles from town. She borrowed, in 
 the aggregate, $2,375, making about thirty loans dur- 
 ing the year. Listen to the details of the robbery:
 
 168 THE STRANGLE HOLD 
 
 $162,50 for SO days at 36 per cent: $377 for S4 days 
 at 44 per cent; $620.25 for 23 days at 77 per cent; 
 $11 for 30 days at 120 per cent; $21.50 for SO days 
 at 90 per cent; $33 for 2 days at 93 per cent; $27 for 
 15 days at 195 per cent; $110 for SO days at 120 
 per cent — that was to buy a horse for her plowing — 
 $20 for 48 days at 187 per cent; $6 for 10 days at 
 720 per cent; $7 for 3 days at 2,000 per cent; and so 
 on; every cent paid off by what sweat and struggle 
 only God knows." 
 
 As an exceptional instance, this statement might not 
 be of such overwhelming concern, since the loans were 
 small. But it is not an exceptional instance. In that 
 state alone 192 banks out of 534 were found guilty of 
 usury, charging all the way from twelve to two hundred 
 and fifty per cent on the money they could get from the 
 Federal Reserve Bank for from three and a half to five 
 per cent. 
 
 Another instance cited by the Comptroller is equally 
 interesting : 
 
 In Oklahoma, where the legal rate of interest is 
 six per cent, with ten per cent as the maximum under 
 special contract, harassed farmers paid all the way 
 from 12 to 2400 per cent with 40 per cent as the 
 average. In the case of one bank, ]\Ir. Williams 
 proved that not a single solitary loan had been made 
 under fifteen per cent. He cited one particular case 
 that he asked to be regarded as typical. In the 
 spring the farmer went to the bank and arranged for 
 a loan of $200. Out of his necessity he was compelled 
 to pay 55 per cent interest charge. Unable to meet
 
 INTEREST 169 
 
 the note at maturity, he had to agree to 100 per cent 
 interest in order to get the renewal. The next renewal 
 forced him up to 125 per cent. For four years the 
 thing went on, and all the drudgery of the father and 
 the mother and the six children could never keep down 
 the terrible interest or wipe out the principal. As a 
 finish, the bank swooped down and sold him out; the 
 wretched man, barefoot and hungry, went to work 
 clearing a swamp, caught pneumonia and died; the 
 county buried him, and neighbors raised a purse to 
 send the widow and children back to friends in Arkan- 
 sas. 
 
 That such a condition of affairs should exist in this 
 twentieth century of enlightenment would not be believed, 
 were it not for the authenticity of the source from which 
 the information comes. But what is still more surpris- 
 ing is the fact that this charging of usurious interest 
 rates does not comprise the sum total of the abuses. For 
 while the Comptroller has stopped the particular abuse 
 we have discussed so far as lay in his power to do so, 
 and while no national bank has since dared to report a 
 usurious interest charge, the abuse has not been done 
 away with entirely. For the banks have several other 
 ways of "beating the game" and achieving the same 
 abusive results, regardless of Comptrollers or of state 
 authorities. 
 
 One of these, for instance, is where the banker directs 
 an unsuccessful borrower to a broker. For instance, 
 when a borrower appears, the banker either demands a 
 bonus, or gives some reason why he cannot handle the 
 loan. Pretending, however, to be desirous of helping
 
 170 THE STRANGLE HOLD 
 
 the customer, and hiding his deceit under the mask of 
 friendship, he refers the would-be borrower to a broker 
 who, he says, may be able to secure the loan from out- 
 side parties. Of course, there will be a little brokerage 
 fee of from two to five per cent, and the money-lenders 
 want a little higher rate of interest than the banks. 
 
 Flattered by the banker's interest in his welfare, the 
 helpless borrower takes a card to the broker. The latter, 
 really a stool pigeon, goes into the back door of the 
 bank and secures the funds with which to make the loan. 
 
 The advantages of this method are apparent. The 
 bank escapes the odium of usury. The official who turns 
 the trick does not have to divide his rake-oflF with the 
 stockholders of the bank in which he is employed. And 
 the borrower's resentment is turned against the stool 
 pigeon instead of the banker. High class bankers no 
 longer consider this method "ethical," and they do not 
 practice it. This makes little, if any difi^^erence, however, 
 for they have an "ethical" method of putting on the 
 screws. This is by requiring the borrower to keep his 
 balance at a certain figure. 
 
 If the borrower gets a loan of ten thousand dollars 
 it is with the understanding that he is to maintain a 
 balance in the bank of from two to four thousand dol- 
 lars. That is, the borrower is required to keep from 
 one-fifth to one-third of the amount he borrows always 
 on deposit in the bank; so if he really needs seven thou- 
 sand dollars he must borrow and pay interest on at 
 least ten thousand which, of course, raises the rate on 
 the money actually used and what appears to bs six per 
 cent money is really nine or ten per cent money.
 
 INTEREST 171 
 
 This practice is considered perfectly "ethical," and 
 it is so common that bankers have evolved a rule by 
 which they figure how much a man is entitled to borrow. 
 The basis of the problem is the average monthly or 
 yearly balance the borrower has carried in the bank 
 and the answer is about four or five times that balance. 
 
 Thus a business man who has carried a bank balance 
 of $2,500, paying interest out of his own pocket on any 
 loan, while his balance lies there idle, not drawing a 
 cent of interest or at best a low rate of interest, would 
 be figured as good for a loan of about $10,000. If his 
 balance were $5,000, then he might get a loan, on the 
 basis of this larger balance, of $20,000 or perhaps more. 
 
 These are a few of the methods by which our modern 
 feudalistic masters grind out their wealth from the toil 
 of their serfs. Can anyone still doubt the claim that we 
 are living under a modern autocratic regime that is 
 rather more than less dominant, ruthless, and terrible 
 than that of former ages.'' 
 
 When we read of the grinding taxes imposed upon the 
 common people by the autocratic government of the 
 Bourbon Kings of France, we wonder more at their 
 long patience than at the result of their final despera- 
 tion, which ended in the Reign of Terror. The people 
 of those days were no different from what they are now. 
 There were good and innocent Frenchmen among the 
 aristocracy who protested against existing injustices, and 
 there were high-spirited, intelligent and liberty loving 
 people among the down-trodden commoners; but a cour- 
 ageous and intelligent peasant remained helpless against 
 tyranny, because his neighbors lacked the force to assert
 
 172 THE STRANGLE HOLD 
 
 their rights and the courage to organize. The peasants 
 who would have started an uprising were bound by the 
 inertia of the others. Constant pressure of wrong finally 
 overcame this inertia and the righteous wrath of the 
 people was finally kindled into an all-consuming flame 
 which spared neither innocent nor guilty among the 
 governing class. 
 
 If this bit of history teaches anything, it is that the 
 crime of one of a class, or an injustice to one of a class, 
 in the exercise of a public function, is the crime of all 
 that class, and an injustice to all of the other class. 
 
 And from the statements it will be seen that even if 
 we are not personally and directly affected by the abusive 
 practices current under our present financial system, we 
 are, nevertheless vitally concerned. Whether or not we 
 are, individually, affected by a particular act at a par- 
 ticular time, we are at any rate greatly concerned in an 
 indirect way. For if the weeds of greed, injustice, and 
 oppression are permitted to grow at all, their seeds will 
 soon produce more and more weeds, and the whole garden 
 will soon be ruined. 
 
 The few illustrations given by the Comptroller serve 
 to show that autocratic power in modern America has 
 the same tendency toward cruelty, injustice and disre- 
 gard of the rights of others that it had in France prior 
 to the French Revolution. 
 
 And this is not all. For it is not the flagrancy of 
 the cases cited, nor the question of whether few or many 
 suffer, that is of greatest importance. Essentially it is 
 a matter of principle. The greatest evil lies in the fact 
 that the system allows of such abuses. And this is not
 
 INTEREST 17* 
 
 modified by the fact that the particular abuse has, to a 
 great extent, been allayed. For its correction was an 
 accident. It happened as a result of the appointment 
 of an efficient, and fearless Comptroller of the Currency. 
 
 In fact, the matter of interest, and all the abuses 
 which we have seen are possible, and have existed, under 
 the present system of banking are really only of minor 
 concern to us. For evil as are their effects, they arise 
 from a condition which is in itself merely the effect of a 
 still more vital evil, the fault that lies at the heart of our 
 financial structure. 
 
 This is, once more, the private control of the greatest 
 of all public utilities, the medium of exchange. This 
 private control is the root in which all evils, such as 
 we have been discussing, and others too countless to 
 enumerate, find their origin. And these and other abuses 
 will be continued, and will forever crop out in new and 
 terrible forms, regardless of all governmental restraint, 
 however well-intentioned, that is aimed at the effect and 
 not at the cause. 
 
 These and many other abuses can be prevented only 
 by removing their cause. The whole matter of interest 
 or discount, excessively injurious as it may be, is but 
 a matter of minor importance. The real concern is the 
 matter of private control, from which all the other evils 
 spring. 
 
 And once more it can only be said that the marvel is 
 not that the evils are so great, nor that their effects are 
 so far reaching, as it is that they are allowed to exist at 
 all. It is so apparent that our medium of exchange is 
 merely a system of keeping track of credits and that the
 
 174 THE STRANGLE HOLD 
 
 whole system rests on the people's laws and is, therefore, 
 the peojale's property that our present system seems a 
 slur on American genius and business ability. It is also 
 so plain that it is our greatest public utility, that it seems 
 incredible to see the American people submitting to 
 tyranny and abuse due to its private control. Especially 
 is this so when the remedy for all these evils is such a 
 simple one. Thirty words to be added to the Federal 
 Reserve Act, would do away with the rottenness at the 
 core of our present commercial and industrial structure, 
 and thereby kill oiF all the weeds and cankerous growths 
 that find their origin in that festering center of unre- 
 strained private control.
 
 THE GOLD STANDARD 
 CHAPTER XI 
 
 When we read of the misguided individuals who, in 
 past ages, believed in witchcraft and sorcery, who wor- 
 shipped idols, and who fanatically killed each other in 
 the name of religion, we are inclined to pity them. We 
 look down upon these former ages from our heights of 
 enlightened opinions and our great scientific and mate- 
 rial progress, and congratulate ourselves that we have 
 become emancipated from ancient and ridiculous beliefs. 
 
 And yet at the same time we have in one metal an 
 idol which we worship with no less intensity than did 
 the people of past ages worshijD their graven images. 
 An idol, furthermore, which is raised on grounds no les3 
 fallacious than the idols of old; but one, the worship of 
 which is far more destructive in its effects upon the real 
 progress of the world than were all the heathen creeds 
 and practices of all past ages. 
 
 This idol is gold, and the pedestal on which it is 
 raised is the fallacy of the gold standard. It rests upon 
 the idea that there is an essential difference between 
 gold and all other things, a difference which gives this 
 one thing, gold, certain peculiar properties by which it 
 has certain power over all other things. 
 
 The subject of the gold standard is mentioned here 
 with the intention of divorcing the human mind from 
 these ideas. In the suggested remedy^ no mention has 
 
 175
 
 176 THE STRANGLE HOLD 
 
 been made of the gold standard or of anjrthing connected 
 with it and none is necessary. For, as the remedy rests 
 upon the foundation of truth all means used to deceive 
 and, all false standards will automatically disappear. 
 
 The United States, as well as all other progressive 
 countries, has adopted the gold standard. Our finances 
 are said to be on a gold basis, meaning that our currency 
 is based on gold as the money of ultimate redemption. 
 Now to a certain very limited extent this statement may, 
 guardedly, be taken as true. Unless, however, it is taken 
 in this very limited sense, it includes such a multitude of 
 untruths that it becomes the foundation of a very great 
 fallacy. 
 
 For it leads to the belief that gold is somehow above 
 all other commodities, and by its very nature in a posi- 
 tion superior to them. Whereas in truth gold is a com- 
 modity, just as lead and iron are, having certain peculiar 
 characteristics of its own, as every other commodity has; 
 but differing in essential principle not a whit from any 
 other commodity. For it obeys the same natural laws, 
 from the law of gravity to the laws of value and price. 
 Without entering here into a discussion of the various 
 theories of value and price, it will be sufficient to explain 
 this statement as meaning that gold, just as every other 
 commodity, has a real, or true, value, which varies 
 according to certain natural phenomena, including de- 
 mand and supply. Just as, roughly speaking, demand 
 and supply determine the real value of any other com- 
 modity, so they determine the real value of gold. 
 
 The truth of this is somewhat obscured by reason of 
 the fact that gold, having been used as money for many
 
 THE GOLD STANDARD 177 
 
 centuries, has had its price fixed by law. That is, the 
 weight and fineness, or the amount of pure metal, to be 
 put into various gold coins, has been fixed and these 
 coins have been designated as of a certain value. The 
 significance of this fixed price is, therefore, that it prac- 
 tically assumes that gold is the standard of value. 
 
 It is a standard in so far as the prices of other com- 
 modities are quoted in or referred to its price, but as its 
 price is not stable it is not a real standard. History 
 testifies that it has been necessary to readjust the fixed 
 price of gold many times within the past six hundred 
 years. If gold were in itself the standard of value, 
 these changes in its price could hardly have happened. 
 
 Furthermore, the use of gold for other purposes than 
 its employment as a money metal — that is, the use of 
 gold in the arts shows, in its effects upon the gold coin 
 in circulation. The real value of gold varies according 
 to the demand for and supply of it. The price of gold 
 as fixed by law in the United States today stands at 
 $20.67 per ounce. If the production of gold should fall 
 off very greatly, so that the needs of goldsmiths, jewel- 
 ers, and dentists could not be adequately supplied, these 
 people would be willing to pay more for it. That is, 
 its market or bullion price would rise. Suppose it rose 
 above the money price, say to $22 an ounce. Then gold 
 as bullion would be more valuable than gold as coin, and. 
 coins would be melted up and disappear from circula- 
 tion. 
 
 Again, gold always seeks the country where the de- 
 mand is greatest, where people are willing to pay the 
 highest price, that is, give up the most goods, for it.
 
 178 THE STRANGLE HOLD 
 
 All these facts go to show that the real value, and, 
 therefore, the true price, of gold fluctuates according to 
 the supply of and demand for it, just as does the price 
 of every other commodity. Consequently the effect of 
 fixing the price of gold at one dollar for 25.8 grains of 
 gold nine-tenths fine, at the mint, is no different in 
 principle from the effect of fixing the price of wheat at 
 two dollars a bushel in Chicago, or the price of iron at 
 four cents a pound in Pittsburg. 
 
 It is the fallacy, however, that there is a difference 
 between gold and other commodities, a fallacy which has 
 endured throughout the ages, and that has been the cause 
 of countless unfortunate misunderstandings. And these 
 misunderstandings will continue to exist until the fallacy 
 has finally been done away with. 
 
 The origin of this fallacy is not hard to find. It 
 arose because of the peculiar fitness of gold to be used 
 as a medium of exchange at a time when commerce was 
 still small enough not to be restricted by its use. For, 
 as will be remembered, to render efficient service a 
 medium must have universal acceptability and proper 
 elasticity. Gold has universal acceptability, and conse- 
 quently, so long as commerce did not grow to such pro- 
 portions that the lack of elasticity of the gold supply 
 hindered its development, gold formed a fairly good 
 medium of exchange. As a result of this acceptability 
 and because its value fluctuated the least of all com- 
 modities, gold came into universal use as a medium, by 
 which value is measured and goods are exchanged. It 
 was but a short step — ^however fallacious, to attribute to 
 gold the attributes of money (as distinct from the
 
 THE GOLD STANDARD 179 
 
 medium of exchange) ; that is, to regard gold itself as 
 the standard of value. 
 
 And bound up with this fallacy, in that it depends 
 for its existence upon the gold standard, is still another 
 fallacy, namely, the assertion that gold is the money of 
 ultimate redemption. This fallacy, as we have seen, 
 arose through the development of credit as a super- 
 structure on a medium of exchange composed largely 
 of gold, the purpose being to supply the lack of elas- 
 ticity from which gold suffers. 
 
 Now it is true that a balance of trade is sometimes 
 settled in gold. For instance, if the United States sends 
 to England meat, raw cotton, and wheat greater in value 
 than the fabric and textiles England sends to us, then 
 the difference may be settled in gold, since this is a 
 universally accepted medium. 
 
 But the statement that gold is the money of ultimate 
 redemption is a different proposition. It means that all 
 the currency of the United States, including gold and 
 silver certificates, silver and fractional coins, may be 
 exchanged for gold at the United States Treasury at 
 the option of the holder. It means, too, that bank de- 
 posits and other debts are payable in gold. 
 
 Now, as already stated, this is true in a limited sense 
 only, that is, so long as too many persons do not try to 
 avail themselves of the promised exchange at the same 
 time. For if the people should attempt to make the 
 exchange in any great quantity as they have several 
 times in the past the promise would be found to be 
 entirely a fiction. Since the days when gold was really 
 used as a medium of exchange, instead of a phantom to
 
 180 THE STRANGLE HOLD 
 
 bolster credit as it is now used, the volume of trade or 
 business has increased many fold, while the increase in 
 the amount of metal has been entirely inadequate. And 
 now with the amount of gold practically a fixed quantity, 
 while the volume of credit is piling up every day, the 
 percentage of ultimate payment money to bills payable 
 will soon reach the vanishing point. 
 
 The history of finance is largely a list of the various 
 deceits and devices that have been used to cover the fact' 
 that the promise to pay in gold could not be fulfilled. 
 Its path is strewn with the wreckage of government 
 paper money issues, asset currencies, greenbackism, 
 bimetalism, and a varied assortment of banking systems 
 and legislation induced by bank failures and panics. 
 Altogether it is a sorry story, filled with miseries and 
 repeated failures, all due to a lack of understanding of 
 basic principles and of the first requisites of a medium 
 of exchange. 
 
 But regardless of the amount of trouble that this 
 fiction of ultimate gold redemption has caused, it is really 
 only a minor point. It is one of the excrescences of the 
 real evil at the bottom of all evil which is the private 
 control of our medium of exchange. As has been shown, 
 the gold standard merely intensifies this evil. Since the 
 promise to redeem in gold cannot be fulfilled, it need not 
 be considered, in arriving at an intelligent solution of 
 the financial tangle. It is necessary, however, that the 
 solution shall so completely eradicate the basic evil that 
 the resulting fallacies will alfo disappear. As has re- 
 peatedly been shown, the suggested remedy thoroughly 
 fulfills this requirement.
 
 THE GOLD STANDARD 181 
 
 But the fallacy of the gold standard is of exceedingly 
 great interest in illustrating the hold fiction such as this 
 can gain on the minds of the greatest authorities, and as 
 an example of how such a false promise confuses what is 
 really simple and clear. It furnishes an explanation as 
 to why our present financial system seems so intricate 
 and unintelligible and the depth of the deception is re- 
 alized when one sees this fallacy treated as the truth by 
 eminent authorities on money and banking. 
 
 An example will bring this point home so clearly that 
 an examination of it is highly interesting as well as 
 instructive. This is furnished by an address made be- 
 fore the Ohio Bankers' Association in 1905, by Leslie M. 
 Shaw, Secretary of the Treasury from 1902 to 1907. 
 
 In this address Secretary Shaw is reported to have 
 said: 
 
 "The fact, and I think it is a fact, that the United 
 States has the best currency in the world does not 
 imply that the currency system of the United States 
 is perfect, or that it cannot be improved. It is as 
 safe as any system in the world because it is estab- 
 lished on the only safe basis known to man — the gold 
 standard." 
 
 The double standard of gold and silver at the ratio 
 of sixteen to one was in force until 1873, when the 
 country adopted the gold standard. But panics con- 
 tinued to occur every ten years as before, which would 
 argue that the gold standard is hardly the great tower 
 of strength and safety it is here claimed to be. Mr. 
 Shaw continued: 
 
 "The United States dollar is worth not only one
 
 182 THE STRANGLE HOLD 
 
 hundred cents, but one hundred gold cents. The dol- 
 lar is worth 25.8 grains in gold. That measures the 
 market vahie of our dollar. Whatever 25.8 grains of 
 gold will buy our dollar will buy, and it is worth 
 precisely the same uncoined as coined, for the Govern- 
 ment stands ready to coin it free and in unlimited 
 quantities." 
 
 All these statements are apparently true, but funda- 
 mentally misleading, because a dollar is worth one hun- 
 dred cents worth of any commodity and gold is only a 
 commodity not one whit different from any other. To 
 be sure the price of gold has been fixed by law for 
 many generations, which may add to its dignity; but 
 during the Food Administration we saw many other com- 
 modities, such as wheat, have the same dignity bestowed 
 upon them. 
 
 In less than two years after Mr. Shaw made this 
 claim of the solidity of our financial system because of 
 the gold standard, the country was using clearing house 
 certificates under pressure of continued holidays declared 
 by the governors of the several states. What difference 
 is it whether 25.8 grains of gold is worth a dollar, or a 
 bushel of corn is worth a dollar? It is a distinction 
 without a difference. 
 
 But Mr. Shaw did not stop here. He went further: 
 
 "Then in addition, every dollar of our currency, 
 gold certificates, silver, silver certificates. United 
 States notes. Treasury notes. National Bank notes, 
 subsidiary silver, nickel, and copper coins, is redeem- 
 able in or exchangeable for gold at the will of the 
 holder."
 
 THE GOLD STANDARD 183 
 
 This statement is true only when the aggregate holders 
 of these various other kinds of money do not wish to 
 exchange them for gold. It is not true when an occasion 
 arises in which they would wish to make the exchange, 
 but even if the statement were true Mr. Shaw completely 
 ignored bank credit, which constitutes more than 95% 
 of our medium of exchange, while everything he men- 
 tioned constitutes less than 5%. 
 Continuing Mr. Shaw said: 
 
 "This fixes the stability of our currency. Its value 
 does not and can not fluctuate." 
 
 If by the use here of the word "currency" the secretary 
 intended to confine his statement of gold redemption to 
 the "government issued" money alone the statement 
 might be true. The government possibly could redeem 
 enough "currency" used in this narrow sense to hold it 
 at par, but since government issued money, including 
 gold, constitutes less than 5% of our MEDIUM OF 
 EXCHANGE, the statement, even if true, is to say the 
 least entirely misleading. 
 
 Continuing Mr. Shaw then admitted: 
 
 "The system is not perfect, largely because it is 
 non-elastic. It fails to respond in volume to the 
 changing needs of the seasons and localities. Atten- 
 tion has been called to the non-elastic character of 
 our currency many times and by many people, but 
 that there will be no further currency legislation until 
 we shall have experienced a panic occasioned by this 
 want of elasticity, I am fully convinced." 
 This prophesy that Congress would do nothing to 
 improve a very defective financial system, although pub-
 
 184 THE STRANGLE HOLD 
 
 lie attention had often been called to its defects, proved 
 true within two years after it was made, when the panic 
 of 1907 caught the country unprepared. In fact, no 
 remedial action of importance was taken until six years 
 after the panic of 1907, when the Federal Reserve Act 
 was evolved. 
 
 As JNIr. Shaw also prophetically said: 
 
 "The country does not appreciate the danger, and 
 
 until the danger is fully understood no remedy will 
 
 be applied." 
 
 This still remains true. The danger has never been 
 understood, so no remedy could be applied that would 
 attack and remove the cause of the trouble. 
 
 Starting out with such assurances of the safety and 
 stability of our currency, it seems strange that in the 
 midst of so short an address the former Secretary should 
 follow immediately with this statement: 
 
 "A glaring deftct at a vital point will sometime, 
 
 sooner or later, assert itself. Meantime a remedy 
 
 should be discovered, discussed, and, as far as possible, 
 
 agreed upon, so that it may be promptly applied when 
 
 the people are ready for it." 
 
 Mr. Shaw was not alone in knowing that a glaring 
 defect existed. However, he could neither locate nor 
 define it. 
 
 In his search for a remedy he discarded "Asset cur- 
 rency" as commonly understood, and was correct in so 
 doing, because no method had been devised for issuing 
 asset currency on a safe basis. Emergency currency in 
 the form of clearing house certificates, he condemned in 
 the following words:
 
 THE GOLD STANDARD 185 
 
 "The United States originates more commerce than 
 any other country, but our chief commercial city is not 
 the world's clearing house. It ought to be, but it is 
 not. One reason why it is not is the fact that it has 
 sometimes resorted to clearing house certificates, which 
 is a plea of guilty to an indictment charging bad 
 management locally or bad legislation nationally, and 
 the financial world charges both. Clearing house cer- 
 tificates must never be authorized by law." 
 The suggestion here that with a strong financial sys- 
 tem New York would become the world's financial center 
 should be noted. 
 
 The remedy suggested by Mr. Shaw was to provide 
 an "emergency currency" by permitting the national 
 banks to increase their government-bond-secured note 
 issue up to fifty per cent over their bond security on 
 which excess the bank should pay a tax of five or six 
 per cent and the government, in consideration for the 
 tax, should guarantee the redemption of the issue. 
 
 His remedy proposed that the printing on the bank 
 notes be changed somewhat so that the extra notes could 
 be slipped into circulation without attracting attention. 
 The last sentence of Mr. Shaw's suggestion should be 
 carefully noted. It is a most complete but unconscious 
 indictment of our system. His proposed remedy for a 
 "vital defect" was as follows: 
 
 "By eliminating the one statement on the present 
 bank note, 'This note is secured by bonds of the 
 United States,' the additional currency could be made 
 identical with that based on Government bonds. The 
 Comptroller of the Currency and the bank issuing
 
 186 THE STRANGLE HOLD 
 
 the currency would alone know of its existence. It 
 would not advertise its existence or our extremity." 
 We are not criticising Mr. Shaw's remedy, which was 
 tried in a little different form by the Emergency Cur- 
 rency Act of May SOth, 1908, and which has in a 
 changed form been utilized by the Federal Reserve Act. 
 But the suggestion that stealth and secrecy are neces- 
 sary to the successful operation of a proposed remedy 
 for our financial ills completely condemns the system. 
 Stealth and secrecy should have no place in a demo- 
 cratic government, and a financial system, which because 
 of its weakness is compelled to make use of star cham- 
 ber methods, is a menace to liberty as well as industry. 
 This address of former Secretary Shaw, which starts 
 with such a brave defence of the gold standard and the 
 stability of a financial system based on it, proves on 
 analysis to be a sweeping condemnation of both. Al- 
 though using his best endeavor to defend and even 
 glorify our financial system, he proves conclusively that 
 the gold standard fetish is a lie and that the financial 
 system based on it is weak, dangerous and degrading. 
 Weak because the silly promise of gold redemption 
 makes our currency non-elastic; dangerous because "a 
 glaring defect at a vital point" (meaning the gold re- 
 demption lie) will some time, sooner or later, assert 
 itself, meaning that a panic will ensue when the lie is 
 discovered by the people; and degrading because deceit 
 must be resorted to to cover up the lie. The suggestion 
 that a remedy must be stealthily and secretly applied 
 is an unconscious acknowledgment that our whole ex- 
 change system is conceived in error. Coming from the
 
 THE GOLD STANDARD 187 
 
 source it does it proves that the financial world is just 
 as much in the dark as the rest of the community re- 
 garding the weakness in our financial system. Appar- 
 ently our statesmen and financial leaders have never 
 seen the real cause of the unfavorable phenomena which 
 reveals itself in the form of non-elasticity, money short- 
 age, lack of efficiency, industrial turmoil and social 
 unrest. 
 
 Here we see a man, holding the most important finan- 
 cial position in the United States, addressing financiers, 
 the Bankers' Association, starting with a congratulation 
 as to the strength of our financial system and ending 
 with a suggestion that stealth and cunning are necessary 
 to overcome a "vital defect." If this paradox were 
 intended, financial humor is certainly subtle.
 
 CIL\PTER XII 
 SPECULATION 
 
 Because of the fact that the trade centers in various 
 staple commodities — the -wheat pit, the cotton market 
 and the stock exchange, have been the scene of the 
 gain and loss of immense fortunes, most good folk 
 have come to consider these places as dens of iniquity 
 run by unprincipled crooks. As a matter of fact, 
 however, this is not the case, for the trade that gots 
 on in these centers has a distinct economic value. Were 
 it not for these market centers trade would be much 
 more difficult, eratic and uncertain. By taking the 
 risk of gain or loss off the shoulders of the producers, 
 the speculators give a degree of regularity to commerce. 
 And the brokers operating in the various markets are 
 equal in honesty to any other class of business men. In 
 one aspect, indeed, they are even more reliable, since 
 they must abide by the rules of the exchange mart in 
 which they deal. 
 
 But while the brokers themselves may be honest, there 
 is at least one great trade center in which the game is 
 not fair, because one set of players has a distinct advan- 
 tage over the others. One party controls the wheel of 
 fortune, as it were, and consciously or unconsciously, 
 regulates it to suit certain interests. 
 
 The trade center referred to is the Xew York Stock 
 Exchange, and the party referred to includes the bank- 
 
 188
 
 SPECULATION 189 
 
 ing interests. The unfair condition here arises partly 
 from the custom of having stock on margin, as will be 
 esplained, but its real origin lies in that same defect 
 in our financial svstem that we hare come to recognize 
 as the fountain head of so many and such great erils 
 afflicting our modern industrial community. 
 
 The evil in the stock market is but another bad result 
 of the private control of bank credit,, by means of which 
 the banker, being able to withold loans regardless of 
 their merits, is enabled to influence prices and in fact 
 regulate the whole current of business. It is cumulative 
 evidence that the banker dictates every man's chance 
 for financial and industrial success. 
 
 Not all the havoc of the stock market, however, can 
 be blamed on the banker. We must rersescber thit hs 
 is not a free agent for his acts are controlled by the 
 reserve requirement. When he gets up against his re- 
 serve his credit "freezes" and when quite a number of 
 them arrive at the zero point about the same time it 
 sends a decided chill down the spine of "Wall Street." 
 
