Fr011i Our Financial Correspondent
I have been reading a large number of articles recently on banks and bunking.
The writers of those articles appear to be in great distress, and they all make the same complaint. The banks, they declare, arc not nearly as liquid as they Ought to be.
I can still remember the thrill of surprise I felt on the first occasion when I was told that a bank's first duty was to keep liquid. I had not, somehow. associated these solid and noble buildings with instability in any of its forms. I was told that liquidity is stability— the only real stability.
Later in life I learned the meaning of this remarkable paradox. A hank, I found, is "liquid " when the securities it has taken against its loans can be sold in a hurry at their full face value.
When the securities cannot be sold in a hurry without incurring loss, the bank is " frozen."
U.S. Banks "Frozen"
In America, as I gather from the writers
have just mentioned, nearly all the banks are " frozen," or if not frozen at least becoming very cold. The reason is that they arc stuffed full of government paper.
In other words they have been lending great quantities of their credit to President Roosevelt in exchange for President Roosevelt's 1.0.U.s.
The president has made use of the creditmoney to start public works and to heir) the unemployed, and this money has gone out in wages and grants and has found its way to the shopkeepers and the farmers and the factories. As a result shopkeepers and farmers and factory owners have been doing a good trade and getting out of debt.
Not only so, but a large number of shopkeepers and farmers and factory owners have been acquiring little nest-eggs of their own.
No New Borrowers These nest-eggs are deposited in • the banks. People with nest-eggs do not borrow.
So the poor bankers find themselves in the position that the money they lent has all been paid back—by the shopkeepers and farmers, and factory owners—and no new borrowers are corning forward to ask for it.
Now, in the good old days, that trouble would have carried its own cure. As people repaid their debts the amount of money in circulation would have grown smaller and smaller—because " creditmoney " and debt are one and the same thing. Repaynienr, in other words, would have had the same sort of effect as putting money awl,o in stockings or urtper the bed.'
And as the amount of money had grown smaller, prices would have fallen owing to want of money to buy things with.
That would soon have put shopkeepers and farmers and factory owners back into debt. First these poor souls would have been forced to draw out and spend their little nest-eggs in paying rates and rents and taxes. And then, when the nest-eggs were all used up, they would have been forced to borrow once more.
But the good old days in America have faded into the past—owing to the terrible and even ravenous hunger for loans of Mr. Roosevelt. You simply cannot satisfy the president in the matter of loans.
As soon, therefore, as a farmer pays off his debt to his bank, Mr. Roosevelt appears and borrows the money that was paid back.
Unsafe Borrowers And so, almost before you realise what is happening, that money is back again in the markets as wages or relief. Prices do not fall and the nest-eggs do not have to be drawn out.
And so while millions of Americans are getting out of debt the president is getting deeper and deeper and deeper into debt.
What happens next?
Obviously if one is the only borrower in the country, or at any rate the only big borrower, one can borrow very cheaply. For if not, then one's I.O.U.s already outstanding must lose value. Borrowers who have to pay high rates of interest are unsafe borrowers, and the I.O.U.s of unsafe borrowers are unsafe I.O.U.s.
Banks Kept " Liquid"
But every bank in America is stuffed with Mr. Roosevelt's 1.0.U.s, as has been said. Consequently if any bank was to refuse to lend to Mr. Roosevelt, or was to demand a high rate of interest from him, the securities held by all the banks (Mr. Roosevelt's I.O.U.$) would fall heavily in value.
All the banks would immediately be " frozen " stiff.
To avoid that the banks must go on lending at ever lower and lower rates of interest. And they must look, too, as if they liked it. That keeps them " liquid " in the sense that Mr. Roosevelt's .1.0.U.s (the government bonds) stand at a good price.
But it secures also that no bank dares to sell Mr. Roosevelt's 1.0.U.s in any large quantity. Much selling would cause the price of the 1.0.U.s to fall, and so would " freeze " all the banks.
Master Head of State In other words, the American banks have to do what the president wants. It is no longer, as in the good old days, the banks who are master; the master now is the head of the State.
How will it end? How is Mr. Roosevelt going to pay off that tremendous load of debt?
The answer is that he is now paying it off. Fle is borrowing to-day at 1 per cent. per annum for five-year bonds. He is using these new borrowings to pay off the old loans at 4 per cent. and 5 per cent. Consequently the interest he has to pay now is actually less than it was when he became president.
But no bank can grow rich on loans at per cent. There is not enough, there to pay for clerking. The day will come, therefore, when the banks will have to ask Mr. Roosevelt to take them over in the sense of taking over their debts to their customers.
Naturally, if he does that, he will also take over his own debt as well.
America will have no national debt.