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[39]Discussions concerning the issue of notes by banking institutions, which largely occupied the attention of students of finance and business men in the eighteenth and the first three quarters of the nineteenth centuries, have been succeeded by equally intense discussions of the amount and influence of credit deposits on the books of the banks, when drawn on by their customers with checks. The fact that the use of checks against deposits renders unnecessary a large amount of money, or currency, attracted attention early in the history of deposit banking, and efforts have been made from time to time to determine the proportion of money, or currency, replaced with checks and credit documents of similar character.[40]

We may summarize the results of our inquiry and inferences therefrom briefly as follows:

1. In the first place, it is very clear that a large proportion of the business of the country, even the retail trade, is done by means of credit instruments. While it is probably true that wage-earners, as a class, do not commonly use checks, it is also true that a great many of them do. Moreover, the use of checks is common among people who derive their income from other sources, even though it be not larger than the well-paid day laborer. We are justified … in concluding that 50 or 60 per cent. of the retail trade of the country is settled in this way.

2. … Over 90 per cent. of the wholesale trade of the country is done with checks and other credit documents.

3. The very general use of checks is shown in the deposits of "all other" depositors. The average is close up to that of the wholesale trade, and while many corporations, public and private, are doubtless represented here, and many speculative transactions are included, there is no reason for excluding any one of those in determining the proportion of business done, whatever we may think of its legitimacy from the point of view of public morals or public utility.

4. The use of checks is promoted in a measure by the payment of wages by check. It appears from our investigation that of weekly pay rolls reported by the banks, aggregating $134,800,000 for the week ending March 13 last, 70 per cent. was in checks. …

5. The great use of checks is shown also by the large number of accounts under $500. …

6. We may therefore safely accept an average of 80 to 85 per cent. as the probable percentage of business of this country done by check.

7. The fact that so large a proportion of business is done with credit paper may or may not be a good thing. Whether it is or not depends on circumstances. If any part of the country is compelled to use checks because of the lack of currency, when it would prefer the latter, the situation is an evil.

8. The transaction of so large a volume of our business by checks is an element of danger in times of stringency and crisis. In such times the uncalled balance of credit transactions creates a larger demand for money, but the habit of settling by check has meantime kept the available amount of money at a minimum.

9. Consequently there ought to be some means of supplying additional currency when credit as a means of payment diminishes. This currency ought to be as safe and as uniform as the ordinary currency, and it should be capable of being quickly emitted and recalled. That is, it should possess elasticity.

10. The large money circulation of the country is explained by the facts that our prices and wages range high, that our people probably carry a larger average amount of money on their persons than do foreigners, that some portion of our currency has been destroyed or lost or hoarded. … As our business grows, the amount of money needed as reserve to perform this vast volume of business transactions increases, too. …

13. The volume of credit transactions very likely tends to increase as population and business grow. It does not increase uniformly, however, but by periodic movements. That is to say, the rate of increase of credit transactions, as compared with the whole volume of business, grows, as it were, by jerks and at a decreasing rate.

Several important questions are closely related to the inquiry which has been [made and summarized]. Among them are these:

1. What is the amount of money rendered unnecessary by the use of credit paper?

2. What is the influence of the vast volume of credit transactions on the value of money or the level of prices?[41]

3. Why is it that our per capita circulation is so large and where is the money in active circulation? …

1. We will take these questions up in order. … No one can say … with definiteness what is the amount of money released if 75 or 80 per cent. of our business transactions are settled by means of credit paper. This is a matter in which the long experience of practical bankers is the only safe guide, because the amount in question is changing from day to day as the conditions change. No simple rule about it can be laid down. …

One point needs to be carefully borne in mind. However great the volume of credit exchanges, however extensive the use of credit may become in a community, they can never fully displace sales for direct money payment. The extensive use of credit is not of itself a sign that a community is well off. Credit is used in poor as well as in rich communities. Its extensive use in a poor and undeveloped country is likely to indicate a lack of capital rather than an abundance of wealth. Every community tends to use the cheapest medium of exchange accessible to it. If its capital is of very high value for producing goods for direct consumption, a community will be averse to investing much of it in a medium of exchange.