 There is one condition noticeable in the stock ex- 
 change, however, which points to an unfair control of 
 this game. This condition is the constant fluctuation in 
 prices of stocks. 
 
 It is not uncommon to see the price of the stock of 
 well established corporations which have been doing a 
 steady business for years and paying regular dividends 
 fluctuate several dollars within a very short time. The 
 price of such stocks may fall violently one day and re- 
 cover the next, and a week or a month may show a very 
 wide range of prices.
 
 190 THE STRANGLE HOLD 
 
 It is perfectly clear that such fluctuations cannot 
 be due to any change in the real or intrinsic value of the 
 stock. Neither the business outlook of the corporation 
 nor the state of its prosperity could possibly change 
 with such kaleidoscopic rapidity as the prices quoted on 
 the exchanges would suggest, so these fluctuations in 
 price are not due to the changing value of the stock 
 but are due to the change in the money market. 
 
 By intrinsic value is meant the actual or real value of 
 the securities, dependent, of course, upon the dividends 
 or interest paid on these securities, coupled with the 
 safety of the principle invested. The market value is, 
 as the name indicates, the price at which the securities 
 are bought and sold. 
 
 This market value may, and almost invariably does, 
 differ from the intrinsic value, and it may do so to a 
 very pronounced degree. The existence of speculation 
 in securities arises entirely from this difference between 
 intrinsic and market values. 
 
 It is the fluctuation in price that attracts the gambler 
 and makes a game of chance of institutions necessary 
 in our business and commercial life. 
 
 As has been shown prices fluctuate with the volume 
 of the medium of exchange in circulation and with the 
 interest or discoimt rate charged for its use. We have 
 seen that these two factors are entirely in the bank- 
 ers hands, considering of course his limitations. If we 
 can hold these facts in mind, while we examine another 
 factor which contributes strongly to making a game of 
 chance out of all investment and business, we will see 
 just what is at the bottom of price fluctuation and how
 
 SPECULATION 191 
 
 the stock exchange, cotton exchange and wheat pit are 
 turned from legitimate markets into gambling games. 
 
 The other factor above referred to is the trading on 
 margin which makes up a considerable proportion of 
 the deals on these exchanges. When a margin purchase 
 is made the customer does not put up the entire pur- 
 chase price of the securities, but only a portion thereof, 
 say twenty or thirty per cent. The broker carries the 
 balance — virtually loans it to the customer, charging in- 
 terest on the amount carried. 
 
 If the stocks dealt in happen to be reliable industrial, 
 railroad, or mining stocks, the broker can take the secur- 
 ities which he has purchased for his client, to the bank, 
 and put them up as collateral for a loan of the differ- 
 ence between the margin put up by the customer and 
 the price of the stock. The broker borrows this money 
 from the bank on call, and lends it to the customer 
 on margin. That is, at the expiration of the number of 
 days notice agreed upon, the banker can call upon the 
 broker to repay the loan. This notice, as agreed upon, 
 may be for one, two, three or more days. On the other 
 hand, the broker requires the customer to keep his mar- 
 gin good. If the price of the stock declines, the cus- 
 tomer must put up additional payments to keep the 
 same margin or he will be sold out. 
 
 Now here is the way in which the banker secures his 
 Tinfair advantage. Supposing, for instance, the cus- 
 tomer buys 1,000 shares of steel at $100 per share and 
 puts up a twenty per cent margin, or $20,000. The 
 broker may now do either of two things. If he is 
 square, he will actually purchase the stock for the cus-
 
 192 THE STRANGLE HOLD 
 
 tomer. Otherwise he may, as the term is, "bucket the 
 order," that is, he will give the customer a receipt for 
 the 1,000 shares, without actually purchasing them; 
 he will be taking chances on being able to buy the stock 
 later on at a lower price, and pocket the difference; if 
 the stock should go up, he would have to lose the dif- 
 ference. 
 
 But let us suppose that the broker is honest, and 
 actually purchases the stock. Putting up the twenty 
 thousand dollars received from the customer, he will 
 order the stock to be delivered to the bank: on it, as 
 security, he will borrow the balance of eighty thousand 
 dollars and pay for the stock. 
 
 Here the broker is in the clear. He runs the game, 
 and his profit consists entirely in the percentage which 
 he takes as his commission or brokerage, just as does a 
 pool seller on a horse race. His profit being certain, 
 the price of stocks makes no difi'erence to him so long 
 as he conducts a legitimate business. His only interest 
 lies in the volume of business on the stock exchange. 
 
 The real game is between the banker, who puts up 
 the eighty thousand, and the customer who puts up the 
 twenty thousand. The only interest the banker should 
 have is to get his money back with interest. But, as is 
 most likely, he may be playing the market a little him- 
 self ; or perhaps some of his clique desires to obtain a lit- 
 tle stock at a cheap price. 
 
 Now suppose the money market tightens up, sup- 
 posedly due to any one of a great number of reasons 
 assigned by our financial lords, but in reality due to the 
 fact that our rulers at the financial center have caused
 
 SPECULATION 193 
 
 it through cupidity or fear or because the limit of credit 
 has been reached. Just a word is suflScient as we have 
 seen in the case of automobile credits. 
 
 The banker adds to the money shortage by calling 
 in the particular loan of eighty thousand dollars along 
 with other loans aggregating several million. 
 
 Neither the broker nor the customer can borrow money 
 in a tight money market. Others are in a similar posi- 
 tion, and their efforts to borrow lessens the value of the 
 security offered, the price of which falls on the ex- 
 change. 
 
 As a result, the broker must call on his customer to 
 put up more margin. Some are able to do so, but others 
 cannot. The broker has to sell the stock to pay the 
 banker's loan ; the customer is thus squeezed out, and 
 the stock, thrown on a declining market, accelerates 
 the decline, and results in a call for more margin from 
 those still in. 
 
 More customers are frozen out, until finally the price 
 reaches bedrock. Now the banker and his friends, the 
 big traders, step in, and grab the stock which the cus- 
 tomers could not protect by putting up the margins. 
 The tight money market and the resulting stock flurry 
 are a result, merely, of the fact that the banker had 
 stopped his mint: he ceased making loans. Now that 
 his clique are in possession of the stocks, he again 
 lends money, or in other words, mints bank credit. With 
 this, his friends, the inside ring, buy more stock. As a 
 result, the prices go up and soon the market is ready 
 for another set of customers who come to be divested 
 of their money, as sheep to the shearing.
 
 194 THE STRANGLE HOLD 
 
 The game is well arranged, and certainly more digni- 
 fied and orderly than a horse-race, for it runs during 
 every business day in the year, and its results are more 
 certain than the results of the races. The banker has a 
 handle which operates this wheel of fortune, and which 
 practically eliminates the factor of chance or uncertainty, 
 as far as the insider is concerned. This handle is known 
 as "call money." It works like a pump handle. When 
 it is pushed down, that is, when call money is cheap, up 
 go stocks. When it is pushed up, that is, when the 
 banker refuses to make loans, or the discount rate on 
 call money is raised, stocks go down. 
 
 Every one knows that the more rapidly you move a 
 pump handle up and down the more water you pump 
 and it is just as certain that the more rapidly you move 
 prices up and down the more gambling you produce. Of 
 course, the brokers all know this, and some of the bank- 
 ers may, and in order to make the game lively, and in- 
 crease their profits, the bankers of New York allow a 
 committee of brokers on the stock exchange to fix the 
 rate on call money. This committee pumps vigorously 
 by varying the rate from five or six to as high as thirty 
 per cent. It is fixed every day and all the banks are 
 notified of the change. This makes the price of stocks 
 fluctuate and gives the insiders a chance to get their 
 money down right. 
 
 No doubt there is some reason for changes in the rate 
 on call money, but if it were not changed prices would 
 not fluctuate so rapidly nor so violently and the gambling 
 element in the country would not be attracted. In that 
 case the business of these trade marts would be greatly
 
 SPECULATION 195 
 
 decreased for the business would be conlined to legitimate 
 trade.* 
 
 As the banker alone controls this handle, he likewise 
 operates the wheel of fortune. But as the brokers de- 
 pend on the amount of trade or the turn over of the 
 exchange and as this volume depends on the gambling 
 spirit excited by the fluctuations in prices it is both con- 
 venient and effective to have the call money rate £xed 
 by the brokers. 
 
 We headed this chapter "Speculation" but the result 
 of operations on the exchange seems to be almost too 
 definite to be so designated. This game, if we may still 
 consider it a game of chance, has several advantages 
 over others we have known. For instance, none of the 
 players see each other, and no one is to blame, and so 
 no sympathy is wasted on the losers. The broker, the 
 only man in sight, has collected two commissions — one 
 for buying the stock, the other for selling out the cus- 
 tomer. The stock is back to its former price, and the 
 only difference is that the customer's money is in the 
 pockets of the banker or of his friends, the insiders. 
 
 To point out this aspect of the game to the banker, 
 and show him that he had committed a most cowardly 
 robbery, would hurt him and surprise him beyond meas- 
 ure. We should not blame him, for he is a most re- 
 spectable and kindly gentleman, and this aspect has 
 never occurred to him. In fact ignorance is the only 
 excuse that can be advanced in his favor. He operates 
 the pump-handle for the most part unconsciously, so in 
 
 *See Appendix. 
 
 (Note changes reported by Comptroller) Page 306.
 
 196 THE STRANGLE HOLD 
 
 the operation of the game the banker is generally iiuio- 
 cent of any evil intent. 
 
 Reserve requirements are for the purpose of perpetu- 
 ating the belief that credits are payable in money and 
 for the purpose of continuing the gold standard fallacy, 
 as has been demonstrated. Both these fictions remain 
 from the time when the goldsmith was the banker. The 
 whole reserve system was instituted to cover up the gold- 
 smith's deception, and is still in force to perpetuate 
 the banker' control and furnish him an excuse for re- 
 fusing loans. Both the gold standard and the reserve 
 system have been stretched to the limit, and are ready 
 for the waste-basket. 
 
 But until these fallacies, and the other features of xm- 
 soundness in our financial system are eliminated, the 
 game we have just illustrated, and the evils we have 
 shown to follow therefrom^ will continue. 
 
 With the proposed remedy, however, the whole aspect 
 of affairs would be changed. As we have shown how the 
 other evils would disappear, so would this one also van- 
 ish. For we have seen that "call money" is the means by 
 which this unfair condition is made possible. Under the 
 proposed change in our financial system there would be 
 no such thing as "call" money. There would be no lack 
 of public confidence to guard against, and so the need 
 of loaning money on "call" would disappear; the con- 
 trolling handle would be removed from the wheel of for- 
 tune, and it would run free. 
 
 What little speculation still remained would be a real 
 game of chance dependent upon judgment and the 
 exigencies of trade and production.
 
 SPECULATION 197 
 
 A similar improvement would apply to trade in the 
 other commercial centers — the wheat pit and the cotton 
 exchange. These marts would thrive as centers for in- 
 vestment and trade, where people could transact 
 legitimate business. The changes in the volume of the 
 circulating medium would cease, and with them the re- 
 sulting violent fluctuations which invite the gambler and 
 enrich the sure-thing speculator. Instead of the present 
 artificial fluctuations in price, we would have variations 
 in real values only, due to legitimate changes in business 
 enterprise. The movement of prices would result from 
 differences in business ability, and from the laws of sup- 
 ply and demand, but the violent fluctuations arising out 
 of the banker's cupidity, fear, lack of enterprise, or 
 manipulation of call money, would no longer make of 
 business a gambling game.
 
 CHAPTER XIII 
 RURAL CREDITS 
 
 FROM time to time in the history of this country 
 political parties have arisen, such as the green- 
 back party and later the populist and silver parties, 
 which advocated financial reform. The remedies invari- 
 ably suggested inflation. 
 
 At one time the continuance of large greenback issues 
 was suggested, at another, free coinage, as a means of 
 increasing the money supply. Invariably these reforms 
 resembled each other, in that they attacked the symptoms 
 rather than the cause of the poor financial conditions. 
 Owing to the latter fact the remedies proposed would 
 not have removed the cause of our financial and indus- 
 trial ills. 
 
 But, these political parties, during their time, were 
 strongly supported by the farmers. Offhand it might be 
 inferred that the financial interests of the farming ele- 
 ment are opposed to those of the rest of the community, 
 because farmers have always been ready to support par- 
 ties proposing financial measures. As a matter of fact, 
 however, this conclusion would be far from the truth. 
 
 The real reason for the support given these proposals 
 by the farmers is due to the fact that the evils of our 
 present financial system fall heaviest upon the agricul- 
 tural interests. Those engaged in agricultural pursuits, 
 being the more keenly conscious of the ills of the pres- 
 
 198
 
 RURAL CREDITS 199 
 
 ent system, are the more eager for relief, and so more 
 readily responsive to suggested reforms. 
 
 In truth, the interests of the farmers are identical 
 with the interests of the rest of the community — except- 
 ing those of the parasites who profit by the farmers' 
 present ills. 
 
 It is a truism to say that agriculture is the funda- 
 mental activity of the world, upon which all industries 
 rest. Consequently it follows from this truism that any 
 measure which increases the producing power of the 
 farmer, is by that very fact a benefit to the community 
 2iS a whole. 
 
 In other words, it is to everybody's interest that the 
 farmer should be able to secure the funds necessary to 
 carry on his business with an ease equal at least to that 
 of any other producer. And yet equal financial facility 
 is far from being the condition under our present system. 
 
 The difficulty experienced by the farmer in getting 
 adequate credit facility is proverbial. And even under the 
 Federal Reserve System no adequate provision was made 
 for agricultural interests. This fact was practically ad- 
 mitted by the passage of the Farm Loan Act, following 
 an inefi'ectual attempt of the Federal Reserve Board to 
 serve the farmers of the coimtry through the national 
 banks. 
 
 It may be well to state that the attempt on the part 
 of the Federal Reserve Board failed for two reasons. 
 The first of these is that the member banks found it dif- 
 ficult to serve the interests of the farmer and their own 
 interests at the same time. 
 
 The second reason is that private control puts a time
 
 200 THE STRANGLE HOLD 
 
 lock on the bank's credit which the farmer cannot work. 
 The meaning and force of these causes will be explained 
 in the following pages. 
 
 But the effect of the failure was the passing by the 
 Federal Government of the Farm Loan Act, an act spe- 
 cifically intended to deal with the credit requirements 
 of agriculture. This act has fallen short of its purpose, 
 as will be shown presently, but irrespective of its suc- 
 cess or failure, we may inquire as to the implication of 
 this special act. 
 
 Is it not an acknowledgment that agriculture, upon 
 which all other commercial activities depend, is prac- 
 tically outlawed under the present financial system .'' And 
 does it not seem to imply that the farmer, like the 
 Indian, is a ward of the government? 
 
 Singling the farmer out from the rest of the busi- 
 ness world as this rural credit legislation does, it sug- 
 gests that he is a kind of financial weakling, unable to 
 take care of himself, and, therefore, a fit subject for 
 special governmental care. 
 
 Let us see whether such an impression is in any way 
 justified. Let us compare the manner in which the 
 farmer has run his business — that of providing food, or 
 taking care of the food requirements of the country — 
 with the way the banker has rim his business, the busi- 
 ness of taking care of the credit requirements of the 
 country. 
 
 From 1837 to 1907, as we learned, a disastrous finan- 
 cial panic occurred on an average of once every ten 
 years, with several money stringencies in between the 
 times of panic.
 
 RURAL CREDITS 201 
 
 Since the banks have displaced government money by 
 bank credit it is the banker's business to supply the 
 nation's commerce and industry with an adequate amount 
 of the medium of exchange, and the bankers are plainly 
 at fault when this medium is not adequately supplied. 
 
 Consequently, this decennial breakdown of the finan- 
 cial system suggests a considerable degree of inefficiency 
 on the part of those who have assumed the responsibil- 
 ity of supplying the medium of exchange. 
 
 A breakdown of the agricultural system in any way 
 comparable with the oft-repeated collapse of the finan- 
 cial system would have meant dire famine throughout 
 the land. Such a famine has not once occurred. 
 
 While the banker has repeatedly failed to supply us 
 with a medium of exchange adequate to the needs of the 
 business of the country, thereby bringing loss and mis- 
 ery, not only upon himself, but upon the entire nation, 
 the farmer has meanwhile gone steadily on, supplying 
 to the country, year after year, its requisite food supply. 
 
 Considering achievement, therefore, there is no jus- 
 tification for the assumption that the farmer is less 
 capable financially than other producers. The fact that 
 the government is obliged to establish a special institu- 
 tion to take care of his financial necessities is clearly not 
 due to any fault of his. 
 
 After a consideration of the foregoing, are we not jus- 
 tified in placing a charge of inefficiency against the 
 banker, rather than against the farmer, for the failure 
 of the present financial system to supply proper credit 
 facilities for agricultural enterprises ? As we shall show, 
 this assumption is entirely correct.
 
 202 THE STRANGLE HOLD 
 
 But for the present let us note how, through our gov- 
 ernment, we have treated these two different groups, 
 the farmers and the bankers. Let us make a comparison 
 of the help given by the nation to the banker with that 
 given to the farmer. 
 
 After the bankers had made experiments at the na- 
 tion's expense, going even to the extent of issuing 
 clearing house certificates in open defiance of the laws 
 of the land, the country came to their rescue and placed 
 the credit of the United States back of their credit 
 through the Federal Reserve System. If the bank now 
 trades a little too much on its credit and finds that cur- 
 rent funds are needed to conduct business safely and 
 profitably, there is at hand an institution, supplied with 
 practically an unlimited amount of government money 
 which it will exchange, dollar for dollar, for the notes 
 and drafts and other commercial paper that the banker 
 has purchased. 
 
 But, although the Federal Reserve System furnished 
 the banker with ideal facilities, the law did not require 
 him to use any of his own time or to assume any respon- 
 sibility in its establishment or operation. The only re- 
 quirement was that he make an investment of six per 
 cent of his capital and surplus, on which he was assured 
 a six per cent cumulative dividend. 
 
 But note the difference in the case of the farmer. In 
 order that he may take advantage of the Farm Loan Act, 
 the farmer must get nine other farmers in the neighbor- 
 hood to join with him, all of whom measure up to cer- 
 tain definite qualifications. These ten must then incor- 
 porate a "National Farm Loan Association," a banking
 
 RURAL CREDITS 203 
 
 institution which they must officer and manage, although 
 banking is entirely foreign to their business experience. 
 They are then required to subscribe to the stock of this 
 association five per cent of the aggregate sum the asso- 
 ciation wishes to borrow. 
 
 This subscription carries with it a stockholder's liabil- 
 ity which cannot be evaded, as the holders are not pet- 
 mitted to sell their stock. When all this complicated 
 business is done, the farmer may borrow from one hun- 
 dred to ten thousand dollars on a mortgage payable in a 
 definitely prescribed way in not less than five nor more 
 than forty years, and the money borrowed may be used 
 for only a few specified purposes and for none other. 
 
 These provisions are such that the farmer who needs 
 money, unless to clear an existing mortgage, probably 
 would have to go outside to borrow funds for the re- 
 quired subscription to the Farm Loan Association stock. 
 If the farmer's condition and needs meet the rigid re- 
 strictions of the loan, he may borrow to pay for land, 
 buildings and implements which constitute his plant; but 
 no provision is made for working capital. 
 
 Now farming requires financing on terms similar to 
 other manufacturing industries. Two prime factors en- 
 ter into the building and operating of any manufacturing 
 enterprise. First, there must be capital to pay for the 
 site, construct the buildings, and supply the machinery 
 of the plant. Secondly, there must be funds for opera- 
 tion. The second requirement is fully as important as 
 the first, for many well-planned and completely equipped 
 manufacturing enterprises have failed for the lack of 
 adequate working capital.
 
 204 THE STRANGLE HOLD 
 
 Now the Farm Loan Act was doubtless an attempt to 
 meet the farmer's financial necessities. Its principal ob- 
 ject, however, as stated in the title of the act, seems to 
 be — "to create standard forms of investment based on 
 farm mortgages," giving only a minor place to the 
 ostensible object, "to provide capital for agricultural de- 
 velopment." In this way the interests of the farmer are 
 made incidental only to those of the investor. 
 
 Therefore, as a remedy for the extremely unsatis- 
 factory financial condition of the farmer, the Farm Loan 
 Act is far from being successful. For while it attempts 
 in a fashion to supply capital for the farm plant and 
 equipment, it not only fails to supply working capital, 
 but makes it increasingly difficult to obtain the necessary 
 current credit after supplying funds for the plant and 
 accessories. 
 
 At a signal of distress, the country came to the rescue 
 of the banker with the Federal Reserve System, which 
 supplied him with a completely equipped institution 
 backed by the credit of the nation and ready to serve, 
 him without cost of time, money or responsibility. 
 
 But the plea of the farmer was answered by throw- 
 ing him a bunch of red tape and a few dollars out of 
 which he was supposed to fashion an institution which 
 would supply his special needs. So many conditions were 
 attached to the money, finally supplied, that few farmers 
 could take advantage of the opportunity to secure it. 
 Those who, after much labor, erected such an institution, 
 found that it met but half their needs at best, and this 
 need was not the portion of greater necessity to the ma- 
 jority of farmers, which was for working capital.
 
 RURAL CREDITS 205 
 
 Suppose a limb of the human body suffered because an 
 arterial stricture shut off its required supply of the life- 
 giving fluid. Would surgeons attempt to cure the af- 
 fected limb by amputating it and expecting it to live and 
 prosper by setting up its own circulatory system? Yet 
 this is in reality what the Farm Loan Act does, for 
 our medium of exchange, whether it be gold, govern- 
 ment paper, or bank credit, is the life-blood of the 
 nation. Because of a stricture in the circulation of our 
 medium of exchange, the Farm Loan Act severs the 
 agricultural limb from the national body, and expects it 
 to lead a separate existence. 
 
 And what is still worse, this Farm Loan Act does not 
 even do what it sets out to do. In farming, as in every 
 other industry, two financial elements are required for 
 success. The Farm Loan Act attempts to provide for 
 only one, and makes the securing of the other more 
 difficult. 
 
 It requires the farmer to organize and operate Farm 
 Loan Associations that he may secure a part of the first 
 element of success — a plant — and this very act hinders 
 him in securing the second element, working capital. 
 
 Our farmers have conquered the wilderness and have 
 carried the light of civilization and the little red school 
 house across a vast continent; they have fought and won 
 battles for freedom in the past and have proved a great 
 factor in the world struggle just ended. Therefore, to 
 single them out of the community, as the Farm Loan Act 
 does, and expect them to set up and put into successful 
 operation a banking institution which creates a separate 
 financial world, wherein they must live and prosper, is
 
 206 THE STRANGLE HOLD 
 
 adding insult to injury^ and imposes on them an un- 
 warranted task. 
 
 From the time the farmer puts the plow into the 
 ground, to the time his crop reaches the market, he is 
 beset by insect and animal pests and by weather con- 
 ditions, labor, and transportation difficulties. 
 
 When his product finally does arrive at the market, he 
 is met by the speculator. This Ishmaelite, aided and 
 abetted by our financial system, takes a liberal and easy 
 toll from what has been produced by hard physical toil 
 and unremitting care. 
 
 The farmer who survives these natural and financial 
 enemies must be a hardy individual, justly entitled to 
 be considered the bone and sinew of the nation. 
 
 But, as if this were not enough, the Farm Loan Act, 
 as we have seen, requires the farmer to provide his own 
 credits. Supplying credit is clearly the banker's busi- 
 ness; and, as if he had not enough burdens already, the 
 farmer is required to take over the banker's work also. 
 
 The farmer should not be compelled to provide his 
 own system of financing any more than the banker 
 should be compelled to grow his own food. 
 
 Division of labor is requisite to civilization, and it is 
 the farmer's function to supply food and raw material. 
 The banker, in common with all other members of society, 
 is dependent upon the farmer for food and clothing, just 
 as all other elements of society are dependent upon the 
 banker for the medium used in exchanging goods and 
 services. 
 
 The banker's dependence upon the farmer is not so 
 direct, and is, therefore, not so easily controlled, nor so
 
 RURAL CREDITS 207 
 
 keenly felt, but it can be clearly seen, however, if one 
 pictures a situation wherein the banker would be forced 
 to produce that which the farmer might choose to refuse 
 hira. 
 
 Now then it is certain that just as it is the farmer's 
 function to provide us with food and raw materials, so 
 it is the banker's function to provide all with the medium 
 of exchange. The failure of the banker to supply the 
 farmer with proper credit facility on terms similar to 
 those extended to the other producers, is due to inef- 
 ficiency on the part of the banker and is no fault of 
 the farmer. Yet the result of the flaw in our system 
 has been to make the farmer a financial nuisance to the 
 banker, and a subject for governmental care. 
 
 But in this phase of the general situation, as in all 
 those we have already dealt with, the real cause of the 
 trouble is neither with the banker nor the farmer. 
 
 It is in the fundamental fault of the system. It arises 
 out of that defect in our present financial arrangement 
 that is responsible for all other evils — the defect of pri- 
 vate control, and its inability to endow bank credit with 
 a full measure of public confidence. 
 
 To prove our case, let us compare the situation of a 
 farmer with that of a manufacturer. 
 
 A shoe manufacturer, for instance, having the tech- 
 nical knowledge, the machinery and tools necessary and 
 enough money to pay a month's rent in advance, can 
 start a factory with assurance of success, because he is 
 able to use the present financial system. In addition to 
 his plant he needs leather and labor. To secure the 
 leather, the manufacturer simply orders it and when it
 
 208 THE STRANGLE HOLD 
 
 arrives he "accepts" a draft for the price payable to the 
 vendor within thirty to ninety days. This draft is called 
 an "acceptance," which the leather dealer may discount 
 at his bank for cash. 
 
 Our shoemaker next employs labor and begins to turn 
 out shoes. If he has a reputation as a successful shoe 
 manufacturer almost any commercial bank will provide 
 the money (or most of it) to carry his payroll — for 
 thirty days or more. During this period he gets goods 
 ready for the market. Then he sells the shoes at a price 
 that covers the cost of leather, labor, rent and profit and 
 draws a draft on the purchaser, who writes "accepted" 
 across the face of it and signs his name. This paper, the 
 manufacturer turns into his bank, where it is discounted 
 for cash. Out of the proceeds of this draft, the manu- 
 facturer pays the bank the money advanced for the pay- 
 roll and the acceptance for the leather, besides taking 
 care of the coming month's rent. Furthermore, he still 
 retains a profit that he is not compelled to turn over to 
 a speculator. 
 
 To start this manufacturing business, we grant that 
 the shoemaker had a technical knowledge of shoe mak- 
 ing, some equipment, enough money to pay a month's 
 rent and the incidentals for sixty days. The bank, how- 
 ever, did the rest, and was glad to get the business. 
 
 Now the farmer is a manufacturer, just as surely as 
 the shoemaker. He takes the raw material in the form 
 of seeds and live stock, and through labor applied to 
 the soil and the care of animals, he produces goods for 
 the market. Provided he is equally capable in his line, 
 and enjoys an equal reputation for success and honesty.
 
 RURAL CREDITS 209 
 
 is it not clear that he should have the privilege of doing 
 business in the same manner as the shoemaker? And in 
 fact, his property, business stability, efficiency, and his 
 record for meeting his obligations, are such as justly to 
 entitle him to ask credit from the banker on the same 
 terms as those upon which other lines of endeavor are 
 financed. 
 
 At present, this privilege is denied him. As we now 
 see, it is by no means his fault. Nor is it the fault 
 of the banker. It is the fault of the banking system, 
 which, owing to a lack of public confidence due to pri- 
 vate control, is forced to set a time limit of thirty, sixty 
 and ninety days for commercial credits. 
 
 Unlike other producers, the farmer is dependent upon 
 nature, and cannot produce his goods within ninety days. 
 
 If the banker could put one hundred per cent con- 
 fidence into his credit, and keep it there, no time limit 
 for credit would be necessary nor would reserve require- 
 ments, which limit the amount of bank credit, then be 
 necessary. 
 
 If after securing public confidence the banker were 
 required to treat all applicants for loans alike, there 
 would be no necessity for rural credit institutions, nor 
 for a government financing corporation such as we had 
 during the war and which has been reinstated recently. 
 In that case everyone, farmers included, would be en- 
 abled to make such use of the medium of exchange as 
 their business justified. 
 
 But until the people know that every dollar of credit 
 issued by the bank is based on safe and ample security, 
 they will not have complete confidence in bank credit.
 
 210 THE STRANGLE HOLD 
 
 And until this one hundred per cent confidence is at- 
 tained, commercial banks will have to base their loans 
 on "liquid" assets and will have to continue to limit 
 their loans to thirty, sixty and ninety days. This limit 
 of time will continue to make commercial banks useless, 
 or almost so, to the farmer, the exporter, and to nearly 
 all other business interests requiring a longer use of 
 credit. 
 
 Securities now may be perfectly good, and yet may 
 not be liquid. Of these the banker will say: "It is a 
 good, but not a bankable, security." 
 
 Statistics show that the farmer's security is good. It 
 is not bankable, however, because he must have money 
 for longer than ninety days. 
 
 The banker, not being able to command sufEcient pub- 
 lic confidence, cannot safely issue his credit for a longer 
 period. 
 
 Since the banker "issues" practically all of our me- 
 dium of exchange, the farmer is through this defect, and 
 through no fault of his own, outlawed by our present 
 financial system. 
 
 As the farmer is an important member of society, and 
 since the banker had to eliminate him to insure his own 
 safety. Congress created a special institution supposedly 
 for his benefit. 
 
