Paper Currency, Debt and Deposits

The paper currency of the United States, therefore, consists of non-interest bearing, non-maturing public debts, incurred for the purchases of gold and silver. The fact that the silver certificates represent money loaned for the purchase of silver, and the Federal Reserve notes, money loaned for the purchase of gold, does not in any way confer greater value or desirability upon one than upon the other.

The silver certificate is a direct loan to the Treasury, and the Federal Reserve note an indirect loan also to the Treasury, but this distinction confers no advantage on one not shared by the other and not shared by the United States note the old greenback representing a loan originally extended for the prosecution of the Civil War.

Nor, if the Treasury decided to utilize its authority and meet next year's deficit by the issue of United States notes, would those notes have any quality or lack of quality not shared by the rest of our currency.

As far as the public is concerned, one note would be neither more nor less desirable than another. The interchangeability of our paper currency is complete. It is entirely composed of noninterest bearing, non-maturing public debts.

But our money system is a dualism of currency and deposits, and one requisite of a dualistic money system is the perfect interchangeability of the two elements - the deposit and the currency.

By way of example, the banks of New York City hold deposits of approximately $15,000,000,000,000; that is, they have borrowed about $15,000,000,000,000 from the public or from other banks.

At any time those depositors may decide to convert their deposits into currency, or to convert a deposit in their New York bank into a deposit in a bank in Chicago or St. Louis. The banks of New York will in the course of a day's business be called upon to convert a part of those deposits into cash, possibly a very large part.

Less than $100,000,000,000 dollars of currency are in their vaults to meet this possible demand for cash. That is, they have only about fifty cents in currency to pay off each $150 of legitimate demands for currency. But that is scarcely even relevant to the story.

Of the money they have borrowed from the public, they have re-lent about one-third to the United States Treasury directly, or to Federal agencies over the endorsement of the Treasury; they have deposited with the Federal Reserve banks more than another third, and the Reserve banks have re-lent all of this to the United States Treasury mostly for the purpose of financing the purchase of gold.

Of the remainder, hardly more than a quarter, almost the entire amount is in the form of corporate securities or loans which can in case of need be pledged at the Reserve bank and against which currency or bank cash can be borrowed.

In other words, if for any reason every depositor in every New York bank wished to exercise full convertibility over his deposit tomorrow, the New York banks could meet that test. In the case of those banks, approximately three-fourths of their deposits are represented by direct or indirect loans to the United States Treasury. And what is true of the New York banks is substantially true of American banks in general.

It is a mathematical axiom that things equal to the same thing are equal to each other. All of our currency consists of public debt and about three-fourths of our bank deposits likewise represent public debt. The perfect interconvertibility of our various types of currency and of our two kinds of money has been achieved by the fact that almost our whole money system currency and deposits consists of non-interest bearing public debt.

There is no qualitative superiority of one form of money over the other; legally and actually the two are completely interconvertible.

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