This is the reason why undeveloped countries, as our own was a century ago, try to effect their exchanges by means of credit paper to a larger extent than wealthier communities. Under such conditions paper money is commonly thought to be the cheapest medium of exchange. If, now, part of the money exchanges are replaced with credit exchanges, the amount of money released, or the amount without which the community could now get on, would be the whole amount formerly used in money payments … minus the reserve necessary to do this credit business. The important point, however, is that less money is necessary. How much less we can not be sure. We can get some light on the subject, however, by noting the volume of business done by credit paper and the balances which from time to time are carried as a basis of settlement.

It is important to note also that an increase in the volume of credit transactions does not necessarily mean that we must get a proportionate increase in our reserve of money. Every refinement of the credit mechanism makes it possible to do a larger volume of business on the same reserve. …

The volume of business that can be done by credit paper depends on several circumstances. Obviously, in the first place, it depends upon the banking facilities of the country. If the banks are widely distributed, if they are willing to deal in transactions small enough to be within the reach of large numbers of people, many more transactions will be settled through them than would otherwise be the case. This fact undoubtedly explains in large measure the development of what may be called the "banking habit" among the people of the United States. Undoubtedly our people pay by check much more commonly and much more largely than people of any other country. We settle smaller transactions by check; our banks are willing to carry smaller accounts. Indeed, the rapid industrial development of our country is probably due in no small degree to our system of independent banks and the facility with which we have permitted banks to be established. The small independent bank in the country community has felt that its interests and success were bound up with the interests and success of the community, and, therefore, has undoubtedly been willing to do more for the general interests than a branch of a large bank in some remote commercial center would have felt like doing, even if it had been justified in doing so. The small capital with which we have permitted banks to be established also has undoubtedly been a contributing factor to our rapid economic development, as well as to the promotion of the banking habit among our people.

In the next place, the density of population is, of course, an important factor for the growth of credit exchanges. A larger volume of business is settled by bank paper in a commercial center than in an agricultural community, even though the proportion of total business thus settled may not be larger. However, it is necessary that there should be a certain number of people within reach of a common center in order to have a bank established there. Of course the smaller the bank the fewer the people thus required. Thus again our inclination in the past to favor the establishment of the small independent banks has facilitated the spread of banking and promoted the volume of business settled in the country districts by credit payment and stimulated the banking habit among our people.

Finally, the general education and intelligence of the mass of the people is an important factor. Men do not use banks unless they have confidence in them, and they have come to be regarded as a settled part of the ordinary commercial mechanism of the community. Our people are people of a wide general education and high order of intelligence. They understand the place and work of the bank in a community much better than the same number of people, for example, in a European country. This fact is strikingly brought out by a study of the proportion of retail business settled by means of checks, in what are called the "foreign" districts of our large cities, on the one hand, and in an agricultural community on the other. The European immigrant is not a man who has had banking connections in his home country, and he does not use them here, even though the facilities are more numerous.

Such evidence as there is seems to indicate that payment by check has shown an increase during the past few years:

(a) In the first place, the returns of our reports show a larger percentage in retail trade. …

(b) The prosperity of the farmers in the Central West has enabled many to have bank accounts who fifteen years ago could not carry balances. The writer's information from central Illinois is strongly in this direction.

(c) The third evidence is found in the growth of the number of small banks, especially in the country districts. …

(d) The appearance of a considerable proportion of checks in the deposits of mutual savings banks is also, to some degree, significant. …

On the other hand, the increase of that part of the population which consists of the wage-earning class, by whom the use of checks is small, is undoubtedly greater than that of our other classes of population. However, the wealthy classes, though fewer in number, have more to spend and their use of checks raises the proportion of credit paper in payments.

We can not expect any social movement to continue steadily in one direction for an indefinite time. Such evidence as inquiries of this character furnish seems to show that there is a certain ebb and flow in the proportion of checks used in business payments. With a given amount of money a certain proportion of it can be used for bank reserves on which to build credit transactions. For a time the volume of business will increase more rapidly than the money supplies, so that the proportion of credit business to the whole will increase, the improvement of the credit machinery in the meantime facilitating the movement. But the perfection of the facilities for utilizing to the utmost a given reserve, or a slowly increasing one, will come to a stop after a time, and it will be necessary to increase the money supply for any further expansion of credit. In the language of business, another unit of capital must be added to plant. The unit added to the social capital devoted to exchange—that is, the additional amount of money—will be larger than is necessary for most profitable immediate use, consequently the proportion of money exchanges will for a time show an increase. We may conclude, therefore, that the volume of business done on credit gradually increases as the population and total amount of business are enlarged, but at a decreasing rate and with occasional or periodic retardations.