 While, therefore, the Farm Loan Act would seem to 
 be for the farmer's benefit and implies inefficiency on his 
 part, in reality its purpose is to relieve the banker of a 
 duty that is plainly his. It is in truth a relief meas- 
 ure for the banking interests and a token of the banker's 
 inability, and not one to relieve the farmer nor is it due
 
 RURAL CREDITS 211 
 
 to any inefficiency on his part. Let us see what the 
 present situation leads to. 
 
 Thirty, sixty and ninety day money will not raise and 
 harvest a crop or carry live stock during its period of 
 growth. But it will enable a middle man to market 
 harvested crops and matured stock. 
 
 So here we see our present system opposing the best 
 interests of the community and the banker unconsciously 
 standing in league with the despoiler. 
 
 The middle man knows how to use short time money 
 and how to get it from the commercial banks, so he takes 
 a slice from the profit which rightfully belongs to the 
 farmer, and extracts additional tribute from the con- 
 sumer, without contributing one fraction of a mill to the 
 value of the product. 
 
 Our whole financial system is framed for the benefit 
 of this go-between, while the farmer, upon whom the 
 community depends, remains an economic outcast be- 
 cause of his inability to get inside the banker's time 
 limit. 
 
 And there is yet a further effect of this stt of circum- 
 stances, in that a second reason is furnished which will 
 cause present conditions to continue to prevail under the 
 existing financial system. 
 
 In the first place, the bank must maintain a bulkhead 
 of liquid assets against a possible decrease in public con- 
 fidence; and a twelve, eighteen, or twenty- four months' 
 note signed by a farmer, who is unknown to the commu- 
 nity, is not a liquid asset. 
 
 The second reason is that the banker makes a greater 
 profit by dealing with the speculator than with the
 
 512 THE STRANGLE HOLD 
 
 farmer; and, since a bank is a private institution, so 
 long as it is permitted to serve private interests without 
 regard to public welfare, it will naturally seek the source 
 of larger profits. 
 
 With regard to this, it is true, and happily so, that 
 individual bankers are not now so generally seeking "ex- 
 tra profits" as in times past. Nevertheless, those who so 
 desire can still align themselves with speculators in a 
 combination which stands both farmer and consumer on 
 their heads and shakes the money out of their pockets. 
 
 Now the only difference between the bank credit re- 
 quired by the farmer and that supplied to the merchant 
 and speculator lies in the length of time for which it 
 must run. The farmer requires longer credit than the 
 banker is able to give him, tmder existing conditions. 
 As Ave have seen, the proposed remedy, when in effect, 
 will place a full hundred per cent of public confidence 
 behind bank credit, and thereby remove all necessity for 
 a time-limitation. In that case also the amount a bank 
 could lend would be limited only by the amount of good 
 security offered and not by a silly reserve requirement 
 as at present. Farmers would then be on the same 
 financial footing as merchants, and farm loan acts and 
 the like could be consigned to the scrap pile. 
 
 As may well be imagined, the effects of such a change 
 upon the welfare of the nation would be tremendous, so 
 great, indeed, as to baffle our powers of description. 
 
 Suffice it, then, to point out one phase of the benefit 
 to be gained, letting each individual see for himself 
 what the total benefit would be. 
 
 As we have seen, owing to the present limitations on
 
 RURAL CREDITS 213 
 
 bank credit, the farmer has become a financial nuisance 
 to the banker, and a fit subject for governmental care. 
 This condition is a detriment to agriculture. It has 
 naturally caused people to depreciate the farming busi- 
 ness. If, however, the agricultural interests enjoyed 
 the same financial facilities as the manufacturer and 
 speculator — that is, if a farmer could sign a note at five 
 or six per cent per annum for a large share of what 
 it cost him to plant and harvest his crop, or rear his 
 stock, to be paid only when the goods produced are sent 
 to market, then he would become a much more contented 
 and respected citizen. This would be the cure for "ur- 
 banitis." A "back to the soil" movement would arise of 
 itself, and the problem of congested centers of popula- 
 tion would be solved.
 
 CHAPTER XIV 
 THE FEDERAL RESERVE 
 
 THE creation of the Federal Reserve System marked 
 a very great improvement in our financial and bank- 
 ing situation. 
 
 The fact is before it was instituted it could scarcely 
 be said that we had a financial system. To be sure, we 
 had banks the same as we have now, but we had no sys- 
 tem, for each bank stood alone except in so far as banksJ 
 co-operated by agreement among themselves or through 
 the clearing house. 
 
 The effect of such a condition is best described by 
 pointing to the fact that the country had a disastrous 
 financial panic every ten years for the eighty years pre- 
 ceding 1907 with severe money stringencies in between 
 the panics. Besides the panics and semi-panics money 
 was always so tight every harvest time that the country 
 heaved a great sigh of relief when the harvest was over. 
 Any important event such as an election or a large busi- 
 ness failure was liable to upset the whole credit structure 
 and cause a panic. 
 
 The Federal Reserve Act has proved a great relief 
 and it was slipped into Uncle Sam's Christmas stock- 
 ing not a day too soon. It was approved on the 
 twenty-third day of December, 1913, and turned out to 
 be a valuable Christmas present. Subsequent events 
 suggest that the motto on our coin, "In God we trust," 
 
 214
 
 THE FEDERAL RESERVE 215 
 
 was chosen advisedly, for an all-wise Providence must 
 have directed the adoption of this act at this particular 
 time. 
 
 Not long after its adoption came the shock of war, 
 which would have thrown our shaky financial system to 
 the ground, like a house of cards, had it not been for 
 the support given it by the new law. That this support 
 was provided just in time to avert a great calamity proves 
 that our faith in Providence has not been misplaced. 
 
 Roughly stated, the main feature of this act is that it 
 created a central bank of issue similar to that which 
 most European countries have had for many years. That 
 is it created a bank for the bankers, where banks be- 
 longing to the Federal Reserve System keep their 
 reserves and where they may discount or sell the notes, 
 etc., they take for loans. In exchange for such paper as 
 the Federal Reserve will discount, it pays federal reserve 
 notes or federal reserve bank notes. 
 
 The law provides for a 40% gold reserve behind fed- 
 eral reserve notes, but the federal reserve bank notes are 
 issued against government obligations in about the same 
 way national bank notes are issued. In brief, these are 
 the features of the system. 
 
 The value of the act was felt by the Comptroller of 
 the Currency, who expresses what is owed to the Federal 
 Reserve System in his report for 1916. After speaking 
 of the unprecedented commercial activities of the pre- 
 ceding twelve months, he goes on to say — 
 
 "In past years, under inadequate and unscientific 
 banking and currency methods and systems, a great in- 
 crease in business activity has almost invariably pro-
 
 216 THE STRANGLE HOLD 
 
 duced a money scarcity, has occasioned high interest 
 rates, and sometimes has precipitated panics : but dur- 
 ing the last eighteen months of unexampled prosperity 
 we have enjoyed, throughout the length and breadth 
 of the land, the lowest money rates the country has 
 ever seen." 
 
 "No fair-minded man who has studied financial and 
 business conditions for the past two or three years 
 can fail to see how large a measure of these deeply 
 gratifying results are to be credited to the operation 
 of our Federal Reserve System." 
 
 This statement is a great tribute to the new system, 
 but on closer inspection the words may also be seen 
 to imply something else, something that we have been 
 steadily maintaining all along. 
 
 To speak plainly, the Comptroller's words mean: first, 
 that our privately administered financial system had 
 always been an automatic brake on progress and pros- 
 perity; second, that the Federal Reserve System gave 
 the private interests a certain amount of control, so that 
 today a period of progress and prosperity is not nec- 
 essarily followed by a financial panic. 
 
 Even private control is better than no control and, 
 therefore, in so far as the Federal Reserve System has 
 given the bankers a certain degree of control it has 
 proved itself to be a benefit. 
 
 With its assistance, the crucial panic period of 1917 
 was weathered without a break-down in our financial 
 system, such as had been a decennial occurrence since 
 1837. For this relief from panic we must thank the new 
 system but our present state of business collapse indi-
 
 THE FEDERAL RESERVE 217 
 
 cates that the sore spot has not yet been reached. The 
 improvement made lies in the fact that our financiers have 
 learned a lesson in the expensive school of experience in 
 which they have been blindly working for so long. The 
 lesson learned is the main principle that has been advo- 
 cated by the writer, namely, that the only way of fixing 
 the volume of the medium of exchange at the proper 
 amount is to let the demands of business fix it; or in 
 other words, by letting the productive activity of the 
 community determine the amount of the medium of ex- 
 change in circulation. Let business control the medium 
 by which it is carried on instead of having the medium 
 control business. 
 
 The system attempts to achieve this object through 
 the federal reserve notes, which are issued against 
 commercial paper — that is, notes arising out of business 
 transactions. As stated in the title of the act the object 
 is to furnish an "elastic currency." 
 
 While the object sought was elasticity the act restricts 
 the expansibility or elasticity of the currency by limiting 
 the discount privilege to certain paper — "self-liquidat- 
 ing" securities — and also by the requirement of a 40% 
 gold reserve against the federal reserve notes. 
 
 This latter restriction clearly demonstrates the 
 tenacious hold which the fallacious gold standard pos- 
 sesses over the human mind. Even in a measure designed 
 to alleviate the evils that follow from it, it cannot be 
 shaken off. 
 
 However, this restriction is greatly modified by Sec- 
 tion 11-C of the Federal Reserve Act, which gives the 
 Federal Reserve Board power to suspend ALL RE-
 
 218 THE STRANGLE HOLD 
 
 SERVE REQUIREMENTS for thirty days and renew 
 
 such suspension for fifteen-day periods without limit. 
 
 This provision which follows permits an unlimited issue 
 
 of federal reserve notes^ "provided that it (the Board) 
 
 shall establish a graduated tax upon the amounts by 
 
 which the reserve requirements of this Act may be 
 
 permitted to fall below the level hereinafter specified," 
 
 and "provided further, that when the gold reserve held 
 
 against federal reserve notes falls below 40 per 
 
 centum, the Federal Reserve Board shall establish a 
 
 graduated tax of not more than one per centum per 
 
 annum upon such deficiency until the reserve fall to 
 
 S2^ per centum, and when said reserve falls below 
 
 S^Yz P^^ centum, a tax at the rate increasingly of 
 
 not less than 1^ per centum per annum upon each 
 
 2^ per centum or fraction thereof that such reserve 
 
 falls below 32 ^^ per centum. The tax shall be paid 
 
 by the reserve bank, but the reserve bank shall add 
 
 an amount equal to said tax to the rates of interest and 
 
 discount fixed by the Federal Reserve Board." 
 
 The effect of this section is to make possible the 
 
 issuing of federal reserve notes to an amount limited 
 
 only by the demands of business or the action of the 
 
 Federal Reserve Board. 
 
 The object of the provision is to do away with the 
 limit fixed by gold on the elasticity of our medium of 
 exchange — to unfetter it, so its volume may expand to 
 meet the demands of growing and progressive industry. 
 This section, coupled with our present business con- 
 dition, confirms all that we have been contending for, so 
 let us examine it carefully.
 
 THE FEDERAL RESERVE 219 
 
 The first point to note is that it gives the Federal 
 Reserve Board the power to suspend ALL RESERVE 
 REQUIREMENTS and such suspension may be con- 
 tinued indefinitely. 
 
 "Necessity is the Mother of Invention," and every 
 one who has followed these pages must see clearly v/hat 
 was the necessity that caused this provision to be in- 
 serted in this law. 
 
 The provision so completely bears out our whole con- 
 tention and the present imsatis factory business condi- 
 tions make it so clear that the object of the provision 
 cannot be gained imtil the reform suggested herein is 
 carried out that a few points must be reviewed. 
 
 Every expansion of business calls for a corresponding 
 expansion in the medium of exchange. If for any reason 
 the medium cannot or does not expand business hesitates 
 and shakes confidence; then a slump follows. From the 
 beginning of the commercial era the experience of trade 
 the world over has been the same — slimap has always 
 followed prosperity — hard times have followed good. 
 Every financial reform has sought to overcome this oft 
 repeated phenomena but it continues to the present 
 moment, as we are only too well aware. Two years ago 
 industry was brisk, labor was active, business was good 
 and times were prosperous; about a year ago credit was 
 shut off or "froze up," business wavered for a few 
 months, and then the slump started. 
 
 Some maintained it was due to "liquidation," others 
 said it was a "buyers' strike," while everybody laid it to 
 the "H. C. L." and now we are promised good times as 
 soon as we return to "normalcy." But the trouble with
 
 220 THE STRANGLE HOLD 
 
 "normalcy" is that a condition of slump or hard times 
 is just as much or a little more our normal condition 
 than prosperity and good times. 
 
 It has been fully explained how this condition is 
 brought about because credit is limited to a promise to 
 pay a certain commodity, gold, which makes a reserve 
 limit necessary. This folly and deception is exposed in 
 the following chapter although it is fully explained in 
 Chapter V and the method by which it may be overcome 
 is given in Chapters VII and VIII. 
 
 The present slump makes it most certain that this pro- 
 vision in the Federal Reserve Act which was intended to 
 overcome the phenomena of slump following prosperity 
 has not accomplished its object. 
 
 A little reflection will show the reasons. We still have 
 the false promise of gold redemption as a basis for credit 
 and its use is privately controlled. Until these defects 
 are removed the phenomena will continue. 
 
 This provision is a wise one and aimed in the right 
 direction, for it is an attempt to overcome the limit fixed 
 by the gold standard. It shows that part of the lesson 
 has been learned. But while aimed in the right direc- 
 tion, it is not aimed at the real cause of the trouble 
 — private control. However, it shows clearly that finan- 
 cial reform is tending in the direction we wish it to go 
 and the suggestion in Chapter VIII, of thirty words to 
 be inserted in the Federal Reserve Act, which will over- 
 come all the trouble, is but one short step in advance. 
 
 This provision in the act had to fight against a strong 
 national prejudice which had been handed down from the 
 beginning of our government. The provision, in permit-
 
 THE FEDERAL RESERVE 221 
 
 ting an unlimited paper currency, as it does, had to en- 
 counter a long-continued and deep-seated enmity against 
 precisely this one thing — an unlimited paper currency. 
 
 We should also note that the Federal Reserve Act 
 overcame another national prejudice, as deep-seated and 
 as long-continued as that against an unlimited paper cur- 
 rency. That was the prejudice against a central bank 
 exercising some measure of uniform control over its 
 many, diverse and scattered branch banks — a prejudice 
 which has existed ever since the downfall of the Second 
 United States Bank. 
 
 This prejudice may not be overcome but it has been 
 sidetracked by the Federal Reserve System. This was 
 accomplished by side-stepping and the juggling of terms 
 in this way. Since the country was opposed to a central 
 bank, twelve regional districts, with a Federal Reserve 
 Bank and a board of directors in each district, were cre- 
 ated. Then all were put under the control of the Federal 
 Reserve Board in Washington. In this way a uniform 
 control is exercised over the different banks just as if 
 they were branches of one central bank. 
 
 In effect, then, and in order to circumvent a popular 
 prejudice, the act did not establish a central bank with 
 a branch in each district, as in Europe, but instead es- 
 tablished the branch banks, and then consolidated them 
 under one supreme management. Except for this distinc- 
 tion, which is really no difference, the Federal Reserve 
 System is a reproduction of the European central bank 
 idea. It very closely approaches the German Reichsbank 
 in structure, method of management, and operation. 
 
 To the Federal Reserve System, then, we owe the fact
 
 222 THE STRANGLE HOLD 
 
 that our country has been able to pass through a period 
 of great stress without recurrence of the formerly in- 
 evitable phenomena of bank runs and financial panic. 
 These evils the Federal Reserve System has, at least so 
 far, checked, and to this extent it has been a benefit. 
 
 Tight money and panics, however, are only the symp- 
 toms of a deep-seated trouble, and the system cannot be 
 rectified until the underlying flaw has been removed. This 
 flaw has not been removed, for the Federal Reserve Sys- 
 tem has not broken the strangle-hold of our bankers 
 upon the prosperity and business life of the commTmit3\ 
 So far from removing the private control of our bank- 
 ers over our medium of exchange, the Federal Reserve 
 System tends rather to strengthen it. This private con- 
 trol, the real trouble maker, like the mosquito which car- 
 ries the yellow fever germ, is relatively insignificant in 
 comparison with its bad effects, which no doubt ex- 
 plains why it has evaded detection so long and why it 
 was left untouched by the Federal Reserve Act. 
 
 Instead of securing 100% confidence by public con- 
 trol of bank credit, the Federal Reserve System seeks 
 to gain confidence for our medium of exchange by put- 
 ting the nation's credit at the disposal of the banks. 
 This arrangement has to a degree allayed the bad symp- 
 toms of bank-runs and panics. 
 
 The nation's credit is loaned to the bankers by pro- 
 viding a discount market for the paper the banker buys 
 with his credit. That is, it established "shops" (the 
 regional bank) where banks belonging to the system may 
 exchange the notes they have taken from their custom- 
 ers for federal reserve notes, which are guaranteed by
 
 THE FEDERAL RESERVE 223 
 
 the government. This arrangement has greatly strength- 
 ened the position of the banker and reduced the hazard 
 of loss of public confidence. Through the regional banks 
 all the discountable paper in a member bank's possession 
 can be turned into government paper any time its depos- 
 itors want money. Assuredly such an arrangement 
 strengthens public confidence in the banks, for it prac- 
 tically gives to each member bank a master key to the 
 national treasury. 
 
 Putting the nation's credit at the disposal of the bank- 
 ers has, of course, increased their lending power and to 
 that extent the system has improved the elasticity of our 
 exchange medium. 
 
 That we have improved our financial system by estab- 
 lishing the Federal Reserve Bank cannot be denied for 
 we have increased the two elements, safety and elasticity 
 and on them depends the efficiency of any medium of 
 exchange. But, would not these two vital elements, 
 safety and elasticity, be enhanced still further by public 
 control of bank credit? 
 
 If the people knew that every loan every bank made 
 was based on security approved by themselves they would 
 have one hundred percent confidence in bank credit. In 
 that case all bank credit would be perfectly safe and 
 any or all of it could be exchanged for federal reserve 
 notes whenever desired. 
 
 Under public control the amount of bank credit would 
 be limited only by the amount of good security offered 
 and as equal facility would be enjoyed by all, our medium 
 of exchange would then be one hundred percent clastic. 
 
 So public control, by giving; perfect safety and per-
 
 224 THE STRANGLE HOLD 
 
 feet elasticity, would accomplish what the Federal Re- 
 serve Act tries to accomplish. 
 
 As long as bank loans are left to the unrestricted will 
 of the bankers the little gain in safety and elasticity 
 secured by means of the Federal Reserve Act are at alto- 
 gether too great a cost in personal liberty and national 
 efBciency. 
 
 To give up our American principles of liberty and 
 equality for any degree of financial stability is too much 
 like asking the wolf to accept the house dog's collar in 
 order that he may be well fed. 
 
 A remedy that aims to improve our financial system at 
 the cost of our principles may be suffered as a pallia- 
 tive, but only pending the operation necessary for a 
 cure. 
 
 While admitting that it has greatly improved our 
 financial system, the Federal Reserve Act does not reach 
 the fundamental evil. On the contrary, it only tends to 
 cover up the flaw, private control, by giving it the ap- 
 pearance of public control. The impression of public 
 control is created through the federal reserve notes 
 being printed by the government but they are issued only 
 when and as called for by the banker. 
 
 Instead of breaking the hold of private interests on 
 the commercial life of the nation we see that the amoimt 
 of federal reserve notes in circulation depends entirely 
 upon the amount of paper the private banks choose to 
 discount. To insure justice and an equal opportunity 
 for all and to promote efficiency and prosperity the cir- 
 culating medium should be regulated entirely by the 
 business activity of the whole commiinity.
 
 THE FEDERAL RESERVE 225 
 
 To the extent that the P'ederal Reserve supplies an 
 elastic currency through privately owned and controlled 
 banks it is good, but it serves only those interests which 
 have access to these private banks. It does not, in its 
 present form, nationalize our medium of exchange as it 
 should and could be made to do, nor does it remove the 
 stranglehold of private interests from the throat of in- 
 dustry. 
 
 The title of the Federal Reserve Act recites that the 
 primary purpose of the act is "to furnish an elastic cur- 
 rency, to afford means of rediscounting commercial 
 paper," etc. The only means by which the act furnishes 
 an elastic currency are: First, by reducing the legal 
 reserves required to be held by member banks, thus 
 allowing them to issue a larger amount of bank credit on 
 the reserve; and, second, by allowing the member banks 
 to take private obligations (acceptances and commercial 
 paper) purchased with their credit to the Federal Re- 
 serve Bank and exchange this private paper for govern- 
 ment obligations in the form of federal reserve notes. 
 
 This crystallization of bank credit into government 
 money adds greatly to the stability and value of bank 
 credit and dignifies it by the name of currency. The 
 added amount of bank credit put into circulation by the 
 reduction of legal reserve requirements and the increased 
 credit that banks are encouraged to issue through dis- 
 counting private paper for federal reserve notes, con- 
 stitutes the "elastic currency" furnished under the Act. 
 
 The accepted meaning of the term "currency" is gov- 
 ernment-issued paper money, and in this sense the fed- 
 eral reserve notes are "currency," since they are issued
 
 226 THE STRANGLE HOLD 
 
 by a Federal institution (the Federal Reserve Board) 
 and they are obligations of the government. Yet the 
 word "currency" is essentially misleading when applied 
 to these notes. A careful examination of the modus 
 operandi of their issuance shows that they are put into 
 circulation only on the action of the banker and not at 
 the will of the government. The government institution 
 which issues them operates only when the banker turns 
 the crank because they are issued only in exchange for 
 paper which the banker has taken by making a loan of 
 his credit. 
 
 The point is this, and it should be perfectly under- 
 stood: federal reserve notes are called forth only in 
 exchange for commercial paper purchased by the banker 
 with bank credit. It is done in this way: Jones wants 
 to borrow money. He goes to the bank where he is known 
 and applies for a loan. If the bank's finance committee 
 (our "money trust") passes the loan Jones puts up his 
 note and securities and receives credit (bank credit) on 
 his pass book for the amount borrowed. Now let us sup- 
 pose Jones and others draw on the bank to the extent 
 that the banker needs money. In that case the banker 
 simply takes Jones' note to a Federal Reserve regional 
 bank and exchanges it for its discount value in federal 
 reserve notes. This privilege of trading private paper 
 for government money is extended only to "member 
 banks." Since this currency is issued only in exchange 
 for paper presented by these banks, we have in effect 
 turned the United States mint over to the bankers. 
 
 How completely the mint has been turned over to the 
 banking interests may be judged by the percentage which
 
 THE FEDERAL RESERVE 227 
 
 these notes and national bank notes bear to all the cur- 
 rency in circulation. 
 
 Before the days of the Federal Reserve we had in 
 circulation, besides the national bank notes, greenbacks 
 and gold and silver certificates. The bank notes, as their 
 name implies, were and are "bank money" issued by the 
 national banks and we have seen that the federal re- 
 serve notes are also bank money, but the others were 
 and occasionally are now issued by the government and 
 may be referred to as the "people's money." 
 
 Now in order to ascertain to what extent the banks 
 have encroached on this most important function of 
 issuing money, that is, to what extent the bankers have 
 taken charge of our mint — ^just take note of the money 
 that comes into your possession and see what per- 
 centage of the whole is made up of gold coin, gold and 
 silver certificates or greenbacks of large denomination 
 and what percentage consists of national bank notes, 
 federal reserve notes or federal reserve bank notes. 
 If silver coin and the lesser coins are excluded from this 
 calculation, for the reason that there are no bank issues 
 to take their place in making change, you will find that 
 the "people's money" is practically unrepresented. "Bank 
 money" has so nearly displaced the use of government 
 money that gold coin, gold and silver certificates and 
 greenbacks of large denominations are now curiosities. 
 
 No question is raised as to the safety of these fed- 
 eral reserve notes. They are good, safe money, for not 
 only do they have private credit for their full face value 
 behind them, but they are government obligations and 
 are, therefore, as safe as government bonds.
 
 228 THE STRANGLE HOLD 
 
 The real effect of the Federal Reserve System is to 
 strengthen the position of the bankers. It does not in 
 the least tend to remove the vital defect in our financial 
 system. Federal reserve notes are a crystallization of 
 bank credit, in vfhich the security of the government iy 
 added to the security of the banks. These notes are a 
 safe medium; but the bankers are in control of their 
 issuance. The Federal Reserve Banks do not deal vs^ith 
 the people. They are bankers' banks only. The privilege 
 of turning credit into our national currency is, therefore^ 
 still in the hands of the few private citizens who control 
 the banks. 
 
 The Constitution reserves to the Federal Government 
 the right to coin money. In order that all may share 
 equally so important a privilege, gold is given the right 
 of FREE coinage. Any one possessing gold bullion may 
 take it to the United States mint and receive its full 
 value in coined money. The gold coinage law is general 
 in application, and confers the right equally upon all. 
 If a law attempted to say that only a few, or only a cer- 
 tain class, had this particular privilege, it would be 
 condemned as class legislation and as being imdemo- 
 cratic, for under our declared principles, all men should 
 be equal before the law. 
 
 Since bank credit has almost entirely replaced gold as 
 our medium of exchange, it should be issued under the 
 same conditions as apply to the coinage of gold. The 
 freedom from special privilege, which accompanies the 
 coinage of gold, should be applied also to the minting of 
 credit. Value, in all its concrete forms, is the real se- 
 curity behind bank credit and all who bring value to the
 
 THE FEDERAL RESERVE 229 
 
 bank should, therefore, be privileged to receive the same 
 percentage of the medium of exchange thereon. 
 
 But how completely this principle is ignored! In the 
 federal reserve notes we have a crystallized form of 
 bank credit, constituting a major part of our circulating 
 medium. Yet these notes are issued entirely at the will 
 and discretion of various groups of private citizens, the 
 finance committees of banks, wholly without regard to 
 individual rights, constitutional provisions, or to the dem- 
 ocratic principle that government must be administered 
 impartially. 
 
 What an outcry would be raised were the government 
 to mint gold bullion into coin for a certain class only. 
 But compare the number of persons who have gold bul- 
 lion to exchange for coin at the public mint with the 
 number who go to the private mint, to wit, the bank, 
 to have their securities coined into bank credit, through 
 a loan which may subsequently be coined into federal 
 reserve notes by the banker. 
 
 In this private mint, which is far more important than 
 the public mint, privilege exists to the highest degree. 
 And besides this fact the arbiters of our fate are re- 
 sponsible to no one, not even to their own consciences. 
 For in all probability they do not themselves realize the 
 far-reaching eifects of the autocratic power they wield. 
 
 The effect of the Federal Reserve Act is that it in- 
 tensifies the grip which the bankers have upon our whole 
 industrial system. By placing the strength of the 
 national government behind bank credit, through the 
 issue of federal reserve notes, without taking out of the 
 bankers' hands the control over the issuing of that credit.
 
 230 THE STRANGLE HOLD 
 
 the Federal Reserve Act confers upon our bankers a 
 privilege that is vastly more important than the right to 
 the free coinage of gold. Consciously or unconsciously, 
 it undermines the principle upon which our government 
 was founded, the principle of equality before the law. 
 Unless this principle is upheld, no democracy can pos- 
 sibly endure. 
 
 At once the matter becomes not merely a financial 
 problem, nor a mere question of banking or business 
 methods, it reaches to the very bedrock of our social 
 institutions, and its importance is commensurate with 
 its depth. 
 
 The Federal Reserve System, then, is at best no cure,, 
 it is a sedative, nothing more. It has soothed the bank- 
 er's fears, and injected some confidence into the public 
 mind, thus enabling us to pass through a very trying 
 period in our history. But like all sedatives, it has a 
 bad result. Its narcotic effect renders more difficult the 
 location of the cause of our social ills — for it lulls us 
 into the belief that the disease has been cured. 
 
 Because our usual decennial panic did not occur, and 
 our chronic state of money stringency has been some- 
 what relieved, the belief is common that our financial 
 evils have been cured ; while the truth is that the cause of 
 these unfavorable financial manifestations, and of most 
 of our political, industrial and social ills, remains un- 
 touched. 
 
 And, what is even worse, the system attempts to cure 
 our financial ills by increasing the real defect in our 
 social system. Under this act the private control of our 
 medium of exchange is given a firmer grasp upon the
 
 THE FEDERAL RESERVE 231 
 
 nation. The Act has rendered the money power more 
 dangerous to our personal liberty, and gives it greater 
 opportunity to encroach upon our national democracy. 
 
 While the Federal Reserve Act has fallen far short 
 of its purpose, it has performed a service and it has 
 within itself a latent power for good. For although the 
 act is not a cure in its present form, it furnishes a most 
 convenient and readily adaptable instrument through 
 which a real cure may be administered. 
 
 The act should be amended by striking from the title 
 the word "Reserve," making it read, "The Federal Bank 
 Act," then the body of the act should be amended to 
 conform to that title. With the addition of a few 
 words to put into effect the suggestions made in Chapter 
 VIII, the flaw not only in our financial system, but in 
 our social system, would be removed. A simple change 
 indeed and one that could be easily made to the benefit 
 of all and with no disturbance to business.
 
 CHAPTER XV 
 
 THE CONSERVATIVE BANKER AND HIS 
 RESERVE JOKE 
 
 THE banker is an extremely conservative person. He 
 clings closely to the status quo and is fearful of 
 all changes, regardless of the reasons which may 
 prompt them. This attitude on his part is exactly what 
 might be expected, for the banker enjoys such a secure 
 and powerful position under existing conditions that any 
 change seems likely to him to result in a lessening of his 
 power, consequently he will oppose all changes on prin- 
 ciple. 
 
