Retitu of RevietM, IO/i/06 



STATE BANKS VERSUS STATE BONDS, 



By John Miles Verrall 



" The rights, responsibilities and protits of the 

 note-issue ought to belong only to the State" — 

 Gladstone. 



" Deposits are only so many bank notes in dis- 

 guise. " — " The essential business of all banks is to 

 issue circulating rights of action, credits or debts to 

 their customers, recorded in the first instance as en- 

 tries in their txwks, termed deposits, and their cus- 

 tomers may circulate these rights of action either by 

 means of notes or cheques." — " Banking credits in 

 the form of bank notes, or deposits and cheques, 

 perform exactly the same functions, and are in all 

 respects equivalent to the creation of so much addi- 

 tional capital." — "These circulating credits have 

 exactly the same effects, in every respect, as an 

 equal quantity of money. As Bishop Berkeley said 

 long ago, a bank is a gold mine. And it is to this 

 faculty, as it were, of multiplying gold, that the pro- 

 digious advajice of commerce and wealth in modern 

 times is due." H. D. Macleod's "Theory of 

 Credit." 



"The dislike of the banks to State-issued paper 

 money is simply the dislike • of the thief to the 

 policeman." — William Pitt. 



" Public debts paying interest are simply the pur- 

 chase by the rich of power to tax and plunder the 

 poor." — Ruskin. 



The history of lianking in Scotland, as given by 

 Macleod, shows how private capitalists originally 

 managed to appropriate to themselves there, the 

 protits of the paper currency. The Bank of Scot- 

 land, founded in 1695, began with a paid-up capital 

 of only _;^io.ooo. and on this it found it could 

 maintain in circulation ^£50,000 of its own notes. 

 The next Scotch Bank was the Royal Bank, estatv 

 lished in 1727, which bank two years later, says 

 Macleod, "invented the system of cash-credits, 

 which has done more to develop the resources, and 

 to promote the agricultural and commercial pros- 

 perity of Scotland, than any other cause whatever." 

 " There were immense quantities of unemployed 

 labour, but no capital or money to set their industry 

 in motion. Seeing this state of matters, the Edin- 

 burgh banks opened branches in numerous parts of 

 the country, and sent down boxes full of ;£i notes, 

 and granted rash-credits to the farmers. These 

 notes were universally received as readily as coin. 

 The farmers made their purchases and paid wages 

 with them, and enormo«s tracts of barren lands were 

 changed into fertile corn fields." 



In the same way the Forth and Clyde Canal was 

 made. The notes and credit given for labour, skill 

 and material created so much capital in the sha^ie 

 of the Canal. Every week's wages represented so 



Formerly M.H.R.. Neiv Zealand. 



much value received, so much labour converted into 

 capital, .ind it was upon this value that the credit 



wHj advanced, and out of the future profits of it 

 that it was redeemed. As therefore both notes and 

 che jues rq:)resented the credit of the people, why 

 should private persons have ever been permitted to 

 appropriate the enormous profits of the public paper 

 currency? No Government dare give to private per- 

 sons the right to coin money. But paper money is 

 the chief money of the day, and in granting Bank 

 Charters, Governments give away to private persons 

 the power to create capital and to control the cur- 

 renov. 



There is no profit in coining a million sovereigns. 

 But there is enormous profit in substituting millions 

 of bank-credit, b.mk-notes, or bills of exchange in- 

 stead of sovereigns. Banks create banking capital 

 by placing securities in their safes and making ad- 

 vances against them in the shape of cash-credits or 

 depr/sits. These credits are transferred and circu- 

 lated by means of bills of exchange, cheques and 

 notes. Bullion whiclv can be melted down into coin 

 is just as good bank assets as coin, and securities 

 with sufficient margin are equally good assets, be- 

 cause they can be exch.inged for the gold they re- 

 present. But everv bank must keep a sufficient gold 

 reserve. Macleod saj s : — " Every svstem of credit 

 must have a solid basis of specie to maintain its 

 par value with specie, but there is no absolute fixed 

 ratio between specie and credit; it depends entirely 

 upon the organisation of the system of credit. In 

 the first rude organisation of credit in Scotland, it 

 probably required a specie basis of 20 per cent. ; in 

 the more highly organised system which prevails in 

 England, it seems to reiuire a specie basis of 10 

 per cent. ; but in Scotland, where it is more highly 

 organised still, it only requires a specie basis of 5 

 per cent." 



Conimerce is barter; barter is exchange; ind 

 most business is carried on simply by transfers of 

 banking credits. Quoting from Sir John Lubbock 

 concerning the business of his bank during a short 

 period. Nicholson says: — "Transactions to the ex- 

 tent of _^23. 000,000 were effected in the followin, 

 proportions: — Cheques and bills of exchange, 94.1 . 

 Bank of England notes, 5.0 ; country bank notes. 

 0.3 : and actual coin only 0.6.'' 



Macleod says: — "Governments and States should 

 never issue paper money, because they can ne^'er re- 

 sist the temptation to issue it in boundless quanti- 

 ties, so that it soon begins to depreciate, and there 

 is no powder to redeem it." But why should not 

 State Bank managers be capable, experienced, and 

 trustworthy, and whv should they not be able to 