2. Relation of credit exchanges to the volume of money and prices.—It is pertinent to inquire, now, what effect, if any, this great settlement of indebtedness by means of credit paper has upon the value of money. Evidently, it can influence this value, or the general price level, only as it changes the amount of demand for money. We have seen reason, now, to think that 80 per cent. of our business transactions are settled by means of credit paper. Credit paper cancellation enables a larger amount of business to be done with the same amount of money and has an effect in determining the value of money by increasing the demand for reserves. …

… The use of credit paper in effecting credit exchanges makes possible a far larger volume of business than could otherwise be done, and that this increased volume of business must in some way influence prices seem[s] undeniable. …

… We are told by many that there is a vast amount of credit transactions embodied in banking and clearing-house statistics which may be termed "fictitious." That is to say, they are not a part of the necessary work of exchange in a community. For example, the cotton and wheat crops are sold several times over on the exchanges of the country, but not all these purchases and sales are a necessary part of the process of getting the cotton from the planter to the manufacturer. These sales, we are told, are purely speculative and born out of the credit organization, which, it is urged, merely makes the transactions possible. … However, … these exchanges actually exist. All the purchases involved constitute a part of the demand for means of settlement. Therefore they are to be regarded as a proper part of the exchange business of the country, and in some degree they must influence the need for money. …

… The demand for money to effect exchanges includes, first, demand for money for direct exchanges; second, demand for reserves for credit exchanges. Some goods exchange by direct barter and still more probably by indirect barter. If these last exchanges just cancelled one another, the credit paper that grows out of them would also cancel, and no balances would remain to be settled with money. Usually, however, they do not cancel, and the balance must be settled with cash; hence a reserve is necessary. … This demand for reserve is certainly one of the influences that go to determine the value of money. In short, the demand for money includes a demand for direct payment and a demand for reserve. …

3. Our monetary circulation.—Our per capita circulation, as estimated by the Comptroller of the Currency, has increased from $21.10 in 1906 to $34.72 in 1908.[42] This is larger than the per capita circulation of other great industrial and commercial countries with the exception of France. Why is it necessary and where is it? It is necessary, perhaps, for the following reasons:

(a) A larger amount of money is needed in this country because, in the first place, our prices range higher. If the prices of articles commonly consumed range 20 per cent. higher than they do abroad, the people who buy them and pay for them with money need a larger amount to make their purchases. The same cause makes a larger reserve necessary to exchange a given volume of goods by credit. The demand for money, therefore, both for reserve and direct money transactions, is greater on account of the higher scale of prices.

(b) The same kind of reasoning applies to our wage scale. Whether the wage scale be the cause of the higher cost of living or the higher cost of living be the cause of the higher wage scale, more money will be needed in proportion to the trade. If wages are paid with checks, more money will be needed by the amount that the reserve must be increased to furnish a basis for the checks.

(c) Our country is more sparsely settled than England, France, or Germany. In spite of the large increase in the banking facilities of the country, it still remains true that very many places are remote from banks, so that business, so far as it is not barter, will probably be carried on with money. It is necessary, therefore, to have a larger amount of money than if population were denser. …

(d) It may be that our spirit of individualism plays some part. So large a proportion of our wage-earning population have come from conditions where they had opportunity to handle very little money, that they like to carry money on their persons. It makes them feel, as one man said to the writer, "more independent." To quote the same informant, they would "rather pay higher prices and have more money to pay with."

(e) Doubtless there is a good deal of hoarding by people who distrust banks or are not near enough to use them. It might be urged that no larger proportion of people here hoard than is the case in Europe. Without disputing this, it is true, however, that if only the same proportion hoard and in the same relative amounts as is done by corresponding classes of the population, the absolute amount thus withdrawn would be larger because of our higher scale of wages and prices. …