translated by Philip Pye M.A.
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The NATURAL ECONOMIC ORDER
translated
by Philip Pye M.A.
PREFACE
(Preface to the
third edition, 1918) Magna quies in magna spe.
The economic order here discussed is
a natural order only in the sense that it is adapted to the nature of man. It
is not an order which arises spontaneously as a natural product. Such an order
does not, indeed, exist, for the order which we impose upon ourselves is always
an act, an act consciously willed.
The proof that an economic order is
suited to the nature of man is furnished by observation of mankind's
development. The economic order under which men thrive is the most natural
economic order. Whether an economic order which stands this test is at the same
time technically the most efficient order, whether it provides the bureau of
trade statistics with record figures is a matter of secondary importance. At
the present day it is easy to imagine an economic system of high technical
efficiency coupled with gradual exhaustion of the human material. It may,
however, be taken for granted that an economic order under which mankind
thrives will also prove its technical superiority. For human work can, ultimately,
only advance with the advance of the human race. "Man is the measure of
all things" including the economic system under which he lives.
The prosperity of mankind, as of all living beings, depends in the main
upon whether selection takes place under natural laws. But these laws demand
competition. Only through competition, chiefly competition in the economic
sphere, is right evolution, eugenesis, possible. Those who wish to ensure the
full miraculous effects of the laws of natural selection must base their
economic order upon competition under the conditions really decreed by nature,
that is, with the weapons furnished by nature after the exclusion of all
privileges. Success in competition must be exclusively determined by inborn
characteristics, for only so are the causes of the success transmitted to the
offspring and added to the common characteristics of mankind. Children must owe
their success, not to money, not to paper privileges, but to the ability,
strength, love and wisdom of their parents. Only then shall we be justified in
hoping that humanity may in time shake off the burden of inferior individuals
imposed upon it by thousands of years of unnatural selection - selection
vitiated by money and privileges. And we may also hope that in this way
supremacy may pass from the hands of the privileged, and that mankind, led by
the noblest sons of men, may resume its long-interrupted ascent towards divine
aims.
But the economic order which we are
about to discuss has another claim to the title of a natural order.
Human beings, to prosper, must be
able under all circumstances to give themselves out for what they are. A man
must be something, not appear something; he must be able to stride through life
with head erect-to speak the truth without incurring the risk Of hardship or
injury. Sincerity must not remain the privilege of heroes. The economic order
must be so framed that a man may combine sincerity with the highest degree of
economic success. The dependence inseparable from economic life should affect
things only, not men.
If a man is to be free to act as his
nature dictates, religion, custom and law must extend him their protection
when, in his economic life, he is guided by justified egoism-when he obeys the
impulse of self- preservation given him by nature. If a malls actions conflict
with religious opinions, and if the man, nevertheless, is morally thriving, the
religious opinions should be examined afresh on the presumption that a tree
cannot be evil which bears good fruit. We must avoid the fate of a Christian
reduced to beggary and disarmed in the economic trial of strength by the
logical application of his creed-with the result that he and his brood go under
in the process of natural selection. Humanity gains nothing if the finest
individuals it produces are crucified. Eugenic selection requires the direct
contrary. The best of mankind must be allowed to develop, for only then can we
hope that the inexhaustible treasures latent in man will gradually be brought
to light.
The Natural Economic Order must,
therefore, be founded upon self-interest. Economic life makes painful demands
upon the will, for great natural indolence must be overcome; it requires,
therefore, strong impulses, and the only impulse of sufficient strength and
constancy is egoism. The economist who calculates and builds upon egoism,
calculates correctly and builds for all time. The religious precepts of
Christianity must not, therefore, be transferred to economic life, where their
only effect is to produce hypocrisy. Spiritual needs arise only when bodily
needs have been satisfied, and economic effort should satisfy the bodily needs.
It would be preposterous to start work with a prayer or poem. " The mother
of the useful arts is want; the mother of the fine arts is superfluity "
says Schopenhauer. In other words, we beg when hungry and pray when fed.
An economic order thus founded upon
egoism is in no way opposed to the higher impulses which preserve the species.
On the contrary, it furnishes the opportunities for altruistic actions and the
means for performing them. It strengthens the altruistic impulses by making
their satisfaction possible. Under the opposite form of economic order everyone
would send needy friends to an insurance company and sick relatives to a
hospital, the State would make all personal assistance superfluous. With such
an order it seems to me that many tender and valuable impulses must be
lost.
In the Natural Economic Order
founded upon egoism everyone must be assured the full proceeds of his own
labour, and must be allowed to dispose of these proceeds as he thinks fit.
Anyone who finds satisfaction in sharing his wages, his income, his harvest,
with the poor may do so. Nobody requires, but nobody hinders such action. It
has been said that the most cruel punishment imaginable is to bring a man among
sufferers crying aloud for help which he is unable to give them. To this
terrible situation we condemn each other if we build economic life on any other
basis than egoism; if we do not allow everyone to dispose as he thinks fit of
the proceeds of his labour. To reassure the humanitarian reader we may here
remark that public spirit and self-sacrifice best thrive when the economic task
is crowned with success. The spirit of sacrifice is one result of the feeling
of personal security and power of those who know that they can trust to their
own right hands. We may also remark that egoism should not be confused with
selfishness. Selfishness is the vice of the short-sighted. Wise men soon recognise
that their interest is best served by the prosperity of the whole.
By the Natural Economic Order we
mean, therefore, an order in which men compete on equal terms with the
equipment given them by nature, an order in which, consequently, the leadership
falls to the fittest, an order in which all privileges are abolished, in which
the individual, obeying the impulse of egoism, goes straight for his, aim,
undisturbed by scruples alien to economic life-scruples which he will have
opportunities enough of obeying outside economic life.
One of the conditions of this
natural order is fulfilled in our present, much-abused, economic order. The
present economic system is founded upon egoism, and its technical achievements,
which nobody denies, are a guarantee of the efficiency of the new order. But
the other, the most essential condition of any economic order that can be
called natural-equal equipment for the economic struggle-remains to be
achieved. Purposeful constructive reform must be directed towards suppressing
all privileges which could falsify the result of competition. This is the aim
of the two fundamental reforms here described: Free-Land and Free-Money.
The Natural Economic Order might
also be called the "Manchester System", the economic order which has
been the ideal of all true lovers of freedom-an order standing by itself
without intervention from outside, an order in which the free play of economic
forces would rectify the blunders of StateSocialism and short-sighted official
meddling.
One can, it is true, now speak of
the Manchester system only to those whose judgement is unaffected by the
mistaken attempts at putting it in practice. Faults of execution are not proofs
of the faultiness of the plan itself, yet an acquaintance with what is
popularly known as the Manchester system is enough to make most people curse
the whole theory from beginning to end.
The Manchester school of economists
took the right road, and the subsequent Darwinian additions to their doctrine
were also correct. But the first and most important condition of the system was
not investigated. There was no inquiry about the field in which the free play
of economic forces was to take place. It was assumed, sometimes from dishonest
motives, that the conditions of competition in the existing order (including
the privileges attached to the private ownership of land and to money) were
already sufficiently free, provided that the State stood aside and interfered
no further with the development of economic life.
These economists forgot, or did not
wish to see, that for a natural development the proletariat must be given the
right of reconquering the land with the same weapons by which it was taken from
them. Instead of this, the Manchester economists appealed to the State, which
by its intervention had already disturbed the free play of economic forces, to
prevent, by its power of coercion, the establishment of a really free play of
forces. Such an application of the Manchester system was by no means in
accordance with its theory. To protect certain privileges, dishonest
politicians exploited a theory which rejected all privileges.
To form a just opinion of the
original Manchester theory one must not begin by investigating its later
applications. The Manchester economists expected from the free play of forces,
first, that the rate of interest would gradually sink to zero. This expectation
was founded on the fact that in England, where the market was relatively best
provided with loan-money, the rate of interest was also lowest. The release of
economic forces and their free play, with the resulting increase in the offer
of loan-money would eliminate interest and thus cleanse the darkest plague-spot
in our present economic system. The Manchester economists did not yet know that
certain inherent defects in our m monetary system (which they adopted without
examination) were insuperable obstacles to the elimination, in this way, of the
privileges of money.
Again the Manchester theory asserted
that the division of inheritances and the natural economic inferiority of
children bred in opulence would divide landed property and automatically bring
rents into the possession of the people as a whole. This belief may seem to us
to-day ill-grounded, but it was at least justified to this extent, that rents
were bound to fall by the amount of the protective duties after the
introduction of free-trade-,which was also a tenet of the school. In addition
to this, steamships and railways the workers, for the first time, freedom of
movement. The raised wages in England, at the expense of rents, to the level s
of labour earned by emigrants on rent- and American land (freeland farmers). At
the same time the produce of these freeland farmers reduced the price of
English farm produce-again at the expense of the English landlords. In Germany
and France this natural development was intensified to such a degree by the
adoption of the gold standard that a collapse would have occurred if the State
had not countered the results of its first intervention (gold standard) by a
second intervention (wheat-duties).
It is easy to understand, therefore,
why the Manchester economists living in the midst of this precipitate
development, and over-estimating its importance, believed that the free play of
economic forces might be expected to cleanse the second plaguespot in our
economic system, namely private ownership of rent on land.
In the third place the Manchester
economists held that since the application of their principle, the free play of
economic forces had eliminated local outbreaks of famine, the same methods,
namely improvement of the means of communication, trade organisation, extension
of banking facilities and so forth, must eliminate the causes of commercial
crises. It had been proved that famines are the result of defective local
distribution of foodstuffs, so commercial crises were supposed to be the result
of defective distribution of goods. And, indeed, if we are conscious of how
greatly the short-sighted policy of protective duties disturbs the natural
economic development of nations and of the world, we can readily pardon the
mistake of a free-trader of the Manchester school who, ignorant of the mighty
disturbances which can be caused by defects of the traditional monetary system,
expected the elimination of economic crises simply from free-trade.
The Manchester school argued
further: " If, by universal free-trade, we can keep economic life in full
activity; if the result of such untrammelled, uninterrupted work is an
over-production of capital which reduces and finally eliminates interest; if in
addition, the effect of the free play of economic forces on rent is what we
expect, the taxable capacity of the population must increase to such a degree
that within a short time the whole of the national and local debts all over the
world can be repaid. This will cleanse the fourth and last plague-spot in our
economic life, the burden of public debt. The ideal of freedom upon which our
system is based will then be justified before the whole world, and our envious,
malevolent and often dishonest critics will be reduced to silence."
That these fair hopes of the
Manchester school have in no single particular been fulfilled, that, on the
contrary, the defects of the existing economic order are becoming greater as
time goes on, is due to the fact that the Manchester economists, through
ignorance of monetary theory, adopted without criticism the traditional
monetary system which simply breaks down when the development foretold by the
Manchester economists sets in. They did not know that money makes interest the condition
of its services, that commercial crises, the deficit in the budget of the
earning classes and unemployment are simply effects of the traditional form of
money. The Manchester ideals and the gold standard are incompatible.
In the Natural Economic Order,
Free-Land and Free-Money win eliminate the unsightly, disturbing, dangerous
concomitants of the Manchester system, and create the conditions necessary for
a truly free play of economic forces. We shall then see whether such a social
order is not superior to the creed at present in vogue which promises salvation
from the assiduity, sense of duty, incorruptibility and humanitarian feelings
of a horde of officials.
The choice lies between private
control and State control of economic life; there is no third possibility.
Those who refuse to make this choice may, to inspire confidence, invent for the
order they propose attractive names such as co-operation or guild-socialism, or
nationalisation, but the fact cannot be disguised that all these amount to the
same thing, the same abominable rule of officials, the death of personal
freedom, personal responsibility and independence.
The proposals made in this book
bring us to the cross-roads. We are confronted with a new choice and must now
make our decision. No people has hitherto had an opportunity of making this
choice, but the facts now force us to take action, for economic life cannot
continue to develop as it has hitherto developed. We must either repair the
defects in the old economic structure or accept communism, community of
property. There is no other possibility.
It is immensely important that the
choice should be made with care. This is no question of detail such as, for
example, whether autocratic government is preferable to government by the
people, or whether the efficiency of labour is greater in a State enterprise
than in a private enterprise. We are here on a higher plane. We are confronted
with the problem, to whom is the further evolution of the human race to be
entrusted ? Shall nature, with iron logic, carry out the process by natural
selection, or shall the feeble reason of man - present - day, degenerate man -
take over this function from nature ? That is what we have to decide.
In the Natural Economic Order,
selection under free competition untrammelled by privileges will be determined
by personal achievement, and will therefore result in the development of the
qualities of the individual; for work is the only weapon of civilised man in
the struggle for existence. Man seeks to hold his own in competition by
constantly increasing and perfecting his achievements. These achievements
determine whether and at what time he can found a family, in which manner he
can rear his children and ensure the propagation of his qualities. Competition
of this kind must not be pictured as a wrestling match or as a struggle such as
takes place, for example, among the desert beasts of prey. Nor should it be
imagined that the issue for the vanquished is death. Such a form of selection
would be purposeless, for human strength is no longer brute force. We should
have to go far back into human history to find a leader who owed his position
to brute force. For the losers, therefore, competition has no longer the same
cruel consequences as in those early days. They would merely, because of their
inferiority, meet with greater obstacles when founding a family and bringing up
their children, and as a result would have a smaller number of descendants.
Even this result would not always follow in individual cases, for something
would depend on chance. But beyond all doubt free competition would favour the
efficient and lead to their increased propagation; and that alone would suffice
to ensure the ascent of man.