 The banking interests strenuously opposed the adop- 
 tion of the Federal Reserve Act, just as they have op- 
 posed many other pieces of constructive legislation. Op- 
 position to change is the natural attitude of all bankers, 
 but in the particular case of the Federal Reserve Act, this 
 opposition was due not only to a general aversity on the 
 part of the banker to any change, but also to another 
 reason, a reason far stronger, and one which resulted 
 in the bitter and united opposition of practically all the 
 bankers in the country. 
 
 This reason was the original proposal to make the Fed- 
 eral Reserve Bank a people's bank, where borrowers 
 could go directly for credit when private banks refused 
 to accommodate them. The origin of this suggestion lay 
 in the startling revelations of what was known as the 
 
 232
 
 THE CONSERVATIVE BANKER 233 
 
 Pujo committee, "which made a congressional investiga- 
 tion of the "money trust." 
 
 The testimony given before this committee disclosed 
 the vast power wielded by a few rich men. It also 
 showed up the black hand financial methods used by 
 what we commonly call "Wall Street." Together the dis- 
 closures shocked the country. The result was a sugges- 
 tion to establish a Federal Bank open to the use of the 
 people directly. 
 
 But the mere suggestion caused such a cry of fear and 
 such a frantic prediction of calamity from the bankers 
 that it sent a cold chill down the spine of every business 
 man. 
 
 One can well imagine the light in which the bankers 
 regarded such a proposal. The whole subject of finance 
 had always been shrouded in such a veil of mystery and 
 the system had permitted the bankers to command hom- 
 age and compel tribute from all for so long a time, that 
 the granting or denial of credit had come to be looked 
 upon by them as a vested right. Naturally any sug- 
 gestion which had as its object the curtailment of this 
 right would meet with strong opposition. To permit 
 the people to use their own credit without the permission 
 of the bankers and without paying tribute to them 
 seemed to them to be an invasion of their rights. The 
 idea of a people's bank for this reason, aroused them 
 and the result of their opposition is interesting. 
 
 Natural history informs us that the octopus, some- 
 times referred to as the devil fish, has in its anatomy an 
 ink sack from which it can, when attacked, emit a black 
 fluid that will confound an enemy and cover its escape.
 
 234 THE STRANGLE HOLD 
 
 This characteristic seems to be common to the species, 
 whether of the order "dibranchiate" or "financial." For 
 by their clamorous opposition to the proj^osition of a 
 people's bank^ the banking interests succeeded in having 
 the act recast. And it was cleverly recast, too, by the 
 adroit hand of Wall Street, so that in its present form 
 the people's bank idea was entirely wiped out, and 
 every provision was turned to the banker's benefit. 
 
 And like the octopus, those who had it recast were 
 clever to cover the effect of their operations with an 
 impenetrable haze of financial fiction. The effect of the 
 act in its new and present form was and still is generally 
 misunderstood. Not only is this true of the average lay- 
 men, but also of many of the bankers. For, after the act 
 had been changed so that the last vestige of a people's 
 bank was removed, the opposition to it among the bank- 
 ers remained. In fact their opposition was so strong 
 that only the great impetus of popular pressure for 
 some kind of relief, backed by the firm will of a deluded 
 President, forced the adoption of this law, emasculated 
 as it was. 
 
 The opposition of the great majority of the bankers, 
 inspired by their natural conservativeness, wr.s no doubt 
 genuine. But when the features of this act are really un- 
 derstood, one cannot believe that the apparent opposition 
 of the big interests was ever intended as anything more 
 than a counter-irritant, with the object of making the 
 people adopt the law. 
 
 Few laymen, and not even our law makers have 
 given sufficient heed to the ultimate effect of this act. 
 Those who uphold it do not see that under its veneer
 
 THE CONSERVATIVE BANKER 235 
 
 •of public good it gives the big financial interests a 
 firmer grip than ever upon the business life of the na- 
 tion. They have not noted that the act has put into the 
 hands of these interests full control of the circulating 
 medium. And so they fail to realize that the real effect 
 of the Federal Reserve Act has been to give control of 
 the medium, which is necessary to every industry and 
 to every person, so completely into the keeping of a few 
 that their power over the nation industrially, socially, 
 and politically is practically complete. No political 
 ruler ever wielded such an autocratic power. 
 
 This charge is a severe arraignment of a law pop- 
 ularly supposed to free the people from the strangle- 
 hold of the money power. Facts and logic, however, 
 make this charge. It is the only conclusion possible when 
 the situation is understood. No other conclusion is ten- 
 able as can be seen from the exposition of the true nature 
 of the act, given in the last chapter. We saw in Chapter 
 XI that a former Secretary of the Treasury considered 
 it necessary to deceive the people in order to cover the 
 weakness of our financial system. The super financiers 
 who shaped the Federal Reserve Act into its present 
 form followed this suggestion most effectively and with 
 surprising results. 
 
 The main points in the law have been explained. No 
 object could be gained by following its intricate de- 
 tails and it would be unwise to attempt to do so here. 
 The explanation of one means by which the act has been 
 made to serve the banking interests will be apparent and 
 will suffice. This is the way in which the greenback, at 
 one time a very much despised and a very much opposed
 
 236 THE STRANGLE HOLD 
 
 type of national currency, has become highly appreciated 
 by and very lucrative for the banker. 
 
 The greenback. United States note, or legal tender 
 note was an unsecured promise to pay, first issued dur- 
 ing the Civil War. It certainly was an ugly duckling 
 though it afforded a great refuge during the stress of 
 those times. By giving these notes full legal tender 
 power, the government gave them all the force that a 
 government can put behind an unsecured paper currency. 
 However, for nearly twenty years, starting with their 
 first appearance, an unrelenting attack both as to the 
 validity and value of these notes was led by the banking 
 interests. At one time these attacks drove their value 
 down to less than forty cents on the dollar. The strife 
 continued until the bankers finally had the matter ar- 
 ranged to their satisfaction. Greenbacks became avail- 
 able for reserve. They were "lawful money." 
 
 By means of the Federal Reserve Act, the banker suc- 
 ceeded in turning this "people's money," as the green- 
 back was called by its advocates, into a most valuable 
 "banker's money," and the way in which this feat was 
 accomplished was as follows: 
 
 The Federal Reserve Act provides that the reserve of 
 35%, which all Federal Reserve Banks must hold against 
 deposits, can be held in either gold or "lawful money." 
 Greenbacks are lawful money. By means of this sim- 
 ple arrangement a miracle was wrought. Through this 
 arrangement, which permits Federal Reserve Banks to 
 carry their reserve against deposits in greenbacks, this 
 despised paper currency became as valuable as gold. 
 
 To judge the effect of this miracle let us take, as an
 
 THE CONSERVATIVE BANKER 237 
 
 example, a little jim crow bank in a country village, 
 with a capital of $25,000 distributed as follows: $10,000 
 invested in building and fixtures; $1,500 in gold invested 
 in Federal Reserve Bank stock, purchased under com- 
 pulsion, on which the bank receives 6% cumulative divi- 
 dends; and $13,150, in other securities. The bank has 
 then left out of its capital $350, let us say this is in 
 greenbacks. 
 
 The bank has no deposits as yet, but as it is com- 
 pelled by law to maintain a reserve equal to 7% of its 
 demand deposits and 3% of its time deposits with the 
 Federal Reserve Bank of its district, it prepares for 
 business by sending the $350 in greenbacks to the Fed- 
 eral Reserve Bank as a deposit. That leaves the till of 
 our little bank as clean as old Mother Hubbard's cup- 
 board ; but the customer is not going to fare as poorly as 
 the dog did, even if the till is bare and the customer 
 happens to be a borrower. 
 
 It is easy to see how a bank with no money on hand 
 can accommodate a depositor, but just how is this bank 
 going to satisfy the borrower out of an empty till? 
 
 This feat is easy when you know how. Listen ! Here 
 comes the borrower with that humility and deference 
 with which the borrower always approaches the banker 
 and, by means of an eloquent appeal in which he tells 
 the banker just how he is going to use the money, he 
 finally succeeds in breaking through the million dollars' 
 worth of dignity with which the banker surrounds his 
 empty till. So he secures a loan of $1,000 for 90 days. 
 The banker takes the borrower's note and securities and 
 hands him in exchange a pass book with the date and
 
 238 THE STRANGLE HOLD 
 
 $1,000 written on the credit side. For the purpose of 
 turning that daub of ink into money, he very graciously 
 gives him a check book. 
 
 It usually thrills one with a sense of importance to 
 be handed a nice new check book by the banker. 
 
 The borrower now has one thousand dollars' worth of 
 the medium of exchange, bank credit, with which to do 
 business, and the banker has one thousand dollars in 
 personal credit, a note, at, say, eight per cent interest 
 backed by good security. The question now arises, how 
 are the checks which the borrower will draw going to be 
 paid.** The bank till being empty, one naturally won- 
 ders where the money is to come from. At first sight 
 this seems to be rather a complicated problem, but when 
 one imderstands the tricks of banking it becomes very 
 simple. 
 
 Without loss of time the banker takes that $1,000 
 note to the Federal Reserve and discounts it at 6%. 
 He draws out only $350 in federal reserve notes, thereby 
 increasing his deposit of $350 already made with the 
 greenbacks by $650, which gives him a credit of $1,000 
 as a reserve. So he goes merrily on receiving deposits 
 and making loans. 
 
 Deposits of cash will probably equal or exceed with- 
 drawals, so the $350 in federal reserve notes which he 
 has taken out of the $1,000 note will give the banker 
 ample cash funds for paying checks. 
 
 Let us follow this operation in frenzied finance and 
 figure the yearly profit made possible for the banker 
 through the proper use of a few greenbacks which his 
 predecessor so despised.
 
 THE CONSERVATIVE BANKER 239 
 
 On the note discounted, the banker profits by the 
 difference between the 8% the note bears and the 6% 
 for which it was discounted, or 2% on $1,000 which for 
 one year would be $20. As this bank is required to 
 carry a deposit in the Federal Reserve Bank equal to 
 only 7% of its own deposits, and as it now has de- 
 posited there $1,000 it can carry deposits up to 
 $14,285.71, for $1,000 is 7% of that amount. It can, 
 therefore, create this amount of deposits by making 
 $13,285.71 additional loans on which it will collect 8% 
 or $1,062.85, which added to the $20.00 made on the 
 note for $1,000 which is kept discounted makes $1,082.85 
 in all. 
 
 This income on each $1,000 of deposit with the Fed- 
 eral Reserve is not so bad a piece of business when 
 one considers that the bank has not one cent invested. 
 Its whole capital stock was put into income property 
 or securities except the $350 in greenbacks, which were 
 traded for federal reserve notes by discounting a pri- 
 vate note. These notes are held by our little bank as 
 CASH while the $350 in greenbacks are held by the 
 Federal Reserve Bank as RESERVE. From the stand- 
 point of "good banking" this arrangement has two ad- 
 vantages. It helps overcome the limit set by the gold 
 standard and at the same time is not unprofitable to the 
 banks, but from the standpoint of common sense to hold 
 one piece of paper as reserve against another piece of 
 paper when both pieces of paper are guaranteed by the 
 same government look like a joke. 
 
 The foregoing income is obtained by figuring that all 
 the deposits made with this bank are demand deposits.
 
 240 THE STRANGLE HOLD 
 
 against which it must hold a seven per cent reserve. A 
 reserve of but 3% is required to be held against time 
 deposits, and, consequently, were all deposits time de- 
 posits, the bank would be able to lend over twice as much 
 of its credit. But without stopping to figure how much 
 could be made on time deposits, let us see what could be 
 earned by all the banks on all the greenbacks issued. 
 
 This problem of course is a hypothetical one, for all 
 the greenbacks outstanding are not held as reserves by 
 the Federal Reserve banks, and the problem assumes 
 that they are. It is, however, not unreasonable to sup- 
 pose that they could be so held, and, therefore, the 
 problem is of interest in that it exposes the fallacy of 
 the reserve system and shows a possible situation under 
 the Federal Reserve Act. 
 
 The reserve requirements of banks, which are mem- 
 bers of the Federal Reserve System, varies according to 
 the location of the bank. Banks in central reserve cities 
 are required to carry with the Reserve bank a credit of 
 not less than 13% against their demand deposits, re- 
 serve city banks must have a balance of not less than 
 10%, other banks get off with 7%, while all are re- 
 quired to carry only 3% against time deposits. Let us 
 take the average of reserve against demand deposits as 
 10%, and consider all the member banks as constituting 
 one bank. 
 
 Then for every $10,000 of demand deposits carried 
 this big bank would be required to have a credit balance 
 with the Federal Reserve of $1,000 or 10%. This bal- 
 ance may be created by depositing money or discountable 
 paper, but the Federal Reserve must hold a reserve of
 
 THE CONSERVATIVE BANKER 241 
 
 35% against these deposits in either gold or "lawful 
 money." 
 
 To comply with the law then the Federal Reserve 
 holds, we will say, in greenbacks, for they are lawful 
 money, $350 against ever}' $1,000 deposited with it 
 by the member banks. Since every $350 in greenbacks 
 satisfies the reserve requirement for credit with the Fed- 
 eral Reserve then every $350 worth of greenbacks per- 
 mits the member bank to carry $10,000 in deposits. 
 
 Now let us see how much bank credit can be issued in 
 the form of loans by the member banks through using 
 the full issue of greenbacks as the only reserve. 
 
 There are outstanding $346,681,000 in greenbacks 
 and as the banks can issue ten thousand dollars of bank 
 credit for every $350 held in the Federal Reserve, 
 divide the $346,681,000 by 350 and multiply by 10,000. 
 It gives a little less than ten billion dollars as the amount 
 of bank credit which can be issued against legal tender 
 notes, the despised greenback as the sole reserve. 
 
 If you can now get hold of one of these precious 
 greenbacks, you will see that they are not redeemable in 
 gold or anything else and the government will not even 
 accept them for customs duties. 
 
 It is safe to say that not one person in a million 
 knows or cares whether there is a gold reserve behind 
 them or not. 
 
 Their value rests entirely on the belief that they will 
 be accepted from us at the same value at which we 
 accepted them. That is their sole value is CONFI- 
 DENCE. 
 
 The banker by putting something over three hundred
 
 242 THE STRANGLE HOLD 
 
 million dollar's worth of this form of confidence through 
 the magic process of the Federal Reserve mill makes 
 these pieces of paper carry ten billion dollars' worth 
 of his credit, which is also confidence. 
 
 In this arrangement we have conclusive proof of the 
 fact that our development has outgrown the gold reserve 
 system for by this use of greenbacks as reserve the 
 gold reserve idea is discarded. It also proves the cor- 
 rectness of our whole contention. 
 
 If ten billion dollars' worth of bank credit can be 
 issued with nothing back of it but CONFIDENCE why 
 not thirty or fifty or for that matter a hundred billion 
 dollars' worth.'' 
 
 The point is to be sure of the confidence. As long 
 as that is safe there is no limit. 
 
 By making the people know that every loan that every 
 bank makes is perfectly safe the maximum of confidence 
 would be secured and, consequently, our medium of 
 exchange would be perfected. 
 
 This use of greenbacks as reserve is a powerful argu- 
 ment in favor of the suggestion made in this book for 
 the reform suggested certainly would secure the maximum 
 of confidence. 
 
 Instead of having ten billion of our medium of ex- 
 change based on green paper and the rest on "gilt" 
 paper and then allowing private interests to dictate its 
 use, why not have it all based on the solid rock of sure 
 public confidence and permit everybody to use it on equal 
 terms? Is there any reason? 
 
 Again, since all financial reform has always tended 
 toward and striven to reach the goal of complete public
 
 THE CONSERVATIVE BANKER 24S 
 
 confidence why not put into effect a reform which will 
 reach it and which will always hold it? 
 
 The fact that using the greenbacks as reserve is prof- 
 itable to the banker is no argument either in favor of 
 or against that arrangement so no criticism is intended 
 by showing it. The only object is to complete the argu- 
 ment that the people's money has been made a profitable 
 banker's money. 
 
 We have seen that on $350 of greenbacks held as 
 reserve the banker can collect as interest on every 
 $10,000 of his credit issued an average of say 7% 
 or on the ten billion dollars* worth about seven hundred 
 million dollars per year. We have also noted that the 
 banker has nothing invested. When one considers that 
 this income is made entirely out of the people's laws and 
 the people's confidence, without any investment whatso- 
 ever on the part of the banker, the Wallingford stories 
 seem not only probable but quite tame. 
 
 If the foregoing seems to be an exaggerated picture 
 of existing conditions let us pursue the story and then 
 prove up hy a few figures taken from government docu- 
 ments. 
 
 The Federal Reserve banks are supposed to hold a 
 reserve of 40% in gold against federal reserve notes 
 in actual circulation. The amount of gold held Decem- 
 ber 1st, 1919, was $1,148,724,000 against which was out- 
 standing $3,059,652,000 in federal reserve notes. This 
 apparently is a gold reserve of 38% and only 2% below 
 what the law requires. Besides this issue against gold 
 reserve the Federal Reserve banks can issue federal 
 reserve BANK notes to the full value of all govern-
 
 244 THE STRANGLE HOLD 
 
 ment bonds bearing the circulation privilege which they 
 have with the United States Treasurer, and small bills 
 against United States certificates of indebtedness, as 
 authorized by the act of April 2Srd, 1918. 
 
 Besides all this paper secured by paper there are the 
 national bank notes secured by government bonds or 
 an issue in December, 1919, of a little over 990 million 
 dollars secured practically by paper only. Adding this 
 amount to $3,059,652,000 of federal reserve notes gives a 
 little over four billion dollars of paper money and prac- 
 tically the only gold held for its redemption is the 
 $1,148,000,000 in the Federal Reserve or about 28%. 
 
 All this paper is spoken of as our national currency 
 but altogether it constitutes but a small portion of our 
 real currency or medium of exchange. 
 
 There are, in round numbers, 30,000 banks, state and 
 national, doing business in this country. The deposits 
 in these banks amount to about 33 billion dollars. If 
 our financial system is really on a gold basis all these 
 deposits are payable in gold. So we have a little over 
 one billion of gold with which to redeem S3 billion of 
 bank credit plus 4 billion of paper money, or, 37 bil- 
 lion of the medium of exchange. By dividing the $1,- 
 148,000,000 by the 37 billion it shows we have a reserve 
 of about 3% of gold supporting our circulating medium. 
 
 That is, for every $100 of paper money and bank 
 credit, which practically makes up oui entire medium 
 of exchange, there is $3 in gold. But you say the 
 Comptroller's report shows there are about three billion 
 dollars of gold in the United States although but $1,148,- 
 000,000 is on deposit with the Federal Reserve.
 
 THE CONSERVATIVE BANKER 245 
 
 Yes, and there are also 25 billions of government 
 bonds outstanding besides billions upon billions of pri- 
 vate bonds, notes and accounts, all payable in gold. The 
 amount of these debts payable in gold cannot be known 
 but it is safe to say they amount so far into the billions 
 that the percentage of gold to bills payable in gold in 
 the United States would not exceed 1% or $1.00 on the 
 $100. This is a rich country and holds about one-half the 
 world's supply of gold. If we could figure out the per- 
 centage of gold to bills payable for all the countries 
 which have based their system of exchange on the gold 
 standard we would require a microscope to find the 
 answer. It would probably not exceed fifty cents on 
 the hundred dollars. 
 
 If an ordinary mortal should promise to pay us $100, 
 when we knew he possessed but fifty cents and we knew 
 full well that he could not possibly get any more we 
 would look upon him with great distrust, even with dis- 
 gust; but when the same promise under the same condi- 
 tions comes from the banker we accept it. 
 
 Most of us can imagine, or have seen, a group of 
 little girls "playing lady." With an old skirt of their 
 mother's, or of their big sister's, they pretend that they 
 are grownups, and that a corner in the attic is their 
 home. One makes believe that she is Mrs. So and So, 
 and another is Mrs. Somebody Else who comes to call. 
 The whole point of the game is to "make-believe." 
 
 When we can escape from the magic spell of gold 
 and cast off the fear of all things financial, the force 
 of the story here presented will be readily recognized. 
 The provision of the Federal Reserve Act wliich permits
 
 246 THE STRANGLE HOLD 
 
 the reserve against a promise to pay to be carried in a 
 promise to pay makes a farce out of the gold standard 
 and the whole reserve system is shown to be a game of 
 "make-believe" and becomes a joke. 
 
 If the gold reserve idea, false as it is seen to be, were 
 necessary to a proper working of our exchange system, 
 it would be both unwise and unpatriotic to attack it, for 
 naught but harm could result. The true condition, how- 
 ever, is the exact opposite for it is not at all necessary 
 and besides it is robbing the whole nation of liberty and 
 equality as well as prosperity and happiness. 
 
 This false promise to redeem in gold has but one 
 result. It continues the strangle-hold of private inter- 
 ests upon our national life by bolstering up private con- 
 trol over the medium of exchange. It is a smoke screen 
 which hides the truth that our financial system is nothing 
 but a system of bookkeeping. The bank is a clearing 
 house for credits, nothing else, and it will be a much 
 more useful institution when the truth is recognized and 
 the suggested reform is put into effect.
 
 CHAPTER XVI 
 FOREIGN EXCHANGE 
 
 THE problem of foreign exchange exhibits a phase of 
 finance that has of late been vividly called to the 
 attention of the public. The variation in the value of for- 
 eign money as measured in dollars decides the course of 
 foreign exchange. The question on this subject is, what 
 causes this variation? 
 
 It is a question that is little understood even by those 
 who handle exchange. Obviously, then, it is understood 
 still less by the general public. As a consequence, a 
 number of different explanations for this variation in 
 the course of foreign exchange have been given. Let 
 us examine the chief explanations and see whether they 
 are correct. 
 
 Most bankers in trying to explain the course of for- 
 eign exchange, will assign as the main reason, if not the 
 entire reason for the price of exchange, the difference 
 in the gold reserve held by the various countries. The 
 banker, who is accustomed to deal in foreign exchange, 
 ought to know more about the subject than others who 
 deal in exchange only infrequently or never. To deter- 
 mine whether or not the banker's explanation is correct 
 let us examine the relationship existing between gold 
 reserve and the price of exchange. 
 
 It has already been seen that in the United States, 
 the richest country in the world, there exists about thirty- 
 
 217
 
 248 THE STRANGLE HOLD 
 
 three billions of bank deposits and four billions of paper 
 money resting on a little over one billion of gold held 
 as reserve or something less than three per cent. Euro- 
 pean countries are not advertising the amount of their 
 gold reserve just now, so there is no authentic informa- 
 tion at hand on the subject. It will be seen that the 
 suggestion is so ridiculous, however, that we do not 
 need exact information in order to show the fallacy of 
 connecting the price of foreign exchange with the gold 
 reserve. 
 
 Let us suppose that England, for instance, has no 
 gold at all. In the United States each dollar has about 
 three cents in gold behind it. The par value of an Eng- 
 lish pound in our money is $4.86. Multiplying this by 
 .03 gives about fourteen and one-half cents as the worth 
 of gold behind the equivalent of a pound in our money. 
 Since we have assumed that there is no gold behind the 
 pound in England it is worth as much less per gold 
 reserve as there is less gold behind it than behind its 
 equivalent. Since there is 141/0 cts. worth of gold behind 
 $4.86 of our money the pound is only worth that much 
 less than its par value, so it is worth, then, $4.86 minus 
 14^ cts. or $4.71^2- If the gold reserve sets the value 
 of a nation's medium of exchange and we allow the 
 maximum value behind one and the minimum behind the 
 other, the diiference should certainly be a conservative 
 estimate of the ratio of value. 
 
 Since the pound sterling is quoted at the present writ- 
 ing at $3.56, and has been less, and according to the 
 difference in gold reserve it should be worth $4.71%, 
 there is a difference of $4.71^^ minus, say, $3.56 or
 
 FOREIGN EXCHANGE 249 
 
 $1.15% unaccounted for by gold reserve. It is plain 
 there must be some other reason than gold reserve for 
 this difference of $1.15% in exchange value. In order 
 to locate the cause of this difference of $1.15% we must 
 determine what other value is behind the dollar and com- 
 pare that value with the value behind the pound. 
 
 On examination we find that the English monetary 
 system is quite similar to our own. The English law 
 requires that all Bank of England notes must rest on 
 a reserve of gold or government obligations. These 
 Bank of England notes constitute the paper money used 
 throughout Great Britain the same as federal reserve 
 notes, national bank notes and greenbacks constitute the 
 paper money used in this country. Our paper money 
 rests on practically the same kind of a basis as the 
 Bank of England notes, that is gold reserve and gov- 
 ernment obligations. So the only difference in value 
 would be the difference in gold reserve and the value of 
 the different government obligations. 
 
 The gold reserve is a farce in both instances and as 
 we have seen, accounts for but 14% cts. on the value 
 of the pound, under the most favorable circumstances, so 
 it may be ignored in the search for real sustaining value. 
 
 On examination we find that British government obli- 
 gations are more nearly worth par in Great Britain than 
 American government obligations are in the United 
 States. The value behind British paper money then is 
 practically the same as the value behind our own. 
 
 As in the United States, so in Great Britain, bank 
 credit constitutes the bulk of the medium of exchange. 
 It is issued in both countries in practically the same
 
 250 THE STRANGLE HOLD 
 
 way, on notes and mortgages, and, therefore, the values 
 behind it are as good in one country as in the other. 
 The difference of $1,151/2 in the exchange value of the 
 pound cannot, therefore, be found in the sustaining value 
 behind either the paper money or the bank credit. 
 
 John Bull's note is secured in the same way as Uncle 
 Sam's. The fact that John's note is at a discount when 
 measured in Sam's money cannot, therefore, be explained 
 upon the basis of a difference in security. 
 
 In this case, then, it is plain that the gold reserve 
 assigned by the banker as a reason for the price of ex- 
 change is erroneous but as there is no difference in other 
 sustaining values the real reason has not been found. 
 Let us now examine, for instance, the exchange value 
 of the money of the other two large commercial coun- 
 tries of Europe, the franc and the mark. 
 
 Both the French and the German monetary systems 
 have progressed beyond the folly of gold reserve. The 
 paper money of both France and Germany is issued in 
 the first instance through the Bank of France and in 
 the second through the Reichsbank on the assets of the 
 bank as security. In both instances it is issued in prac- 
 tically the same way that bank credit is issued in Eng- 
 land and in this country. 
 
 The only difference between the paper money of these 
 two countries and the bank credit of our own is in its 
 form. When a French or German business man goes 
 to the bank and puts up his note and securities for a 
 loan he comes away with a handful of paper money. 
 In this country the loan he receives from the bank is 
 represented by a daub of ink in a bank book.
 
 FOREIGN EXCHANGE 251 
 
 Practically the only difference is in the form of the 
 banker's promise to pay. In those countries a banker 
 hands out his I. O. U. in the form of a bank note and 
 here in the form of an entry in the customer's pass 
 book. If the banker here would hand us national bank 
 notes and we would use them instead of his giving us 
 credit on the bank's book, for us to transfer by means 
 of a check, the system would be almost identical with 
 that of those continental European countries. 
 
 Since the system of issuing the media of exchange 
 in all three countries, though outwardly somewhat dif- 
 ferent, are really almost identical in principle, there 
 cannot be much difference in real value between the 
 media of exchange unless there is a difference in the 
 security behind the bank loans. On examination, we find 
 the securities which are put up for bank loans are sub- 
 stantially the same in form and effect and are practically 
 equal in value, so the promises to pay issued by the dif- 
 ferent banks should be the same in value. But today 
 we find the franc selling at about fifteen to the dollar, 
 while the par ratio is a little over five to the dollar ; and 
 we find the mark, with a par value of 23.82 cents, sell- 
 ing for the time being at one and one-half cents. This 
 discrepancy clearly indicates, then, that the difference 
 in the price of exchange cannot be attributed to a differ- 
 ence in system or to a difference in the value of the 
 security behind the media of exchange of the different 
 countries. 
 
 Since the banker's explanation of difference in gold 
 reserve does not explain and we find no difference in 
 other value, let us turn to another attempted explana-
 
 252 THE STRANGLE HOLD 
 
 tion. There is one which bases the difference in the 
 price of exchange upon the volume of the medium in 
 circulation in the various countries, or rather, upon the 
 ratio of inflation. 
 
 The first country called to mind in this connection is 
 Russia. Here inflation has been carried to such an 
 extreme that the Russian rouble is almost valueless at 
 home. Naturally, then, it is even less valuable in for- 
 eign exchange ; and in fact it has so little value that it is 
 no longer quoted. 
 
 This would seem to demonstrate the truth of this 
 second reason given for the price of exchange. How- 
 ever, even in the case of the rouble, it is not the only 
 reason; the value of credit money depends upon the 
 stability of the government and the institution issuing 
 that money. Russia at present has no government worthy 
 of the name. The effect is the same as the effect of 
 over-inflation; it reduces the price of the rouble in for- 
 eign exchange. To over-inflation, then, it is not per- 
 missible to assign the whole of the abnormal lack of 
 value of Russian exchange. 
 
 It would seem, therefore, that the ratio of inflation, 
 while quite possibly one of the factors affecting the price 
 of exchange, is by no means the only factor. This con- 
 clusion is brought out still more forcefully in the case 
 of exchange on England, France, and Germany. For 
 in these countries their medium of exchange is inflated 
 little if any more than ours is in this country. 
 
 In the leading European countries the rise in the cost 
 of living since 1914 has been no higher than it has 
 been in this country. In 1914, however, exchange
 
 FOREIGN EXCHANGE 25S 
 
 between these countries and the United States was at 
 par or practically so. And to account for the present 
 value of the franc, for instance, on the inflation theory, 
 the cost of living in France would have to be relatively 
 three times as high as it is in this coimtry, because the 
 franc is about one-third par. 
 
