MR. LABORINGMAN: What do you mean by tying up the capital and deposits of a bank in mortgages and real estate?
MR. BANKER: I will explain that to you in such a way that I am sure you cannot fail to understand and appreciate it. Suppose that I had $100,000 in cash in my bank to meet the demands of my depositors; but should give it to farmers in exchange for mortgages upon their farms. I could not pay my depositors the mortgages; they want money. I might not be able, and probably would not be able, to sell the mortgages in time to pay the depositors their money; and if money happened to be scarce, possibly not for a long time would I be able to pay them their money. I would have that $100,000 tied up in mortgages. This is granting credit on land. Now, these mortgages will continue in existence until the farmers can make enough out of their crops to pay the interest upon them from year to year, and finally to pay them off; it may take ten or twenty years. If I had loaned $100,000 on cotton or cattle, the products of the farm, they could have been converted immediately into money at some price to meet the demands of my depositors.
MR. LABORINGMAN: I see now that you bankers must keep the money you receive from us depositors, either in cash or in something you can instantly convert into money, and when you don't do that, you have tied it up, as you say; and if we happen to find it out we are apt to want our money; and if we all want it at the same time, you call it a run on your bank. Now when you say a banker is ready for a run, you mean, as I now understand it, that he has all his deposits on hand in cash, or has all his deposits invested in something that he can turn into cash: good notes that have been taken in the course of business, that is, in the production and transportation of consumable commodities, the necessaries of life. Of course, anybody must understand that if a bank bought a lot of farms or a lot of farm mortgages (and it might be worse off if it bought city mortgages with our deposits), he could not convert them or turn them into money on demand. I am on to this thing now; neither mortgages nor land can be considered what you described a minute ago as quick assets, or as liquid assets, because you cannot convert them into money practically on demand.