Natural selection, thus restored,
will be further intensified in the Natural Economic Order by the elimination of
sex privileges. To secure this aim, rent upon land will be divided among the
mothers in proportion to the number of their children, as compensation for the
burden of rearing children (Swiss mothers, for example, will receive about 60
francs a month for each child). This should make women economically independent
enough to prevent them from marrying out of economic necessity, or from
prolonging a marriage repugnant to their feelings, or from being forced into
the class of prostitutes after a first false step. In the Natural Economic
Order women will have not alone freedom to choose their political
representatives (an empty boon !) but freedom to choose their mates; and upon
this freedom is based the whole selective activity of nature.
Natural selection in its full,
miraculous effectiveness is then restored. The greater the effect of medical
science upon the conservation and propagation of congenitally inferior
individuals, the more important it becomes to preserve in full activity
nature's methods of natural selection. We can then without reproach yield to
the humane and Christian feelings which urge the application of medical
science. No matter how great the quantity of pathological material resulting
from the propagation of defective individuals, natural selection can cope with
it. Medical art can then delay, but it cannot arrest eugenesis.
If, on the other hand, we decide for
State control of economic life, we exclude nature from the process of
selection. Human propagation is not, indeed, formally handed over to the State,
but virtually it passes under State control. The State determines whether and
at what time a man can found a family, and what sort of upbringing he can
provide for his children. By paying its officials different salaries the State
at present intervenes decisively in the propagation of those in its service,
and in the future this intervention would become general. The type of human
being which pleased the State authorities would become the prevailing type. The
individual would then no longer gain his position by personal capacity, by his
relation to other men and to his surroundings; his success or failure would, on
the contrary, depend upon his relation to the heads of the party in power. He
would obtain his position by intrigue, and the cleverest intriguers would leave
the largest number of descendants - endowed of course with the qualities of
their parents. In this way State control of economic life would influence the
breeding of men, as changes of fashion in clothing influence the breeding of
sheep, and determine the numbers of white sheep and black sheep bred. The
authority composed of the cleverest intriguers would appoint - promote or
degrade - each individual. Those who refused to become intriguers would fall
into the rear, their type would become less numerous and finally disappear. The
State mould would form men. A development above the type it produced would be
impossible.
I shall spare my readers a description
of social life as it would develop under State control. But I should like to
remind them that the principle of the free play of economic forces, even the
travesty of this principle known to us before the war allows very great freedom
to large sections of society. Greater independence than that enjoyed by the
possessors of money cannot well be imagined. They have complete freedom of
choice of profession, work as they think fit, live as they wish, have perfect
freedom of movement and never learn the meaning of State control. No one asks
them from where they receive their money. They travel round the world with no
other luggage than an " open Sesame " in the shape of a
cheque-book-truly, for those concerned, an ideal state of things. This is
indeed recognised as the Golden Age - except by those excluded from this
freedom by defects of construction in our otherwise fundamentally sound
economic system - except, that is, by the proletariat. But are the wrongs of
the proletariat, the defects of construction in our economic system, any reason
for rejecting the system itself and introducing, in its stead, a new system
bound to deprive all men of their freedom, and to plunge the whole world into
slavery ? Would it not be more reasonable to repair the faults of construction,
to liberate the discontented workers, and in this way to make all men sharers
in the priceless freedom of the present system ? For the aim, most certainly,
is not to make all men unhappy; it is, on the contrary, to give all men access
to the sources of the joy of life, which can be unsealed only by free play of
the forces inherent in man.
From the point of view of economic technique, that is of
the efficiency of labour, the question of whether private enterprise is
preferable to State enterprise is equivalent to the question whether, in
general, the impulse of self-preservation is more effective in overcoming the
difficulties connected with each man's task in life than is the impulse of
race-preservation. (*The impulse, more or less developed in every man, to
preserve the whole, the species, the community, the people, the race, humanity)
This question, because of its
immediate practical importance, is perhaps more generally interesting than the
process of natural selection which requires ages to take effect. We shall
examine it briefly.
It is a curious phenomenon that a
communist, an advocate of community of property, usually believes all other
men-so far at least as they are personally unknown to him - to be more
unselfish than himself. Thus it often happens that the most short-sighted
egoists, who think first of themselves and sometimes only of themselves, are in
theory enthusiastic communists. Anyone who wishes to convince himself of this
fact need only, in an assembly of communists, make the truly communistic
proposal of pooling and redistributing in equal shares wages and salaries. The
result is a general silence, even among those who, a moment before, were
loudest in their praises of community of goods. All are silent because all are
calculating whether they would gain by community of wages. The leaders flatly
reject the proposal with the flimsiest arguments. Yet in fact there is no
obstacle to this community of income but the egoism of communists. Nothing
prevents the workers in a factory, community, or trade-union from pooling their
wages and distributing the total amount according to the needs of the separate
families. By this plan they could gain experience in a matter of difficulty;
they could convince the whole world of their communistic principles, and
completely refute the sceptics who deny that man is a communist. No one prevents
such communistic experiments; neither the State, nor the Church, nor the
capitalists. No capital is required, no paid officials, no complicated
preparations. A start could be made any day on any desired scale. But the need
among communists for real community of economic life is apparently so small
that such an experiment has never been attempted. Pooling of wages within the
capitalistic system only requires that the proceeds of labour should be divided
according to the personal needs of each individual; but for a State built upon
community of property it would be further necessary to prove that this system
did not diminish the individual's joy of work. This also the communists could
prove by pooling their wages. For if, after introduction of community of wages
(that is after abolition of all special reward for special effort) effort
(especially in piece-work) did not diminish; if the pooling of wages did not
reduce the total earnings; if the most efficient communists put their larger
earnings into the wage-fund as cheerfully as at present into their pockets,
then the proof would be complete. The failure of the numerous communistic
experiments in the sphere of production is by no means so conclusive a proof of
the impossibility of communism as the simple fact that the proposal to pool
wages always meets with point-blank rejection; for community in the production
of goods requires special preparations, discipline, technical and commercial
leadership and, as well, instruments of production. Failure can therefore be
explained in many ways, and is not a conclusive proof that the principle itself
is false, that the communistic spirit, the feeling of solidarity, is too weak.
But the proposal to pool wages makes evasive arguments impossible. Its
rejection is direct testimony against the communistic spirit against the
assertion that the impulse of race-preservation is sufficiently strong to
overcome the hardships attached the tasks of life.
It is no escape from the logic of
these facts to point to the existence of communism among the early Christians.
The early Christians who practised, it appears, community of earnings but not
the more difficult community of production, acted upon religious principles;
and the others who practised family or tribal communism were under the orders
of a patriarch, a father of the community. Both acted under forced or fanatical
obedience, not in obedience to impulse. They were driven by necessity; they had
no choice. Again, the production of goods for exchange, the division of labour,
which makes differences in the individual achievements measurable and visible
to every eye, had not yet been established. Primitive men sowed and reaped,
fished and hunted in company, they were all pulling on the same rope, so it was
not noticeable whether an individual pulled a little more or less. No standards
of measurement existed or were necessary, and life in common was tolerable. But
with the production of goods for exchange, with the division of labour, a
social order of this kind became impossible. The exact number of ells, pounds
or bushels contributed by each member of the community was known to everyone
and the peaceable division of the product of labour was a thing of the past.
Everyone wished to dispose of the product of his own labour, above all the most
efficient workers, those who could point to the greatest achievements and
consequently enjoyed the respect of the community. The leaders must have
endeavoured to dissolve the community, and they must have been supported by all
whose achievements were above the average. When individual production became
possible, community of production necessarily disappeared. Community of
economic life, communism, did not disappear because it was feared and attacked
by outside enemies. It succumbed to inner enemies " consisting always, in
this case, of the most efficient members of the community. If communism were
based upon an impulse stronger than egoism, upon an impulse common to all men,
it would have prevailed. The adherents of communism, no matter how often driven
asunder by outward events, would always have tended to come together
again.
The driving force of communism, the
impulse of race-preservation (the feeling of solidarity, altruism), is, indeed,
but a diluted solution of the impulse of self-preservation which makes for
individualism in economic life, and its efficacy is therefore in inverse
proportion to the amount of dilution. The larger the society (commune), the
greater is the dilution, the weaker is the impulse to work for preservation of
the community. An individual who works with one companion is less industrious
than an individual who enjoys the fruit of his labour alone. If there are 10,
100, or 1000 companions, the impulse to work must be divided by 10, 100, or
1000; and, if the whole human race is to share in the proceeds of labour,
everyone will say to himself: " It does not matter how 1 work, for my work
is but a drop in the ocean." Work is then no longer impulse-driven;
impulse must be replaced by some form of compulsion.
For this reason the Neuchâtel
savant, Ch. Secrétan, is right in saying: "Egoism should be, in the main,
the stimulus of work. Everything, therefore, that can give this impulse more
force and freedom of action must be encouraged; everything that weakens and limits
this impulse must be condemned. This fundamental principle must be applied with
inflexible resolution despite the opposition of short-sighted philanthropy and
the condemnation of the Churches."
We are then justified in promising
that even those who believe themselves indifferent to the higher aims of the
Natural Economic Order will benefit from this reform. They may look forward to
a better table, to better houses, to more beautiful gardens. The Natural
Economic Order will be technically superior to the present, or to the
communistic order.
PREFACE
(Preface to the fourth edition,
1920)
Thanks to active and widespread
propaganda by the now numerous friends of the Natural Economic Order, this
fourth edition follows, after a brief interval, the large third edition.
Of the contents of the book I can
say that the war has shown me nothing new. I have not been obliged to revise
even the smallest detail of my theory. The events of the war and of the German
revolution are so many proofs of the correctness of what I wrote before the
war; and that is true of both the theoretical contents and of the political
application of these theories. The war has given capitalists, communists,
Marxists, much food for reflection. Many. perhaps most, men admit that their programmes
were faulty, or they are frankly perplexed and embarrassed. Most men indeed no
longer even know to what party they belong. All this confirms the truth of the
principles upon which the Natural Economic Order is based.
The political parties all lack an
economic programme; they are held together by catchwords.
Capitalism must be modified, that
even capitalists admit. Bolshevism or communism may be possible in a primitive
state of society, such as is still found in rural parts of Russia, but such
prehistoric economic forms cannot be applied to a highly developed economic
system founded on the division of labour. The European has outgrown the
tutelage inseparable from communism. He must be free not alone from
capitalistic exploitation, but also from meddling official intervention, which
is an integral part of social life based on communism. For this reason we shall
experience failure after failure in the present attempts at nationalising
industry.
The communist, the advocate of the
system of common property, stands at the extreme right wing, at the
entrance-door of social development. Communism is therefore the most extreme
form of reaction. The Natural Economic Order, on the contrary, is the programme
of action, of progress, of the fugleman on the extreme left. Transitional
stages, merely, lie between.
The transition from the
half-developed human being of the horde to the independent, fully-developed
individual, the "a-crat", who rejects completely the control of
others, begins with the division of labour. The transition would long ago have
been completed if it had not again and again been interrupted by certain
defects in our system of land tenure and in our form of money - defects which
produced capitalism; and capitalism produced, for its own protection, the State
as we know it - a hybrid between communism and the Natural Economic Order. We
cannot at this stage of development; the difficulties created by the hybrid
would in time ruin us as they ruined the peoples of antiquity. There is no
question today of halting or retreating; the choice lies between progress or
ruin; we must push on through the slough of capitalism to the firm ground
beyond.
The Natural Economic Order is not a
new order artificially put together. To allow the development of the order
which starts from the division of labour, it was only necessary to remove the
obstacles due to defects in our monetary system and our system of land tenure.
More than this has not been attempted.
The Natural Economic Order has
nothing to do with Utopias and visionary enthusiasm. The Natural Economic Order
stands by itself and requires no legal enactments, it makes officials, the
State itself and all other tutelage superfluous, and it respects the laws of
natural selection to which we owe our being; it gives every man the possibility
of fully developing his ego. Its ideal is the ideal of the personality
responsible for itself alone and liberated from the control of others-the ideal
of Schiller, Stirner, Nietzsche and Landauer.
May 5th, 1920.
Silvio Gesell
PART I. DISTRIBUTION
INTRODUCTION
If employers of labour were offered
money-capital at half the present rate of interest, the yield of every other
class of capital would soon also fall to half. If, for example, interest on the
money borrowed to build a house is less than the rent of a similar existing
house, or if it is more profitable to bring a waste into cultivation than to
rent similar farmland, competition must inevitably reduce house and farm rents
to the level of the reduced interest on money. For the surest method of
depreciating material capital (a house, a field) is obviously to create and
operate additional material capital alongside it. But it is a law of economics
that increased production increases the mass of available money-capital. This
tends to raise wages and finally to reduce interest to zero.
Proudhon: What is Property ?
The abolition of unearned income, of
so-called surplus-value also termed interest and rent, is the immediate
economic aim of every socialistic movement. The method generally proposed for
the attainment of this aim is communism in the shape of nationalisation or
socialisation of production. I know of only one socialist - Pierre Joseph Proudhon
- whose investigations into the nature of capital point to the possibility of
another solution of the problem. The demand for nationalisation of production
is advocated on the plea that the nature of the means of production
necessitates it. It is usually asserted off-hand, as a truism, that ownership
of the means of production must necessarily in all circumstances give the
capitalist the upper hand when bargaining with the workers about wages - an
advantage represented, and destined eternally to be represented, by "
surplus-value" or capitalinterest. No one, except Proudhon, was able to
conceive that the preponderance now manifestly on the side of property can be
shifted to the side of the dispossessed (the workers), simply by the construction
of a new house beside every existing house, of a new factory beside every
factory already established.
Proudhon showed socialists over
fifty years ago that uninterrupted hard work is the only method of successfully
attacking capital. But this truth is even further from their comprehension
to-day than it was in Proudhon's time.
