described in Section 14 properly endorsed and acceptable to the said reserve bank." Section 14 reads:

"Any federal reserve bank may, under rules and regulations prescribed by the Federal Reserve Board, purchase and sell in the open market, at home or abroad, either from or to domestic or foreign banks, firms, corporations, or individuals, cable transfers and bankers' acceptances and bills of exchange of the kinds and maturities by this Act made eligible for re-discount, with or without the indorsement of a member bank."

This section is the result of agitation now for many years by Mr. Paul M. Warburg, and it covers fully foreign bills of exchange.

"Bankers' acceptances and bills of exchanges" are known abroad, but acceptances and bills of exchange are not known as between bankers of this country.

Right at the start the Act may have to be amended to make the eligible paper for instalment payments that likewise described in Section 13 as "notes, drafts, and bills of exchange, arising out of actual commercial transactions" or "drawn for agricultural, industrial or commercial purposes," "the Federal Reserve Board to have the right to determine or define the character of the paper thus eligible for discount, within the meaning of this Act."

It will thus be seen that the Act may need amendment unless foreign acceptances and bills of exchange are to have the right of entry for the first 200 millions into the Federal Reserve Banks.

Of course, the wording of this Act can be circumvented by member banks re-discounting under Section 13 and then making transfer of credit with the reserve bank for their instalment payments,

It would seem, however, as though the Act should be immediately amended by making Section 19 read: "Eligible paper as described in Sections 13 and 14" instead of only "as described in Section 14."*

Before "acceptance" and "bill" markets can be set up here, under the new currency act America is going into an industrial expansion such as has never before been known.

Now industrial expansion has very little relation to that which makes so-called commercial paper which, in the text of the letter, appears to be the keynote of the bank act but which can have little relation to the bank act until there is expansion in prices of labor

*Note. Since this was written Section 19 has been amended to read "Eligible paper as described in Section 13."

or commodities or there has been an over-investment in the field of constructive industry. It sometimes appears as though the greatest good to the greatest number in the world arose from popular fiction, fabrication or misinformation. What the theologians call "apparent truth" is sometimes more potential than real truth and in certain ways it may accomplish great good.

Our brothers of the South may have thought Uncle Tom's Cabin a very useful book in making white owners of black men more prudent and careful. They rested their faith in the Constitution, but fiction was more powerful.

That there was no demand for more currency or facilities for expanded credit to move the commerce of the United States, and that all such demand was a political fiction and never a financial reality will be shown in the next article.

XIX

CONSTRUCTION NEEDS.

The cry that has gone up from Congress has been, "Unshackle business." "Away with stocks and bonds and Wall Street." "Give hogs and hens, beef on hoof, cotton in bales, and wheat in barn, the right of way to market." "We will build a bank act that will give commerce right of way to bring raw products from farm to factory and family."

Let us see where commerce stands in relation to raw products from farm to factory or family.

The cotton crop of the United States is estimated at a value of $975,000,000. Summon all of the money of the world to assist in its financing to market and you could not employ $200,000,000 in sixty or ninety day bills, for the cotton grower has now some money himself. The wheat crop requires less money. The corn crop and the grass crops although worth more also take less money as they move largely in pork and beef. No great amount of money in credit form of commercial paper is required to move iron or coal. The Reading Railroad and the Steel Corporation are not makers of commercial paper. The real financial requirements of commerce are largely away from the farm and after raw materials have been multiplied in value by added labor.

The Washington authorities have been trying to get some estimates of the amount of commercial paper in the banks. For the purpose of these articles leading bankers of the country have been likewise canvassed for estimates that would be valuable in revision of the government tables. The Comptroller of the Currency in his annual report issued in December presents a table on page five showing that on June 4, 1913, of the $6,143,000,000 loans in the national banks 33%, or $2,032,000,000, were time paper with two or more individual or firm names. Single name time paper without other security was 20%, or $1,261,000,000. There were demand loans of $603,000,000, with one or more individual names. There were time and demand loans on stocks and bonds, or mortgages, or other real estate security amounting to $2,245,000,000, or 36%. If the demand loans are divided as between commercial and collateral loans, the commercial loans would stand at 58%, or $3,600,000,000.

