To the Editor of Liberty:
I desire opportunity to answer a criticism of my paper on Banking and the State, which appeared in Liberty of May 18, and to which my friend Tucker takes some exceptions under the head of Where Wright is Wrong.
The first exception is to my contention that it is of great importance that paper money should be subject to immediate redemption. Mr. Tucker says that certainty of ultimate redemption
is an essential, but that immediate redemption is not. Now, it seems to me that the only possible way of making ultimate redemption sure is to insist upon immediate redemption in that medium which possesses in the highest degree all of the essential attributes of money. Without that condition an important and proper check upon the banker would be removed. There would be a constant temptation to issue bills without proper security. Paper money is credit,—simply a promise to pay real money. In order that it may most efficiently perform its office, it is essential that it be regarded with the highest confidence. Confidence is a thing of growth, and it can grow only with opportunity; and opportunity, with the bill-holder, means that he must have a chance to frequently test the ability of the banker to redeem his promise to pay. Whenever a man receives a piece of paper on which is printed a promise to pay money, he has a right to an immediate knowledge as to whether that promise is good or not; the only way in which he can know is by demanding immediate redemption and having the demand satisfied. Another thing: if paper money is at all times redeemable on demand, there never can be a redundancy of money; as soon as the volume exceeds the demand in the slightest degree, it will return to the author of its existence, and demand the redemption to which it is entitled. The reason that paper money was thought of and came into use was and is because of economy. Paper money costs almost nothing. Every device for safeguarding bill-holders against loss will add to the cost of paper money, and, when the point of absolute security is reached, all the credit features are eliminated, and the paper money costs its face in real money, and sometimes even more than that. The bills of issue of our national banks afford an illustration, the expense of security costing more than the face of the note. The demand for money is subject to fluctuation; it is greater at some seasons of the year than at others, and greater some years than other years; therefore it is essential that paper may come into existence in response to demand, and must go out of existence when the demand is satisfied and therefore ceases. Immediate redemption is the regulating agency that can be had without adding to the cost of the machinery used. Immediate redemption is a limitation, of course, but it is natural, and not arbitrarily imposed; it is, therefore, in harmony with free banking.
Paper money rests upon the sense of right and wrong, not upon security. Without intelligence sufficient to properly recognize and appreciate this fact, paper money is impossible. Every restriction other than natural limitations will obstruct rather than aid. Paper money has come into existence in recognition of economic law; it is a time- and labor-saving device; its function in smaller transactions is the same as that of the draft and bills of exchange in larger transactions,—i. e., the avoidance of the expense incident to the keeping on hand at all times of large amounts of cumbrous metallic money and the changing of the same from hand to hand at the close of every transaction. To properly fulfil the office of money, paper bills of issue must be redeemable at once in that medium; that, in the estimation of the holder of such paper bills, comes the nearest to possessing all of the attributes of real money. A time limit would destroy an essential requisite. Real money is at all times instantly available. Paper promises to pay real money, to properly fill the office of a cheap substitute for money, must be redeemable on demand; this is an essential condition, because it is a natural condition.
I did say that Banks should be permitted to issue paper money equal to their unimpaired capital,
but I did not mean that there should be a limit at that point, although I confess that it might be considered that such a limitation was implied. A good banker will always insist upon the borrower and user of the credit depositing sufficient security to guarantee its redemption at maturity, so that no limitation as to the amount of bills that he may issue, and for the redemption of which he has assumed liability, is necessary.
Now, as to the unlimited liability of the banker, I think there should be no limit to his liability, because there would naturally be none. He is the self-appointed conservator of common funds, a self-constituted dealer in money and credit, and for his services he charges a fee in the shape of interest and exchange. He performs no gratuitous service. While it is true that he usually furnishes some capital of his own, it is not necessary, for the bank is always in reality its line of deposits. So long as he conducts the bank upon sound banking principles, failure is utterly impossible, inasmuch as nothing can go wrong unless the banker fails to properly perform his duties. He should be liable for and make good every loss. He charges a fee,—that is, he enjoys benefits from his acts; he should therefore accept all the responsibilities incident to his actions. I am not denying the right of individuals limiting their liabilities in relation to each other, but I am denying the right of the State to limit the liability of the banker, allowing him to escape the liability that fairly belongs to his vocation. Unlimited liability is the natural condition; it requires an arrangement of some kind imposed by the State to enable the banker to escape it; therefore unlimited liability is right, because it is natural, and can be avoided only by artificial device. I do not think there should be any favors shown the banker by law, nor should there be any laws that are to his disadvantage; there should be freedom limited only by natural conditions.
It seems to me that there are a great many special reasons why the State should not engage in a banking business, just as there are special reasons why the State should not engage in the carrying of the mail and the conduct of post offices, or the conducting of public schools and arbitrarily obliging people to pay the expense thereof. There are special reasons that apply only to each of these several things, aside from the general reason that it is not a proper function of the government to attempt in any way the promotion of the public welfare. The sole function of government is the protection of individuals from the aggressions of each other. Whenever the govrenment attempts to do too many things, or too much of any one thing, it fails to properly perform the governmental office that is essential. It is possible that the State might engage in a banking business without invading individual right, but it is not at all probable that it would do so, and in the case of the United States there has most certainly been such invasion.
Any business undertaking can most certainly be more economically conducted by private enterprise than it can be through the exercise of governmental agencies. This fact alone is sufficient reason why the State should not engage in a banking business. There would not and could not be exercised the discriminating intelligence on the part of governmental bank managers in the way of negotiating loans and always exacting proper and sufficient security for the same that is at all times absolutely essential to the safe and proper conduct of the business; then, too, there are innumerable political objections that might be urged against a governmental banking system, such as the giving of improper credit to political favorites or withholding credit from political opponents; it could be used to reward friends and to punish enemies of the officials connected with the bank. No such powerful engine for mischief should be thought of for a moment in a democratic republic.