Proudhon, indeed, has not been
entirely forgotten, but he has never been properly understood. If his advice
had been understood and acted on, there would now be no such thing as capital.
Because he was mistaken in his method (the exchange banks), his theory as a
whole was discredited.
How was it that the Marxian theory
of capital succeeded in ousting that of Proudhon and in giving sovereign sway
to cornmunistic socialism ? How is it that Marx and his theory are spoken of by
every newspaper in the world ? Some have suggested as a reason the
hopelessness, and the corresponding harmlessness, of the Marxian doctrine.
"No capitalist is afraid of his theory, just as no capitalist is afraid of
the Christian doctrine; it is therefore positively an advantage to capital to
have Marx and Christ discussed as widely as possible, for Marx can never damage
capital. But beware of Proudhon; better keep him out of sight and hearing! He
is a dangerous fellow since there is no denying the truth of his contention
that if the workers were allowed to remain at work without hindrance,
disturbance or interruption, capital would soon be choked by an over-supply of
capital (not to be confused with an over-production of goods). Proudhon's
suggestion for attacking capital is a dangerous one, since it can be put into
practice forth-with. The Marxian programme speaks of the tremendous productive
capacity of the present-day trained worker equipped with modem machinery and
tools, but Marx cannot put this tremendous productive capacity to use, whereas
in the hands of
Proudhon it becomes a deadly weapon
against capital. Therefore talk away, harp on Marx, so that
Proudhon may be
forgotten."
This explanation is plausible. And
is not the same true of Henry George's land-reform movement ? The landowners
soon discovered that this was a sheep in wolf's clothing; that the taxation of
rent on land could not be carried out in an effective form and that the man and
his reform were therefore harmless. The Press was allowed to advertise Henry
George’s Utopia, and land-reformers were everywhere received in the best
society. Every German "agrarian" and speculator in corn-duties turned
single-taxer. The lion was toothless, so it was safe to play with him, just as
many persons of fashion are pleased to play with Christian principles.
Marx's examination of capital goes
astray at the outset.
Marx succumbs to a popular fallacy
and holds that capital consists of material goods. For Proudhon, on the
contrary, interest is not the product of material goods, but of an economic
situation, a condition of the market.
Marx regards surplus-value as spoil
resulting from the abuse of a power conferred by ownership. For Proudhon
surplus-value is subject to the law of demand and supply.
According to Marx, surplus-value must
invariably be positive. For Proudhon the possibility of negative surplus-value
must be taken into consideration. (Positive surplus-value is surplus-value on
the side of supply, that is, of the capitalist, negative surplus-value is
surplus-value on the side of labour).
Marx's remedy is the political supremacy of the dispossessed, to be
achieved by means of organisation. Proudhon's remedy is the removal of the
obstacles preventing us from the full development of our productive
capacity.
For Marx, strikes and crises are
welcome occurrences, and the final forcible expropriation of the expropriators
is the means to the end. Proudhon, on the contrary, says: On no account allow
yourselves to be deterred from work, for the most powerful allies of capital
are strikes, crises and unemployment; whereas nothing is more fatal to it than
hard work.
Marx says: Strikes and crises will
sweep you along towards your goal; the great collapse will land you in
paradise. - No, says Proudhon, that is humbug, methods of that kind carry you
away from your goal.
With such tactics you will never
filch as much as one per cent from interest.
To Marx private ownership means
power and supremacy. Proudhon, on the contrary, recognises that this supremacy
is rooted in money, and that under altered conditions the power of private
ownership may be transformed into weakness.
If, as Marx affirms, capital
consists of material goods, possession of which gives the capitalist his
supremacy, any addition to these goods would necessarily strengthen capital. If
a load of hay or a barrowful of economic literature weighs 100 lbs., two loads,
two barrowfuls must weigh exactly 200 lbs. Similarly if a house yields $1000 of
surplus-value annually, ten houses added to it must always, and as a matter of
course, yield ten times $1000 - on the assumption that capital consists simply
of material goods.
Now we all know that capital cannot
be added up like material goods, since additional capital not infrequently
diminishes the value of capital already existing. The truth of this can be
tested by daily observation. Under certain circumstances the price of a ton of
fish may be greater than the price of 100 tons. What price would air fetch, if
it were not so plentiful ? As it is, we get it gratis.
Not long before the outbreak of the war landlords in the
suburbs of Berlin were in despair about the decline of house-rents, that is,
surplus-value, and the capitalistic press was clamorous in denunciation of
the
"building fury of the workers
and contractors",
of the
"building plague rife in the
housing industry."
(Quoted from the German Press.)
Are not these expressions a
revelation of the precarious nature of capital ? Capital, which Marxists hold
in such awe, dies of the "building plague"; it decamps before the
"building fury" of the workers! What would Proudhon and Marx have
advised in such a situation ? "Stop building", Marx would have cried;
"lament, go abegging, bemoan your unemployment, declare a strike! For
every house you build adds to the power of the capitalists as sure as two and
two make four. The power of capital is measured by surplus-value, in this case
house-rent; so the greater the number of houses the more powerful, surely, is
capital. Therefore let me advise you, limit your output, agitate for an
eight-hour or even a six-hour day, since every house you build adds to
house-rent and house-rent is surplus-value. Restrain, therefore, your building
fury, for the less you build, the more cheaply you'll be housed!"
Probably Marx would have shrunk from
uttering such nonsense. But the Marxian doctrine, which regards capital as a
material commodity, misleads the workers into thinking and acting on these
lines.
Now listen to Proudhon: "Full
steam ahead ! Let's have the building fury, give us the building plague!
Workers and employers, on no account let the trowel be snatched from your
hands. Down with all who attempt to interfere with your work; they are your
deadly enemies! Who are these that prate of a building plague, of
over-production in the housing industry, while house-rents still show a trace
of surplus-value, of capital-interest ? Let capital die of the building plague!
For some five years only have you been allowed to indulge in your building
fury, and already capitalists feel the pinch, already they are lamenting the
decline of surplus-value, rents have already dropped from 4 to 3 % - that is,
by a quarter. Three times five years more of untrammelled labour, and you will
be revelling in houses freed from surplus-value. Capital is dying, and it is
you who are killing it by your labour."
Truth is as sluggish as a crocodile in
the mud of the eternal Nile. It does not reck of time; time measured by the
span of human life means nothing to it, since it is everlasting. But truth has
an agent which, mortal like man, is always hurried. For this agent, time is
money; it is ever busy and excited, and its name is error. Error cannot afford
to lie low and let the ages pass. It is constantly giving and receiving hard
knocks. It is in the way of everyone and everyone is in its way. It is the true
stumbling block.
Therefore it does not matter if
Proudhon is taboo. His adversary Marx, with his errors, takes good care that
the truth shall come to light. And in this sense we may say that Marx has
become the agent of Proudhon. Proudhon in his grave is at peace. His words have
everlasting worth. But Marx must keep restlessly moving. Some day, however, the
truth will prevail and Marx's doctrines will be relegated to the museum of
human errors.
Even if Proudhon had really been
suppressed and forgotten, the nature of capital would still remain unchanged.
The truth would be discovered by another; of the discoverer's name truth takes
no account.
The author of this book was led into
the path pursued by Proudhon and came to the same conclusions. Perhaps it was
fortunate that he was ignorant of Proudhon's theory of capital, for he was thus
enabled to set about his work the more independently, and independence is the
best preparation for scientific inquiry.
The present author has been more
fortunate than Proudhon. He discovered what Proudhon had discovered fifty years
earlier, namely the nature of capital, but as well he discovered a practicable
road to Proudhon's goal. And that, after all, is what matters.
Proudhon asked: Why are we short of
houses, machinery and ships ? And he also gave the correct answer: Because
money limits the building of them. Or, to use his own words: "Because
money is a sentinel posted at the entrance to the markets, with orders to let
no one pass. Money, you imagine, is the key that opens the gates of the market
(by which term is meant the exchange of products), that is not true-money is
the bolt that bars them."
Money simply will not suffer another
house to be built in addition to every existing house. As soon as capital
ceases to yield the traditional interest, money strikes and brings work to a
standstill. Money, therefore, acts like a serum against the "building-plague"
and the "working fury". It renders capital (houses, industrial plant,
ships) immune from the menace of its own increase.
Having discovered the barring or blocking nature of
money, Proudhon raised the slogan: Let us combat the privilege of money by
raising goods and labour to the level of money. For two privileges, if opposed,
neutralise one another. By attaching to goods the surplus weight now on the
side of money, we make the two weights balance.
Such was Proudhon's idea, and to put
it into practice he founded the exchange banks. As everyone knows, they
failed.
And yet the solution of the problem
which eluded Proudhon is simple enough. All that is needed is to abandon the
customary standpoint, the standpoint of the possessor of money, and to look at
the problem from the standpoint of labour and of the possessor of goods. This
shifting of the standpoint will let us grasp the solution directly. Goods, not
money, are the real foundation of economic life. Goods and their compounds make
up 99% of our wealth, money only 1%. Therefore let us treat goods as we treat
foundations; let us not tamper with them. We must accept goods as they appear
in the market. We cannot alter them. If they rot, break, perish, let them do
so; it is their nature. However efficiently we may organise Proudhon's exchange
banks, we cannot save the newspaper in the hands of the newsvendor from being
reduced, two hours later, to waste paper, if it fails to find a purchaser.
Moreover we must remember that money is a universal medium of saving; all the
money that serves commerce as a medium of exchange comes to the savings banks
and lies there until it is enticed into circulation again by interest. And how
can we ever raise goods to the level of ready money (gold) in the eyes of
savers ? How can we induce them, instead of saving money, to fill their chests
or storerooms with straw, books, bacon, oil, hides, guano, dynamite, porcelain
?
And yet this is what Proudhon really
aimed at in attempting to bring goods and money to a common level. Proudhon had
overlooked the fact that money is not only a medium of exchange, but also a
medium of saving, and that money and potatoes, money and lime, money and cloth
can never in any circumstances be looked upon as things of equal worth in the
chests of the savers. A youth saving against old age will prefer a single gold
coin to the contents of the largest warehouse.
We cannot, therefore, tamper with
goods, they are the primary factor to which everything else must be adapted.
But let us look a little more closely at money, for here some alteration may
prove feasible. Must money always remain what it is at present ? Must money, as
a commodity, be superior to the commodities which, as medium of exchange, it is
meant to serve ? In case of fire, flood, crisis, war, changes of fashion and so
forth, is money alone to be immune from damage ? Why must money be superior to
the goods which it is to serve ? And is not the superiority of money to goods
the privilege which we found to be the cause of surplus-value, the privilege
which Proudhon endeavoured to abolish ? Let us, then, make an end of the
privileges of money. Nobody, not even savers, speculators, or capitalists, must
find money, as a commodity, preferable to the contents of the markets, shops,
and warehouses. If money is not to hold sway over goods, it must deteriorate,
as they do. Let it be attacked by moth and rust, let it sicken, let it run
away; and when it comes to die let its possessor pay to have the carcass flayed
and buried. Then, and not till then, shall we be able to say that money and
goods are on an equal footing and perfect equivalents - as Proudhon aimed at
making them.
Let us put this demand in terms of a
commercial formula. We say: The possessor of goods, during the period of
storage, invariably incurs a loss in quantity and quality. Moreover he has to
pay the cost of storage (rent, insurance, caretaking and so on). What does all
this amount to annually ? Say 5% - which is more likely to be below than above
the actual amount.
Now what depreciation has a banker,
capitalist, or hoarder to debit to the money in his possession or on loan ? By
how much was the war-chest in the Julius Tower at Spandau diminished in the
course of the 44 years that it was stored there ? Not by one penny !
That being so, the answer to our
question is clear, we must subject money to the loss to which goods are liable
through the necessity of storage. Money is then no longer superior to goods; it
makes no difference to anyone whether he possesses, or saves, money or goods.
Money and goods are then perfect equivalents, Proudhon's problem is solved and
the fetters that have prevented humanity from developing its full powers fall
away.
My endeavour to give this
investigation the form of a social and political programme has induced me to
postpone the solution of the problem in question to Parts 3 - 5 of this book
and to begin with sections on Distribution and Free-Land. This arrangement
serves to bring out the general scheme and to reveal more clearly the aim a
Natural Economic Order. Readers eager to learn how Proudhon's problem has been
solved may however begin with Parts 3 - 5 and turn to Parts 1 and 2 later.
1. AIM AND METHOD
As has been pointed out in the
Introduction, the economic aim of every kind of socialism is to abolish
unearned income, so-called surplus-value, sometimes termed rent and interest.
To attain this end, nationalisation or socialisation of production with all its
consequences is usually declared to be indispensable.
This claim of the dispossessed is
supported by Karl Marx’s scientific investigation into the nature of capital
which attempts to prove that surplus-value is an inseparable concomitant of
private enterprise and private ownership of the means of production.
The present writer proposes to
demonstrate that this Marxian doctrine is based on untenable premises which we
must abandon in order to arrive at the truth. My conclusions are to the effect
that capital must not be looked upon as a material commodity, but as a
condition of the market, determined solely by demand and supply. The French
socialist Proudhon, the opponent of Marx, gave the workers the proof of this
more than 50 years ago.
Guided by this corrected theory of
capital we shall learn that the removal of certain artificial obstacles due to
private ownership of land and our irrational monetary system, will enable our
present economic order to realise fully its fundamentally sound principle. The
removal of these obstacles will allow the workers by their own labour and in a
short time (ten to twenty years) so to alter the market conditions for capital
that surplus-value will disappear completely and the means of production will
lose their capitalistic character. Private ownership of the means of production
will then present no advantage beyond that which the owner of a savings-box
derives from its possession: the savings-box does not yield him surplus-value
or interest, but he can gradually use up its contents.
