To the Editor of Liberty:
In your article concerning Comrade Cohen's interpretation of Greene, in the April number of Liberty, you use this phrase:
so that no one would ever present a note to the bank, even after maturity, for redemption in specie. What do you mean by the words I have italicized? Were the article in question written by one less careful in the use of language, it would seem trivial to pick out a subordinate sentence like this for criticism. If it is a slip on your part, I have but to apologize for being hypercritical. But, from several similar remarks I have noticed in the editorial columns of Liberty from time to time, I infer that you believe all mutual bank notes should mature at definite dates, and be redeemable in specie at the bank any time after that.
If a mutual bank were to operate upon such a principle, one of two things would be inevitable. Either the bank would be compelled to accept from its borrowers, in cancellation of loans, nothing but notes which have reached maturity; or else a very large portion of the notes which it has in circulation will soon be redeemable in specie on demand. To illustration, I negotiate a loan of $1,000 from a mutual bank which has notes to the extent of $99,000 outstanding. In return for this sum I give my personal note, amply secured, payable at, say, six months. In order to simplify matters, we will assume that the mutual bank notes mature at the same time. During the sixth months which follow, the $99,000 the bank had in circulation will mature, and be replaced by other notes which will have six months to run. When my note matures, therefore, the bank will have in circulation $100,000, of which $1,000 have reached maturity, and $99,000 have not. If I have $1,000 in my possession, probably $10 will be in matured notes and $990 in unmatured. There will also be in the hands of other persons $990 of the $1,000 I have originally borrowed, and these notes will be payable in specie on demand at the bank.
If the bank accepts my unmatured as well as my matured notes, it will have outstanding $990 payable in specie on demand. If it continues this method of business, it will only be a short time till all of its notes are payable on demand. In short, we come almost back to the specie basis. If the bank refuses to accept its own unmatured notes, I will have to hustle around and swap my $990 for matured notes. This will involve much time and labor. In order to save myself that labor, I find it to my advantage to go to a note-broker and pay him a premium for the matured notes. From this will surely spring a system of discounting notes.