Evening star., 1936-02-11
PEOPLE TOLERATE
CREDIT INITIATION
Public, However, Will Not
Stand for Fiat Money,
Says Observer.
BY DAVID LAWRENCE.

SION, Is an lQQlcaClOO IlldC tIle Sup-
ject cannot be dismissed as irrelevant
even If it Is assured that President
Roosevelt Is opposed to printing press
money of any sort.
What the people who write In to
Washington want to know Is this:
II the Federal Government can issue
its own bonds in extensive quanti-
ties and these bonds become the
equivalent Of money at the banks,
why cannot the Government issue
currency directly and save itself the
payment of interest?
This is q fair question, especially
In view of the fact that $50 of Gov
ernment bonds can, under the law,
constitute the backing for the issuance
Of. s100 of currency, provided the
other $40 worth of backing is in
the form of gold certificates held
at the Federal Reserve banks as
reserve.
Borrowing From People.
Government bonds, however, are
originally a borrowing from the peo-
pie, who draw from their bank funds.
coming unless the people or their
trustees in the banks felt that bank
deposits could be safely invested In
those bonds.
When are Government bonds a
safe investment? The answer Is:
When it is apparent to the investors
either banking institutions or in
dividuals-that the Government will
repay the bonds at maturity.
What evidence or indication is
there that the Government will re-
pay? One evidence is that the Gov
ernment will raise revenue through
taxes, that 1t will gradually balance
its expenses against receipts and pro-
vide for annual installment payments
to retire the bonds.
Another evidence of intention to
repay is the willingness of the Gov
ernment to pay interest for the hir-
ing of the peoples money. The in
terest charge is an incentive toward
ultimate retirement instead of per-
petual maintenance of the debt.
Otherwise, there would be such an
extensive increase in the size of the
debt as to arouse doubts whether q
Government had the capacity to re-
pay any of its outstanding bonds at
100 cents on the dollar.
Faith Must Have Basis.
There is no physical reason at all
Wny government cannot issue bonds
without interest or currency in unIirn-
ited quantities. The printing presses
could turn out the bills and the bonds
But how would they get into circula-
ton?
Let us suppose the Government used
the currency to pay for relief projects
or for the purchases of materials or
to pay Federal employees. The ques-
uon would then turn on what faith
the storekeepers and merchants gen.
orally would have in accepting at 100
cents the currency issued or what
faith the holders Of bonds previously
issued would have in retaining their
securities or selling them. The mar
kets would promptly reflect the down.
ward trend In bonds and a dollar bill
might sell at q discount, as it did In
Civil War days. when It got down to
IS cents.
Faith Is not merely a blind conf
oence in Government seal or stamp.
It Is something that starts with those
who are familiar with the backing of
currencies and the capacity Of gov
ernments to pay bonds. The feeling
OF confidence or lack Of confidence
percolates very quickly from the In
Vestment expert down through the
community to all the people.
In the case Of drop in confidence
In government, as happened in Ger
many In 1923, the people did not feel
safe In keeping their currency very
long, so they converted it quickly into
commodities or things. For a time,
this creates demand for goods and
looks healthy. But actually it is a
feVer which, when it runs its course,
leaves a terrible residue. Once paper
money begins to depreciate in value,
or rather once prices begin to sky
rocket in terms Of paper money, hu-
man nature Is such that the drop In
value becomes uncomfortable.
Gold Pledged as Security.
Today. while the American people
know they cannot actually get gold
Tor their currency, they have a feel
ing that the Federal Reserve Banks
do hold gold certificates, against which
the gold bullion in the Treasury Is
pledged by law as security.
This may not be known to the
masses who use currency every day.
out 1t Is known to the banks and to
financial institutions. This accounts
for the feeling that America today
mas q sound monetary base and will
continue to have it so long as there
Is no material change in the gold con-
tent Of the dollar or SO long as Gov
eminent borrowings are not multi
piled beyond the Nations capacity to
repay debt.
IL has been assumed that, either
through the Federal Reserve banks or
through the Treasury, both the pledged
ana unpiedged gold amounting to $10,-
ooO,0O0,000 could be used as q nucleus
for the issuance Of two and half
times that amount of currency, instead
Of the $500, ,o00, 900 Of currency out
standing today.
This; theory arises out of the fact
that 40 per cent is usually considered
. sound legal reserve in gold for the
Issuance Of currency. Since $10,000.-
600, 900 In gold bullion would be 40 Der
cent OF s25.000, ,oo0,o 900 Of possible cur
rency expansion, the impression has
been held that a mere $1,000 ,000, 900
or more Of currency issued now would
do no harm and would be less costly
than $4,000, ,000, 900 in bonds, especially
since the latter require an interest
payment.
Heavy Bond Issues Overlooked.
What Is overlooked is that the Fed
erAl Treasury has actually issued ap-
proximately $50 .o00, ,oo0, 900 in bonds,
Of which nearly half Is Of such short
term as to carry q negligible interest
charge. If bonds and currency are
considered the same thing, then the