 Now it is true that, on account of the adverse rate of 
 exchange with the United States, goods imported from 
 this country to France are three times as high as nor- 
 mally; for the francs with which they are bought are 
 selling at one-third their normal exchange rate, so in 
 figuring the cost of living, these goods must be left out 
 of the calculation. 
 
 At present it costs the average American family of 
 of three, we will say, $100 a month to live in this 
 country. At par this sum would be equal to 500 francs; 
 a sum probably greater than that which the average 
 French family spends for living. If inflation, however, 
 made the franc worth what the exchange rate quotes, 
 then it would cost the average French family 1500 francs 
 per month. 
 
 The same reasoning applies, only with greater empha- 
 sis, in the case of Germany. In order to account for 
 the German exchange rate on the ground of inflation, 
 the cost of living there would have to be over fifteen 
 times what it was in 1914. Taking the mark at its pres- 
 ent exchange value, a family of three would have to 
 spend at present about 7,000 marks montlily for living 
 on the same scale as the average American family of 
 the same size. 
 
 While the difi'erence in inflation, then, is to some
 
 254 THE STRANGLE HOLD 
 
 extent a factor in determining the present abnormal 
 rate of exchange, it is at most only a minor factor. For 
 the fact is that, exclusive of goods which must be im- 
 ported, the cost of living in England, France, and Ger- 
 many is relatively little if any higher than it is here, if 
 we figure their money at par. Or, in other words, Eng- 
 lish money, French money, and German money are worth 
 in those countries as much as they ever were and as much 
 as our money is here. 
 
 What then is the real cause for the difference in 
 exchange rates ? We have seen that the reason advanced 
 by the banker, the difference in gold behind the money of 
 each country, is not correct and that there is practically 
 no difference in the security behind each. We have also 
 noted another reason, the relative inflation, and find it 
 to be inadequate to explain the present price of exchange. 
 What then is the real explanation ? 
 
 There are two factors that account almost entirely 
 for the present state of foreign exchange. The first 
 of these is the balance of trade, and the second the 
 position of the foreign exchange speculator. 
 
 Trade can be compared to a clearing house operation. 
 If I ship you one hundred barrels of flour worth ten 
 dollars a barrel and you ship me ten barrels of dye 
 stuff worth one hundred dollars a barrel, the transaction 
 clears itself. 
 
 It may happen, however, that you buy the flour from 
 me, but ship me in return goods worth only a part of its 
 value. Two possibilities arise at this point. Either you 
 will pay me the balance in money, or I will trust you 
 to pay me later.
 
 FOREIGN EXCHANGE 255 
 
 Perhaps you are unable to pay the balance in money 
 immediately. If I have perfect confidence that you 
 will pay me in goods or in money at a later date, then 
 it Avill be to my advantage as well as to yours to let you 
 have the flour. For to do so will stimulate trade. On 
 the other hand, to refuse to let you have the flour will 
 harm me as well as you. For the result of the refusal 
 will be a lagging of the flour trade and a decline in the 
 price of flour. The slump in flour will cause wheat to 
 drop, resulting finally in a falling off" in production 
 which will throw men out of employment, cause a reduc- 
 tion in wages, and general loss and discomfort to every- 
 body. Obviously, then, I should be inclined to trust you 
 for the flour. 
 
 But let us see why I do not trust you for the flour. 
 If in this supposed case I am an American merchant 
 and you are a merchant in Europe we will see what the 
 situation actually is today. 
 
 Europe has been depleted by the war, and now stands 
 in need of food and raw materials from us. At present 
 the merchants of Europe cannot pay us for the materials 
 they need, either in goods or gold. By means of our 
 goods, however, those people could rise to their feet all 
 the more quickly, and they would soon be able to pay 
 us. We want to let them have the goods but here again 
 the inefficiency of our financial system shows up to block 
 business, and our failure to sell is detrimental, not only 
 to them, but to us also, and is due to the fact that our 
 financial system is not elastic enough to permit us to 
 carry the credit. 
 
 Credit, as has already been noted, is made up of con-
 
 Q56 THE STRANGLE HOLD \ 
 
 fidence and time and the time is in direct proportion to 
 the confidence. Little confidence, little time, therefore, 
 the reason why bank credit it limited to 30, 60, and 90 
 days is because our banks are not sure enough of public 
 confidence to let their credit out for a longer time. Bank 
 credit is our medium of exchange — the means of carry- 
 ing on trade — and the exporter can not use such short 
 time credit for he must give his customer a longer time 
 than 30, 60, and 90 days. 
 
 Because of the disrupted condition in which the war 
 has left European industry the merchants there must 
 have long time credit and our banking system because 
 of lack of public confidence cannot carry it. 
 
 The Edge Act was passed as an amendment to the 
 Federal Reserve Act in order to overcome this difficulty 
 and under it the bankers are forming a one hundred 
 million dollar Foreign Trade Financing Corporation so 
 as to be able to extend the credit necessary. 
 
 The exporter is in exactly the same position as the 
 farmer. He cannot use 30, 60, and 90 day money. He 
 must have longer credit and since our banking system in 
 its present condition cannot extend it this special insti- 
 tution is being gotten up for his benefit just as the 
 Farm Loan Act was gotten up as an attempt to over- 
 come the farmer's difficulties. 
 
 The Edge Act and the corporations formed under it 
 like the Federal Reserve and the Farm Loan Acts are 
 cumulative evidence that all financial reform is seeking 
 to accomplish the result which can be accomplished by 
 the remedy suggested in this book. 
 
 Our foreign trade suffers from the same old defect —
 
 FOREIGN EXCHANGE 257 
 
 the false promise to pay gold, and a lack of confidence 
 in the bank, due to private control. It is, once more, 
 merely a repetition of the same old flaw. The situation 
 that exists is the same as when lack of transportation 
 facilities causes a freight blockade. 
 
 Here, then, we come back again to that flaw which 
 is at the root of so many other evils, THE SELEC- 
 TION OF A COMMODITY AS A MEDIUM OF 
 EXCHANGE. It has been shown how this act, while a 
 natural step in the evolution of trade, proved to be a 
 mistake and has become the basic flaw in our whole social 
 system. It has limited man's activities by limiting the 
 volume of the medium by which his activities have 
 always been conducted. In this way it has at all times 
 subjected all industry to the will of the few who con- 
 trolled the commodity used as an exchange medium. 
 
 This flaw has always caused and is still causing most 
 of man's economic troubles, one of which is the present 
 deplorable condition of our foreign trade and shipping 
 business. 
 
 Business can be carried on onlj'^ by using the medium 
 of exchange. If, at any time, this medium cannot be 
 had in sufficient quantity, the business must wait until 
 it is supj)lied. The fact that the medium is limited today 
 by the supply of a single commodit}', gold, brings with 
 it the natural effect that if the gold-supply is inade- 
 quate, business must wait until there is enough gold to 
 carry through the exchange. It amounts to the same 
 thing as waiting until a car is obtainable before goods 
 can be shipped. 
 
 Now it is true that we no longer limit our medium of
 
 258 THE STRANGLE HOLD 
 
 exchange to the use of gold, since we also use paper and 
 bank credit. We have greatly expanded our medium of 
 exchange, for domestic purposes. Similarly every other 
 gold standard country has expanded its medium for the 
 same purposes, and by similar devices. But gold still 
 remains the only universally accepted medium of ex- 
 change, and, consequently, the only means of settling 
 international balances. 
 
 By making gold the basis of our medium of exchange 
 at home, we have piled on it a mass of paper money and 
 credit, which we promise to redeem in gold. Although 
 we know this promise cannot be fulfilled, some gold must 
 be kept stored away in vaults, so that through a complex 
 system of reserves we can hypnotize ourselves into be- 
 lieving it to be true. Through the juggling of reserve 
 requirements we have already stretched the little truth 
 there is in the gold redemption promise to a point where, 
 it is so thin that, any one can see through it, so there is 
 real danger in stretching it any further. 
 
 In foreign exchange, therefore, we have a very intri- 
 cate problem: the problem of getting the exchange 
 mechanism big enough to carry our exchange operations 
 and still keep it on the narrow-gauge gold track. All 
 our gold supply is now used as the basis of credit at 
 home. If we ship gold out of the country our reserve 
 shrinks, and to get things back on balance, we must 
 reduce our credit. But the percentage of gold reserve 
 behind credit has become so small, or in other words, 
 there is so much credit piled on so little gold, that a 
 comparatively small shipment of the metal requires a 
 very considerable curtailment of credit. This means a
 
 FOREIGN EXCHANGE 259 
 
 contraction in the medium of exchange, and we know 
 only too well the results of such an act. 
 
 The whole situation reminds one of the game of "jack- 
 straws," or a similar game played with cards, where the 
 deck is spread roughly on the table with two cards form- 
 ing a house set on top of the pile. The object of the 
 game is to see how many cards can be withdrawn with- 
 out shaking down the house. And the object of the 
 financial game, or the problem for some super-financier 
 is: how can enough gold be pulled out from under the 
 pile of paper money and credit at home to settle foreign 
 trade balances, without shaking down the structure of 
 credit ? 
 
 At first sight this might seem to be a question, at pres- 
 ent, for European coimtries to answer, but before we 
 proceed much further it will be shown that it is our prob- 
 lem. 
 
 We shall not attempt to answer this question as above 
 stated but it might be suggested, that if instead of keep- 
 ing up the reserve bluff, we should put one hundred per- 
 cent confidence behind our paper money and our bank 
 credit, by the simple means of public control already 
 explained, we could extend credit where credit was due 
 and revive our drooping foreign trade. We would not 
 need foreign trade financing corporations, nor any of 
 the other devices intended to accomplish this purpose. 
 
 And here we come to the second factor determining 
 the price of exchange. The first factor, the one which 
 plays the larger part in determining the exchange ratio 
 of foreign money, is the balance of trade. The second 
 factor is the speculator, and the speculator comes into
 
 260 THE STRANGLE HOLD 
 
 the field only because the medium of exchange is so 
 limited that foreign trade, like agriculture, cannot be car- 
 ried on through the legitimate channels of credit. 
 
 Europe has been depleted by the war. Property has 
 been destroyed, factories dismantled, material wasted, 
 and business organization disbanded. Great quantities 
 of raw material, machinery, food, etc., are needed for 
 rehabilitation. Europe has no gold with which to pay 
 for these things, and the credit of our bankers with its 
 time limit of 90 days cannot be issued for a time suffi- 
 ciently long to permit our exporters to get goods back 
 in return for those shipped. 
 
 Some other way of payment for these exports must 
 therefore be found. Gold cannot be used in payment, 
 for the lack of confidence in banks, due to private con- 
 trol, keeps the gold buried in vaults to make good the 
 gold payment bluff. The only way left open is to go 
 to the speculator. 
 
 The American exporter takes the foreign purchaser's 
 acceptance, or his drafts, or checks on a foreign bank, in 
 payment for the goods. He cannot use these at his bank 
 for his credit is limited by the banker's short time money, 
 consequently he must sell these drafts to raise current 
 funds so he goes to a speculator. 
 
 This involves selling the foreign credit at a discount, 
 and since the greater the export trade, the greater the 
 supply of those instruments of credit received and 
 offered for sale, consequently the greater the discount. 
 
 And so the value of foreign exchange depends upon 
 the price the speculator will pay for it. 
 
 Now the speculator's price will depend, not upon the
 
 FOREIGN EXCHANGE 261 
 
 intrinsic value of the foreign credit, but upon the amount 
 of it offered and the state of the money market. In 
 other words, the price of "call money" in New York. 
 The rate on "call money" then is the barometer not only 
 for the prices of stocks and bonds, but for the price of 
 foreign exchange. It is evident then that the discount 
 rate fixed by a committee of New York brokers controls 
 the price of foreign exchange and through it the volume 
 of foreign trade, which in turn, affects the price of our 
 exports, especially wheat and cotton.* 
 
 There are, therefore, two valid reasons why foreign 
 exchange rates vary. The first factor is the balance of 
 trade. When we export more tlian we import, that is, 
 when the balance of trade is in our favor, there is created 
 a demand for credit to the foreign purchaser. To obtain 
 this credit the foreign purchaser offers his local credit in 
 terms of the money of his location. This foreign credit is 
 good but, like tlie farmer's credit, must run for more than 
 ninety days so it is discounted to the speculator by the 
 exporter because his bank is too weak in public confi- 
 dence to carry it. When, as is the case today, there is 
 much of this foreign credit and call money is high, the 
 value of foreign credit goes down just as stocks go 
 down, and all other prices tend downwards. 
 
 But what is the effect of this condition on the foreign 
 customer? The greater the discount, the less his credit 
 is worth to the exporter. The latter, then, must either 
 raise his prices in terms of the foreign money, or quote 
 them in terms of domestic money. In either case the 
 foreign customer must stand an increased cost. This 
 
 *See Appendix, page 307.
 
 262 THE STRANGLE HOLD 
 
 cost increase is due to the discoimt which the speculator 
 demands for turning foreign credit into domestic credit 
 and not to any increase in the selling price of the goods, 
 nor in the profit to the American producer. 
 
 The result is that this discount on foreign credit cuts 
 down our export trade, because it continues to increase, 
 without profit to the producer until the price of our 
 goods to the foreign customer becomes prohibitive. He 
 has to stop buying. 
 
 It is of the utmost importance to notice in this con- 
 nection that the fall in exchange does not injure the 
 foreigner so much as it injures ourselves. We are anxious 
 to sell goods to them but the trade is stopped because our 
 financial system is not big enough and strong enough 
 to carry the exchange. 
 
 The same condition is presented as would exist if our 
 shipping business were confined to the use of wooden 
 tubs such as Columbus used. We are using a weak and 
 antiquated system of finance which causes demand to 
 automatically raise the price of our goods so high that 
 other people cannot afford to pay for them. 
 
 This fall in exchange value puts a break on foreign 
 trade just as a rise in the interest or discount rate puts 
 the break on domestic business. 
 
 Again, we see the gold redemption promise and the 
 private control which it fosters as unyielding opponents 
 of prosperity and business expansion. It puts our in- 
 dustries and commerce in a strait- j acket and by bind- 
 ing our financial system to the service of private inter- 
 ests reduces our efficiency and retards our development. 
 The gold payment promise is a molock against which
 
 . FOREIGN EXCHANGE 263 
 
 the banker is as helpless as the rest of us. Prosperity 
 depends on business and business consists of exchange. 
 We must make the medium big enough and strong 
 enough to carry all that is offered just as we want a 
 merchant marine big enough to carry our goods. 
 
 It is impossible to over-emphasize the fact that the 
 abnormal rates of exchange existing today are more of a 
 disadvantage to us than to foreigners, although they are 
 apparently in our favor. 
 
 The fall in the price of exchange is generally sup- 
 posed to militate against the interests of the foreign 
 people by making them pay high prices. In reality it 
 is just the opposite. It shuts their doors to our export 
 trade but opens wide our door to imports. 
 
 The fall in the price of exchange operates in two 
 ways against us. By making our goods dear in their 
 money it shuts off our export trade and by making their 
 goods cheap in our money it booms our import trade. 
 This condition is just the reverse of the one desired. 
 
 To illustrate this point let us take the cotton trade 
 as an example. Europe was our best customer in this 
 line. When the war came and this market was closed 
 there was a big slump in the price of cotton. The dis- 
 tress of our cotton growers at that time is quite memor- 
 able. Government purchases during the war relieved 
 the situation, but now the price has slumped again be- 
 cause our foreign market cannot be restored on account 
 of the exchange situation. 
 
 Take cotton that is worth say 40 cts. per lb. as it was 
 in the spring of 1920, and say it costs 3 cts. to get it 
 to England making the price in England without profit
 
 264 THE STRANGLE HOLD 
 
 for the seller 43 cts. per lb. The exchange rate of 
 $3.50 per pound sterling for example made the price of 
 cotton in England about 60 cts. per lb. And England 
 naturally curtalied purchases to the minimum. 
 
 But note hoAV the exchange rate affected Germany 
 which would have been and still would be a very large 
 buyer of cotton if our financial system permitted. The 
 German mark, normally worth 23.82 cents in our money, 
 has now fallen to around 1.5 cents, because the balance 
 of trade is against Germany. This rate of exchange 
 would make cotton costing 40 cents per poiind in this 
 country with a 3 cent freight rate cost in Germany 
 almost 27 marks per pound or at the pre war dollar 
 price of the mark $6.43 per lb. That is cotton that 
 is worth 40 cts. per lb. here with a 3 ct. freight rate, 
 is worth at the present price of exchange, $6.43 per 
 pound in German money. Under such circumstances 
 it is quite evident that Germany even though in great 
 need of it will buy but little cotton. 
 
 Other European countries are shut out from buying 
 our goods for the same reason as England and Ger- 
 many are. 
 
 The foreign exchange situation is an illustration of 
 the effect of our short time and shaky credit upon our 
 foreign trade. The medium of exchange supplied by 
 our banks under private control is not able to carry it. 
 Our exporters are shut out of the bank for the same 
 reason as the farmer always has been, and the auto- 
 mobile dealer recently has been. Through the weakness 
 of our banking system legitimate business is driven to 
 seek the speculator for financial relief.
 
 FOREIGN EXCHANGE 265 
 
 Foreign exchange would practically come to par, and 
 our export trade would be flourishing if our financial 
 system were enlarged by the method suggested. This 
 change would help the shipping business, the farmer, 
 and everybody else. The Edge Act attempts to ac- 
 complish the same object but only by doctoring a 
 symptom. A cure can be accomplished in a practical 
 way by adding thirty words to the Federal Reserve Act 
 as suggested.
 
 CHAPTER XVII 
 NATIONAL EFFICIENCY 
 
 LABOR through trade supports and advances civili- 
 zation. A means of producing labor and carrying 
 on trade is, therefore, necessary. The only efficient way 
 so far found is by rewarding effort. Slave labor proved 
 inefficient because there existed a lack of incentive to 
 work on the part of the slave. It consequently follows, 
 that the better, safer and more accessible the means used 
 to reward labor and conduct trade, the greater will be 
 the civilization produced. 
 
 Since the efficiency of a nation depends primarily 
 upon its trade and since trade cannot be conducted 
 without the medium of exchange which is the present 
 recognized form of producing labor and conducting 
 trade, therefore, if the medium of exchange is not to be 
 obtained the man power lies idle and resources remain 
 undeveloped. Such a condition must exist until the 
 medium of exchange is at hand to bring labor and the 
 natural resources of a country together for the produc- 
 tion of those things which improve living conditions. 
 
 But despite the great part that money or reward of 
 effort has played in the development of the world's 
 civilization little scientific study has been made of it. 
 Although trade and commerce have been given a great 
 deal of attention very little unbiased study has been 
 applied to the medium so essential in carrying on the 
 
 266
 
 NATIONAL EFFICIENCY £67 
 
 process of trade. Most improvements in the medium of 
 exchange have been the result of the slow process of 
 evolution due to self interest, or to accident. 
 
 It is hardly possible to give too much attention to 
 the elements necessary in an efficient means of reward- 
 ing effort and conducting trade. 
 
 It is evident that a financial system which for any 
 reason is so restricted that it does not bring together 
 the man power and the resources of a country will retard 
 development. The effect is similar to lack of trans- 
 portation facilities. 
 
 The medium of exchange must not only be safe and 
 elastic but it must be available for use at all times. The 
 greater the safety, elasticity and availability the greater 
 will be the efficiency of the medium of exchange and the 
 well being of the people will be in proportion. 
 
 It follows, then, that the different degrees of efficiency 
 displayed by the people of different countries is due to 
 a difference in their financial systems. 
 
 Most of the commercially important countries have 
 adopted the gold standard so there is no difference in 
 that respect. We must go beyond that point to find the 
 real cause of their difference in efficiency. We must 
 look into the conditions relating to the real medium of 
 exchange, which is, in all commercially important coun- 
 tries, just as in this country, some form of bank credit. 
 Consequently the variations we seek must be found in 
 a difference in banking methods. 
 
 In this investigation, the first thing to be noticed is 
 the fact that practically all European countries have 
 long since adopted the central bank idea, which the
 
 268 THE STRANGLE HOLD 
 
 United States finally arrived at in a roundabout way 
 through the adoption of the Federal Reserve Act. 
 
 The Bank of England, to name the most familiar 
 bank of Europe, consists of a central bank with nine 
 branches. It is a private corporation, managed by a 
 board of directors, chosen by the stockholders, with a 
 banking department and a note issue department, con- 
 ducted separately. This Bank acts as reserve depository 
 for practically all the banks of the United Kingdom, 
 and has the exclusive right of note issue. This note 
 issue is limited and is based on government securities 
 and gold. The people are served generally by means 
 of a number of lesser banks, privately owned and man- 
 aged. 
 
 In this system there are two defects, the first being 
 private management which precludes one hundred per- 
 cent confidence and thus one hundred percent safety, 
 and also precludes equal service to all members of the 
 community. Such arbitrary power can not possibly be 
 used with justice to all. 
 
 The second flaw is tliat in this system the volume of 
 the medium of exchange is determined not by the de- 
 mands of business, as it should be, but by the amount 
 of government obligations and the value of the gold 
 held by the bank. 
 
 The system is non elastic because of the fact that the 
 only considerations for note issue are government obli- 
 gation and gold. Neither of these elements are respons- 
 ive to commercial activity or to the growth of business 
 due to increase of population. 
 
 The English system, then, falls very short of the
 
 NATIONAL EFFICIENCY 269 
 
 mark of one hundred percent safety and one hundred 
 percent elasticity. It is evident that no privately-con- 
 trolled institution, operated for private gain, can hold 
 one hundred percent confidence of the people, and the 
 safety of any credit system is in direct proportion to 
 public confidence. 
 
 As the amount of the note issue depends upon the 
 government obligations and gold held, and as the volume 
 of credit depends upon the amount of the notes put into 
 circulation, it is evident that the system has a very low 
 degree of elasticity. Its basis of note issue is in no way 
 responsive to the fluctuating demands of business. Pri- 
 vate control also detracts from elasticity, because it 
 serves the interests in control and fails to serve the 
 whole community impartially. 
 
 The Bank of France is a private institution with 
 numerous branches. It is managed by a board of 
 directors representing the stockholders. However, the 
 government has a semblance of control through the gov- 
 ernor and t\vo deputy governors, appointed by the head 
 of the state from among the stockholders. The bank 
 has the exclusive right of note issue, the amount of which 
 is limited by legislation. This amount is varied from 
 time to time in anticipation of commercial needs. The 
 note issue is based on the bank's assets. 
 
 While this system has passed beyond the folly of a 
 gold reserve the fault in the system is still two-fold: in 
 that private interests are in control, which detracts from 
 safety and also from elasticity as in the English system. 
 
 Secondly, the note circulation is fixed by the legisla- 
 ture — a non commercial agency which prevents the vol-
 
 270 THE STRANGLE HOLD 
 
 ume of the medium of exchange from being fixed by the 
 demands of business as it should be. 
 
 The Reichsbank, in the days of the German Empire, 
 was a private institution controlled by a president and 
 board of directors who were appointed for life by the 
 head of the state and who were not permitted to hold 
 stock in the bank. They were, therefore, government 
 officials and not private employees. The bank had the 
 right to issue a fixed amount of uncovered notes and a 
 practically unlimited amount of secured notes, two-thirds 
 of which were based on commercial paper and the other 
 third on "cash" not necessarily gold. 
 
 This proposition of basing the note issue on the bank's 
 assets, that is to say, mortgages, notes, acceptances, etc., 
 was, no doubt, due to the fact that Germany could not 
 procure gold as England could, for she had little foreign 
 commerce at the time the Reichsbank was established, 
 J 875, and no possessions where gold was produced. 
 Consequently she happened to adopt a financial system 
 which did not have gold as a basis of note issue. 
 
 This system, when put into efi'ect, increased the elas- 
 ticity of the medium of exchange for it was limited only 
 by the confidence that the people had in the power that 
 controlled the bank. 
 
 The good results were produced because the system 
 gave a broader basis to the country's credit. Practically 
 the only check on note issue was a tax imposed on the 
 surplus when the reserve fell below thirty-three and 
 one-third percent of the secured note issue. 
 
 Here then is quite a departure from the banking 
 methods of other countries. This system was the only
 
 NATIONAL EFFICIENCY 271 
 
 financial system from which private control had been 
 partially eliminated, and the only one which made com- 
 mercial activity its limit of credit. 
 
 This difference of government control instead of pri- 
 vate control, and this note issue based on commercial 
 paper, the volume of which depended on business activ- 
 ity, were the points of excellence in the system which 
 made it superior to others. In this superiority in her 
 exchange system we find the real source of the much 
 vaunted German efficiency and achievement. However, 
 while this system fitted an imperial form of government 
 it could not serve a democracy because the idea of pub- 
 lic control in the case of Germany was due to the auto- 
 cratic idea of making all interests subservient to the 
 state. In a democracy, the United States for instance, 
 public confidence could not be gained by such an ar- 
 rangement. Confidence in banks to be secure here must 
 rest on exact knowledge. The people must know of their 
 own knowledge that bank loans are on good security. 
 
 But, the two provisions, of partial public control and 
 a commercial basis for credits, supplied the necessary 
 elements of safety and elasticity to Germany's medium 
 of exchange in a greater degree than they were supplied 
 to the medium of any other country, and, therefore, its 
 efficiency was proportionately greater and was reflected 
 in Germany's commercial achievement. 
 
 The commercial advancement here mentioned is in 
 direct contrast with the commercial achievement of one 
 of the largest nations of the world — China. 
 
 An old Chinese custom obliged every honorable China- 
 man, as well as his eldest son, to commit suicide if, on
 
 272 THE STRANGLE HOLD 
 
 the coming of the Chinese New Year, he found himself 
 unable to settle his outstanding debts and start the new 
 year with a clean sheet. If he lacked the courage to 
 impose death on himself and his unoffending son, he 
 was sent to prison or perhaps to the headsman, and all 
 his relatives to the forty-second degree "lost their face" 
 until his debts were paid. 
 
 This system may have enforced honesty. It has often 
 been referred to by American business men unable to 
 collect bad debts. Economically, however, it was a most 
 effective way of squeezing out of a people the last drop 
 of initiative and enterprise. Each man played crabbedly 
 and timidly and as a result, the people lived as miserably 
 as rats in a country of good natural resources. 
 
 These natural resources have not been developed be- 
 cause China never has adopted a medium of exchange 
 which would gain and hold the confidence of her people 
 and that was elastic enough to permit her man power 
 to be employed. Chinese exchange is carried on prin- 
 cipally by the use of metal as a medium of exchange. 
 This rigid and narrow exchange medium puts China into 
 a financial strait-jacket. Imagine an American busi- 
 ness man settling an account with a few bars of silver 
 or a wheelbarrow filled with "cash," as the cheap brass 
 coins, perforated and strung on strings are called, 
 
 China's lack of enterprise and progress is due to a 
 financial system so cramped that it does not permit her 
 man power to be employed sufficiently to supply the 
 needs of the nation. 
 
 We have noted the financial systems of England, 
 France, Germany and China and the different effects
 
 NATIONAL EFFICIENCY 273 
 
 which the different systems have had on the national 
 efficiency of these countries. 
 
 History, instead of noting commercial advancement 
 and its causes, consists of a chronicle of wars and 
 dynastic and political changes with comemrcial and in- 
 dustrial development as a side light. 
 
 Could tlie history of the world be written in the 
 light of real human achievement and well-being it would 
 be found that advancement in civilization is due to im- 
 provement in industrial and commercial methods. 
 
 Industry and commerce are entirely dependent upon 
 labor, mental and physical, and since labor is not a 
 natural instinct of man, but must be induced by the 
 hope of reward, it, therefore follows, that all advance- 
 ment in civilization is the result of improvement in the 
 means of producing and rewarding labor. That is to 
 say, it is dependent upon the development of a more 
 efficient medium of exchange. 
 
 Civilization is the result of exchange, therefore, social 
 betterment is due to improved methods or means of ex- 
 change. 
 
 It follows then, that since the medium of exchange is 
 the ladder by means of which humanity has climbed 
 from barbarism to our present state of social develop- 
 ment that further advancement is dependent on still 
 greater improvement in this medium. 
 
 By taking note of known facts and by logical conclu- 
 sions we have seen the value of safety and elasticity in a 
 medium of exchange and found that the principle which 
 produces these essentials is public control. The control 
 of the medium of exchange must be expressed through a
 
 ^74 THE STRANGLE HOLD 
 
 system by which the volume of the medium is regulated 
 by the requirements of business — the very principles 
 advocated in these pages. 
 
 Public control can be secured in a perfectly democratic 
 manner without any radical change. It implies no ma- 
 terial alteration in our present banking and financial 
 system. All that it really needs is the modification of 
 the present system so that its control shall be in accord- 
 ance with the principles we have demonstrated to be 
 correct. 
 
 We need only to place the granting of loans on their 
 intrinsic merits, displacing the private judgment of the 
 banker with the exact information of the various markets, 
 and of the assessor imder a reformed plan of assess- 
 ment. The right of appeal from the board of review 
 or equalization, and a final settlement by a jury where 
 personal interest dictates the verdict will absolutely 
 guarantee correct valuation. 
 
 Public control of the greatest of our public utilities 
 — our medium of exchange — would thus increase our 
 present meager portion of individual and collective effi- 
 ciency to a full one hundred per cent. Not only would 
 we benefit personally and nationally but the cause of 
 civilization and the welfare of all humanity would be 
 advanced.
 
 CHAPTER XVIII 
 THE CONCLUSION 
 
 SOME of those who have read these pages may feel 
 that the change proposed will be an infringement 
 upon the rights of the banker. They may still think 
 that it is the banker's money that is being loaned and, 
 consequently, they may feel that the banker should have 
 no restrictions placed upon his loans. If it were his 
 money perhaps he should be allowed to loan to whom 
 he wishes, when and where and in any manner he pleases, 
 but this is not the case. 
 
