Chapter V
Bankers Want Double Or Nothing
Well, Josiah Stamp said that so long as a nation will let private corporations create money and control credit, one is foolish not to be a banker. Too, you have heard that there is no better way to learn than by doing. So let's you and I go into the banking business. I don't mean that we shall buy stocks in some bank. We are going to be top dogs or nothing - in this our make-believe story.
There is a little story behind this, decision. We have been trying for years to get a bank on the wrong side of the river. The big uptown banks blocked us year after year because they didn't quite own the earth, and didn't want opposition, I believe it is called competition. Since the big boys control our Banking Commission, the commission sat and patiently listened to our plea for a bank charter, and would always say no. But you and I finally got the charter, and scraped up $200,000, with another $100,000 for surplus, and were soon in the banking business, and I mean the banking business in a big way.
When we got our charter, we went to Washington and bought from the Reserve Bank $200,000 U.S. Bonds. Let me add that we organized a South Austin National Bank, which gave us front seat on this master stock exchange. Well that was good business for we had "invested our capital" in the best securities on earth, the promise of Uncle Sam to pay, U.S. Bonds, so it was not long until we were clipping coupons, and handing them over to Uncle Sammy, and he was handing us cash. Within a year we had collected $7,000, but that is chicken feed in our language.
Well, you neophytes are wondering where we are going to get any money to lend. We have already lent our capital to Uncle Sam! Uncle Sam is the nicest old fellow you ever saw. When we got the bonds, he smiled and said, "Sonnies, just to show you how much I appreciate my enterprising boys, take this $200,000 in cash just as a present." Now, what do you know about that? We go to Washington with a cheque book, write a cheque to the Reserve Bank for $200,000, and get for that cheque against just ordinary bank deposits we had piled up in Austin, $200,000 in U.S. Bonds, and $200,000 in cash. That certainly doubled our money before we got our doors open to lend our neighbours money. (Note: We used Uncle Sammy instead of the Reserve Bank, because in reality Uncle Sam stands behind them, and is endorser of all that they do.)
Well, you look at me and I look at you and both of us are wondering how we are going to keep robbers off our trail as we return to Texas with all of that $200,000 in cash. Uncle Sam, seeing our perplexed expressions, said, "Now, boys, you will not need all that cash to do business on. Since you are a country bank (he knew we were on the wrong side of the river) you will need only $32,000 in the vault just leave all of the cash here in your reserve fund. The Reserve Bank will send you the $32,000 cash when you build your vault and get ready for business, and the $168,000 will be your reserve fund.
So we came back to Austin, and having spent our last dollar buying U.S. Bonds, we had to find a house we could rent to do banking business in. We could not build.
Finally we found a fellow who agreed to build us a bank building, just a modest one-story structure, with picture window that lets us look out over rolling bare hills except there were scattering live oaks here and there. It sort of hurt our feelings to be put way out of business section, and behind a new trade centre at that, and on a side street but it didn't matter: we now had that better mouse trap.
But finally we moved in, the Reserve Bank sent us the $32,000 to do business on, leaving us the $168,000 in our reserve funds the San Antonio Reserve Bank. Our South Austin friends came in and left deposits with us, even Houston and citizens from other towns came in and left deposits. They wanted to pep us up, you see and that first night our clean, new deposit books shewed that we had on deposit to the credit of our friends $32,000. Well, when we took those deposits we only promised the depositors that we would cash their cheques with cash that cost us nothing or see that they cleared through other banks.
Of course not one in a thousand of our friends knew that when we sent those cheques to our San Antonio Reserve Bank for clearing that it would give us credit for these cheques in our reserve fund, dollar for dollar, which amounted to $32,000. There you are again. Our customers' cheques in our hands doubled: they got $32,000 to their credit on our deposit books, and we got $32,000 to our credit on the Reserve Bank's books. We could have asked the Reserve Bank to send us the whole amount, $32,000 in cash, but not needing the cash, we just left it in our Reserve fund, which raised it to $200,000.
Are you getting dizzy, Sam? Well, let's stop and sort of check up, and shake our heads, and clarify this thing in our minds. We have been used to making [begin page 55] pretty big money at 10 to 50 percent on goods we have been selling for thirty years; but never anything like this ever happened to us before. Here are the figures:
Assets
We own U.S. Bonds. $200,000
We have cash in vault. 32,000
We have Bank Reserves. 200,000
Total. $432,000
Liabilities
Demand Deposits. 32,000
Net Assets. $400,000
Of course we have overlooked the $100,000 surplus, but that would just confuse us a little, and it does not amount to much anyway; so we will just let it alone.
But that looks pretty good for first day's business doesn't it, Sam? We went to Washington with a Cashier's cheque for $200,000, and on first day of business we find that our net assets are $400,000. But, Sam, you have not heard or seen anything yet. Tomorrow we will begin lending to Tom, Dick and Harry. We will not lend any of the $32,000 cash we have. We will not lend any of the $200,000 capital we have; (of course our capital is just figures on our books!) nor any of the $100,000 surplus. We will begin lending against that $200,000 reserve fund we have on the Reserve Bank books in San Antonio. We can lend $168,000 of the $200,000. We can lend seven times that amount. So we will just write on our books to our credit seven times $168,000, which swells our lending funds (now called bank credit) to $1,176,000.