The savings or other money then
invested in means of production (house, ship, factory) will be returned to the
owners in the shape of sums annually written off their value in proportion to
their natural wear and tear or consumption. Simply by means of untrammelled
hard work fructified by the powerful modern instruments of production, the
great admired and dreaded tyrant capital will be reduced to the harmless role
of a child's porcelain savings-box. The savings-box yields no surplusvalue, and
to get at the contents its owner must break it.
The first and second parts of this
book, dealing with land, show how agriculture and the building and mining
industries can be carried on without surplus-value, yet without communism. The
later parts of the book, dealing with the new theory of capital, show how,
without nationalising the remaining means of production, we can entirely
eliminate surplus-value from our economic order and establish the right to the
whole proceeds of labour.
2. THE RIGHT TO THE WHOLE PROCEEDS OF LABOUR
A worker in this book means anyone
living on the proceeds of his labour. By this definition farmers, employers,
artisans, wage-earners, artists, priests, soldiers, officials, kings, are
workers. The antithesis of a worker in our economic system is therefore the
capitalist, the person in receipt of unearned income.
We distinguish between the product
of labour, the yield of labour and the proceeds of labour. The product of
labour is what is produced by labour. The yield of labour is the money received
through the sale of the product of labour or as the result of the wage
contract. The proceeds of labour mean what a worker, out of the yield of his
labour, can buy and convey to the place of consumption.
The terms: wages, fee, salary are
used instead of the term yield of labour when the product of labour is not a
tangible object. Example: street-sweeping, writing poems, governing. If the
product of labour is a tangible object, say a chair, and at the same time the
property of the worker, the yield of labour is not called a wage or salary, but
the price of the object sold. All these designations imply the same thing: the
money-yield of the work done.
Manufacturers' and merchants'
profits, after deduction of the capital interest or rent usually contained in
them, are likewise to be classed as yield of labour. The manager of a mining
company draws his salary exclusively for the work done by him. If the manager
is also a shareholder, his income will be increased by the amount of the
dividend received. He is then at once a worker and a capitalist. As a rule the
income of farmers, merchants and employers is made up of the yield of their
labour plus a certain quantity of rent or interest. A farmer working on rented
land with borrowed capital lives exclusively on the proceeds of his labour.
What is left to him of the product of his labour after payment of rent and
interest, is the result of his activity and is subject to the general laws
determining wages.
Between the product of labour (or
service rendered) and the proceeds of labour lie the various bargains which we
strike daily in buying the commodities we consume. These bargains greatly
affect the proceeds of labour. It very commonly happens that two persons
offering the same product of labour for sale obtain unequal proceeds of labour.
The reason for this is that though equal as workers, they are unequal as
dealers. Some persons excel at disposing of their product for a good price, and
at making judicious choice when purchasing the commodities they need. In the
case of goods produced for the market, the commercial disposal of them and the
knowledge necessary for successful bargaining contribute as much to the success
of labour as does technical efficiency. The exchange of the product must be
considered as the final act of production. In so far every worker is also a
dealer.
If the objects composing the product
of labour and those composing the proceeds of labour had a common property by
which they could be compared and measured, commerce, that is, the conversion of
the product of labour into the proceeds of labour. might be dispensed with.
Provided the measuring, counting or weighing were accurate, the proceeds of
labour would always be equal to the product of labour (less interest and rent),
and the proof that no sort of cheating had taken place could be supplied by
examination of the objects of the proceeds of labour, just as one may
asceration by one's own scales whether the druggist's scales weigh correctly or
not. Commodities have however no such common property. The exchange is always
effected by bargaining, never by the use of any kind of measure. Nor does the
use of money exempt us from the necessity of bargaining to effect the exchange.
The term "measure of value" sometimes applied to money in antiquated
writings on economics, is misleading. No quality of a canary bird, a pill or an
apple can be measured by a piece of money.
Hence a direct comparison between
the product of labour and proceeds of labour will not furnish any valid and
legal proof as to whether the labourer has received the whole proceeds of his
labour. The right to the whole proceeds of labour, if by that phrase we mean
the individual's right to the whole proceeds of his labour, must be relegated
to the realm of imagination.
But it is very different with the
common or collective right to the whole proceeds of labour. This only implies
that the proceeds of labour should be divided exclusively among the workers. No
proceeds of labour must be surrendered to the capitalist as interest or rent.
This is the only condition imposed by the demand for the right to the common or
collective whole proceeds of labour.
The right to the collective whole
proceeds of labour does not imply that we should trouble about the proceeds of
labour of the individual worker. For whatever one worker may fail to secure
will be added to the remuneration of another worker. The apportioning of the
workers' shares follows, as hitherto, the laws of competition, competition
being keener, and the personal proceeds of labour being less, the easier and
simpler the work. The workers who perform the most highly qualified work are
most securely withdrawn from the competition of the masses, and are therefore
able to obtain the highest price for the product of their labour. In certain
cases some natural physical aptitude (such as singing, for example) may take
the place of intelligence in eliminating the competition of the masses.
Fortunate is he whose service liberates him from the dread of competition.
The realisation of the right to the
whole proceeds of labour will benefit all individual workers in the form of an
addition to the present proceeds of their labour, which may be doubled or
trebled, but will not be levelled. Levelling the proceeds of labour is an aim
of communism. Our aim, on the contrary, is the right to the whole proceeds of
labour as apportioned by competition. As an accompanying effect of the reforms
necessary to ensure the right to the whole common proceeds of labour, we may,
indeed, expect the existing differences in the individual proceeds of labour
which are sometimes, particularly in commerce, very great, to be reduced to
more reasonable proportions; but that is only an
accompanying effect. The right to
the whole proceeds of labour, in our sense, does not imply any such levelling.
Industrious, capable and efficient workers will, therefore, always secure
larger proceeds of labour, proportionate to their higher efficiency. To this
will be added the rise of wages in consequence of the disappearance of unearned
income.
Summary
The product of labour, the yield of
labour and the proceeds labour are not immediately comparable. There is no
common measure for these quantities. The conversion of one into the other is
not done by measuring but by contract, by a bargain.
It is impossible to say whether the
proceeds of labour of in workers do or do not correspond to the whole proceeds
of their labour.
The whole proceeds of labour can
only be understood to the common or collective proceeds of labour. The right to the whole collective proceeds of
labour implies the total abolition of all unearned income, namely interest and
rent.
When interest and rent are
eliminated from economic life, proof is complete, that the right to the whole
proceeds of labour has been realised, and that the collective proceeds of
labour are equal to the collective product of labour.
The suppression of unearned income
raises the individual of labour - doubling or trebling them. There is no
levelling to be expected, or only a partial one. Differences in the individual
product of labour will be accurately translated into the individual proceeds of
labour.
The general laws of competition
determining the relative amounts of the individual proceeds of labour will
remain in force. The most efficient worker will receive the highest proceeds of
labour, to use as he pleases.
Today the proceeds of labour are
curtailed by rent and interest, which are not, of course, determined arbitrarily,
but by the conditions of the market, everyone taking as much as the conditions
of the market allow him.
We shall now examine the manner in
which these market conditions are created, beginning with rent on land.
3. REDUCTION OF THE PROCEEDS OF LABOUR THROUGH RENT ON
LAND
A landowner has the choice of
cultivating his land or allowing it to lie fallow. His possession of the land
is independent of its cultivation. Land does not suffer from lying fallow; on
the contrary, it improves; indeed, under certain systems of cultivation, to let
the soil lie fallow is the only method of restoring its fertility.
A landowner, therefore, has no
inducement to allow others to use his property (farm, building-site, oil or
coal field, water-power, forest and so forth) without compensation. If the
landowner is offered no compensation, no rent, for its use, he simply lets his
land lie fallow. He is absolute master of his property.
Anyone needing land and applying to
a landowner will obviously, therefore, have to make a disbursement called rent.
Even if we could multiply the surface of the earth and its fertility, it would
never occur to a landowner to let others use his land free of charge. If the
worst came to the worst he might turn his property into a hunting ground or use
it as a park. Rent is an inevitable condition of every tenancy, because the
pressure of competition in the supply of land for letting can never be great
enough to make the use of land gratuitous.
How much, then, will the landowner
be able to demand ? If the whole surface of the earth were needed for the
sustenance of mankind; if no more free land were obtainable far or near; if the
whole surface of the earth were in private possession and under cultivation,
and if the employment of more labour, the application of so-called intensive
cultivation, resulted in no increase of produce; then the dependence of those
without property on their landlords would be as absolute as it was at the time
of serfdom, and accordingly the landlords would raise their claims to the
utmost limit of the attainable; they would claim for themselves the entire
produce of labour, the entire harvest, and grant to the labourer, as to a
common slave, only what sufficed for his subsistence and propagation. Under
such conditions the so-called " iron law of wages " would hold good.
Cultivators of the soil would be at the mercy of landowners, and rent would be
equal to the yield of the land, less the cost of feeding the cultivator and his
draught animals, and less capital-interest.
The conditions which would result in
an "iron wage" do not, however, exist; for the earth is much larger
and more fertile than is necessary for the support of its present population.
Even with present-day extensive cultivation, hardly one-third of its area is
exploited, the remainder lying fallow or being unclaimed. If instead of
extensive cultivation, intensive cultivation were generally introduced -
onetenth of the surface of the earth would perhaps suffice to provide mankind
with the average amount of foodstuffs consumed by the workers at the present
day. Nine-tenths of the earth's surface in this case, be left fallow. (Which,
of course, does not mean that mankind would be satisfied with such a result. If
everyone desired to eat his fill of something better than potatoes; if everyone
wanted to have a saddlehorse, a court-yard with peacocks and pigeons, or a rose
garden and a swimming-pool the earth might, even with intensive cultivation, be
too small).
Intensive cultivation comprises:
drainage of swamps, irrigation, mixture of soils, deep ploughing, blasting of
rocks, marling, application of fertilisers; choice of plants for culture,
improvements of plants and animals; destruction of pests in orchards and
vineyards, destruction of locusts; saving of draught animals through railway,
canal and motor transport; more economical use of foodstuffs and fodder through
exchange; limitation of sheep-breeding through the cultivation of cotton;
vegetarianism and so forth. Intensive cultivation requires much labour, extensive
cultivation much land.
No one, then, is at present
compelled, by complete lack of land, to appeal to the landowners, and because
this compulsion does not exist (but solely for this reason) the dependence of
those without land on the landowners is limited. But the landowners are in
possession of the best land, and it would require a great deal of labour to
bring into cultivation the only unclaimed land in settled
neighbourhoods. Intensive
cultivation, again, involves considerably more trouble, and not everyone is
capable of emigrating and settling in the unclaimed lands of the wilderness;
apart from the fact that emigration costs money, and that the produce of those
lands can be brought to market only at great expense in transport-costs and import-duties.
The farmer knows all this, and the
landowner likewise. So before the farmer makes up his mind to emigrate; before
he sets about draining the neighbouring swamp; before he turns to market
gardening, he will ask the landowner what rent he demands for his field. And
before answering the question the landowner will think the matter over and
calculate the difference between the proceeds of labour on his field and the
proceeds of labour (* We again call attention to the difference between
the product of labour and the proceeds of labour. The product of labour of the
emigrant may be ten times larger, yet the proceeds of his labour the same.) on waste land, garden land, or unclaimed land in Africa, America,
Asia, or Australia. For the landowner is determined to obtain this difference
for himself; this is what he can claim as for his field. As a general rule,
however, there is not much calculation. In these matters both parties are
guided by experience. Some hardy young fellow emigrates and, if he reports
favourably, others follow. In this way the supply of labour at home is reduced,
the consequence being a general rise of wages. If emigration continues, wages
will rise to a point at which the would-be emigrant becomes doubtful whether he
had not better stay at home. This indicates that the proceeds of labour at home
and in the new country are again equal. Sometimes an emigrant makes an estimate
beforehand. So it may be worth while examining such a calculation.
An Emigrant's Estimate
Travelling expenses for himself and
family $1000
Accident and life insurance during
the voyage 200
Health insurance for
acclimatisation, that is, the slim which an insurance company would charge for
the special risk due to the change of climate
200
Prospecting and fencing 600
We may assume that the same amount
of working capital is required as in Germany, so it is not included in the
estimate
Cost of emigrating and settling $2000
-----
These expenses, which the farmer in
Germany does not incur, are added to the working capital. the interest on which
is charged to working costs: 5% on $2000 $100
We assume that the settler, with the
same amount of the same amount as on his native competition of which is here to
be considered. We remember that the farmer, like any other producer, in the
products of his labour but only in the goods for consumption which he can
obtain for that is, in the proceeds of his labour. The settler must send his
products to market and convert the money he obtains for them into the goods he
needs for consumption. And he must pay for the conveyance of these goods to his
new home. The market for the exchange of his products is, as a rule, distant;
if we suppose it to be Germany, a country which is forced to import large
quantities of agricultural produce, the emigrant will have to pay:
Freight-charges for cart, railway,
ship and lighter 200
Import-duty in Germany 400
Freight-charges for fighter, ship,
railway and cart for the goods received in exchange 200
Import-duty in the new country 100
-----
$1000
In the above estimate the conversion
of the product of labour into the proceeds of labour, usually effected by way
of commerce, the emigrant for freight, customs-duties and commercial profit the
sum of $1000, an expense which the cultivator of German soil avoids. If,
therefore, the latter pays $1000 in rent for a piece of land which yields the
same product of labour as the emigrant's homestead, the proceeds of his labour
are equal to those of the emigrant.