The best estimates that we can get privately of bankers is that

the real commercial loans in the national banks do not exceed three billions, or one-half the loan account.

While the paper appears in the form of commercial loans a considerable part is for fixed forms of property and for as distinctively industrial construction expansion as are stocks and bonds. And why should it not be?

A merchant with sufficient capital to do his own banking may have several hundred thousand dollars cash in the bank, owe no money and have a million dollars in accounts on his books, or notes in his box representing commercial loans due him. His business. expands and he desires to put a half million or a million into a new factory. Will he issue stocks or bonds or make any permanent borrowing for this? Certainly not. He notifies his bank he will want a half million or more money covering certain months. The bank's response is, of course, that he can have all the money he wants and give any kind of a note on time or demand. His cash balance is worthy of this credit. His borrowing is, therefore, not necessary commercial borrowing, but the commercial borrowing is forced by his construction.

The state banks and trust companies carry far less commercial paper than the national banks. On page 51 of the report of the Comptroller of the Currency will be found a record of not only the 7473 national banks but of 18,520 state banks, trust companies, private bankers and savings banks in respect to the character of their loans. Out of a total of $14,600,000,000 loans based largely on demand deposits $3,500,000,000 are secured by real estate and mortgages, and $4,500,000,000 by other collateral,—$8,000,000,000 on fixed forms of property. The "other loans" are $6,500,000,000 including of course the so-called $3,600,000,000 commercial loans in the national banks as noted above. Of these the real commercial loans are somewhere between three billion and six billion. Private estimates of bankers with far better knowledge of the real situation than is possessed by the government officials vary all the way between these two figures.

We have for some time estimated that the real commercial loans for the transactions of commerce in this country do not exceed five billions and that between nine and ten billions of bank loans are on fixed forms of property.

This represents property in process of digestion by investors. When the amount is large, or the investment fund is light, it is termed over-investment or indigestion of securities.

Nearly two-thirds of our bank loans represent constructive industry-stocks, bonds and fixed forms of property in process of digestion and only one-third represents commercial transactions

XX

OUR INVESTMENT DIGESTION.

The highest estimate of growth in values in this country is seven billions per annum. This includes road building, house building, and all forms of property accretion. It is not probable that more than two billions take form in stocks and bonds, or in such shape as to be available in bank loans.

If, therefore, we have an investment digestion capable of absorbing two billions a year we are already and steadily over-invested by from four to five years. This over-investment is taken care of largely in bank loans. It is just as clearly property moving to market as hogs or cotton.

Strange as the statement may appear, it is nevertheless a provable fact that the flexibility in our bank reserves is entirely in this ten billions and not in the five billions of commercial paper.

The most fixed thing in the bank loans is the commercial paper, as Mr. Armour had to show the Chicago bankers in 1907.

They asked him to reduce his loans. He exclaimed, "What! I who am liquidating the country and taking the cattle, sheep and hogs that are being daily sent to market to liquidate bank loans! I who am pushing pork and beef over to Europe for money, must curtail! Gentlemen, I am the liquidator! What would be the condition of your bank loans if I turned these cattle back to the farms?"

Mr. Armour was right. The theory is that a commercial loan based upon consumable products liquidates itself. But until the world stops eating and drinking or wearing clothes or consuming fuel, there is a new note right behind the one liquidated by the consumable commodities. Across the continent there is a line of sheep and a commercial note on the tail of each sheep in endless procession. There is no fluctuation possible with commercial notes based on consumable commodities unless prices are changed, or the capital of the merchant, or middleman, is expanded.

It is Wall Street and its shrinkage in stocks and bonds; it is slaughter of the lambs, and the liquidation of margin held investments that has eased money, in every pinch, up to 1913.

One of the most sagacious financiers in Wall Street failed to buy securities in the latter part of 1913 because he was out of sorts