To the Editor of Liberty:(84 ¶ 1)

In view of the favorable criticism which Involuntary Idleness received at your hands, I gladly accept the invitation to state my reasons for advocating governmental management of the circulating medium, rather than free banking.(84 ¶ 2)

My studies have led me to the conviction that mutual banking cannot deprive capital of its power to bring unearned returns to its owner. Referring to my exposition of the monetary circulation between the financial and the industrial group, and the inevitable effects flowing from the power of money to bring a persistent revenue, it follows that a normal condition can only be attained if interest on money loans is reduced to the rate of risk, so that, in the aggregate, interest will just pay for the losses incurred by bad debts; and this desideratum will not result from mutual banking.(84 ¶ 3)

The members of such banks must no doubt be in some way assessed to defray the expenses and losses incurred by the banking associations, and these assessments are virtually interest payable for the loan of mutual money. While these rates are lower than the current rates of money-lenders, the mutual banks will be more and more patronized, which will have a depressing effect on the current rate of interest. But the increase of membership will cease as soon as the current rate has adapted itself to the rate payable to the mutual banks.(84 ¶ 4)

We must now assume that the assessments of the mutual banks are in substance equitably distributed among their members; otherwise, such banks cannot compete against others who have adopted the more equitable rules. These assessments must obviously cover not only the expenses of the banks, but also occasional losses; and that such losses should be assessed in proportion to the rate of risk attached to the security each borrower offers for the faithful redemption of his obligation requires here no explication. But other outlays, such as the making of the notes, together with all the attending expenses, must also be paid by the members of the mutual banks, and this increases the interest virtually payable by the borrowers beyond the rate of risk. Consequently competition will be incompetent to lower the current rate of interest to this desirable point. Money-lenders will therefore still be able to obtain an income from the mere loan of money, and capital will continue to return interest to the wealthy. The germ of the inequitable congestion of wealth will still linger after the introduction of mutual banking.(84 ¶ 5)

At this point the question arises as to who should pay for that part of the expenses of the financial system that relates to the production of the money tokens. The answer is not difficult when it is considered that the benefit of the medium of exchange accrues to those who use it. They should contribute, as near as possible, in the proportion in which their handling wears the tokens, for in the long run the cost of production will virtually resolve itself into the cost of replacement. Not the borrowers, then, who as members of the mutual banks would be obliged to do so, but the people at large, in whose hands the money circulates, are in equity under the obligation of this expense. And to accomplish this I see no other way than for the people to instruct their representatives to make the notes at public expense, distribute them according to the demand, and charge no cost to the borrowers exceeding the rate of risk attached to the securities offered by them.(84 ¶ 6)

I should of course never attempt to deny that mutual banking would be by far better than the present oppressive system. But the question at issue is between mutual banking, which would not remove but only mitigate the source of involuntary idleness, and a system involving a complete eradication of the cause of the discrepancy of the supply and the demand of commodities. My preference for the latter does, however, not imply that any restrictions should be placed upon mutual banking; such institutions could for obvious reasons not compete against the government institution, and would fail to find a suitable soil for their growth.(84 ¶ 7)

Before concluding I also wish to meet the objection of the critic of Involuntary Idleness to the use of the word Capital in its concrete sense. Having frequent occasion to refer to labor products used for further production in contradistinction to money, I elected to use the shorter term capital, especially as I had no need to refer, during the discussion, to its other and perhaps more appropriate meaning. I attempted to express thoughts, and made use of words as tools, the selection of which cannot commit me to any opinion. In fact, I am convinced that Capital in contradistinction to Wealth must lose its significance in either of its concepts as soon as the people learn to make honest laws.(84 ¶ 8)

Yours truly,

Hugo Bilgram.

Philadelphia, January 18, 1890.