Omaha daily bee., 1906-11-23
ADDRESS OF DEAN JoHNso
Currency Composed Of Two Elements.
Credit and Gold.

Currency Composed Of Two Elements,
Credit and Gold.
The address Of Prof Joseph French John
son on THE Currency" was one Of the most
interesting and notable events Of the con-
vention. It took rank in prominence with
that Of former Comptroller Pickles.. Prof.
johnson Is dean Of the New York Univer-
sity School Of Commerce and secretary Of
commerce and one Of the leading authori-
ties on financial questions in the United
States. In part he said:
Our currency is made up of two ele>
ments money and credit. gold and promises
to pay gold. Some of these promises are
declared by law TO be equivalent to the
thing promised. Here we have the nlst
debatable question in our currency. Is II
wise or safe for the country to do business
with a currency over half Of which con-
sists of government promises stampeq on
when IL was a very live issue, but at pres
cnt IL seems to be academic. We have the
greenbacks and we have the silver dollars.
II would be very difficult to get the Ameri-
can people to consent to their retirement
even though their existence were bringing
on practical evils or giving us the threat 81
a panic Fortunately. however, the green
back and the silver dollar are steadily los
ing their power to do mischief. The stock
OF gold has increased so rapidly during the
last ten years that there need be little rear
about the government ability TO redeem
Why should not all the currency be goln
Why should there be any credit at allY
There are two reasons; % credit Is
cheaper currency than gold; CD credt Is a
more flexible currency than gold. The
stock OF gold in a country at any time Is
fixed. If there is an increase In the amount
of business done and In the number Of ex-
changes made, there can be no sudden IN
crease in the stock of gold. Credit now
ever, being mere promise 70 pay g oIIs, u
so that II can furnish currency which con-
forms exactly to the needs of business In
the United states we have this quality OF
credit beautifully illustra ted in what Is
called deposit currency. The currency con-
sists of checks and drafts, and II takes the
transactions of this country. II Is Issued
with perfect freedom. No man When ne
writes a check Is Obliged TO deposn any
bonds or other collateral as a guaranty that
II will be paid. II the law should impose
any such restrictions upon the writing OF
checks, business would be greatly inpeoeo.
stantly subjected to the test OF redemption
Our bankers have established clearing
houses in all parts of the country ana nave
brought themselves into such close relp'
tionship that all checks are hurried 10
clearing house for redemption the moment
their work has been done. AS result the
volume of deposit currency expands and
contracts with the needs OF business. Ihere
is never too MUCH Of 1t In existence anu
Il is wanted, and II passes out OF being the
moment II is no longer needed. This quality
q npDOS1t
fiexibility, and 1t is quality which money
does not and cannot possess for the amount
of money is fixed at any time and cannot
be increased at the will OF bank or at the
will OF the government
The check and the draft however, cannoi
be used as substitutes for money in all
transactions. There are many people IN
this country who do not have bank ac-
counts, and among these people the check
Is not a convenient medium OF exchange
When they sell their goods or their serN-
ices they like to be paid in money ITSELF
or in something which possesses an equal
acceptability. For people Of this kind
banks have for centuries issued their credit
in form different from the bank deposit
or the bank check. The bank deposit Is
merely the banks promise to pay certain
Individual a sum of money. This credit
the individual utilizes by means OF checks
which are, therefore, combination oil
individual credit and bank credit. In order
to eliminate the personal element and sc
produce a Medium of exchange represent
ing pure bank credit. banks early begar
the practice of issuing promises TO pay tht
bearer These are now known as bank
notes. Essentially they are identical witt
| a cashiers check payable 20 bearer. II
was soon discovered however mat notes
OF this sort representing pure bank credit
/ passed current among the people as money
] Itself. Then governments began to require
that they should be engraved on gooC
paper in order that counterfeiting should
/ be difficult and then, for fear that irrespon
sible banks might issue such notes in ex
cess governments began to impose certain
restrictions upon their issue. In England
! these restrictions reached the extreme, fol
there the law now declares that no bant
shall issue notes payable to bearer exoep
/ in exchange for sum of gold equal to tht
/ face OF the notes. Bank notes in England
therefore, are m rely gold certificates. The
are said to be issued in accordance will
| what is called the currency principle, which
| assumes that five soVereigns in gold shoulC
| be behind every FIVE pound bank note. II
| the United States we have adopted anothe
measure of safety. Here the law insist
/ that a dollars worth Of choice collateral
namely government bonds, shall be depos
! tied as security for the payment OF ever!
dollar on bank notes. In other countries
notably in Canada and France, the Law
protects the noteholder merely by placinl
a limit upon the amount of notes which
bank may issue, and by providing that tn
redemption of notes shall be easy and In
Here we have the currency question in
nutshell. Which one Of these three sys
! TENS is the best2 We cannot answer thi
question without deciding first upon wha
Is the test of a good bank note system
| Is a good bank note one about the con
VeItiblity of which there Is no doubt
Then the English system Is the best. Or ]
a good bank note system one which yield
a Flexible note currency? II so, then tn
Canadian and French systems are the bes
IL bank notes are not to possess tn
quality of fieXibility or elasticity, / oanno
ri0c0ver any reason why they should b
issued at all. The United States govern
ment is able TO supply the country with a
the paper currency IL needs, for the score
Tag "a the treasury mas the authority {
1 issue EOtu CeILluGdNes IN tACldliBe TOT BOlt
and silver certificates In exchange 10
| silver. With respect to our currency
therefore the important questions are
the credit part o. Il flexible? If not, ho'
can Il be made flexible?
! l think we are ali agreed as to the answe
to the first question. National bank note
under the present system OF issue and rS
demption are almost utterly devoid OF tha
element OF elasticity, of eNpanstbility an
cOntractibility, which renders our depOs
! currency so scrVlceable. In the first plaC
the conditions governing their issue an
1 such that no bank puts them forth merel
TO satisfy temporary increase In the nee
, profit and no advantage in so doing @
. / the contrary, at time when banks al
losing cash because depositors are with
drawing it for use in making exchange
each individual bank sees chance OF los
, Z rather than OF gain in an increase OF Il
, circulation. Since II must buy bonds at
J premium, II must pay out more currenC
than IL will receive back in the form
bank notes. It's own ability 20 supply cas-
: to its customers will be lessened rathi
{ than increased. Again there Is the ris
that IL Will lose on the bonds for the ma
/ ket price is uncertain. Should Il issue MOI
notes than IL can keep constantly IN circt
lauOn II may have to sell the bonds at
) loss. As a result, banks do not increds
their circulation unless they think thu
bonds are good investment ana that n
! growth OF the country will absorb the ne
notes. Under these circumstances they al
Wiling to have expansion, but under
circumstances DO they want cOntrac tic
forced upon them.
3 This leads me TO speak OF a second d
r feet of our bank note system. In IA
country there is only one clearing hOu
for baak notes and that Is at Washin
I ton, and is managed Us the government
y As result the redemption OF bank notes