 To answer this possible objection we need only re- 
 mind the reader that the banker does not lend money. 
 He lends bank credit which has displaced money and is, 
 therefore, a public utility. Its value rests entirely on 
 the people's laws and the people's confidence and not 
 at all on the banker's money or his personality. It wiU 
 be seen, therefore, that the proposed regulation is not 
 only justified but necessary. And if any doubt still 
 remains, it should be swept away by a consideration of 
 the enormous public advantages that would be gained. 
 For when we reflect that the loans made by the banker 
 constitute our medium of exchange, the tool with which 
 we produce and carry on trade, the means by which 
 labor is induced and rewarded, the element which every 
 person must use in order to enjoy those blessings of life, 
 liberty, and the pursuit of happiness guaranteed by our 
 
 275
 
 276 THE STRANGLE HOLD 
 
 Declaration of Independence, the situation is put in a 
 very different light. 
 
 A person in a civilized community cannot apply his 
 energies to the development of the resources of the 
 country vsdthout the use of the medium of exchange. It 
 follows, therefore, that control of this utility controls 
 the energy, the activity and, in fact, the whole life of 
 the community. The effect of bank control of this great 
 public utility can be graphically demonstrated as fol- 
 lows: 
 
 In the following diagram let E. represent the ener- 
 gies of all the people and R. the resources of the coun- 
 try, such as all the land, timber, waterpower, mineral 
 wealth, etc. 
 
 In the United States there is about one bank to every 
 4,000 inhabitants so the bank window in the diagram 
 should be about one four thousandth part of the size of 
 the energy of the people. 
 
 With the bank in control of practically all of the 
 medium of exchange, that is, all of it except the small 
 change the merchant has in his till or the little we carry 
 for minor necessities ; it is evident that in order to use 
 this public utility to any practical extent, the banker 
 must be consulted. Therefore, the energies of the com- 
 munity cannot be directly applied to the resources of 
 the country but must pass through the bank window as 
 shown in diagram No. 1. Those who are fortunate 
 enough to secure the use of the medium of exchange to 
 an extent great enough so they can apply their energies 
 will employ some of those who are not so fortunate, and, 
 therefore, these lines, after passing through the bank
 
 THE CONCLUSION 
 
 277 
 
 window, should diverge somewhat, in practice; but, if 
 we consider only those who are thus permitted a degree 
 of freedom of action, these lines should not diverge, 
 but will be as in Diagram No. 1. We see tlien, that 
 our present efficiency, with liberty, is compressed to a 
 small portion of that which the whole energy of the 
 people could produce. It is limited by the energy per- 
 mitted, to get through the bank window. 
 
 DIAGRAM No. 1 
 
 R 
 
 Bank wfadow under 
 private control. 
 
 KESOU.'iCE^ OF 
 TOE GiUNIRV 
 
 ii 
 
 Ptaorr EfriciencY 
 
 
 
 ENERGY 
 
 OF ALL 
 
 JHEPEOPIE. 
 
 This diagram shows the result of private control of the 
 greatest public utility which makes the use of the medium 
 of exchange A PRIVILEGE. 
 
 Substituting public control for private control of our 
 medium of exchange by displacing the private bank 
 appraiser by a public appraisement and the "finance 
 committee" of the directors by a public functionary 
 would make the medium of exchange usable on the initi- 
 ative of each individual and on the same terms by all. 
 The bank window would be greatly enlarged and the 
 energies of the people could then be applied directly 
 to the resources of the country. This change would 
 cause a great increase of efficiency as shown in
 
 278 
 
 THE STRANGLE HOLD 
 
 DIAGRAM No. 2 
 
 y\N\\\\\\\\\\\\\\v\< 
 
 RESOURCES OF 
 THE COUNTRY 
 
 WIESCNT tFFICItNOr 
 
 
 This diagram shows the effect of public control of 
 the greatest of public utilities which makes the use of 
 the medium of exchange A RIGHT. 
 
 By public control we would not only increase our 
 personal and national efficiency from the present meager 
 portion to 100%, but our liberty and democracy would 
 be increased in the same ratio. 
 
 Social development decreed that something was neces- 
 sary as a measure and as a means of rewarding effort. 
 The first law of nature, self preservation, demanded and 
 always will demand that the fruits of effort shall be 
 enjoyed by the person making the effort to the exclu- 
 sion of all others. 
 
 These considerations make two requisites necessary in 
 whatever may be used as a medium of exchange. 
 
 First, the reward must be automatically bestowed 
 because, if it is under the control of any person or 
 group, the judgment and desire of that person or group 
 will dominate the community and will result in in- 
 justice and also in the supression of individual effort 
 and individual development. Even though the utmost 
 honesty and unselfishness is used in exercising the con-
 
 THE CONCLUSION 279 
 
 trol no other result is possible. The limitations of 
 human nature set by the first law, self preservation, must 
 give this result. 
 
 Second, whatever is used as such medium must have 
 the confidence of the community in order to have value 
 and its value must remain constant. Unless the value of 
 the reward of effort remains stable a feeling of unrest 
 and uncertainty will menace the community. The only 
 value the medium of exchange has is its exchange value 
 and if this value fluctuates then the medium is valuable 
 only within the limits of the fluctuation. That is, the 
 less it fluctuates the greater its value. 
 
 If the dollar received today buys but fifty cents worth 
 a month or a year from today the reward of effort will 
 be cut in half. Such an occurrence will most certainly 
 create dissatisfaction and uncertainty. Business calcu- 
 lations will be upset, unforeseen losses will be suffered 
 and a constant feeling of fear, unrest and worry will 
 menace the community. 
 
 The defects in our system which cause these unfavor- 
 able phenomena and prevent us from enjoying personal 
 liberty, security and confidence have been thoroughly 
 explained and the remedy necessary to overcome them 
 has been clearly set forth. Its adoption will give us a 
 medium of exchange and reward of effort as perfect as 
 any human institution can be made. 
 
 It has been thoroughly demonstrated that personal 
 and national efficiency and well-being depend on the per- 
 fection of this medium, so with its improvement our 
 personal and collective prosperity, comfort and happi- 
 ness will improve in like degree.
 
 280 THE STRANGLE HOLD 
 
 No country in its medium of exchange has ever at- 
 tained perfection in these two desiderata of elasticity 
 and safety but some have approached it in a greater or 
 less degree. It has been shown that the eflBciency, 
 progress and well-being of the various countries and 
 peoples have always been in direct proportion to the 
 nearness of this approach. 
 
 There still remains, however, one point which should, 
 in justice to the banker, be clearly brought out. From 
 what has been said it may be thought that the bankers 
 are in some degree personally responsible for our 
 troubles, since they are in control of the medium of 
 exchange. This, however, is not so. 
 
 If the impression exists that any banker is in any way 
 responsible for the defects in our present financial sys- 
 tem or that he can be held accountable for our present 
 or past economic ills such a notion should be dismissed. 
 
 The banker is a victim of the system along with the 
 rest of the community. 
 
 The use of bank credit as a medium of exchange was 
 developed because industrial growth made a greater de- 
 mand for an exchange medium than the money metals 
 could supply, so to continue to use metal alone would 
 have held progress in a vise and checked development 
 as it does in the case of China. 
 
 The gold standard, or the use of gold as a basis for 
 credit has become increasingly more difficult as business 
 and credit developed but it has been the only method 
 so far known of holding public confidence in bank credit. 
 It would never have been possible to persuade the people 
 to deposit their funds in a bank had they not supposed
 
 THE CONCLUSION 281 
 
 that the banker kept the money for them and would 
 hand it back any time they wanted it. Since bank de- 
 posits make it possible to substitute bank credit for 
 money a complicated sj'stera of reserve requirements 
 developed for the purpose of continuing this illusion. 
 An expose of the true state of affairs, even a few years 
 ago, might have precipitated a panic, for our system at 
 that time could not have withstood the shock of the 
 truth. Now, however, with all financial reform striving 
 to arrive at the point which this book shows how to reach 
 by taking another short step in the same direction con- 
 fidence will be increased instead of diminished by discus- 
 sion and understanding. One conclusion is certain, 
 since our exchange system is the result of evolution, no 
 banker or anyone else, at the present time, is to be 
 censured for its shortcomings. 
 
 The test of the banker's good faith and understanding 
 will come only when he realizes that fiction and foibles 
 have outlived their day of usefulness and that a logical 
 and better way of securing public confidence is neces- 
 sary. When the slight change herein suggested is fully 
 understood, it will be realized that public control fur- 
 nishes a practical method of putting bank credit on a 
 safe and just basis. The change for the better, from 
 every standpoint, is so obvious that even the most con- 
 servative banker will hardly attempt to argue that it is 
 not an improvement on the present system. When the 
 suggested change is understood, the practical benefits 
 which will accrue, and the justice of the arrangement is 
 so apparent, honest objection seems impossible. And, 
 because it is all so American those who still advocate
 
 282 THE STRANGLE HOLD 
 
 clinging to the status quo can do so only for the purpose 
 of perpetuating their present power and privilege. Such 
 action would certainly be contrary to good citizenship. 
 
 In the proposed remedy there is not the least sug- 
 gestion of a change in our money or methods of using 
 it. There is no suggestion of change in business 
 practice or methods or in the status of the bank. The 
 only suggestion is to overcome the bankers' authority 
 to dictate the use of the medium of exchange by the 
 same means and for the same reason that we overcame 
 the private control of the medium of transportation — 
 the railroads. It suggests applying to the medium of 
 exchange the same principle of public control which was 
 applied to the medium of transportation through the 
 Interstate Commerce Commission. 
 
 The proposed change does not even suggest that the 
 banker give up his power without compensation, for it 
 is proposed to give the banks SAFETY in exchange 
 for POWER. 
 
 By putting bank credit under public control in the 
 manner suggested every loan any bank could legally 
 make would be perfectly safe. This end must be ac- 
 complished or our proposed change fails in its primary 
 object which is to secure to bank credit 100% public 
 confidence. 
 
 It has been seen that the suggested plan accomplishes 
 this purpose because it prohibits banks from lending 
 more than a safe amount on any security, and permits 
 loans only on securities approved by the people them- 
 selves. With such a system in operation no bank could 
 possibly make a bad loan.
 
 THE CONCLUSION 283 
 
 Consequently, a great weight of responsibility would 
 be lifted from the banker's shoulders, a relief which 
 he alone can appreciate. 
 
 Under our present system the banker must be always 
 on guard not only against schemers but he is constantly 
 being asked to make loans to social or business associ- 
 ates on security or under conditions which he does not 
 fully approve. Sentiment and friendship, however, 
 prompt him to make many such loans. This yielding to 
 a common human weakness causes worry and often 
 brings unfavorable criticism and loss, so the banker is 
 constantly torn between sentiment and judgment. 
 
 The proposed change would protect all bankers from 
 both their friends and their enemies. It would even 
 do away with the necessity for good judgment on their 
 part for it would, by confining all bank loans to ap- 
 proved security, do away with the chance for loss. 
 
 No reason, other than a desire to retain power, is 
 apparent why such a system should not be as welcome 
 to the bankers as to the rest of the community. 
 
 With the assurance of safety which public control 
 would give, the people would have 100% confidence in 
 the bank. In that case there would never be a demand 
 made on any bank for a money payment, so the neces- 
 sity for a reserve, the banker's greatest worry, would 
 be removed. 
 
 To be sure money would be used just as it is used 
 now for small transactions and in all respects it would 
 be the same money used today. The only difference 
 would be that instead of having a hazy notion that money 
 called for gold it would be known that it called for
 
 284 THE STRANGLE HOLD 
 
 credit. It would also be understood that the federal 
 reserve note was simply a different form of bank credit 
 and the delusion that it represents gold would no longer 
 exist. 
 
 If the banker did not happen to have on hand all the 
 notes desired by a customer, the Federal Reserve Bank 
 would accept any piece of paper in any bank for its 
 discount value in those notes. The people knowing that 
 money could always be had would never call for it, or 
 use it, except as a means for carrying on small transac- 
 tions where it would be inconvenient to draw a check. 
 
 This change would make all good securities bankable 
 and make all bank credit good money. 
 
 It has been shown that the only reason why a good 
 security is not at present always bankable is either be- 
 cause the banker does not want to lend to the person 
 who offers it or because it is not a liquid security. The 
 reason why securities must be liquid now is because the 
 people, lacking confidence in the bank, may wish to 
 draw out their deposits and, consequently, securities 
 must be such as can be quickly turned into money. 
 
 Public control would remove both of these reasons so 
 that every good security would be a bankable security. 
 The term "liquid" security would soon be obsolete. All 
 security would be equally liquid and equally bankable. 
 
 With this change every branch of industry would have 
 the same access to the use of the medium of exchange. 
 
 The automobile dealer would no longer be excluded 
 because a few persons happened to decide that he was 
 selling a luxury which ordinary people had no right to 
 enjoy.
 
 THE CONCLUSION 285 
 
 The farmer would no longer be a financial outcast 
 because his occupation does not permit him to use thirty, 
 sixty and ninety day money. The bank would no longer 
 have a time lock on it against the farmer. 
 
 The exporter could extend credit to any length of 
 time necessary to carry his trade and he would not be 
 under the necessity of robbing his customers through 
 the fall in the value of foreign exchange or of driving 
 business away because of lack of credit facility. 
 
 Credit could be extended to any length as far as both 
 time and amount are concerned. The only requisite 
 would be sufficient security. As long as the security 
 was good and the interest paid there would be no limit 
 of time nor amount and no other consideration. There 
 would be no control except the demands of business. 
 
 Every man would be enabled to stand on his own feet, 
 use his own judgment and conduct his o\vn business as 
 he saw fit, without fear or favor. All legitimate enter- 
 prises would be readily financed because there would be 
 no limit to the medium of exchange. Prosperity would 
 not kill prosperity by causing a blockade of credits 
 against the reserve requirement. There would be no 
 freezing point for credit, so the wheels of industry would 
 not be stopped by "Frozen Credits." Business would 
 be always on the increase due to a constant demand 
 caused by a continued rise in the living standard. There 
 could be no "Buyers' strike" for desire is never satis- 
 fied so long as the means of turning desire into demand 
 can be had. We would then have "normalcy" and our 
 normal conditions would be one of peace and happiness. 
 Science would advance, the arts be encouraged and
 
 286 THE STRANGLE HOLD 
 
 through a general, continued prosperity civilization 
 would be extended to the utmost. 
 
 The flaw in our system which prevents the accomplish- 
 ment of these desired ends has heretofore been hidden by 
 the bad symptoms which it produced. 
 
 For instance, the most recent bugaboo, the H. C. L. 
 has been shown to be due to a fluctuation in the value 
 of the dollar. It is this fluctuation which causes the 
 disparity between income and the size of the grocery 
 bill, butcher bill, the cost of clothing and the rent. 
 
 If the fluctuation in the value of the dollar were 
 stopped, industrial turmoil would stop, and the con- 
 tinued friction between capital and labor would be re- 
 moved. The bridging of this chasm would surely be a 
 great relief to industry and to society generally. 
 
 The value of all property and the price of commodities 
 would be stable, varying only with the demand for and 
 the supply of various properties and goods. Business 
 could then be conducted with much more certainty and 
 success would depend more on efficiency than on chance 
 and not at all on the banker's favor. 
 
 A farmer would not plant and harvest a crop with 
 dollars worth only fifty cents and be compelled to sell 
 his crop for dollars worth one hundred cents due to the 
 fact that during the summer the banks had shut down on 
 credit. That is, he would not have to pay two dollars 
 for everything he bought in the spring and receive but 
 one dollar when he sold in the fall. He would then sell 
 his crop for the same sized dollars that he spent for 
 plowing, planting and harvesting. The changing value 
 of the dollar between the spring and the fall of 1920
 
 THE CONCLUSION 287 
 
 caused the price of farm products to shrink from one- 
 third to one-half and even more. 
 
 If a thief stole from the farmer one-third to one-half 
 of his crop the v/hole country side would be out to run 
 him to earth and jail him. The object for so doing would 
 be twofold. First, to keep the thief from robbing others 
 and second, to correct the error of his ways. Since the 
 banking interests did that very thing to the agricultural 
 interests, when they "deflated" the medium of exchange 
 between planting time and marketing time, would it not 
 be wise to stop them from further marauding by correct- 
 ing their ways of doing business ? 
 
 Even the most complacent "stand patter" will hardly 
 have the nerve to suggest "over production" as a reason 
 for the recent fall in prices when half the world is in 
 want. The fall in prices for most agricultural products 
 during the summer and autumn of 1920 was due entirely 
 to the weakness in our financial sj'stem. All such un- 
 certainty, worry and loss could be done away with by 
 putting into effect the remedy here given. Such an 
 accomplishment is surely sufficient to fully justify the 
 change even if there were no other advantages to be 
 gained. However, let us examine a problem which 
 caused much comment before the war and which is 
 still the object of legislation and of court action. We 
 refer to the trusts. 
 
 There is the "Beef Trust" and the "Coal Trust" and 
 the "Steel Trust" and numerous other trusts. For the 
 last quarter of a century the word trust with a more or 
 less indefinite meaning has been made the scapegoat for 
 all our economic ills. They are supposed to be both
 
 288 THE STRANGLE HOLD 
 
 father and mother to all the imaginary evils, such as the 
 "H. C. L." and others. 
 
 When prices go up the ire of consumers is directed 
 against "the trusts" and when prices go down the pro- 
 ducers' wrath is directed against the same "trusts." This 
 railing against "trusts' has gone on until now the word 
 has come to be used as an epithet to describe, or rather 
 to locate in a general way, what the user considers to 
 be the cause of unsatisfactory economic conditions which 
 he does not clearly understand. 
 
 Originally the word trust meant a business organiza- 
 tion or an aggregation of business interests associated or 
 consolidated for business purposes. 
 
 So described, the trust is, not only an outgrowth of 
 human progress but it is an expression of advancing 
 civilization because it co-ordinates effort and reduces 
 waste. With this object in view it is the hope of the 
 future for it will increase efficiency and thus advance 
 civilization. 
 
 The evils charged to the trusts and the oppression 
 which they no doubt have exerted is not the fault of the 
 trust, but arises from the fact that those who control 
 them also control the medium of exchange and by exert- 
 ing their power over credit they naturally chill and 
 check all enterprise not tributary to the trusts they con- 
 trol. In this way selfish interests curtail the produc- 
 ing power of the nation and this gives to the trusts a 
 control over production and prices which they, by them- 
 selves, never could expect nor maintain. 
 
 No man, nor set of men, could monopolize the sources 
 of production, that is, the raw material and at the same
 
 THE CONCLUSION 289 
 
 time command the skill and labor necessary for efficient 
 production, except through the control of a great public 
 utility such as the railroad or the medium of exchange. 
 We recognized this power in the case of the railroads 
 and we thought we had overcome the difficulty when we 
 put them under public control but it is quite evident now 
 that we did not reach the real cause of the trouble. 
 
 It is readily seen that the trust, in itself, has no ad- 
 vantage in commercial competition unless it improves on 
 methods of production or marketing. Its apparent 
 power is wholly extrinsic, and is due entirely to money 
 control not trust control. 
 
 This power of money is the prerogative of but one 
 trust — the "Money Trust," which we have seen is neither 
 more nor less than our banking system. The fact that 
 those who control the trusts also control the banking sys- 
 tem is so notorious that we need scarcely call attention 
 to it. 
 
 When through public control we give to all, an equal 
 right to use the medium of exchange the "Money Trust" 
 will loose its power and all trusts will then appear in 
 their true light. They will appear no longer as bogies 
 or scapegoats but merely as combinations of interests for 
 improvement in production and the advancement of trade. 
 Advantage can then be gained only by reducing cost and 
 when a saving is made in production or distribution the 
 whole community profits because it is the object of civil- 
 ization to supply man's wants with the least effort. If 
 the trust does not succeed in reducing cost the combina- 
 tion will have failed in its object and will disappear. 
 
 There is another important improvement that will fol-
 
 290 THE STRANGLE HOLD 
 
 low public control which has not been noted and which 
 will not be understood without considerable thought. It 
 is not quite so apparent as other benefits but it will never- 
 theless be most welcome. This is the betterment which 
 would come about by changing the motive which now 
 prompts men to accumulate great wealth. 
 
 Starting out^ of course, men strive to obtain the nec- 
 essaries of life, then the comforts and then the luxuries. 
 But when all these are assured by the accumulation of a 
 great fortune why do men still strive for gain .'' 
 
 There can be but one reason, other than force of 
 habit, and that is, men love power and the control of 
 money under our present system gives it to them. 
 
 After accumulating a fortune, which assures to the 
 owner and his family all the comforts and luxuries of life, 
 a man will continue working and accumulating because 
 of an instinctive love to dominate his fellow men. 
 
 Under our present political form of government it is 
 only through the control of money that man can gratify 
 this desire. 
 
 To limit by law the amount any man may accumulate 
 or own, would result only in harm for it would put a limit 
 to enterprise and would unnecessarily interfere with 
 personal liberty, therefore, such action should be avoided. 
 
 Public control of the medium of exchange accom- 
 plishes the same object without destroying initiative, for 
 when all are permitted to use the medium of exchange 
 on the same terms the power of money will be destroyed. 
 By divesting money of its power incentive to accumulate 
 beyond the point where comforts and luxuries are assured 
 would be removed.
 
 THE CONCLUSION 291 
 
 Money, the medium of exchange, holds its power only 
 because private persons control the money function 
 through controlling bank, credit and, therefore, can deny 
 its use. 
 
 This money power exerts control in exactly the same 
 way as the railroads formerly did or as any other pub- 
 lic utility would in proportion to its importance. Any 
 facility which must be used by all the members of the 
 community would give to those who could control 
 such a facility power over the community. Bank credit is 
 such a facility, for it is our medium for carrying on 
 trade and all must use it to make a living, so its control 
 gives power. But, wlicn the private control of that me- 
 dium is overcome by permitting all to use it on the same 
 terms, the "power of money" will be destroyed. 
 
 The homage which is paid to wealtli today comes 
 from a mistaken idea that the power of money is due to 
 wealth. Therefore, a natural thirst for power and pres- 
 tige induces men to accumulate wealth beyond their needs 
 only for the purpose of gratifying a common human 
 weakness. 
 
 In this connection, the terms wealth and money must 
 not be confounded nor misunderstood. Let us define 
 wealth as any piece of property of value such as a 
 building, a piece of land or a quantity of merchandise. 
 It is quite evident that nothing of that kind can exert 
 power because none of us arc compelled to use any par- 
 ticular building, piece of land or certain lot of merchan- 
 dise. If we cannot secure what we want at our price we 
 can do without it, we can use somctliing else. 
 
 But, if money is defined as tlic medium of exchange.
 
 292 THE STRANGLE HOLD 
 
 it is a very different story for we must all use that. 
 
 We cannot produce the things necessary for life nor 
 carry on business without using the medium of ex- 
 change. In fact its use is much more necessary in the 
 every day affairs of the community than the railroad or 
 any other facility. No exchange of goods or of services 
 can take place without it, so to keep it from controlling 
 us we must make its use a right. 
 
 As long as the use of it is a privilege which can be 
 denied we give to those who control it a most complete 
 power over us. Since the medium of exchange is almost 
 as essential to industry as air and water are to physical 
 existence, the power which controls it has practically 
 supreme control over the community. 
 
 We see, therefore, that wealth has no power be- 
 cause we are not compelled to use any certain piece of 
 wealth, but the medium of exchange has because we 
 are all compelled to use it. The power of money arises 
 from the fact that its use, while necessary, can be denied. 
 It is plain, therefore, that if our exchange system were 
 so arranged that the use of the medium could not be 
 denied, that is, so that all could use it on the same terms, 
 the power and prestige of money would be overcome. 
 
 Up to the point of supplying our wants, efforts to 
 acquire wealth are spurred by a desire to better our con- 
 dition, or in other words, to raise our living standard. 
 This ambition should be encouraged but beyond the 
 point of satisfaction of desire it is merely the love of 
 money for the power it gives that induces the effort to 
 accumulate. 
 
 It is evident then that if power is taken from money.
 
 THE CONCLUSION 293 
 
 avarice, which is the love of money for money's sake, will 
 be destroyed. With its power gone neither money nor 
 wealth from which its power is supposed to spring would 
 command homage nor cause envy and class hatred. 
 
 Without power, money would be merely a commercial 
 tool and there would be no object in piling it up any 
 more than there would be in gathering up a hundred 
 hammers when one hammer would do the work. 
 
 Such a condition would bring about many improve- 
 ments in our social as well as in our industrial life. The 
 homage now paid to wealth would disappear. Property 
 would be accumulated only to satisfy an ambition to live 
 well. When a sufficient income was secured to assure 
 the satisfaction of desire, the accumulation would cease 
 for there would be no object gained or purpose served 
 in accumulating more. 
 
 Industrially, public control would open the door of the 
 bank to all branches of industry and remove the present 
 restraint on production and trade. Efficiency and square 
 dealing would replace favoritism and chance in business. 
 
 Aside from the industrial and social advantages to be 
 gained by public control of bank credit there is yet an- 
 other advantage not to be lightly considered. That is, the 
 improvement in moral standards which would follow the 
 change of the basis for bank credit from the false prom- 
 ise of gold redemption to one of real security and truth. 
 
 That our present system of credit rests on a false 
 promise, that of gold redemption, covered by a smoke 
 screen of reserve deception, cannot be denied. Such a 
 condition certainly is not conducive to good faith and 
 integrity in any of our dealings. But, when the founda-
 
 294, THE STRANGLE HOLD 
 
 tion of our greatest public utility is changed to one of 
 truth and honesty as suggested^ then honor instead of 
 cupidity will be at a premium. 
 
 When the bank's power is destroyed, as the railroad's 
 power was, push will displace pull as the requisite for 
 business success and the man instead of the courtier will 
 win. 
 
 VvTien the suggested change is adopted the financial 
 system will enable every man to stand on his own feet 
 and will grant him success according to his own efforts. 
 
 The citation of existing evils, which would disappear 
 and of improvements in our industrial, social and moral 
 status which would folloAV from the proposed change in 
 the financial system, could be carried to indefinite lengths. 
 However, enough has been said to thoroughly establish 
 the fact that all members of the community would be 
 benefited and no one would be injured by the change. 
 
 In the proposed remedy there is no suggestion which 
 is not clearly and directly in line with American prin- 
 ciples, ideals and experience, and also in direct line with 
 financial evolution and development. It is but one more 
 step in advance along the same highway of progress 
 which civilization has followed from the beginning. 
 
 However, in order to forestall the usual cry of "rad- 
 ical" the fact should be clearly noted that the only 
 change suggested herein is to extend our well estab- 
 lished principles of public control of public utilitiss to 
 include the medium of exchange. Experience has taught 
 the American people that public control of public util- 
 ities is necessary in order to put into practice the prin- 
 ciples of liberty and equality on which our nation was
 
 THE CONCLUSION 295 
 
 founded. Consequently, when it is definitely established 
 that the medium of exchange is a public utility, one can- 
 not oppose the suggestion of public control for it and 
 still be considered a good citizen. 
 
 On the contrary, it becomes the patriotic duty of every 
 good American to spare no effort to secure this change 
 for it is necessary in order to realize the principles of 
 liberty and equality which the American people have 
 proclaimed to the world as being the foundation of their 
 government.
 
 APPENDIX 
 
 Appended are verbatim copies of official documents 
 furnished by the Comptroller of the Currency. They 
 speak for themselves and supplement and support the 
 text. The facts set forth in these documents are quite 
 startling to those unacquainted with "Wall Street" and 
 as they are based on the statements of the banks them- 
 selves they should be carefully read. 
 
 NOTE 
 
 The side notes are intended to call attention to the 
 points where these official documents supplement the 
 statements made in this book. After reading the ap- 
 pendix a review of the chapter on the "Federal Reserve" 
 and those following it will convince any reasonable per- 
 son that a revision of our exchange system is necessary 
 and a review of Chapters VII and VIII will show that 
 the remedy suggested here is practical and complete. 
 
 296
 
 FOR THE PRESS 
 
 OFFICE OF COMPTROLLER OF CURRENCY 
 
 The Comptroller of the Currency said today: 
 
 NEW YORK CALL MONEY RATES HIGHEST IN 
 THE WORLD 
 
 Unjustifiable Interest Exacted on Demand Loans Ag- 
 gregating Billions an Active Contributing Cause of 
 Exorbitant Rates for New Capital Charged Cities, 
 Railroads, Industrial and Other Public and Private 
 Enterprises and for the Huge Shrinkage During the 
 Past Year in All Security Values. 
 
 "Renewal" Rates Fixed Daily by Small "Coterie" of 
 Stock Exchange Brokers Govern Interest Charged on 
 Brokers Loans in Nearly All New York Banlis, 
 
 In a statement given to the press on July 31, 1920, 
 I expressed the opinion that there was no justification 
 for the excessive and burdensome interest rates "running 
 up to ten, twelve and fifteen per cent and higher, which 
 had been exacted by some of the banks in New York 
 City, the principal financial center of our country." 
 
 It is no part of my business to discuss now the moral- 
 ity or the ethics of these transactions. It is my imper- 
 ative duty to take close cognizance of them so far as 
 they may have effect on the general banking and com- 
 
 297
 
 298 THE STRANGLE HOLD 
 
 mercial interest of the country. I realize clearly the in- 
 estimable and indisputable value to our own country and 
 WALL the world of the great money center popularly known as 
 STREET "Wall Street;" and have no purpose or wish to stir prej- 
 udice against it, or to do or say anything to impair its 
 usefulness or to injure any institution or individual con- 
 nected with its activities. I do intend, strictly in the line 
 of official duty, to put before the public and the news- 
 papers facts of which both are uninformed and to point 
 out evils already existing and dangers threatened be- 
 cause of those facts. 
 