There is the same economic
difference in favour of the above piece of land when compared with waste land
brought under cultivation in Germany, but here instead of transport costs and
customsduties, we have to enter the interest on the capital employed for
reclaiming the land (drainage of a swamp, mixture of the different layers of
soil, liming and manuring). In the case of intensive cultivation the difference
consists, not of interest and freight, but of the cost of cultivation.
Rent, then, tends to reduce the
proceeds (not the produce) of labour to the same general level everywhere.
Whatever agricultural advantages well-cultivated German farm land possesses
over the Luneburg Heath or, through its proximity to the markets, over
unappropriated land in Canada, are claimed by landlords as rent, or appear, if
the land is sold, as its price, which is simply the rent capitalised. All
differences in land as regards fertility, climate, access to the markets,
customs-duties, freights and so forth are levelled by rent. (It should be noted
that in this connection wages are not mentioned; the omission is intentional).
Economically speaking, rent on land
reduces the globe for the farmer, manufacturer and capitalist (if he is not a
landowner), to a perfectly uniform surface. As Flürscheim puts it: "Just
as the inequalities of the ocean bed are transformed into a level surface by
the water, so inequalities of land are levelled by rent". It is a
remarkable fact that rent reduces the proceeds of labour of all cultivators of
the soil to the yield which may be expected from unreclaimed land at home, or
from unclaimed land in the far-off wilderness. The notions of fertile, barren,
loamy, sandy, swampy, rich, poor, well or badly situated, are rendered,
economically speaking, meaningless by rent on land. Rent makes it a matter of
indifference to a man whether he cultivates moorland in the Eiffel, or a
market-garden at Berlin, or a vineyard on the Rhine.
4. INFLUENCE OF TRANSPORT COSTS ON RENT AND WAGES
The proceeds of labour on freeland,
waste-land, marsh and moor determine how much the landowner must pay as wages
or how much he can claim as rent. The farm-labourer will obviously claim a wage
equal to the proceeds of labour on freeland, since he is free to take
possession of and cultivate freeland (which term we shall soon define more
closely). Nor is it necessary for every farm-labourer to threaten to emigrate
when negotiating about his wages. Married men with many children, for instance,
would gain nothing by such a threat, since the landowner knows that it cannot
be carried into effect. But it suffices if the emigration of the younger men
causes a general shortage of labour. Even although many labourers are unable to
emigrate, the shortage of labour caused by the emigration of others supports
them in their negotiations about wages as effectively as if they had already
booked their passage.
(*How greatly wages are influenced
by emigrants and migrating labour is illustrated by the following passage from
a speech by
President Wilson on May 20th, 1918:
" When the American Secretary of Defence was in Italy, a member of the
Italian Government enumerated to him the various reasons why Italy felt
intimately connected with the United States. The Italian Minister remarked:
-
'If you wish to make an interesting
experiment go into any troop-train and ask the soldiers in English which of
them have been in America. The rest you will see for yourself.'
Our Secretary of Defence did board
a troop-train and asked the men how many of them had been in America. It seems
that more than half of them rose to their feet."
The Italian receivers of rent had
driven these men to America, and the American receivers of rent had driven them
home again. Because they fared as badly in America as they had fared at home,
the poor devils kept restlessly wandering to and from.
Wilson added: "There are
American hearts in this Italian army!" But we know better; when these
migrating workers left their country they cursed their fate, and they cursed
their fate when they left America.)
On the other hand the tenant farmer
must be allowed to keep for himself an amount equal to the proceeds of labour
of the freeland emigrant and the farm-labourer, after deduction of farm-rent
and the interest on his working capital. Thus farm-rent also, is determined by
the proceeds of labour on freeland. The landowner when calculating the rent of
a farm need not leave the tenant a margin greater than the proceeds of labour
on freeland, and the tenant is not compelled to accept less.
If the proceeds of labour on
freeland fluctuate, the fluctuation is transferred to wages and to
farm-rent.
Among the circumstances influencing
the proceeds of labour on freeland we must consider, in the first place, the
distance between the unappropriated land and the place where the products are
consumed. We may suppose this to be the place where the commodities taken in
exchange are made
(manufacturing centre) or collected
(trading centre). The importance of the distance from the market is best seen
from the difference in the price of a field in the vicinity of the town and an
equally fertile field farther from the market. The reason for the difference in
price is simply the distance from the market.
In the Canadian wheat district, for
example, where to this day good land can be obtained free by everyone, the
wheat has to be carried on wagons, along unbeaten tracks, to the far-distant
railroad by which it is conveyed to Duluth to be shipped on lake steamers.
These carry the wheat to Montreal, where it is transferred to ocean steamers.
From there the voyage continues to Europe, say to Rotterdam, where another
transfer to the Rhine vessels is necessary. These go as far as Mannheim, and to
reach the markets of Strasbourg, Stuttgart or Zürich, the wheat must here be
loaded on railway trucks. And its price in these markets, after payment of
import-duties, must be the same as the price of wheat grown on the spot. It is
a long journey costing a great deal of money; yet the balance of the market
price that remains after deducting import-duties, freight, insurance,
brokerage, stamp-duties, interest on money advanced, sacks, etc. is still only
the sum obtained by the sale of the product of labour, and not what is required
by the settler in the wilderness of Saskatchewan. This sum has to be
transformed into articles for use - salt, sugar, cloth, fire-arms, tools,
books, coffee, furniture, etc. and it is only when all these objects have
arrived at the settler's homestead, and the freight on them has been paid, that
he can say: "These are the proceeds of my labour plus interest on my
capital." (Whether the settler has borrowed the money necessary for
emigration or is working with his own capital, he is bound to deduct interest
on his capital from the product of his labour).
It is obvious, therefore, that the
proceeds of labour on such freeland must depend to a great extent on transport
costs. These costs have been steadily sinking, as is shown by the following
table: (Taken from Mulhall's Dictionary of Statistics).
Freight-rates for one ton of grain
from Chicago to Liverpool:-
1873 - $17
1880 - 10
1884 - 6
That is, from Chicago to Liverpool
alone, a saving of $11 on freight for every ton of wheat; almost one sixth of
the price in 1884, or one fourth of the present price (1911). But the distance
from Chicago to Liverpool is only part of the distance from Saskatchewan to
Mannheim; hence the $11 are only part of the actual saving on transport
costs.
There is the same saving of freight
on the goods consumed by the settler. The grain was the product of labour; the
price, $63 in 1884, of a ton of wheat was the yield of labour; and the return
shipment comprised the objects of the proceeds of labour, to obtain which the
settler produced the wheat. For we must keep in mind that the industrial
workers in Germany who eat Canadian wheat, must always pay for it with their
own products which they send directly or indirectly to Canada and for which,
therefore, freight has likewise to be paid. Thus the saving on cheaper freight
is doubled, and the proceeds of labour on freeland, which determine the general
wage in Germany, are augmented.
But it must not be supposed that the
saving of a certain sum on freight is translated into an exactly corresponding
increase in the proceeds of labour of the settler. In reality the proceeds of
his labour will increase by only about half the saving on freight; and the
reason for this is that the rising proceeds of labour of the settler on
freeland raise the wages of the agricultural workers in Germany. The rising
wages of farm labourers and of settlers on freeland cause industrial workers to
pass over to these pursuits. The relation existing between the production of
agricultural and of industrial goods is modified, and in consequence their
exchange ratio is also modified. The settler has to pay higher prices for the
objects of the proceeds of his labour (industrial products). The quantity of
these industrial products does not, therefore, increase in proportion to the
increased yield of labour of the settler on freeland resulting from lower
transport costs. The difference, according to the laws of competition, falls to
the industrial workers. What happens here is what happens when improved
technical methods, such as steam-power, reduce the cost of production. The
producer and the consumer share the gain.
Here again it may be worth while to
illustrate by means of figures the influence of a change of transport costs on
the proceeds of labour of the settler on freeland, and consequently on rent and
wages.
I.
The proceeds of labour of a
settler on freeland in Canada with a freight-rate of $17 per ton in the year
1873.
Product of labour: 10 tons of wheat
shipped to Mannheim and there sold at $63 per ton $630
Less 10 times $17 for freight, etc.
170
Yield of labour ... $460
This money-yield of labour is spent
in Germany for the purchase of goods for use which, when shipped to Canada
cause the same expense for packing, freight, import-duties, deterioration, etc.
as the wheat on its voyage to Germany
170
The proceeds of labour of the
settler therefore amount to $290
II. The same calculation in the year 1884 with a freight-rate of $6 per
ton.
Product of labour: 10 tons of wheat
at $63 per ton $630
Less 10 times $6 for freight 60
Yield of labour $570
This yield of labour, which is $110
greater than in the first calculation, is now converted into the proceeds of
labour, that is, into industrial products. For the reasons indicated above, the
ratio of exchange between industrial and agricultural products has been
modified in favour of industry. Let us suppose that this rise in the price of
industrial commodities absorbs half the increased money-yield of labour, that
is 55
$515
From this we have to deduct the
return freight which we must put a little higher, as the amount of the goods
has increased by the amount economised on freight; instead of $60 freight
amounts to 61 The proceeds of labour of the settler now
therefore amount to $454
Thus the decrease in freight has
raised the proceeds of labour of the settler on freeland from $290 to $454, so
the wages demanded by the German farm labourer will automatically increase by
the same amount, and tenant farmers will claim a correspondingly larger share
of the product of labour for themselves. And rent on land will decrease in the
same ratio.
If in Germany in 1873 the price of
10 tons of wheat was $630
And the wages for producing it
amounted to $290
Then 10 tons of land (*
A ton of land: a Danish land-measure denoting the amount of land that produces
one ton of grain. A ton of land therefore indicates an area of land which
varies according to the quality of the soil.) brought
the landowner who worked or let them, rent amounting to $340
But if in 1884 wages rise to $454,
the rent must fall to $176 (that is
$340, less $164 increase of wages).
What the settler on freeland has to
pay in freight is therefore deducted from the proceeds of his labour; and the
landowner in Germany may demand this amount as farm-rent if he lets his land,
or deduct it as rent from the product of his farm-labourers if he works his
land himself. In other words, what the freeland settler pays as freight is
pocketed by the landowner as rent.
5. INFLUENCE OF SOCIAL CONDITIONS ON RENT AND WAGES
Rail and shipping costs are not of
course the only factor influencing the proceeds of labour of the settler on
freeland, and consequently the wages of the German farm-labourer. Man does not
live by bread alone, so the proceeds of labour are not the sole cause of his
decision for or against emigration. The national aid social life of the country
which the emigrant is to leave, and of the country he is going to, have often a
strong and determining influence, and many a man is satisfied with smaller
proceeds of labour at home, finding compensation for the loss in the possession
of a laurel wreath for rabbitbreeding or in the song of the chaffinches, which
in his opinion is nowhere so beautiful as in the home country. These attractive
or repelling forces fluctuate, sometimes stimulating and sometimes restraining
emigration. Many German farmers, for instance, are again emigrating from
Russia, not in hope of higher proceeds of labour, but because conditions there
are no longer quite to their taste. All these factors counteract to some extent
the forces tending to level the purely material proceeds of labour of the
emigrant and of the farm-labourer left behind. Let us suppose, for example,
that we resolve to render life pleasanter for German workers, the means to be derived
from the prohibition of alcoholic drink. Prohibition itself would enrich the
lives of the workers, and especially those of their wives; and the millions
which alcohol directly and indirectly costs the people might be employed for an
effective endowment of motherhood in the shape of a monthly State subsidy to
cover the expense of bringing up each child. Or for better schools, for public
reading-rooms, theatres or churches, or free treats at pastry shops, popular
festivals, assembly-rooms etc. The question whether a man was going to emigrate
would not then be settled solely by an estimate of the material proceeds of his
labour; many wives would induce their husbands to stay, and many emigrants
would return. The effect on wages and rent is obvious. The landowners would
raise their demands until the restraining influence of prohibition on the
would-be emigrant had been compensated. The cakes given gratis to the women in
the national pastry shops would be abstracted from their husband's wages in the
form of an increase of rent.
Thus every advantage which Germany
offers for professional, intellectual and social life is confiscated by rent on
land. Rent is poetry, science, art and religion capitalised. Rent converts
everything into hard cash: Cologne Cathedral, the brooks of the Eiffel, the
twitter of birds among the beech-leaves. Rent levies a toll on Thomas à Kempis,
on the relics at Kevelaar, on Goethe and Schiller, on the incorruptibility of
our officials, on our dreams for a happier future, in a word, on anything and
everything; a toll which it forces up to the point at which the worker asks
himself: Shall I remain and pay - or shall I emigrate and renounce it all ? The
workers are always at the gold-point. (In foreign trade the gold-point is that
state in the balance of payments at which merchants are uncertain whether it is
more profitable to pay in bills of exchange or in gold. The cost of
transportating gold is the billbroker's "rent".) The more pleased a
man is with his country and his fellow citizens, the higher the price charged
by the landlord for this pleasure. The tears of the departing emigrant are
pearls of great price for the landlord. For this reason city landlords often
organise improvement societies and other institutions intended to render town
life attractive, in order to restrain departure and stimulate arrival and so to
raise the rents on their building sites. Homesickness is the tap-root of rent
on land.
But if the German farm labourer does
not live by bread alone, neither does the settler on freeland. The material
proceeds of labour are only part of what man needs to make life worth living.