Gosh, Sam, here we are millionaires before we lend a dime. And that whole $1,176,000 was gratis money given us just because we are bankers. Uncle Sam gave us the first $200,000 in appreciation of our buying some of his old bonds. Then when our friends came along and deposited their money with us, the Reserve Bank showed its appreciation of us by adding that $32,000 to our reserve fund, which offset the $32,000 we drew out to use in cashing our customers' cheques.
Now that bank credit, total $1,176,000, is as much cash, money to us, Sam, as are those $32,000 deposits to our customers. For we can lend it, use it to buy investment obligations, and should we lend the whole amount, we would have in our vaults, notes, deeds, mortgages, and other good as gold papers totalling $1,176,000! And we can lend it this year, for people are hungry for money.
Now, Sam, it does me good to look at those figures. So let's write them down again.
We own U.S. Bonds. $ 200,000 We have cash in the vaults 32,000 We have notes, etc. 1,176,000 " Ain't it a grand total. $1,408,000 ?
Say, Sam, why did we fool away the best part of our lives selling hams and harness? Well, I don't know, Tom. You know that bankers never told us anything about what a nice thing they have, I guess is the reason. We just didn't know this sort of thing could be done.
Yes, replied Tom; but, Sam, I find that we can get more bank credits, if we will just ask for them. I understand that the Reserve authorities will buy corporation stock, and pay for it with a cheque against no funds. Our school bus factory here in South Austin is growing so fast that they are in great need of additional capital.
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Let's show them how easy it is to issue stock, and sell the stock to the Reserve authorities.
So Tom calls the President of the School Bus Factory and says, "Henry, you were talking to me the other day about your; need of a $1,000,000 for expansion and improvement. I have figured out a way to get the money. Come over and let's talk about it." Henry hurries over, for dangling a $1,000,000 before a hungry corporation president's eyes renews his youth. It is agreed that the Bus Company would print up a $1,000,000 new stock for the corporation. Steck does a beautiful job. And Tom and Henry (I'm Tom, don't forget) hurry by plane to Washington. Trains are too slow now for us Big business men.
We lay the proposition before the Reserve authorities. They agree that in a fast growing city like Austin, an up-and-coming School Bus Factory is entitled to additional capital. So the Reserve authorities buy the $1,000,000 stock in our school Bus Factory, and hand the President of the factory a cheque for $1,000,000. We hurry back; to Austin. Henry deposits the cheque in our bank, and he has $1,000,000 to spend on improvements and extensions and riotous living, too. . . and all such folks do. My cash chops, were drooling all the time, because I knew that when that cheque cleared through the San Antonio Reserve Bank, those nice boys would not forget to add $1,000,000 to our reserve account, and that I could say to the Reserve Bank, just send me $1,000,000 in cash, and get it; but I left it there, and on a scratch pad I deducted $160,000, leaving us $840,000 to lend. I multiplied that $840,000 by seven, and found that now we could continue to lend money, for it showed that our new bank credit growing out of the fact that the bus company deposited $1,000,000 with us had been increased to $5,880,000!
Of course other banks were hogging in our gold mine, for each time a customer sent a cheque to a person who did business with another bank, when that cheque cleared through the Reserve Banks, I lost from my reserve fund the face of the cheque; but I largely offset that by being such a good fellow in the Country Clubs (Oh, yes, I joined at once on becoming a bank President) and on the golf courses, and at night clubs that many folks would send cheques from other banks for deposit in our bank. And, in a way, that just about evens things up.
Well, it is time to quote that biggest of all bankers, who said in the late 20's:
"Banking was conceived in iniquity and born in sin. ...The bankers own the earth. . . take it away from them, but leave them in control of credit and the creation of money, and with a flick of the pen they will create enough money to buy it back again. . . Take this power away from them, and all great fortunes like mine will disappear, and they ought to disappear, for this would then be a better and a happier world to live in. . . But, if you want to remain the slaves of bankers, and pay the cost of your OWN slavery, let them continue to coin money and control credit. . . However so long as a nation will permit men to do this, one is foolish to work for a living."
Now, Sam, let's do a little figuring to see what we will be worth ten years from now:
We have upped our capital to. $ 750,000 Our surplus is now 375,000 We have in U.S. Bonds 750,000 We have collected in interest on bonds. 105,000 We have collected in interest on notes to borrowers. 895,000 We have collected notes 7,105,000 We have outstanding notes. 9,372,989 Assets total. $19,352,989
Our customers' deposits are $6,479,643 . . . And, Sam, this is just cash items we are listing. . . there are those ranches we have bought, that ten acres we bought is now oil. . . Now, Sam, that we have got the touch of Midas . . . oh for the years of old Methuselah - but, Sam, even his 969 years would lack another 969 years making my years long enough. But, Sam, I fear them Damn Rooshuns are going to come over here and take this golden goose away from us; drat' em!
But, old Bob Thornton of Dallas hasn't beat us much. Give us another 20 years, and we will have over $184,000,000 in assets - oh, damn, Sam, there is that damned ulcer at it again, and I (but surely this is not me?) grab my expansive paunch with my Midas hands, and a grimace contorts my Croesus face!
What a finale!