 In the statement of July 31st, I called attention to 
 the fact that New York was the only city of conse- 
 quence in the world where such interest rates existed or 
 are tolerated and I expressed the belief that the exac- 
 tion of these rates, the publicity given them, had in- 
 creased the uneasiness in financial circles and had been 
 an active contributing factor rather than a consequence, 
 EVILS OF in the unsettling of security values, and that they had 
 USURY operated to force railroads and industrial corporations 
 to pay burdensome and costly rates in providing fresh 
 capital for the industries and business of the country. 
 I also pointed out that the banks which had been charg- 
 ing their customers these excessive rates 
 
 "at times as high as fifteen per cent or more have 
 themselves at the same time been liberally accommo- 
 dated with millions of dollars by the Federal Reserve 
 Banks at average rates of considerably less than six 
 per cent." 
 
 This press statement was vigorously attacked in the 
 columns of the New York papers in interviews with vari-
 
 APPENDIX 299 
 
 ous anonymous bankers and financiers •who refused^ how- 
 ever, to permit their names to be used. One leading jour- 
 nal, for example, quoted bankers as saying: 
 
 "It is unfair to attempt to defame the whole New 
 York banking community just because of one or two 
 possible insignificant instances of abuse." 
 
 Another leading New York paper declared that the 
 high rates quoted on the Stock Exchange applied only to 
 
 "a small amount of money relatively speaking." 
 
 The investigation which I have made since my public 
 statement on this subject completely confirms the views 
 expressed and proves that they were, if anything, too 
 conservative. 
 
 In order that the public might be fully informed, and 
 know the exact facts in regard to the money situation 
 in New York, the national banks in New York City were 
 requested by the Comptroller of the Currency, under date 
 of August 5, 1920, to furnish, under oath, a report of banks 
 the number and amount of all demand loans secured by convict 
 bonds and stocks made monthly by them between Octo- them- 
 
 SFLVES 
 
 ber 1, 1919, and July 31, 1920, upon which they had 
 exacted interest in excess of six per cent per annum. The 
 banks generally, including the largest bank in New York 
 City, complied with the request, but three banks de- 
 murred, claiming that it would be impracticable for them 
 to furnish the data called for as to various loans made 
 by them at excessive interest rates by months as re- 
 quested. They were, thereupon, requested to furnish in- 
 formation as to the loans made by them for about eight 
 days in each month since October 1, 1919, these eight 
 days including, generally, the high money periods in each
 
 300 THE STRANGLE HOLD 
 
 month. It should be understood^ therefore, that in the 
 statement which follows, three of the larger banks have 
 included only a portion^ and not all, of their loans made 
 at the high rates. 
 
 The banks were requested, in submitting their state- 
 ments, to count as a new loan each change in the in- 
 terest rate on their existing call loans. If a loan, for 
 example, should be made for $100,000 to a brokerage 
 firm by a certain bank at 10%, and the rate changed 
 five times in 30 da3'^s, this loan would be regarded as six 
 loans with an aggregate of $600,000. Therefore, these 
 demand loans embraced in this statement should be con- 
 sidered as running from one day upwards. It should also 
 be explained that, in the case of one of the three banks 
 which reported its loans for only a portion of the period, 
 call loans are included which were made by this one 
 bank for outside banks as well as for itself. These out- 
 side loans sometimes amounted to more and sometimes to 
 less than the call loans made by the bank for its own 
 account. 
 
 The sworn reports to this office show that during the 
 period from October, 1919, to August 1, 1920, there 
 were made by the national banks in New York City more 
 than 4,000 loans, at rates of 15%, 20%, 25% and 30% 
 per annum, and that the amoimt of these loans, including 
 only a portion of those made during this period at the 
 above rates in three of the largest banks, aggregated 
 over Six Hundred Million Dollars ($600,000,000). 
 
 The records also show that the total loans outstand- 
 ing upon which interest at 15 to 30 per cent was being 
 charged by a portion of these banks on 42 different
 
 APPENDIX 301 
 
 days, for which reports were received from them, aggre- 
 gated over $1,100,000,000. It will be remembered that 
 in my statement of July 31, the banks were charged with 
 making loans at "10%, 12% and 15%." The actual 
 facts, therefore, in view of the loans made at 15%, 20% 
 and 30% indicate that my statement was extremely con- 
 servative. 
 
 The records also show that the amount of loans made the 
 during the same period at rates in excess of 10% and confession 
 up to but not including 15% amounted to over $1,400,- 
 000,000, there being over 11,000 of such loans. 
 
 In addition to the above the aggregate of the loans 
 upon which a portion of the banks reported that they 
 were charging, on 81 different days, interest in excess 
 of 10%, and up to but not including 15%, was about 
 $900,000,000. The "brokers" or "Street" loans upon 
 which the New York banks, during the period referred 
 to, were charging MORE THAN eight per cent per 
 annum and up to 10%, reach, in the aggregate, some 
 billions of dollars additional in amount and tens of thou- 
 sands in number. 
 
 It should be understood that these loans (except in the 
 case of one bank) represent the money loaned by the 
 banks for their own account, and the figures do not in- 
 clude the loans made for tlicir correspondent banks. 
 
 As a result of persistent inquiries among the banks, "call 
 brokers and stock exchange authorities, tliis office is money 
 now, for the first time, able to inform the public as to 
 how the so-called "renewal" rate is made from day to 
 day in the New York Call ISIoney Market, and the extent 
 to which this money rate is observed by the New York
 
 802 THE STRANGLE HOLD 
 
 banks in making their charges on ordinary Wall Street 
 or brokers' loans. 
 
 Under the New York banking law, it is lawful for a 
 lender to charge any rate of interest which may be agreed 
 upon with the borrower on a demand loan for $5,000 or 
 more secured by stocks, bonds or other securities. This 
 provision of the New York Statute enables lenders to 
 escape penalties for usury which exist in most of the 
 other States. 
 THE "pump From information furnished this office, through difFer- 
 HANDLE ent sources, it appears that every business day a coterie 
 of brokers, members of the New York Stock Exchange, 
 get together for consultation on the floor of the Ex- 
 change, or by telephone, and determine what, in its view, 
 is the proper rate for the renewal of all street or brok- 
 ers' call loans for that day. As soon as the rate is agreed 
 upon the President of the Stock Exchange is notified, 
 and the rate is posted on the floor of the Stock Exchange 
 at, say, 11 o'clock. 
 RATE ON This rate is then sent over the "ticker" to all the banks 
 BROKER s jj^ New York City and these banks thereupon mark up 
 or down, as the case may be, the rate of interest upon 
 practically all their Wall Street or so-called brokers' 
 loans. Some banks take the precaution to notify their cus- 
 tomers by card, sent by mail or otherwise of the change 
 in interest rate on their loans, while other banks do not. 
 They claim that the posting of the renewal rate on the 
 floor of the Stock Exchange serves automatically to raise 
 or lower the rate of interest on this character of loans, 
 held by all the New York banks, for themselves or their 
 out of town correspondents, and their customers are 
 
 LOANS
 
 APPENDIX 303 
 
 charged the rate so posted, unless they make special 
 arrangements with the bank to the contrary, or pay the 
 loan. 
 
 In the questionnaire sent by the Comptroller of the 
 Currency to all the national banks under date of August 
 5, 1920, each bank was asked the following question: 
 
 "Has it been the practice of your bank, during the 
 past six montlis, to mark up or down, from day to day, 
 according to the fluctuations of the New York Call 
 Money Market, the interest rates on demand or call 
 loans, secured by bonds or stocks, made to borrowers 
 who are not depositors in your bank?" 
 
 In reply to that question every National Bank in New banks 
 York City with two or three exceptions answered "Yes," plead 
 and two of these stated that they too, under certain con- guilty 
 ditions also charged the "call money" rate. 
 
 It is fair to say, however, that nearly all of these 
 banks with a few prominent exceptions stated that it had 
 not been customary with them, in making advances in 
 rates, to increase the rates on demand or call loans made 
 to their own regular customers who kept deposit accounts 
 with their banks and that these regular customers were 
 treated differently from the ordinary brokers or Wall 
 Street borrowers. It is also wortliy of note that demand 
 loans, secu: d by stocks and bonds, made by banks to 
 their own officers and to tlie officers of otlicr banks are favor- 
 also generally exempted from the high interest rates. itism 
 
 It is also fair to state that the reports in this office 
 show that despite the huge volume of loans made at fancy 
 rates, less than one-half of the National Banks in New 
 York City reported that the demand loans made for
 
 S04 THE STRANGLE HOLD 
 
 their own accounts at rates of 15% or more, aggregated 
 for each bank over ten million dollars between October 
 1, 1919, and July 31, 1920. 
 
 In their reports to this office of September 8, 1920, 
 the national banks of New York City reported that they 
 were lending 07i demand, on bond and stock collateral 
 over $348,000,000. 
 
 The national banks in New York City also reported 
 that on August 1, 1920, the amount of money which they 
 "were loaning on demand, on bond and stock collateral, in 
 New York City for account of customers and corre- 
 spondents was $524,000,000. 
 
 It is fair to assume that the Trust Companies and 
 State Banks in New York City were lending demand 
 on stocks and bonds as much as the National Banks. 
 
 The Stock Exchange authorities state that the post- 
 ing of the "renewal" rate on the floor of the Stock Ex- 
 change does not make it compulsory with the banks to 
 charge such "renewal" rate. Attention, however, must 
 be called to the fact that nearly every National Bank in 
 New York City has admitted that when the rate is 
 posted, the rates charged on "brokers" or "street" loans 
 are changed to conform to the prevailing Call Money 
 Rate and the only alternative for a borrower is to pay 
 his loan or be charged the posted or current rate. As 
 nearly every bank in New York charges the so-called 
 "renewal" rate on what are known as Wall Street or 
 THE "brokers" loans, it would be vain, obviously, for bor- 
 STRANGLE rowcr to hopc to obtain the money in New York at a 
 HOLD lower rate by shifting his loan to some other bank. 
 
 Despite the statement of the banks generally that the
 
 INATION 
 PROVED 
 
 APPENDIX 305 
 
 interest rates on brokers' loans are raised or lowered sim- 
 ultaneously with the fluctuations in the New York Call 
 Money Market, many instances of apparent discrimina- 
 tion were developed which show wide differences in the discrim 
 rates charged on demand loans equally well secured. For 
 example, when the "renewal" rate for a certain day 
 within the last twelve months was posted, on the Stock 
 Exchange at 16% the report of one particular New 
 York bank showed that on that date this Ijank was 
 charging on loans for itself and correspondents: 
 
 7% on $4,900,00 
 
 87o,97o, 11% and 15% on $1,428,000 
 18% on $750,000 
 20% on $42,100,000 
 25% on $3,550,000 
 30% on $900,000. 
 
 The coterie of brokers who fix the "renewal" rate, insiders 
 which appears to have such binding force upon the banks 
 in New York City in the case of brokers' loans, docs not 
 limit its activities to loans but these brokers also execute 
 orders for stocks and bonds on the floor of the Exchange. 
 Inquiry of the Stock Exchange as to the number of 
 brokers who are usually concerned in tlic fixing of the 
 money rate, brought the reply that there were, as a 
 rule, "4 to 8 or more," the Stock Exchange being usually 
 represented by either the President or "one or more" of 
 its governors, in tlie consultations where the rate is 
 fixed. 
 
 On November 10, a year ago, tliis brokers' committee 
 announced that the renewal rate on Call Loans would
 
 306 THE STRANGLE HOLD 
 
 be 12%. The following day, November 11, they raised 
 it to 14%. On November 12 the rate was raised to 16% ; 
 November 14 it dropped to 14% ; on November 21 it was 
 made 8%, although other loans were made as low as 
 6%« On December 18 it was 6%; December 23 it 
 was raised to 10%; on the 29tli to 12%; on the 
 SOth to 15% and remained at that rate until Janu- 
 ary 5 when it was lowered to 10%. On January 31 
 the renewal rate was 12%, the next day February 1 
 it was advanced to 18%, dropped to 14% on February 
 2; advanced to 17% on February 5 and remained at 
 17% until February 9 when it was reduced to 14%. On 
 February 17 it was 6%, raised again on February 26 to 
 10% and continued at 10% until INIarch 4 when it was 
 reduced to 9%. On April 16 the renewal rate was 
 again 10%. In May the highest renewal rate was 9%. 
 In June the rate was 9% from the 25th to the 30th. 
 July opened with a 10% renewal rate. It was lowered 
 during the month but returned again to 9% on the 
 
 A TOUCH 16th, 17th and 27th. It is gratifying to note that since 
 OF PUBLIC the publication of the Comptroller's statement of July 
 
 coNTROii 22^ regarding excessive interest rates, the 'renewal" rate 
 does not appear to have been advancd again as high as 
 10%. 
 
 It seems clear from the figures submitted that the 
 amount of demand or call loans in the National and 
 State Banks and Trust Companies in New York City, 
 plus the loans placed by them for their correspondent 
 banks, which are effected by the rate fixed by this Com- 
 mittee of the Stock Exchange, probably EXCEEDS one 
 thousand million dollars. As I pointed out in a previ-
 
 APPENDIX 307 
 
 ous statement, on this basis an advance in the "Renewal" 
 
 rate from 6% to 18% for one day would add $360,000 
 
 to the net profits of the lending banks for that day. In "profit- 
 
 the first part of January of this year, for example, the Bering 
 
 15% "renewal" rate exacted for six successive days 
 
 meant, on this basis, a net interest profit of about $3,000,- 
 
 000 or more for those six days. 
 
 The raising or lowering of the "Renewal" rate on the 
 Exchange is frequently accompanied by upward or 
 downward movements in stocks and securities ; and those a crooked 
 responsible for the fixing of the rate therefore have the game 
 opportunity, whether exercised or not, of profiting largely 
 bj' operations on the stock market, which is so often and 
 directly effected by the call money situation. I do not, 
 of course, undertake to say that this informal "money 
 committee" does take improper advantage of their fore- 
 knowledge ; but there are critics who severely censure the 
 existing arrangements. Certainly all prudent and tliink- 
 ing business men will agree that there is danger in the 
 concentration of such opportunity and power in the 
 hands of a few persons. Temptations to use this power 
 for individual profit must arise, and human nature is not 
 changed by high position in tlic financial world. 
 
 Mr. Lincoln's axiom that God never made a man good Lincoln 
 enough to be entrusted with unlimited power over an- said 
 other man may be supplemented witli the suggestion 
 that no four, or six, or ciglit men are strong and pure 
 enough to be entrusted with unlimited power over the 
 finances of a great country without direct responsibility 
 and accounting for tluir acts to the jiublic or some 
 other potent and intelligent authority. Power to fix
 
 308 
 
 THE STRANGLE HOLD 
 
 AUTO- 
 CRATIC 
 POWER 
 
 money rates for all, or nearly all, of the banks in New 
 York City, and to change them daily, is a grip on the 
 heart of our commerce. It permits such interferences 
 as fallible human judgment, whim or interest may direct 
 with the natural and orderly movements of money, the 
 life blood of business. Many of us complain bitterly 
 when we fear that the two houses of Congress, State 
 Legislatures, or State or Federal administrators, acting 
 in the open, and after debate and public hearings, have 
 interfered with natural laws of trade. We condemn 
 RADICALISM radical writers and speakers who advocate such inter- 
 ferences and regard them as public enemies. Yet the 
 matter of arbitrarily fixing money rates at the money 
 center, possibly reversing the natural and healthy flow 
 and effecting, directly or indirectly, billions of dollars 
 of security values and other property, is left to a small 
 and varying number of private citizens without official 
 responsibility, deciding in a moment and in secret. 
 DANGEROUS The evils and dangers of such methods could be re- 
 AND cited indefinitely. They reach to the remotest corners of 
 HARMFUL j.]^g Union and its possessions, and touch harmfully every 
 PRACT c (.jjjgg of people. The direct tendency is to reverse one of 
 the fundamental purposes of the Federal Reserve Act, 
 which is to promote orderly distributjion of money 
 through the country to meet the needs of commerce and 
 agriculture. 
 
 Excessive interest rates offered in New York arti- 
 ficially draw money away from outside communities 
 and often leave legitimate enterprises starved or pinched, 
 while feeding speculative movements which may be add- 
 insT nothing to real industrial or commercial wealth.
 
 APPENDIX 309 
 
 I reiterate the statement previously made that the ex- 
 cessive rates on call money, arbitrarily fixed and toler- 
 ated in New York, in my opinion, have been a potent in- 
 fluence in depressing seriously the prices of all invest- 
 ment bonds and standard shares, the shrinkage in which niLi.ioNS 
 in the past twelve months has amounted, including the lost 
 depreciation in Liberty Bonds to several billion dollars. 
 
 It is no part of the function of a Government official 
 to moralize on speculative operations. My attention is 
 demanded when such operations produce conditions re- 
 tarding the development of the country and endangering 
 the stability of its business. Corporations, individuals 
 and investors generally are drawn away from legitimate 
 investments in new enterprises and in the shares and 
 bonds of existing enterprises by the prospect of 10% 
 to 20% interest. 
 
 The effect of these rates is seen when the general everybody 
 managers or executives of railroads or other large cor- ^^'^"^ 
 porations visit New York to raise money necessary for 
 the redemption of retiring loans or for the extension 
 and promotion of new business. The bankers and bond 
 brokers solemnly point to the high rates paid for "call 
 money" and corporations whose credit abundantly jus- 
 tified a 5% or 6% interest basis, have been forced to 
 pay 7% or 8% or 10% on loans for one year, three 
 years or five to ten years; and are sometimes persuaded the 
 by the bankers through whom they obtain tlie funds ^-^""OTE 
 that they are doing well to get money even on such 
 terms, because money on call has been advanced often 
 artificially to 12% or 15% or 20%, for ;i few days at 
 a time.
 
 SIO THE STRANGLE HOLD 
 
 The sophistical argument that a high rate for call 
 loans is a justification for a long time loan at 8%, 10% 
 or 12% by a strong and solvent corporation is trans- 
 parent, but many excellent corporations have, during the 
 past 12 months, been forced to accept loans at exorbitant 
 rates of interest for term of years which will inevitably, 
 in some cases, prove a serious embarrassment and handi- 
 cap in their future operations. 
 ALL ARE The same cause that cripples and hampers a great 
 VICTIMS railroad system or a municipal government also de- 
 prives and injures or ruins a country storekeeper, a small 
 farmer or the owner of a large or little manufacturing 
 enterprise. 
 
 The argument that these high money rates prevent 
 panics by enticing call money from banks and others in 
 the interior to New York will not bear analysis. The 
 facts are that much of the money drawn from the in- 
 terior and loaned on call in New York at fancy rates 
 would, but for the temptation of the high rates and the 
 fear which they instill as to the future of the security 
 market, be used by investors and banks and corporations 
 who have those idle funds in the purchase of standard 
 railroad and other bonds; which would thus furnish 
 funds to the New York market normally and naturally. 
 
 The high rates for call money in New York have thus 
 shut off a large part of the investment demand for secur- 
 ities, which, during the past 12 months, largely because 
 of those disturbing conditions, have been forced down to 
 the lowest prices reached in 40 years. 
 
 It is my belief that if the call money rates in New 
 York had been maintained at 6%, or at the maximum
 
 APPENDIX 311 
 
 rates which are charged in other money centers, as I 
 believe could have been done with a reasonable degree 
 of co-operation upon the part of the New York banks, 
 the unprecedented shrinkage in security prices in the 
 past 12 months would not have taken place and the ap- 
 parent loss of billions of dollars in values would have 
 been avoided. 
 
 My hope for the present is that, with the public in need of 
 possession of the facts, sentiment will be strong enough Reform 
 to bring about reforms. Money rates should not be 
 raised or lowered or manipulated arbitrarily or in secret. 
 New York bankers and financiers have tremendous re- 
 sponsibilities to the general public, and all can be in- 
 duced to realize and respect them, as some honestly and 
 conscientiously do now. Bankers throughout the country 
 should have impressed upon them th.it they owe direct 
 and distinct duties to their customers and communities, 
 in preference to earning excessive and questionable prof- 
 its for stockliolders and themselves, by pouring money 
 into New York for interest exactions which inevitably 
 most injure or destroy somebody. The best banking is 
 the broadest and most foreseeing — that b.ised on the 
 conviction that the real, permanent, stable profit in busi- 
 ness is in building up, encouraging and developing i;> 
 their prosjiective spheres, not in starving the productive object op 
 elements of communities in the hope of grabbing large reform 
 profits from the speculative. 
 
 Reports showing the extent to which, as referred to in 
 my statement of July 31st, banks in Now York City and 
 elsewhere have, during the past year, been obtaining 
 funds from the Federal Reserve Banks at rates varying
 
 312 THE STRANGLE HOLD 
 
 from four and one-half to six per cent and have loaned 
 these funds in New York at the excessive rates referred 
 to, running, in some instances, as high as 20%, 25% 
 and 30%, are now being compiled. A statement con- 
 cerning these transactions will be made later, 
 
 October 22, 1920. 
 
 Comptroller of the Currency said today: 
 
 MILLION DOLLARS OF N- Y. LOANS CON- 
 STANTLY AFFECTED BY RATES ARTI- 
 FICIALLY FIXED 
 
 Additional Examples of Loans on Which 20% and 25% 
 Are Charged. Interest and Discount Collected by 
 N. Y. National Banks, 6 Months Ending June 30, 
 1920, Was About $100,000,000 Which, as Compared 
 with Same Period in 1917 Is an Increase of about 
 $50,000,000 in Interest Collected. 
 
 SPEAK UP 
 
 LET THE Criticisms on the statement given out by this office 
 BANKERS £qj. ^|jg newspapers of Monday last seem to me to be 
 rather vague and feeble as well as anonymous. I hoped 
 they would be strong, illuminating and constructive. I 
 am constrained to believe that they do not express the 
 thought of the bankers of the country or of New York, 
 who certainly are men of ability, with intelligence and 
 courage to speak clearly and frankly when they wish to 
 speak. 
 
 One of the functions of this office is to do all pos- 
 sible to maintain and increase the goodwill and confi-
 
 APPENDIX 313 
 
 dence of the public in the banks of the country. To 
 
 PUBLIC 
 
 that end continual labor, frequently troublesome to all ^q^^^. 
 concerned, has been applied to make sure that the man- denck 
 agement and conduct of all banks should be such as to needed 
 deserve goodwill and confidence. Following along that 
 same line, I think it riglit to reiterate some expressions 
 included in the statement referred to, but unfortunately 
 omitted by many newspapers which published portions 
 of it. These are, that there is no purpose in tliis office 
 to stir or cater to any prejudice against that great and 
 useful part of our financial system popularly kno^vn as 
 "Wall Street"; that there was and is no purpose to hold 
 up the New York City bankers or any other bankers for 
 special condemnation. It is my duty to discover and 
 oppose what I believe to be evils and dangers threaten- 
 ing or impeding the business of the country. There 
 has been no attack on individuals or individual interests. 
 The criticism from this office has been against a system 
 and method. The first step toward correction of any 
 wrong must be discovery and exposure. 
 
 Statements of the existence of extortionate interest criticism 
 rates in New York, affecting the operations of the whole J^'stifikd 
 
 11 1 1. u BUT NOT 
 
 country, made by me some weeks ago, were met by sneer- 
 ing denials through newsjiapcrs. Thereupon it became 
 necessary to present confirmatory specifications and evi- 
 dence. This has been done. Anonymous and indefinite 
 denials are not contradictions. Statements of facts and 
 figures, sworn to by the banks themselves, cannot be 
 met by excited rhetoric or general denunciation, or un- 
 sustained accusation of improper motive. 
 
 In my previous statement I showed that tlic nc^grc- 
 
 APPRE-
 
 314 THE STRANGLE HOLD 
 
 gate of these Demand or Call loans secured by bonds 
 and stocks handled by the New York banking institu- 
 tions for their own account and for account of their 
 correspondents^ ujDon which interest rates varying from 
 7% to 30% have been charged^ has probably averaged 
 throughout the past year more than ONE BILLION 
 DOLLARS. 
 OFFICIAL The assertion by anonymous critics that the exorbi- 
 REPORTS tant interest rates were rare and applied to insignificant 
 sums will not weigh against official reports made to this 
 office under oath. We find, for example, one National 
 bank declaring that loans made by it in the period cov- 
 ered by my statement at rates in excess of 10% per 
 annum, aggregated $448,000,000, including $186,000,000 
 (1426 loans) at rates of 15% and over. On a certain 
 day within this period another bank reported that, on 
 loans for itself and correspondents, it was charging 
 15% on $55,895,000, and 18%, 19% and 20% on 
 $3,600,000 additional. The same bank admitted ex- 
 ROBBERY acting on another day 18% on $57,183,000, 20% on 
 $1,400,000 and 25% on $14,055,000. On three days 
 early in January the amount on which this bank was 
 charging 18%, exceeded $63,500,000. 
 
 Another New York national bank reported that it 
 was charging on a certain day on loans made for its 
 account, 16% on $23,500,000 while two days previously 
 it was loaning at 14%, $27,100,000 and at 16% and 
 18% $315,000 more; another day this bank reported 
 that loans at 17% to 20% exceeded $17,000,000. On 
 December 31 last the same bank made 11 new loans 
 for over $2,000,000 at 25%, and on January 2 it made
 
 APPENDIX 315 
 
 53 new loans aggregating $10,000,000 at 15% in addi- 
 tion to some millions already out at 15%. 
 
 Still another bank reports that, on a particular date insiders 
 during the past year, it was charging on loans for its and 
 own account, 25% on $2,150,000, 13% on $300,000, outsiders 
 15% on $10,900,000. On another date the same bank 
 was charging 22% on $2,000,000 and 11% to 167o on 
 $8,200,000 additional, with other loans at the same time 
 bearing 7%, 8%, 9% and 10%. This particular bank 
 has through this period been lending, as have other 
 banks, many millions more at exorbitant rates for corre- 
 spendent banks. The foregoing figures relate to only 
 four of the thirty-four national banks in New York 
 City and they are matters of record. 
 
 It is of interest to the public that most of those New 
 York banks, a few of whose loans are given above, while 
 lending at these very indefensible rates, sometimes 25% some 
 and 30%, were being accommodated at tlie same time at PROf'T 
 4l/^7o to 6% by the Federal Reserve Bank of New 
 York with sums as great or greater than their loans 
 recited above. They were, therefore, occasionally charg- 
 ing borrowers 20% to 25% more interest than the rates 
 they paid the Reserve Bank. 
 
 The amount actually collected for interest and dis- 
 count by the thirty-four national banks in New York 
 City for the six months ending June 30, 1920, exceeded 
 all previous records, and amounted to ajjjiroximately 
 One Hundred Million Dollars ($100,000,000), which 
 was nearly Fifty Million Dollars ($50,000,000), or the 
 nearly 100% in excess of similar receipts for the cor- "swag 
 responding period in 1917.
 
 S16 
 
 THE STRANGLE HOLD 
 
 In February last, the "Renewal" rate in New York 
 City for the whole month averaged above 10%. This 
 was more than double the normal average for call money. 
 
 While nearly every national bank in New York City 
 has admitted that its rates on the so-called "street" or 
 "brokers" loans are marked up or down automatically 
 from day to day according to the fluctuations of the call 
 money rate, yet reports from some banks show a marked 
 discrimination, and that they exact on some of the well 
 secured loans rates considerably in excess of the so- 
 called daily "Renewal" rate, while other banks adhere 
 quite closely to that rate. 
 
 As to the large amount of call loans held by national 
 banks for account of correspondents (over $500,000,000) 
 it may be of interest to state that the New York banks, 
 DIVISION for their services in handling these loans, make varying 
 OF LOOT charges — sometimes a fractional commission is charged; 
 sometimes, in view of the deposit balances carried, no 
 charge is made; while at other times, the New York 
 bank and its outside correspondents divide evenly the 
 interest collected in excess of six per cent per annum. 
 
 New York, as I have stated before, is the only city 
 of any importance in the world where such interest rates 
 as these exist or are tolerated. They have, in my opin- 
 ion, been most costly to the entire country and can not 
 be justified on any basis of economics or ethics. 
 
 The plainly, indisputably proper course is change of 
 policy and reformation of abuses which have come al- 
 most imperceptibly, not loose and wholesale criticism 
 of the man trying to heave the lead line and give warn- 
 ing of shoals. 
 
 REAL 
 
 PATRIOTISM
 
 APPENDIX 317 
 
 The point is not the qualities or intentions of the 
 oflScial, but whether the shoals are there. My work is 
 to report them and prove where they are. My strong 
 faith is that the bankers of tlie country will find and 
 apply cure for the evil that has been shown. They have 
 on them now some of the heaviest and most difficult 
 responsibilities which ever rested on a financial body. 
 The welfare not only of their own country, but of the for hu- 
 world, depends in a great measure on their wisdom and ^ianitys 
 character. I believe they will meet the test. The most 
 important part of the Comptroller's work is to help them, 
 as he may. There is no better way to help than to 
 detect and point out obstacles and perils in their path 
 toward performance of the tremendous work they have 
 to do. 
 
 » ti 
 
 NOTE 
 
 The foregoing statement of the Comptroller is worthy 
 of careful consideration. It impresses the unbiased mind 
 as a fair statement of fact and a dignified apjieal for 
 justice. Reading between the lines we find complete 
 confirmation of all that has been said regarding the 
 autocracy of our financial system. 
 
 The last paragraph is an appeal to our financial auto- 
 crats for justice and clemency. Such petitions were 
 addressed, in times passed, to political rulers. Is it ill 
 keeping with American princijiles or ideals that we 
 should ask the bankers to reform a practice from which
 
 318 THE STRANGLE HOLD 
 
 we all suffer or is it the place of a free people to reform 
 the laws so that such abuses cannot exist ? 
 