The emigrant had to struggle to overcome the emotional forces binding him to
his native land, and similarly in his new home he finds many things to attract
or to repel him. The attractions tend to make the proceeds of labour appear
sufficient to him (just as everyone is prepared to do agreeable work for a
smaller remuneration), whereas the repellent features diminish them. If the
repellent circumstances preponderate (climate, insecurity of life and property,
vermin and so forth) the proceeds of labour must be correspondingly larger, if
the emigrant is to stay on and encourage those who remained at home to follow
his example. Everything that influences the life and happiness of the settler
on freeland has a direct influence on the contentment of the German worker and
affects his wage demands. This influence begins with the account of the
journey. If the voyage passed off without sea-sickness, if life on board and
the food were tolerable, those left behind will be encouraged. If the settler
tells of liberty he is enjoying, of hunting and riding, of great hauls of
salmon and herds of buffaloes, of his right of disposing freely of the riches
of nature, of his being treated everywhere as a free citizen and not as a serf
and beggar, the labourer at home will of course hold his head higher during the
wage negotiations than if his brother writes of the inroads of Red Indians, of
rattlesnakes, vermin and hard work.
All this is known to the landowners,
so if a letter of lament arrives, the most is made of it; it is published in
the Press which is given to understand that it must on the other hand carefully
exclude any reports that might prove attractive and encouraging. The
organisation which is set up to advertise the attractions of the home country
is also entrusted with the task of reviling freeland. Every snake-bite, every
scalp taken, every swarm of locusts, every shipwreck, by making the workers less
likely to emigrate and more amenable, is converted into hard cash for the
landowners.
6. MORE PRECISE DEFINITION OF FREELAND
When freeland is spoken of we first
think of the vast tracts of uncultivated land in North and South America. This
freeland is easily and comparatively cheaply reached. The climate is suitable
for
Europeans, the social conditions are
to many people attractive; the security of life and property is fair. On his
arrival the immigrant is accommodated for a week or two in a hostel for
immigrants at the expense of the State, and in some countries he is given a
free railway ticket to the farthest limit of settled land. Here he is free to
settle immediately. He may pick out the site he likes best: pasture, ploughland
or forest. The homestead that he has a right to claim is extensive enough to
provide work for the largest family. As soon as the settler has driven in the
boundary stakes and notified the landoffice, he may start work. Nobody
interferes with him or even inquires who allowed him to till the earth and reap
the fruits of his industry. He is lord of the land between his four
stakes.
Land of this kind we call freeland
of the first class. Such freeland is not of course to be found in settled
parts, but only where men are few and far between. Within the tracts already
occupied there are, however, large areas that are not cultivated, but which by
some abuse of State-power have become the private property of individuals
living in some far-off place. A few thousand persons living in Europe own
between them hundreds of millions of acres of such land situated in America,
Africa, Australia and Asia. Anyone wishing to occupy a piece of this land has
to come to terms with the proprietors, but as a rule he may buy or rent what he
desires for a nominal sum. Whether he does or does not pay a few pence an acre
annually for the land he intends to cultivate can make no appreciable
difference in the proceeds of his labour. Such conditionally freeland we call
freeland of the second class.
Freeland of the first and the second
classes is still to be found in abundance in every part of the world outside
Europe. It is not always land of the best quality. Much of it is densely
overgrown with forests needing a great deal of labour to clear. Large areas
suffer from lack of water and can be made fertile only by expensive irrigation
schemes. Other land again, often of the best quality, has to be drained; or
being situated in remote valleys lacks means of communication without which
exchange of the produce is impossible. Freeland of this kind can be taken up
only by emigrants possessing capital or credit. For the theory of rent and of
wages, however, it does not matter whether this freeland is brought under
cultivation by a company of capitalists or by the emigrants directly. The
distinction only affects capital and its interests. If the emigrant settles on
land which has been opened up in this way, that is, with the help of capital,
he has to pay the customary interest on the capital invested, and he must add
this interest to his working expenses.
For individuals or companies
themselves possessing the means necessary for land-reclamation on a larger
scale half the world is still freeland. The best land in California and along
the Rocky Mountains was until lately a desert; now it is a vast garden. The
British have made Egypt habitable for millions of men by means of the Nile
dams. The Zuider-Zee and many deserts such as Mesopotamia will also be brought
into cultivation again by a similar expenditure of capital. Thus we may say
that freeland of the second class will be at the disposal of mankind for an
indefinite period to come.
7. FREELAND OF THE THIRD CLASS
The most important freeland,
however, and that which is also of greatest significance for the theory of rent
and wages is freeland of the third class, which is everywhere available close
at hand. The conception of this freeland, however, is not so simple as that of
the other two forms and calls for some reflection.
A few examples will serve to make
the matter clear to everyone.
Example 1. In Berlin the building
regulations do not allow houses to be built more than four storeys high. If the
limit were two storeys the city would have to cover twice its present area to
lodge the same population. Hence the land saved by the third and fourth storeys
is to this day unoccupied building land. If the American manner of building
were permitted in Berlin - that is, 40 storeys instead of four - one-tenth of
the present building area of Berlin would suffice. The rest would form a
surplus and would be offered to any builder at little more than the price of a
potato patch. Freeland for building purposes is, therefore, available even in
the centre of any large German city, in an unlimited quantity - from the fourth
storey upwards towards the clouds.
Example 2. In the republic of
"Agraria" the use of chemical fertilisers is prohibited by law,
nominally because it is alleged to be injurious to health, in reality in order
to limit the output of grain and so to keep up its price. The landowners of
Agraria believe that little and dear is better for them than much and cheap. In
consequence of this prohibition and the resulting small crops and high prices,
and because emigration, also, is prohibited, the people of Agraria have brought
all wastes, swamps and moors under cultivation, and so contrived to make the
crops meet the needs of the population. But in spite of this the people are
discontented and clamour for repeal of the prohibition, it being generally
expected that the use of chemical fertilisers would treble the produce of the
soil, as it did in Germany.
What would be the result of repeal
on rent and wages ? Would not the same thing happen in Agraria that happens in
the city, when new building regulations allow the number of storeys to be
trebled ? With the use of chemical fertilisers the soil of the republic would
suddenly yield trebled harvests, harvests three times larger than the present
population requires. The consequence would be that of every three acres two
would be allowed to lie fallow at the disposal of future generations. In a
republic where every inch of soil, every swamp is cultivated, the import of
chemical fertilisers would suddenly create vast areas of freeland. And this
freeland would, for the time being, be used only for hunting and would be
leased for this purpose, for a nominal amount.
These examples from the building
industry and agriculture show how new land, freeland of the third class, may be
created and is being daily created as the result of scientific discovery. The
nomad requires 100 acres to provide for his family, the farmer 10, the gardener
one or less.
The whole agricultural area of
Europe is as yet cultivated so superficially, and population, even in Germany,
is still so sparse, that if garden culture were generally adopted, half the
area at present under cultivation would have to be left fallow, first because
we should lack purchasers for such quantities of foodstuffs, and secondly because
we should lack the workers necessary for such an intensive cultivation of the
soil.
We may therefore consider the whole of Germany as such
freeland of the third class. With regard to the yield of the soil which the
farmer working intensively reaps over and above the yield of the hunter, the
nomad, and the farmer working extensively, all farm land may be considered as
freeland, just as Americans may consider the space above the storeys already in
existence, up to the clouds, as free building land.
Let us apply these examples to the
theory of rent and wages. Germany, in the limited sense above described, is
still freeland, and the farm-labourer may at any time take refuge on this
freeland if dissatisfied with his wages. The wages of farm-labourers cannot
fall permanently below the proceeds of labour on such freeland of the third
class, any more than they can fall below the proceeds of labour on freeland of
the first class. Here, then, is an unfailing support for the farm-labourer in
his wage negotiations.
And now, how much can the labourer
demand as wages ? How much the landowner as rent ?
8. INFLUENCE OF FREELAND OF THE THIRD CLASS ON RENT
AND WAGES
Let us suppose that, with the usual
extensive farming methods of the district, 12 men are needed to cultivate 100
acres of land, and that the harvest amounts to 600 tons, that is, 50 tons for
every man and 6 tons per acre.
Let us further suppose that with
intensive farming the same area requires 50 men to cultivate and yields 2000
tons, or 40 tons instead of 50 for each worker, and 20 instead of 6 tons per
acre.
Thus the produce of intensive
cultivation is augmented as compared to the area, but diminished as compared to
the work.
With extensive cultivation:
Twelve men produce 50 tons each,
that is 600 tons. With intensive cultivation:
Twelve men produce 40 tons each,
that is 480 tons.
So the difference of 120 tons is to
be attributed to the larger area of 100 acres, which enabled these 12 men to
adopt this extensive cultivation, that is, cultivation requiring less labour.
They will of course prefer this method as long as the land necessary for it is
at their disposal. But if the land is not at their disposal they are forced to
have recourse to intensive cultivation and to be satisfied with the smaller
product of labour. The disadvantage is so great that if anybody places the area
necessary for extensive cultivation at their disposal they will consent to pay
for the advantage resulting for them, or, in other words, the owner of this
area will be able to levy an additional rent corresponding to the difference
between the product of labour in extensive and intensive cultivation, the
former being larger, as is proved by experience. In our example, then, the rent
of 100 acres of land will be 120 tons.
Agriculture tends to extensive
cultivation to save labour, but to intensive cultivation to save land. Out of
the tension thus arising rent is born, and the degree of this tension (a matter
of experience) determines the distribution of the farm produce between rent and
wages.
We need not stop here to explain why
extensive cultivation yields more produce for a given amount of labour and less
produce for a given amount of land. That is a question of agricultural
technique. For us it suffices to know that such is the case in agriculture,
that it is founded in the nature of things. If it were otherwise, if extensive
cultivation yielded 40 tons while intensive cultivation yielded 50 tons a head,
the whole of agriculture would tend towards intensive cultivation. All the land
that could not he stocked with labour would be left fallow, simply because any
workers still available would reap larger harvests by a still more intensive
tillage of the land already under cultivation than by cultivating fallow
land.
(The theory of population which
asserts that population corresponds to the food supply, is not inconsistent
with the above proposition. Population grows with the augmentation of the food
supply; it follows in the wake of intensive cultivation, it does not precede
it.)
By extensive cultivation we mean
that form of agriculture in which all the labour offering itself must be
employed in order to cultivate the whole of the area available, no matter what
the method of cultivation may be, hunting, cattle grazing, three-field system,
marsh culture, or present-day comparatively welldeveloped farming.
By intensive cultivation we mean
that form of agriculture which, if carried on on a large scale, must result in
a general shortage of labour.
Intensive and extensive cultivation
are therefore relative terms. The herdsman is an intensive worker as compared
to the huntsman. Hence pastoral tribes must generally pay rent for the use of
their land (hunting-grounds), and are able to do so.
Extensive cultivation yields the
larger product of labour (wages and rent), whereas intensive cultivation yields
the larger crop. The landowner would like to combine the two, and of course
endeavours to practice intensive cultivation. He cannot, however, do so without
withdrawing labour from among the extensive cultivators and so causing land to
be left fallow (freeland of the third class). Now it stands to reason that the
owners of this land are unwilling to let it lie fallow. They therefore try to
attract labour to it by raising wages; and in doing so they are prepared to go
close to the limit of profitableness (absorption of rent in wages), since a
landowner will prefer to receive a dollar an acre rent rather than to receive
nothing at all.
Freeland of the third class has thus
the function of levelling wages and rent. Freeland of the third class makes
arbitrary fixation of wages impossible. The landowner does not fix wages as low
as he pleases, neither does the labourer demand as much as he chooses; the
amount that falls to each is determined by economic laws.
9. INFLUENCE OF TECHNICAL IMPROVEMENTS ON RENT AND
WAGES
Technical improvements increase the
product of labour, and if they increase it equally in intensive and in
extensive cultivation, wages and rent will also increase equally. The ratio of
distribution then remains unchanged, the landlord deriving the same advantage
as the workers from improvement of the means of production.
Technical improvements are rarely,
however, of equal benefit to the two modes of cultivation, extensive and
intensive. What, for instance, can the intensive farmer do with a ten-share
motor plough, or with a seed distributor ? Such machines can be used only for
large areas; for intensive cultivation they are useless, just as lions are
useless for catching mice.
For freeland of the third class the
motor plough is quite useless, its realm being freeland of the first or second
class, the vast plains of America, where a single motor plough (*
The motor plough is sometimes the property of the agricultural co-operative
society, but as a general rule it belongs to a contractor, the local
blacksmith, who also keeps it in repair.) will plough
the fields of 50 or more farmers, and plough them well and cheaply. The product
of labour of these freeland-settlers is of course thereby increased enormously.
But on the product of labour depend the proceeds of labour, and the proceeds of
labour of the freeland-settler determine the wages of labour on rented land
everywhere.
Now if all the circumstances
connected with conversion of the product of labour into the proceeds of labour
remained unchanged, wages in general would necessarily rise in the same
proportion as the increase in the products of labour due to the motor plough.
These circumstances do not, however, remain unchanged, and here again we see
how necessary it was to distinguish from the outset, between the product of
labour and the proceeds of labour. For it is the proceeds, and not the product
of labour, that determine wages in general.
If the proceeds of labour of the
freeland-settler increase, the immediate consequence is an increase of the
proceeds of labour of industrial workers. If that were not so, industrial
workers would return to agricultural labour on freeland of the first, second or
third class. This rise of wages in industry is brought about by a modification
of the exchange ratio between the products of the freeland-settler and of
industry. Instead of 10 sacks of wheat the settler has to give 12 for a
gramophone, a rifle, a medicine-chest. In this way the settler, when transforming
the product of his labour into the proceeds of labour, has to surrender part of
his surplus product to the industrial worker. Thus the motor plough forces up
wages all round.
