Charles Lindbergh
Banking and Currency


SHORT SELLING.


We hear many objections raised against short selling, going short in the sales of stocks, securities, grain, provisions, etc., on the market.  Short selling means the selling of what the vendor does not possess.  In Congress there is pending at all times one or more bills purposed to prohibit this practice.  There is, at the present time, serious consideration of passing a bill which will prohibit all short selling, because it is claimed that the practice enables speculators to manipulate the market in a manner that makes it possible for them to pay the producers less and charge the consumers more.  This short selling is a much more comprehensive affair than the sponsors of the bills referred to have allowed the public to gather from any expression of theirs which has been given to the public.

It is from the practice of short selling that the bankers derive the greatest profits.  That statement will, when first read, meet with resentment and denial on the part of the bankers.  It will also surprise many others, but the banker, as well as the others, will admit of its truth when they have fully considered it.  If a person were to sell a thousand bushels of wheat or ten shares of stock that he does not own, it becomes necessary for him to go into the market and buy it at the time that he is required to deliver it to the purchaser.  Ordinarily, the purchaser on the stock or produce market does not require the vendor to do that, but settles with him for whatever the actual market price is at the time for final settlement.  The banker is doing the same thing with the dollar.

All of the money in all of the banks and trust companies combined is only slightly in excess of a billion and a half of dollars, and the banks owe approximately twenty billion dollars.  There is not enough money in all of their vaults to pay one-tenth of what they owe.  There is not money enough in the whole country, including that outside of the banks, to pay one-sixth of what they owe.  That statement may sound a little different from the statement made about the grain and stock gambler, but to those who understand the effect of existing facts,—conditions,—it is clear that the banks are sold short just as effectively as the stock and grain gambler.

Let us follow these facts further as to their reality.  No bank could pay its obligations without collecting its outstanding credits.  If a simultaneous demand were to be made by all of the creditors of all of the banks, all of the banks would fail.  That is because they are all short sold.  There is, however, one difference between the banker's practice of short selling, and that of the ordinary stock gambler.  The man who borrows from a bank will give his note to the bank, and ordinarily the banker simply credits him on the books of the bank, with the amount of the note less the interest.  The bank does not part with the cash, but lets the borrower draw checks upon the account, and, therefore, merely transfers the credit to someone else, for these checks are, in most cases, deposited instead of cashed.  The bank continues to draw interest on the note.  The party who borrowed sold short to the bank by agreeing to deliver to the bank, when due, the number of dollars that his note calls for, and the bank sold short to the borrower by agreeing to deliver to him that many dollars before the note comes due.  Now, in that transaction there were two short sales.  The man who borrowed the money agreed to pay at a future date what he did not have when he borrowed, and the banker agreed to pay immediately what he would not have had if he had first paid his other demand obligations.  Now, the difference in the way that deal was conducted, and the manner in which the stock gambler carries on his short sales is, that the stock gambler, when a person sells short to him (that is, agrees to sell him stock or provisions to be delivered), does not pay interest to the person so selling.  Anyone who carefully investigates the effect of this fact upon the cost of living will find that the short-selling operations of the stock gamblers influence the cost of living far less than the short selling which I have described as being practised by the banks.  The banks should not be condemned for this, however, because it is the only way in which the business of the country can be carried an under the present system, or until a new system has been inaugurated.

Every student who has carefully considered this subject knows that the people, as a whole, which includes themselves as individuals, the General Government, the states and municipalities, cannot pay interest on all of the money that they have agreed to pay.  That is because money does not create itself.  It is claimed that everyone who has a dollar and loans it out is entitled to interest.  It takes one dollar to furnish the exact equivalent of another dollar.  It takes a dollar to pay a dollar debt, and, since that is true, there are no dollars left with which to pay interest.  The whole country has sold money short and could not possibly deliver or pay the money that it has agreed to pay.  The present outstanding interest-bearing contracts are rapidly approaching the hundred-billion-dollar mark.  The annual interest alone, contracted to be paid on these obligations, probably exceeds all of the money in existence.  Of course, some of this interest is paid from other interest collected and is offset, and the total net interest is reduced somewhat by that fact, but the greater part of it still remains to be made up from other sources.

The only way that interest can be liquidated, considering the statement in its general application, is by a transfer of the property or the services of the debtor class to the creditor class.  But, all interest cannot be paid in full even in that way, because, as we have already seen in a former chapter, the geometrical progression of computing interest accumulates it so rapidly that it would exhaust all there is and fail because of the impossibility of its going further.  We, as a people, are in that economic state and cannot extricate ourselves from it under existing conditions.  The whole country is sold short by the debtors who have agreed to pay what they have not, and what they cannot get.  The creditors “have a corner” on us.  How are they enforcing settlement ?  It is being done in several ways.  We are compelled to work more hours per day, receive less pay per hour, pay more for what we buy, and receive less for what we sell.  The consequence is that we must work harder and more hours per day than we should, and in the end have less than what is due to us as our part of the advantages, conveniences and opportunities resulting from the advancing civilization.  This means absolute destitution for great numbers of the debtor class and an enormous general loss.  When I say the debtor class, I do not mean only those who have borrowed money or who owe open accounts.  Debt is now one of the most positive influences in our system.  The consumer is a debtor because he owes it to the producer to pay his part of the interest and taxes that are added to the cost of production under the present system.  As a consequence, we are all virtually debtors, and comparatively few of us have credits and profits enough to offset the debt, or any other way by which to pay it except from the products resulting from our daily toil.  Such a condition reduces the general efficiency of the people, and they are compelled to live on a lower scale than they should.