 It is not the bankers' duty but the citizen's duty to 
 correct these abuses and the banker must not be blamed 
 so long as he is permitted to take advantage of our 
 neglect. 
 
 A great burden of responsibility rests on every citizen 
 until our system of finance is reformed so that such 
 abuses are made impossible. It is a duty which we owe 
 to ourselves, to our country and to all humanity.
 
 INDEX 
 
 Pase 
 ACCEPTANCES, how used.... 124 
 
 ABUSES OF SYSTEM 
 
 157, 166, 167, 171. 226 
 
 "ALL THE TRAFFIC WILL 
 
 Bear" 36 
 
 See usury 
 
 AMERICA, stands for 150, 295 
 
 AMERICANIZE AMERICA.150, 158 
 i^MERICAN BANKERS ASSO- 
 CIATION 
 Protest comptroller's state- 
 ment 165 
 
 AMERICAN PRINCIPLES 295 
 
 Violated 1 4S, 226. 228 
 
 APPEAL 
 
 Given taxpayer 110, 140 
 
 Jury on 141 
 
 APPENDIX 296-317 
 
 APPRAISER. People are.. 104, 113 
 
 APPRAISEMENT 104, 109, 112 
 
 Land, etc 107, 123. IbO 
 
 Laws Required 140 
 
 Perfected 113, 139, 143 
 
 Personal property. 105, 112. 160 
 ARBITRATION of assessment. 141 
 ASSESSMENT 
 
 Appeal from Ill, 140 
 
 Arbitrary 107 
 
 Arbitrated 111,141 
 
 Certificate of 143 
 
 For taxes 106. 141 
 
 Guess work 107 
 
 Used as appraisement 
 
 100, 139, 143 
 
 ASSESSOR 106, 139 
 
 Appeal from 140 
 
 Arbitrary power 109, 111 
 
 Certilicate 143 
 
 AUTOCRATIC POWER 
 
 .34, 35. 115. 157. 172. 230. 308 
 
 Abuses of 166, 173 
 
 AUTOMOBILE 
 
 As security 124 
 
 Declared a luxury 157 
 
 SellinK plan 6, 124 
 
 Reverse Rear illustration. 60, 78 
 AUTOMOBILE DEALERS 
 
 Excluded from bank 5 
 
 Injustice done 167 
 
 Pr.pcr could be used 124 
 
 SeilinK plan 6,124 
 
 Wrongs done by system 7 
 
 BANK 
 
 Capital private property... 119 
 
 Pa^e 
 BANK— Continued 
 
 ClearinK 26 
 
 Deposits created by loan. . . 
 
 24. 34. 117 
 
 Laws to govern 
 
 135, 136. 138. 144 
 
 Lends credit, not money. 26, 34 
 Loans 
 
 General interest. . .3, 117, 148 
 
 How made 23, 67, 160 
 
 Refused 120, 124. Ur 
 
 Renewed 131 
 
 On land 160 
 
 Personal property. .. 159. 160 
 Risht, not privilege. 121. 160 
 
 Mints our money 226. 229 
 
 Not to be changed 118 
 
 Operation of 22 
 
 Origin of 20 
 
 Public utility 
 
 35, 39, 117, 121. 123, 147 
 
 Reform 
 
 Object of 
 
 48. 117, 118, 136. 217 
 
 Of national 114 
 
 Of state 136 
 
 Reserves (see Reserve).... 27 
 Rules for government of... 
 185, 136, 138, 160 
 
 BANK CREDIT 
 
 Created, how 22. 24, 34, 67 
 
 Crystallized into currency. . 226 
 
 Federal Reserve notes are. . 222 
 
 Limit 27, 73, 98 
 
 Percentage of 21 
 
 Safety 101 
 
 Use of a ri^ht 117, 273 
 
 BANK DEPOSITS 67 
 
 BANK NOTES 
 
 Origin 66 
 
 Change suggested by Shaw. 186 
 
 BANK OF ENGLAND 263 
 
 BANK OF FRANCE 269 
 
 BANK OF GERMANY 270 
 
 BANKER 
 
 Alv/ays conservative 232 
 
 Appraiser security 107 
 
 Autocrat 157, 230, 306 
 
 Broke law 80 
 
 Caused panics 66 
 
 Duly to llnanrc farmer.... 20« 
 Enicioncy compared to 
 
 farmer 201 
 
 Encoiirngcn gnmblins 195 
 
 "l-Uhical" methods 171 
 
 loudal lord 152
 
 INDEX— Continued 
 
 Page 
 BANKER— Continued 
 
 Follows Goldsmith's practice 
 
 21. 24, 67 
 
 Good faith tested 281 
 
 Guilty of usury 166, 315 
 
 In the stock market 192 
 
 May refuse loan.. 120, 124, 136 
 No desire to injure 
 
 118, 282, 317 
 
 Not blamed 147, 156, 280 
 
 Our guardian 154 
 
 Opposed Federal Reserve. . 232 
 
 Power of 34, 35, 152, 224 
 
 Protection for 2855 
 
 Responsible for stock prices 105 
 
 Rules country 58, 80 
 
 Trespasser 162 
 
 Use greenbacks 237 
 
 Uses nation's credit 222 
 
 Wallingford 243 
 
 BANICERS' STRIKE 44 
 
 BANKING, "ethical" 170 
 
 BANKING SYSTEM, based on 
 
 deception 66 
 
 BANKS DO NOT COMPETE.. 117 
 
 BAR TO PROSPERITY 1. 15. 98 
 
 BILLS OF CREDIT, state not 
 
 to issue 131 
 
 BOARD OF EQUALIZATION. 109 
 
 Appeal from 110, 140 
 
 Law to govern appeal 140 
 
 BROKERS fix rate on rail 
 
 money 194, 302 
 
 BUSINESS 
 
 Check on 79, 128, 220. 257 
 
 Certainty secured 160 
 
 Improved 100, 286 
 
 No upset to 145 
 
 Slump 16 
 
 Worries gone 161, 28'> 
 
 "BUYERS' STRIKE" 
 
 7. 43, 57, 100, 219 
 
 Would be none 285 
 
 Wrong term 44 
 
 CALL MONEY 
 
 Governs foreign exchange. 261 
 Makes stocks fluctuate. 194, 307 
 
 Rate on 164. 194, 801, 306 
 
 CAPITAL OF BANK, private 
 
 property 119 
 
 CAUSE OF TROUBLE, fluctua- 
 tion of dollar 12, 87. 257 
 
 CERTIFICATE OF ASSESS- 
 MENT 14S 
 
 CHAINS, invisible now 158 
 
 Page 
 CHINA, condition explained... 271 
 CIVILIZATION 
 
 Object of 156 
 
 Result of 266, 273 
 
 CLEARING, accomplished, how 25 
 CLEARING HOUSE CERTIFI- 
 CATES 69, 71 
 
 Comedy of 71 
 
 Not authorized 185 
 
 CLEVELAND, administration of 9 
 
 "CLOSED SHOP" 148 
 
 COINAGE 
 
 Government right... 80, 131, 134 
 In private hands.. 128, 130, 226 
 COMPETITION between banks 40 
 COMPTROLLER OF THE 
 CURRENCY 
 
 Appendix 297 
 
 Approves of, Fed. Res 215 
 
 On interest 163 
 
 Quoted 166, 297 
 
 Report 70, 166, 216 
 
 Stopped direct usury 173 
 
 Table showing percentages 
 
 of medium 21 
 
 CONCLUSION 275-295 
 
 CONFIDENCE 
 
 First requisite 
 
 86, 103, 242, 257. 282. 313 
 
 Goldsmith retained, how. . . 66 
 
 100% 99 
 
 Maximum 101, 113, 122 
 
 CONSTITUTIONAL PROVI- 
 SIONS 80. 131, 144, 228 
 
 Officials should uphold.... 134 
 
 CONTRACTION 41, 43, 49, 113 
 
 Explained 46, 91 
 
 Reasons for 50, 54, 53, 258 
 
 COST OF LIVING 8, 9, 10 
 
 Not cause of turmoil ...11, 286 
 
 Affected, how 12 
 
 CREDIT 
 
 Amount of 245 
 
 Denial to automobile dealer 157 
 
 For Farmer 212 
 
 Nation's, loaned to bankers 222 
 
 Reason for use 64 
 
 Reform needed 
 
 65. 79, 101. 128. 159, 219 
 
 Safety secured 101 
 
 "CREDIT STRUCTURE." 
 
 dangerous 165 
 
 CURRENCY, elasticity sought. 
 
 217. 225 
 
 Fed. Res. Notes not 226
 
 INDEX— Continiud 
 
 Pape 
 DANGEROUS PRACTICES.... 308 
 DECEPTION in bankinK..66, 71, 76 
 Proposed by Secretary of 
 
 Treasury 185 
 
 DECLARATION OF INDE- 
 PENDENCE 146. 29B 
 
 DEPOSITOR, bank does not 
 
 lend money 26 
 
 DEPOSITS 
 
 Created by loan 24 
 
 Remain deposits 25 
 
 DISHONESTY overcome 125 
 
 DOLLAR 
 
 Cause of H. C. L M. 286 
 
 Compared to foot 14, 87 
 
 Fluctuation of value 14, 46 
 
 Stabilized 46, 87, 113 
 
 EDGE ACT 5. 156 
 
 Object 256, 265 
 
 ELASTICITY 92, 217, 225 
 
 EMERGENCY CURRENCY 
 
 ACT 72, 185, 186 
 
 ENGLISH EXCHANGE.... 248, 254 
 
 TBank system 268 
 
 Used tricks to escape gold. . 75 
 
 EPITKET3 not justified 146 
 
 "ETHICAL" BANKING.... 170, 171 
 EVOLUTION OF MEDIUM OF 
 
 EXCHANGE 18, 31 
 
 EXCHANGE, see Foreign Ex- 
 change 
 
 Primitive 18 
 
 EXCHANGE SYSTEM 
 
 Cause of trouble 16 
 
 Evolution of 18 
 
 Outtrrown 32, 128,280 
 
 Perfected 84, 144 
 
 EXPANSION, see Inflation 
 EXPORTER like farmer. . .256. 285 
 
 FARM LOAN ACT 
 
 4. 200. 202. 205. 210 
 
 Effect of 205 
 
 Implication of 200 
 
 Not a success 204 
 
 FARMER 
 
 Ability justifies credit 209 
 
 Compared to Banker 201 
 
 Indian 20(1 
 
 Manufacturer 207 
 
 Shipper 4 4 
 
 Favors reform 19S 
 
 EtTicioncy of 201 
 
 Illuatration 41, 49 
 
 PaK«- 
 
 FARMER— Continued 
 
 Outlawed by system 
 
 200. 210. 285 
 
 Secures loan then 123 
 
 Shipper 44 
 
 Now 203 
 
 Securities should be liquid. 210 
 
 Time lock on bank 209, 211 
 
 Robbed by banking system 287 
 Ward of government 200 
 
 FARM LOAN ASSOCIATION. 203 
 
 FARMING compared to manu- 
 facturing 208 
 
 FAVORITISM 303. 305 
 
 Overcome 116, 118. 124 
 
 FEAR, banker's, rules country. 67 
 
 FEDERAL RESERVE ACT.... 214 
 
 Approved 214 
 
 Chanjres 8UKeKsted.l35, 144, 231 
 Incicases banker's power. . 224 
 
 Object of 46, 67, 72, 217, 225 
 
 Opposed by bankers 232 
 
 Prejudices overcome 221 
 
 Proves coin motto 216 
 
 Section 11-C 217 
 
 Shows folly of gold standard 76 
 
 Use of jcreenbaoks 236 
 
 Unlimited paper currency. 221 
 Violates American prin- 
 ciples 221. 226 
 
 Violates conjlitution. . .133. 228 
 
 FEDERAL RESERVE BANK 
 
 NOTES 215 
 
 FEDERAL RESERVE BOARD 
 
 Effect of rules 160 
 
 Given control by 1-14 
 
 Rules to make 144 
 
 Should control banks 136 
 
 Suspend reserve require- 
 menta 217 
 
 FEDERAL RESERVE NOTES. 215 
 
 Bank credit 2;i5 
 
 How issued 226 
 
 Reserve airaiiist 217 
 
 FEDERAL RESERVE SYSTEM 
 
 211-231 
 
 AKgravntes defect 2S0 
 
 Bankers' banks 228 
 
 Not a cure 230 
 
 Objfct of 217 
 
 R..Hi.Tve h.-M 74. 217. 211 
 
 FEUDAL SYSTEM 131 
 
 FEUDALISM financial 152 
 
 FICTION 
 
 Loan in a deposit 24, 26 
 
 Of guld bl4iadara Gti. 76, 245
 
 I ND EX— Continued 
 
 Papre 
 FINANCE COMMITTE 23 
 
 "Money trust" 35 
 
 FINANCIAL MASTERS 152 
 
 FLAWS IN SYSTEM 
 
 ...4, 81, 95, S8, 148, 166, 173 
 
 Basic 79, 257 
 
 Stated 81. 148 
 
 Shown by world conditions 16 
 
 FLUCTUATION OF DOLLAR. 
 
 12, 14, 87, 236 
 
 Explained 88 
 
 Stopped 47, 84, 113 
 
 FOREIGN EXCHANGE 247-265 
 
 Explained 255 
 
 Gold reserve in 247 
 
 Price hurts us 263 
 
 Value of 248 
 
 FOREIGN TRADE FINANC- 
 ING CORPORATION.. 5, 256 
 
 FREE COINAGE 
 
 Of gold 228, 229 
 
 Of credit 223, 230 
 
 FREE?;iNG POINT OF 
 
 CREDIT 77, 94, 189 
 
 FRENCH EXCHANGE 253 
 
 Banking System 269 
 
 "FROZEN CREDIT" 7, 63 
 
 Cause 77. 94, 99, 189, 219 
 
 GARROTE 309 
 
 GERMAN EXCHANGE.... 253, 264 
 Banking system 270 
 
 "GLARING DEFECT" 186 
 
 GOLD, a commodity 176 
 
 A standard of value 177 
 
 Amount in dollar 58 
 
 Fallacy of 178 
 
 First used as money 19 
 
 Foreign exchange 247, 258 
 
 Free coinage 228 
 
 Reasons for use 63 
 
 Stopped silver talk 89 
 
 Value of 58 
 
 Worship of 68, 175 
 
 GOLD REDEMPTION 
 
 A joke 68, 75. 245, 2.^9 
 
 Deception practiced 20 
 
 Juggled 71, 76, 217 
 
 Trouble maker 180, 246, 257 
 
 GOLD STANDARD 175 
 
 Explained 176 
 
 Origin of 20 
 
 Causes contraction 
 
 54, 68, 63 
 
 Effect of 60. 63, 258 
 
 Page 
 GOLD STANDARD— Continued 
 
 Shown to be fiction 
 
 75, 176, 181, 219, 245 
 
 Secretary Shaw on... 181, 183, 184 
 
 GOLDSMITHS 
 
 Became bankers, how 66 
 
 First bankers' 19 
 
 GOVERNMENT 
 
 Controlled by bankers. .. .66, 58 
 Should coin money 133 
 
 GRAFT, none possible 116 
 
 GREENBACKS 236 
 
 Held as reserve 74, 241 
 
 Used by banker 237 
 
 GUARDIAN 
 
 Banker is 154 
 
 No longer necessary 161 
 
 "H. C. L." 8, 123, 219, 288 
 
 Caused by 12 
 
 Defined 9 
 
 Not cause of turmoil. . . .11, 286 
 
 HISTORY 
 
 Of finance 180 
 
 Should show 273 
 
 Taught 131 
 
 IDEAL 
 
 Modium of exchange 86, £5 
 
 Transportation medium. ... 85 
 
 ILLUSTRATIONS 277, 278 
 
 IMPROVED BUSINESS 
 
 METHODS 159, 287 
 
 INDUSTRIAL STRAIT- 
 
 JACKET 46 
 
 INDUSTRIAL TURMOIL. . .87, 143 
 
 INFLATION 
 
 Caused by war 13 
 
 Effect of. 14, 46, 51, 92, 113, 25:; 
 
 ExpL-iined 46, 87, 91 
 
 Foreign exchange 253 
 
 INHERENT RIGHTS 148 
 
 INTEREST 163 
 
 Call money... 164, 194, 301, 306 
 
 "Ethical" extortion 170 
 
 Usury 168, 170. 314 
 
 INTRINSIC VALUE 190 
 
 I. O. U. illustration 95, 97 
 
 JUROR, qualifications 142 
 
 JURY OF ARBITRATION 
 
 Ill, 140, 141 
 
 KIND OF MONEY not changed 159 
 
 "LACK OF DEMAND" 44 
 
 IV
 
 INDEX— Continued 
 
 LAND 
 
 Appraisement of. . .106, 107, 160 
 Loan on, how secured. . 123, 160 
 National banks should make 
 
 loan 135 
 
 "LAWFUL MONEY"... 74, 241. 273 
 LAW3 BROKEN by banker. 80. 132 
 
 LAWS REQUIRED 
 
 110, 136, 140. 141. 144 
 
 LIBERTY AND EQUALITY... 148 
 
 Cannot exist 157 
 
 LINCOLN quoted 307 
 
 "LIQUIDATION" 7 
 
 UQUID SECURITY 210 
 
 LIVING COST 
 
 Kiph 8 
 
 Low 9 
 
 LOAN 
 
 A privilege 277 
 
 Banker may refuse to make 
 
 120, 124, 136 
 
 Confidence in 112 
 
 Is a deposit 24 
 
 Made now 23 
 
 Made then 123, 160 
 
 Must be secured 119 
 
 On land 159 
 
 On manufactured articles.. 112 
 
 On personal property 
 
 104. 105, 112, 159 
 
 Percentage of 115 
 
 Question asked 154 
 
 Refused to farmer 42 
 
 Renewal of Itl 
 
 Right to 117, 121, 278 
 
 Time limit on 210, 256 
 
 LOAN COMMITTEE 23. 116 
 
 LOCKE, philosopher 93 
 
 LORDS, financial 152, 154 
 
 MARGIN, stock bouRht on 191 
 
 Loans made on 161 
 
 MARKET VALUE 190 
 
 MEDIUM OF EXCHANGE 
 
 Bank credit 22 
 
 Define'! 84 
 
 Evolution of 18, 31 
 
 Metal 9fi, 272 
 
 Object of 87, 95 
 
 Perfection of 95 
 
 Public utility 35. 12S 
 
 Table Showing percentases 21 
 
 Three flaws in 81 
 
 MERCANTILE AGENCIES... 125 
 METALLIC SYSTEM 9ft 
 
 Page 
 MEXICO 
 
 SufTers from railroad break 
 
 down 41 
 
 Mint in private handa 129 
 
 MINT 
 
 In private hands. .129, 226, 229 
 
 MONEY 
 
 Amount needed 98 
 
 Bank does not lend 26 
 
 Basic flaw in 267 
 
 Coinage of 80, 131. 133, 226 
 
 Defined 84 
 
 Fluctuation of volume.... 
 
 14, 47, 88. 94. 113, 130 
 
 I. O. U. system 95,97 
 
 Like transportation 8£ 
 
 No change in suggested... 169 
 
 Not used 2ft 
 
 Not value 
 
 Object of use 87 
 
 Paper unlimited 221 
 
 Percentages of 21 
 
 Public utility. ..31, 36, 85, 128 
 
 Safety secured 101 
 
 System of bookkeeping.... 95 
 Who issues 226 
 
 MONEY POWER destroyed 291 
 
 Fed. Res. increases 224,226 
 
 "MONEY TRUST" 149. 168 
 
 Located 35, 154. 226 
 
 Killed 289 
 
 "MORAL HAZARD".. 118, 126. 189 
 Not allowed 119 
 
 MOTTO ON COIN 214 
 
 NATIONAL BANKS 
 
 Lend on land 135.160 
 
 Loans on personal proptrfy 159 
 Rules governing 135, 144 
 
 NATIONAL CURRENCY AS- 
 SOCIATION 69 
 
 NATIONAL EFF1CII:NCY .266-274 
 
 Case of England 263 
 
 China 271 
 
 Due to hank system 267 
 
 France 269 
 
 Germany 270 
 
 Our own 
 
 NATIONAL FARM LOAN A8- 
 
 SOCI.\TION 202 
 
 NEW KIND 
 
 Of money not necessary... 189 
 
 NEW YORK 166 
 
 Should bo world's cIrarinK 
 
 houue 185 
 
 Stock exchange 188 
 
 NOTHING NEW 169
 
 INDEX — Continued 
 
 Page 
 
 NORMAL CONDITION 220 
 
 How betttred 94 
 
 "NORMALCY" 7, 93. 94. 220 
 
 OBJECT OF MONETARY RE- 
 FORM 48, 217, 220 
 
 OHIO B 4 NKEKS ASSOCIA- 
 TION 181 
 
 100% CONFIDENCE... 99. 103, 242 
 
 "OPEN SHOP" 149 
 
 "OVER PRODUCTION" 44 
 
 Blamed for slump 43, 287 
 
 PACKERS 8 
 
 PANICS 69, 200 
 
 Cause 55, 71 
 
 Occurred 54,200 
 
 PAPER MONEY unlimited 221 
 
 Issued 227 
 
 PEOPLE appraise property. . . 105 
 
 Deceived 63 
 
 Do not rule 56 
 
 Forced to .^ccept clearing 
 
 house certificates 71 
 
 PERCENTAGE OF LOAN TO 
 
 VALUE 104, 115, 160 
 
 PERFECTION OF EXCHANGE 
 
 SYSTEM 84, 96 
 
 100% Confidence 99, 101 
 
 PERSONAL INTEREST 
 
 RULES ..108, 111, 113 
 
 Overcome 120 
 
 PERSONAL PROPERTY 
 
 Appraisem.ent 105, 112 
 
 As security 159 
 
 PETTY, SIR WILLIAM 93 
 
 PLAYING THE STOCK 
 
 MARKET 192 
 
 "PLUTOCRATS" 146 
 
 POPULAR PHRASES 7, 8, 93 
 
 POWER OF MONEY destroyed 291 
 
 PRICES, high 7 
 
 Defined 12. 88 
 
 Edge Act 11 
 
 Fall 10 
 
 Fluctuation 12, 87, 126 
 
 Low 9 
 
 PRINCIPLES, AMERICAN.150. 295 
 
 "PROFITEERS" 8. 307 
 
 PROSPERITY, defined 3 
 
 Checks, prosperity 
 
 60, 78, 129, 219, 263 
 
 Restored 149, 279 
 
 Reverse gear on 60,78,257 
 
 Page 
 PUBLIC CONTROL 
 
 100. 118, 120. 278. 306 
 
 Right of 162 
 
 PUBLIC OFFICIALS 
 
 should act 184 
 
 PUBLIC UTILITY 
 
 Railroad and bank 
 
 35, 39. 128, 147 
 
 Service only should be con- 
 trolled 38, 100, 157 
 
 PUMP HANDLE 194,302 
 
 PURCHASING P0V7ER OP 
 
 DOLLAR fixed 46 
 
 Fluctuation 8^ 
 
 PRIVATE CONTROL, of mint 129 
 "PRIVILEGE," bank loan.. 121, 277 
 
 PUJO COMMITTEE 238 
 
 RADICALISM 294, 308 
 
 RAILROAD 
 
 Compared to bank. .. .36. 40. 41 
 Effect of breakdov?n in 
 
 Mexico 41 
 
 RATIOS 
 
 Between business and 
 
 money 91, 98 
 
 Exchangeable called price. . 12 
 REFORM, attempted . . .150. 217, 225 
 
 Farmer favors 198 
 
 Laws required. 136, 140, 141, 144 
 
 Must not injure bank 118 
 
 Necessity for shown 
 
 16, 32, 40. 65, 81. 311 
 
 Object of 48, 
 
 100, 103. 117. 125. 136, 311 
 
 Of credit 65 
 
 REIGN OF TERROR 171 
 
 REMEDY ...101, 118, 120, 125, 
 
 136. 140, 141, 144, 231. 257 
 
 Proposed by Shaw 185 
 
 RENEWAL OF LOAN 161 
 
 RESERVE, amount required.. 74 
 
 Explained 27 
 
 Folly of 289 
 
 Limits bank credit 
 
 28. 59, 73, 239 
 
 May be suspended 74, 217 
 
 Section 11-C 217 
 
 RESERVE SYSTEM 
 
 Faults of 73. 217 
 
 Folly of 239, 248 
 
 Object 46, 73 
 
 Reserves credit 59. 77 
 
 Used as check 120
 
 INDEX— Continued 
 
 Page 
 REVERSE GEAR ON 
 
 PROSPERITY ...60,78,267 
 
 RIGET to bank loan 120 
 
 RIGHT of public control 162 
 
 KOEBERY ..166, 814 
 
 RULES, for loan... 124 
 
 Federal Reserve" Board. 136, 144 
 
 State banks 186 
 
 RURAL CREDITS 19S 
 
 Not nccoss.iry 209 
 
 Time an element 212 
 
 "SAFETY FIRST" 86.119 
 
 1007c secured 101, 121 
 
 SAVINGS ACCOUNT 73 
 
 SECRETARY OF TREASURY 
 
 SUAW ....ISl, 192, 183, 186 
 SECURITY 
 
 Appeal regardinK. .110, 140, 141 
 
 Appraised 104, 107, 109, 112 
 
 Automobiles as 6, 124 
 
 Certificate of assessment. . . 113 
 
 Farmers 105, 210 
 
 Good but not bankable. . .2, 210 
 
 Land 106 
 
 Must be safe 124 
 
 National banks 136 
 
 Personal property .104. 112, 159 
 Percentage of loan fixed... 115 
 SELLING PLANS 
 
 Automobiles 6. 124, 157 
 
 Banks, co-operated 6 
 
 Could be used 124 
 
 Necessity for 6 
 
 SERVICE 
 
 Only controlled 38 
 
 Of Asses.sor 143 
 
 Of bank and railroad 38 
 
 SHOEMAKER illustration 207 
 
 SLUMP in business 157,219 
 
 SPECULATION 188 
 
 Game not straiKht 189.104 
 
 The Game 192 
 
 STABILIZE THE DOLLAR... 
 
 46, 87, 118, 286 
 
 STAR CHAMBER METHODS. 185 
 STATE BANKING SYSTEM... 
 
 116, 136, 140 
 
 Rules for loans 186 
 
 STATES denied coinage right. 181 
 STOCK EXCHANGE 188 
 
 Crooked vrame 807 
 
 SYSTEM OUTGROWN. 79, 128, 280 
 
 Page 
 TABLE 
 
 Comptroller's of medium of 
 
 exchange 21 
 
 Of value 85 
 
 PercentiiKe of loan.... 115, 136 
 
 TARIFF 
 
 Change caused panic, why. 66 
 
 TAX appeal HO. 141 
 
 Reformed Ill 
 
 Do'l;:inK stopped 107 
 
 Equalization 109 
 
 Remedy no 
 
 TAX, assessment • • • • 106 
 
 TAX PAYER, justice to Ill 
 
 Risht of appeal... 110, 140, 141 
 
 THIRTY WORDS 144 
 
 TIME LIMIT on Loa.nj 209 
 
 Cause of 210,256 
 
 Stops exports 266 
 
 TOBACCO as money 88 
 
 TRANSPORTATION 
 
 Compared to money 85 
 
 Object of 86 
 
 TRUE VALUE 107. 110. Ill 
 
 TRUSTS 287 
 
 TURMOIL 
 
 High Cost of Living and 
 
 Low Cost of Living 10 
 
 Shows wrong exists 7, 149 
 
 Ruaion for 11, 46, 149, 310 
 
 UNION LABOR 148 
 
 UNSECURED LOANS 119 
 
 Not allowed 139 
 
 URBAMTIS, care for 218 
 
 USURY 166. 298 
 
 See Appendix 
 
 liankera guilty of.. 166. 167, 171 
 
 Call monoy 301 
 
 Division of loot 816 
 
 Evils of 298, 817 
 
 Practiced in Middle Ages.. 166 
 
 Present method of 170,171 
 
 Profit from S16 
 
 Terrible resulU 168 
 
 VALUE 
 
 Divided into unit* 90 
 
 Is price 88 
 
 Of dollar Btabilized. . .46, 87. 96 
 
 Of gold 68 
 
 Of land fixed 107,121 
 
 Of stocks, etc 190 
 
 Personal property 104.112 
 
 Table of 86
 
 INDEX— Continued 
 
 Page 
 
 VERDICT of jury 142 
 
 "VESTED INTERESTS" 60 
 
 VIOLATION OF CONSTITU- 
 TION 133.228 
 
 "VITAL DEFECT" 186, 187 
 
 VOLUME 
 
 Of business and money. . .91, 93 
 
 Of medium affects life 130 
 
 "WALL STREET" 298 
 
 Crooked game 189 
 
 Governs country 155, 233 
 
 WALLINGFORD STORIES 
 
 TAME 243 
 
 WAR, caused inflation 13 
 
 WAR FINANCING CORPORA- 
 TION 4, 166 
 
 Reinstated for farmer 4 
 
 Page 
 
 WEALi"H has no power 291 
 
 WUEAT PIT 188 
 
 WILLIAMS, JOHN SKELTON. 163 
 
 See Appendix 297 
 
 Stopped direct usury. . ..173, 306 
 
 Quoted . . . 166, 167, 168, 215, 297 
 
 WORDS necessary for reform.. 144 
 
 WORLD CONDITIONS. . . . 16 
 
 WRONGS 
 
 All are victims 310 
 
 Automobile trade 7 
 
 Exporter 5 
 
 Farmer 6 
 
 Source not understood 7 
 
 YARD STICK 
 
 Compared to dollar 87 
 
 ZERO POINT for credit.. . .77, 189
 
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