What the wage-earners gain by the
motor plough is, however, more than the surplus of products created by the
plough. The motor plough may produce a surplus of 100 million tons, but this,
if distributed among all the workers, would be a trifling sum, out of
proportion to the increase of the labour-proceeds of the freeland-settler. The
reason why the wage-earners gain more is as follows:
If there is a rise in the
labour-proceeds of the freeland-settler of the first or second class, the wages
of the workers on rented land in Europe rise likewise, even although there is
no increase in the product of their labour. (The motor-plough not being
employed, or being employed only to a limited extent.) The increase of wages
here takes place at the expense of rent on land; the means for the rise of
wages are derived only in a small part from the surplus produce of the
freeland-settler.
We continue our examination of this
situation, in which technical improvements benefit freeland farmers of the
first and second classes, without benefiting intensive cultivation. We have
seen that:
The product of labour of the
freeland farmer of the first and second class increases by, say, 20% through
introduction of more efficient agricultural machinery - after allowance for
interest and for upkeep of the machines.
The Proceeds of labour of the
freeland farmer increase by only 10% since, as we have already shown, the
industrial worker demands and obtains more for the product of his labour.
The exchange relation between
industrial and agricultural products shifts 10% in favour of industry.
Thus of the 20% increase of the
product, only half, or 10%, is transferred to the general rate of wages.
German landowners must draw on their
rents to meet the increased demands of their labourers, since the product of
German land has not increased.
But the landowner's loss is not
confined to the decrease of his rent expressed in tons of agricultural produce
- which are of as little use to him as are tons of agricultural produce to the
freeland settler. For with the exchange of his tons of rent-products for
industrial products he again loses, because of the shift in the ratio of
exchange - his total loss being considerably more than 10%.
The smaller the rent in proportion
to labour costs, the harder the landowner is hit by the rise of wages. But
since landowners cannot, obviously, engage labourers at a loss, and since
landowners practising extensive cultivation cannot have a greater profit than
their colleagues practising intensive cultivation, there is a recession from
intensive to extensive cultivation. Less labour is required, labourers are
thrown out of employment, and these unemployed labourers depress wages below
their true level, namely the labour-proceeds of freeland-farmers of the first
and second classes (which have risen 10%). Emigration then increases until
equilibrium between wages at home and the proceeds of labour overseas is
re-established.
When technical progress benefits
extensive cultivation in the home country, without benefiting intensive
cultivation, the larger share of the increased product falls to rent. In spite
of the increased product, wages may then even fall below their former level.
Thus technical improvements affect
very unequally the distribution of the products of the soil, much depending
upon where the benefit falls, whether on freeland of the first and second
classes, or on freeland of the third class, or on extensive cultivation.
The workers, in former times, were
not always wrong when, to safeguard their interests, they clamoured for the
destruction of machinery. It may happen that rent not only absorbs the whole of
the surplus production from technical improvements, but also takes away part of
the former wages.
10. INFLUENCE OF SCIENTIFIC DISCOVERIES ON RENT AND
WAGES
Scientific discoveries were an even more powerful factor
than machinery in trebling the yield of German land within the last decades. I
shall only mention briefly the use of potash salts, basic slag, and
nitrogen-collecting plants as manure; the artificial production of nitrogenous
fertilisers, (calcium cyanamide), the prevention and cure of contagious
diseases in plants and animals. (*By electrifying the soil the
physicist Lodge obtained an increase of produce of 30-40%.)
These discoveries have not, however,
fertilised all soils equally. By far the greatest gain from them so far has
accrued to the peaty, marshy and sandy soils previously considered barren. Here
the development meant more than trebling the produce; it meant the creation of
new soil, for the sand and moor had not been previously cultivated at all. In
Germany a small fraction of these waste-lands was formerly cultivated as burnt moor
and yielded a scanty crop every fifteen years to those who were willing to
undertake this arduous labour.
(*As lately as 30 years ago, more than half the
province of Hanover was covered with heather. Every 15 years the heather was
cut, piled and burnt, the ashes being spread on the land which was then
ploughed and yielded a scanty crop of rye or buckwheat. The smoke from these
fires was often observed at 500 miles distance from Hanover.)
These lands now yield rich harvests
every year. Land which was always naturally fertile cannot, of course, treble
its already rich yield. Such land provides the manure necessary for its own
perennial rejuvenation if, as is the general rule, tillage is combined with
cattle-breeding. That is why artificial fertilisers are much less important in
such cases than when applied to lands naturally barren. And the influence of
artificial fertilisers on the produce of freeland of the first and second class
is still slighter. These virgin lands as a rule require no manuring at all. The
cost of transporting artificial fertilisers to such land is, moreover,
prohibitive.
Thus the effect of scientific
discoveries on wages and rent varies according to the nature of the land to
which they are applied. As in the case of machinery, it is impossible to state
generally whether they raise or depress rent or wages.
11. LEGISLATIVE INTERFERENCE WITH RENT AND WAGES
The influence of legislation on the
distribution of the product of labour among rent-receivers and workers is
manifold and far-reaching. It has often been said that politics consist, in the
main, of attacks on wages and rent, and in the corresponding defensive
measures. As a rule action is here dictated by instinct. The interplay of
forces is not fully understood, or if it is understood it is politic to conceal
the truth. The advocates of the measures proposed with so much passion are not
greatly concerned about the scientific proof of their efficacy. Politics and science
are uneasy bedfellows; very often indeed the aim of politics is to prevent, or
at least retard, the recognition of some scientific discovery. What curious
things have been said, for example, about wheat-duties ! "They protect and
encourage agriculture", say those who pocket the immediate advantages;
"they are bread-usury and theft", say those who become aware of the
duty in the smallness of the loaf. "The duties are paid by the
foreigner", say some, to which others retort that the duties are all borne
by the consumers. Thus the wrangle proceeds, as it has proceeded for fifty
years, over a purely human transaction open to all to see; and still the
disputants are none the wiser. It is therefore well worth investigating the
influence of legislation, for example the taxation of land, on the distribution
of the product of labour.
When a merchant orders a shipment of
tobacco knowing that at the frontier he will have to pay a duty of $100 per
bale, it will be admitted that the merchant must be assured of recouping this
expenditure, plus the interest on the capital invested, and plus his own
profit, in the price of the tobacco when sold. The import-duty is, for the
merchant, an integral part of the merchandise, and is entered by him in his
inventory on the credit side, just like any other item such as chests, sacks
and bales: -
100 Tons Java tobacco $50000
Freight and import-duty 10000
_______
60000
10% expected profit 6000
_______
Capital $66000
That is how the merchant deals with
import-duties. Why cannot our landowner deal similarly with the sum which the
State collects from him in the form of a tax on land ? It is often asserted
that he does so. Landowners themselves will tell you that they intend to charge
every tax, with interest and profit added, to the tenant, so that in the long
run the land-tax will be deducted from the scanty wages of the farm-labourers.
If such is the case, these landowners will argue, is it not preferable to
convert the landtax at once into a poll-tax, a wage-tax or an income-tax ? The
labourers would then at least save the interest and profit that the landlord
adds to the taxes.
In order to examine this problem
more closely it is indispensable to answer a question raised by Ernst
Frankfurth in his illuminating little book on unearned income, namely: What
becomes of the proceeds of the land-tax ? For it surely cannot be immaterial
for the fate of the land-tax whether the State employs the revenue from it to
construct new roads through the landlord's estate, and to reduce the education
rate for the children of his tenants, or, say, to pay an import premium on
foreign grain. If we do not know this we cannot determine who, ultimately, pays
the land-tax. So says Ernst Frankfurth.
There are landowners who do not wait
for the State to tax them and with the proceeds to build the roads necessary
for exploitation of their estates. They construct the roads themselves. The
costs form a capital investment, like clearing, draining, and so forth. The
landowners expect advantages from the roads which will balance the interest on
the capital to be invested. If, nevertheless, it is, as a rule, the State that
constructs the roads, while taxing the landlords for the expenditure, this is
simply because the roads usually cross the land of many owners with conflicting
interests and therefore necessitate powers of expropriation which are
exclusively the domain of the State. But even if the State builds the roads,
the land-tax levied for the purpose is a capital investment, the interest on
which the landlord expects to recover to the last farthing. And this is the
real nature of almost every tax. If the State levies a tax to protect the
frontier from the inroads of barbarians, the landlord saves the amount of this
tax from the insurance which would otherwise be necessary against the invasion
of Cossacks and Yankees (Russian and American wheat! ).
So if the State employs the revenue
from the land-taxes for the benefit of the landlords, these taxes must be
looked upon as capital investments. They are the remuneration of the State for
services rendered. The landowner may enter these taxes where he enters the
wages of his labourers. If he leases the land to tenants he will add the tax to
the farm rent, recovering it if the State works cheaply and well, and even
making a profit if the State displays the shrewdness of a clever contractor.
But what if the State taxes the
landowners in order to relieve the tenant or the labourers, say from the
education-rate ? Is it still possible for the landlord to consider the land-tax
as a profitable investment ? Let us suppose that such is not the case, that the
landlord cannot charge the tenant with the amount of the education-rate saved
by the latter nor reduce the wages of the labourers. Tenant and labourers would
then have their labour-proceeds increased by the amount of the education-rate
remitted. But why should the landlord raise the labour-proceeds of the tenants
and labourers? Because he is himself taxed? That is no reason since the
labour-proceeds of the tenant and labourer are determined by the
labour-proceeds on freeland of the first, second and third classes. If the
revenue from the landtax is employed to benefit the freeland-farmer of the
third class likewise, say also in the shape of a reduction of the
education-rate, then, indeed, the equilibrium between the labour-proceeds of
the wage-earners and tenants and those of the freeland-farmers is not
disturbed, and it is impossible for the landowner to transfer the burden of the
land-tax to his tenants and labourers. Otherwise he says to the tenant:
"To the other advantages which my farm offers you, free education for your
children is added. Rich loamy soil, a healthy climate, a fine view of the lake,
a situation close to the market, free schools - sum total - you have got to pay
me $10 an acre". And to his farm labourer the landowner says: "If you
do not consent to a reduction of wages you may go. Calculate whether with the
wages I offer you, together with free schools for your children, and other
social institutions, you are not as well off as if you decide to cultivate
freeland of the first, second or third class. Think it over before you
go".
It is clear that the whole burden of
the land-tax is transferable as long as its yield does not benefit freeland
farmers, more particularly those of the third class. If, on the other hand, the
revenue of the land-tax is made to benefit, in some form or other, intensive
cultivation, the increase of the labourproceeds of freeland-farmers of the
third class is passed on to the farm labourers engaged in extensive
cultivation, and the land-tax, in this case, far from being transferable, hits
farm rents doubly, first by the full amount of the tax and secondly in the form
of higher wages demanded by the farmlabourers.
This shows how right Frankfurth was
to enquire first about what is done with the yield of the tax, and how futile
it is to attempt to answer the question as to whether the burden of the
land-tax can be shifted or not, without first establishing the necessary
premises. It also leads us to suspect how often the measures proposed by social
reformers must fail, or have the opposite to the desired effect. And it shows
us how greatly the distribution of the labour-product is influenced by the
power of the State.
12. PROTECTIVE-DUTIES, RENT AND WAGES
By the above reasoning we see that a
land-tax levied for the benefit of freeland-farmers, say in the form of a
premium on imported wheat, would hit rent doubly, first by the amount of the
tax, and secondly by the increased wages of farm labourers. Many readers will
now be inclined to suppose that a protective-duty, being the opposite to an
import premium, must raise rents in a two-fold manner, in the first place
directly, by the amount of the special rise, corresponding to the duty, of
prices of farm produce, and in the second place through depression of wages
resulting from reduction of the labourproceeds of freeland-farmers of the first
and second classes.
Let us see if that is true.
To begin with, let it be understood
that a protective tariff differs fundamentally from other revenue duties and
taxes in that the interest of the landowners in the tariff is much greater than
that of the
State which levies the duty. For
every 100 millions which the State raises out of the import of wheat, the
landowners will levy 1000 millions (* The exact amount for any
country can be calculated from the ratio of imports to home production.) from the consumers of bread in the form of higher prices. That is
why the thing is called a protective-duty: it is designed to protect and
augment the rents of the landowners, and to give better security to their
mortgages. When import-duties are purely fiscal, as in the case of tobacco, the
tax is imposed not only on the imported goods but also on those produced in the
country. Anyone having more than one tobacco plant in his garden in Germany
must inform the revenue authorities, and in Spain the culture of tobacco is, or
was, prohibited for fiscal reasons. But if the import-duty on wheat is of
secondary importance as revenue, Frankfurth's query as to the use made of the
tax is likewise of secondary importance for what we have set out to
demonstrate. We shall therefore leave out of account the wheat duties
themselves, and concentrate our attention on the farm rents placed under their
protection.
There is nothing arbitrary in the
distribution of the product between landowner and farm worker; everything
proceeds according to inherent laws. Any artificial interference with this
distribution must be in accordance with these laws, not in opposition to them,
otherwise it will come to nothing. But even if the attempted interference does
come to nothing, some time is usually required for the disturbed equilibrium to
be restored, and meanwhile the play of forces may resemble the swing of a
pendulum that has been set in motion by a push: distribution will oscillate for
some time between rent and wages until the former state of matters is
re-established.
So if protective-duties for the
purpose of raising rents at the expense of wages are in conflict with the
economic laws governing the distribution of the product between rent and wages,
they must either fail entirely or succeed only temporarily, that is, until the
equilibrium of forces disturbed by legislative interference has been
restored.
It is not our purpose to investigate
these matters further than to obtain a general picture of the economic
processes resulting from import-duties. If we wished to arrive at conclusions
applicable in all possible circumstances to individual cases, such as, for
example the question as to how much an import-duty of 33% on wheat would raise
the price of a certain estate, we should be obliged to carry the investigation
far beyond the scope of this book.
