SIGNIFICANCE OF BANKING SITUATION IN COLORADO 55 



On the other hand, abnormal credit is quite a different and much 

 more serious matter. This kind of credit is an increase of purchasing 

 power beyond the value of the goods owned. It may and usually does 

 cause speculation and rising prices. When it is easy to get more credit 

 than the collateral is worth, speculative enterprises will be undertaken. 

 The industrial world is intoxicated. Hope abounds. Stock in the 

 Keeley Motor Company can easily be sold. Conditions are established 

 for growing tulips in Holland, and blowing bubbles in the South Sea. 

 In short the foundations for commercial crises may be laid in this way. 



There are two causes of abnormal credit. One is error of judgment 

 by the banker, and the other is conscious fraud. It is possible for all 

 human beings to err in their judgments of the values of commodities 

 and securities. In a period of rising prices, it is exceedingly hard to tell 

 whether the prices represent a healthy growth of industry or are the 

 result of credit too freely given. The banker is liable to err at such 

 times as are all the rest of us. It is said, however, that this is the unim- 

 portant cause of abnormal credit. The chief cause is believed to be 

 conscious fraud. Excessive loans are made to promoters, and again, 

 the directors are interested in some enterprise needing an excessive loan 

 for its financiering. Their bank accordingly makes the loan. Some- 

 times they organize themselves into a separate company, and borrow 

 largely from their bank. In this way, then, the greater amount of abnor- 

 mal credit comes into existence. In any case the amount of credit to 

 come into existence is very largely determined by the banker. 



It is thus apparent that the power of the banker over industrial con- 

 ditions is very great. He regulates the amount of credit and, as the 

 industries of the country are conducted on a credit basis, he also to a 

 large extent regulates the industries. Hence, the importance to the 

 community of the good judgment and honesty of the banker. There is 

 perhaps no class in the country whose judgment and honesty are so 

 closely associated with our industrial progress. Upon no one class of men 

 does the welfare of any community depend more than upon its bankers. 

 It is therefore of the highest importance that society do what it can to 

 place its bankers in an environment that will secure the wisest and most 

 impartial of their judgments in the matter of extending credit to those 