Our first concern with regard to
import-duties is their influence on the proceeds of labour of freelandfarmers
of the first and second classes, on which farm wages on the tariff-protected
land depend Of the proceeds of labour of the freeland-farmers of the third
class, whose product of labour is also protected by the tariff, we shall speak
afterwards.
Freeland-farmers of the first and
second class rightly consider import-duties as a burden, like any other charge
which renders the conversion of the product of their labour into proceeds of
labour more expensive. Whether this increased expense results from higher
freights, from higher prices of sacks, from piracy, from fraud, or from
import-duties, makes no difference to them. What the consumer pays for the
product of his labour (wheat) the freeland-farmer considers as the yield of his
labour, and this yield is diminished by import-duties and freight. The proceeds
of his labour are therefore correspondingly smaller. If the loss caused by
freight hitherto amounted to 30% of the price of his product, this loss may be
increased to 50 - 60% by the tariff.
The freight from the Argentine
seaports to Hamburg is usually about $4 a ton. To this is added the cost of
railway transport from the farm to the harbour, which is more than twice as
much; in all, therefore, about $13. The duty in Germany is $14 a ton. The total
is thus $27 in a price of about $60.
The immediate effect of the duties
is, therefore, to reduce the proceeds of labour of the freelandfarmers of the
first and second classes, and as these labour proceeds determine the wages of
the workers on tariff-protected land, there is here, too, a reduction of wages,
though at first perhaps only in the form of increased prices for foodstuffs, in
connection with stationary money wages. The duty, then, allows the landowner to
demand higher prices for his agricultural produce without having to pay out
this surplus in the form of higher wages to his labourers, or in higher prices
for industrial products for his own consumption. For a rise of industrial wages
- which would mean a shifting of the burden of the import-duties from
industrial workers - is impossible, since these wages are, as we have seen,
also determined by the labour-proceeds of freeland-farmers of the first and
second classes. Industrial workers are consequently no more able to shift the
burden of the import duties than are farm-labourers and freeland-farmers of the
first and second classes. So until the reactions to be described later begin to
make themselves felt, the whole amount of the import-duty is a free gift to the
landowner. And by import-duty we mean not only the sums received by the public
treasury, but also the sums levied on the consumer in the form of higher prices
paid for native products in the home markets in consequence of the tariff
barrier. This means that every loaf of bread, every egg, every ham, every
potato pays a tribute which goes into the pockets of the landlords. (If the
land is let, the duty is immediately transferred to the rent; if it is sold,
the duty is capitalised, that is, multiplied by 20 or 25, and added to the
usual price.)
The duty, say the politicians, is
paid by the foreigner. And that is perfectly true. For the relatively
unimportant sum collected as State revenue at the frontier is, no doubt, paid
by the freeland-farmer settled abroad, from the proceeds of his labour. But can
anyone seriously attempt to make wheatduties palatable to the German workman by
telling him that it is the freeland-farmer who pays the amount collected by the
State at the frontier ? This is cold comfort for the German worker whose wages
are determined by the proceeds of labour of the freeland-farmer - cold comfort
for the man who must pay out of his own pocket the higher price of food, increased
by German landowners by the full amount of the tariffs.
The belief, the hope, the bold
assertion, that capital-interest win bear part of the wheat-duties is, as we
shall show presently, erroneous. Interest, especially in the case of new capital
seeking investment, cannot be taxed. It is free and independent of
tariffs.
The import-duty will, however,
produce certain counter-effects that will slowly but surely make themselves
felt, somewhat as follows: The freeland-farmer in Manitoba, Manchuria, or
Argentina writes to his friend in Berlin: " I lose in freight and
import-duties more than half of what you pay for my wheat in Berlin, and you
also lose in freight and import-duties half or more of what I pay here for your
goods (tools, books, medicines and so forth). If we were neighbours we should
save these costs and both you and I would find the proceeds of our labour
doubled. I cannot convey my fields to where you are, but you can transfer your
workshop, your factory here. Come, then, and I will supply you with whatever
food you may require at half the price you have now to pay, while you will
supply me with your products at half the price I have to pay at
present."
This calculation is correct, though
the obstacles to the execution of the proposal are many. Industry can, as a
rule, prosper only in centres where there are many other industries, since
almost all branches of industry are to some extent inter-dependent. The
emigration of industries must therefore proceed gradually; it begins with the
trades that are naturally most independent: brickyards, saw-mills, flour-mills,
printing houses, furniture and glass factories, etc., and at first, of course,
it affects only commodities upon which freight-charges and import-duties are
especially high. Nevertheless, the emigration of individual industries depends
on a calculation, and it is import-duty which, added to freight-charges, very
frequently calls for a decision in favour of emigration. The higher the duty on
wheat, the more often will it pay to pack up tools and re-establish the
workshop in the vicinity of the freeland-farmer. And with every new industry
established in the neighbourhood of the freeland-farmer the proceeds of his
labour increase, and this increase reacts, as we know, on wages in the
protected country.
The advantages of the tariff to the
landowner are therefore sooner or later absorbed in rising wages. Landowners
who realise this will act accordingly: they will sell their land before the
counter-effects make themselves felt, and leave their successors to go
clamouring to Parliament for relief, when the inevitable reaction involves
agriculture in difficulties. (* "Die Not der
Landwirtschaft": "The plight of agriculture" was the political
slogan of the Prussian protectionists. Here "agriculture" was a
euphemism for rent. It would not be difficult to find an English or American
parallel.) (The reduction of rent in consequence of the
rise of wages is inevitable, although it may not always be expressed in
figures. For it may happen that the development here described may synchronise
with one of those frequently occurring currency inflations caused by gold
discoveries or over-issues of paper-money. Currency inflation such as occurred
in the period of 1890 to 1914 restores to the landowner what he loses in rent.
But this applies only to mortgaged landed property, and the landowner has also
to reckon with the reverse possibility, namely a gradual fall of prices, as in
the years 1873-1890.)
But the reactions set up by a
protective tariff are not confined to the behaviour of freeland-farmers of the
first and second classes. We must also find out what happens to the
freeland-farmer of the third class. The effect on him is the exact reverse of
the effect on freeland-farmers of the first and second classes, who pay the
duty out of their pockets, whereas he is under the protection of the tariff as
regards the products he brings to market after satisfying his own personal
needs. So he participates in the blessings of the protective tariff, that is,
in the looting of consumers. Instead of six marks he now gets 8 marks for a
rabbit, and he sells his honey for 1.35 marks instead of 1.10 marks: in short,
he obtains higher prices for everything he sells, without having to pay higher
prices for what he has to buy. That is to say, the labour-proceeds of the
freeland-farmer of the third class increase, whereas the wage workers complain
of a decrease in the proceeds of their labour. Thus the labour-proceeds of the
freeland-farmer of the third class increase in a twofold manner, absolutely on
account of the rise of prices, and relatively in comparison with the decrease
of wages. Nevertheless the labour proceeds of the freeland-farmer of the third
class determine the general rate of wages. Evidently, therefore, the
disproportion cannot long continue. Word goes round that a rabbit can be sold
for eight marks, honey for 1.35 marks, potatoes for 5 marks, and goat's milk
for 20 pfennigs, so the wage-earners are up in arms with demands for increased
wages. Pointing to the increased labour-proceeds of the freelandfarmer of the
third class they, too, claim higher wages, threatening to move to the heath, to
the marsh, to the waste, if their demands are not granted.
Hence the wage-increase proceeds
from freeland of the third class, as well as from freeland of the first and
second classes, and it continues until it has completely compensated the effect
of the wheat duties.
It must be remembered, further, that
the special rise of prices of all farm produce, brought about by the
import-duties, and the consequent increase of rents, must call for new efforts
in the direction of intensive cultivation, and that if the duty raises the
labour-proceeds of intensive farmers, wages, and through them rent, must be
still further affected.
The effect of the tariff is to raise
the gross proceeds of intensive farmers and, as the tariff does not at first
affect the prices of industrial products, to increase also the net proceeds of
their labour.
But if the labour-proceeds of
intensive farmers increase, wages must also rise, for the labour-proceeds of
intensive farmers determine wages in general.
The general conclusion of our
examination is consequently that a protective tariff, through its influence on
the proceeds of labour of the freeland-farmer, is bound sooner or later to
counteract itself; so that the protection obtained can never be other than
temporary.
For those who have to pay the tariff
charges "temporarily", it may be a consolation, and for those who
enjoy the advantages of the tariff it may be disquieting, to become aware of
their transitory nature. But it is a very serious matter if the transitory rise
of the rent is accepted as permanent by the farmer when buying land or dividing
an inheritance. For what does the farmer know of theories of rent and wages ?
He is guided simply by experience. He sees the harvest, he knows the prices of
farm produce and the wages paid farm-labourers - his calculation is finished
and the bargain luck. The customary sum is paid in ready money, and the rest is
covered by a mortgage. But this mortgage is not a temporary matter: it is sure
to outlast the transient effect of the tariff upon wages, and it does not
decrease when the labourers, regardless of the stationary selling prices of
farm produce approach the farmer with demands for increased wages. The farmer
then begins to complain, once more, about the plight of agriculture."
13. THE ENTIRE WAGE-SCALE UP TO THE HIGHEST SALARIES
IS BASED ON THE LABOURPROCEEDS OF CULTIVATORS OF FREELAND
If the landowner is able to squeeze
$1000 rent out of his land, he will not be satisfied with less than this amount
if he chooses to hire labourers and to farm the land himself. If the land,
after deducting cost of wages, did not yield at least $1000, the landowner
would dismiss the labourers and let it for $1000.
In no circumstances, therefore, will
a day-labourer earn higher proceeds of labour than the tenant or the settler on
unclaimed land; for otherwise the tenant (or settler) would prefer to work as a
daylabourer.
On the other hand the day-labourer
will not consent to work for a wage which is less than what he might earn as a
tenant or settler, for otherwise he would rent a piece of land or emigrate. It
is true that he often lacks the money necessary to run a farm or to emigrate;
but whether he has the money or is forced to borrow it, he must charge interest
on it in his calculation, and deduct this interest from the product of his
labour. For it is only what is left to the settler after paying the interest on
his capital that belongs to him as a worker.
If the gross proceeds of the labour
of the settler on freeland are $250 and the interest on his working capital is
$50 then the net proceeds of his labour are $200 and the general rate of wages
must oscillate about this point. The wages of the day-labourer cannot rise
higher, for otherwise settlers would turn day-labourers; and they cannot sink
lower, for otherwise day-labourers would turn settlers.
The wages of industrial labourers
are also, obviously, dominated by this general rate of wages. For if the
proceeds of labour in industry were larger than the proceeds of labour on
unclaimed land, agricultural labourers would turn to industry, with the result
that agricultural produce would become scarce and rise in price, whereas
industrial products, being super-abundant, would fall in price. The rise of
prices in agriculture and the fall of prices in industry would bring about a
re-arrangement of the wage scale, until wages had again been equitably
adjusted. And this readjustment would certainly be rapid, considering the great
number of migrating labourers who are indifferent whether they grow sugar-beet
or shovel coal.
Thus it is incontestable that if the
proceeds of labour on freeland determine the labour proceeds of the
agricultural labourer they also determine labour proceeds in general.
Wages cannot rise above the proceeds
of labour on freeland, since freeland is the only support of the farm-labourer
in his wage-negotiations, or of the tenant in his rent-negotiations, with the
landowner. If the farm-labourer or tenant is deprived of this support (say by
suppression of his freedom of movement) he is at the mercy of the landowner.
But since freeland is the only support, it is also true that no other circumstances
can depress wages below these proceeds.
The proceeds of labour on freeland
are, therefore, at once the maximum and the minimum of wages in general.
The existing great differences in
the individual proceeds of labour are by no means inconsistent with this
general rule. When the division of the product of labour between landowners and
workers has once been determined, the share that falls to the workers is
distributed automatically on a perfectly natural basis. The varying
remuneration is not arbitrary, but is adjusted entirely by the laws of
competition, of supply and demand. The more difficult or disagreeable the work,
the higher is the wage. For how is a man to be induced to choose the more
difficult or disagreeable of two tasks ? Only by the prospect of higher
labour-proceeds (which may, of course, consist of advantages and privileges
other than money). Thus if the workers need a teacher, a pastor or a forester,
their only course is to open their purses and grant salaries for these offices
which may greatly exceed their own proceeds of labour. Only in this way can
they induce someone to undertake the expense of having his sons educated for
these professions. If the supply of tachers and pastors is still insufficient,
the salaries must again be raised. If the workers have overshot the mark so
that the supply exceeds the demand, salaries will be reduced. And it is the
same with all trades requiring special training. The opposite happens when the
workers need a shepherd, a goose-girl or a boy to scare crows. If they were to
offer for such leisurely pursuits their own full proceeds of labour gained by
hard work, every townsman, teacher, pastor and farmer would apply for these
posts. So a minimum wage is offered for the herding of the geese, and this
minimum is increased until someone is willing to accept the job. The workers
also need a merchant to buy their products and to sell them whatever goods they
want. This worker (merchant) must also be granted a wage, in the shape of
commercial profit, sufficient to induce someone to devote himself to this
harassing profession.
Thus the basis for the adjustment of
all wages is always the proceeds of labour on freeland. Upon this basis is
built the whole structure of fine gradations in the proceeds of labour up to
the highest-paid occupations. Every change in the basis is therefore
transmitted to the whole superstructure, just as an earthquake makes itself
felt up to the weather-cock on the steeple.
Our proof that the doctrine of the
"iron wage" is unsound is not yet, indeed, complete, for the
"iron wage", though not caused by private ownership of land, might
still be caused by capital. That capital does not possess this power is
obvious, however, from the frequent fluctuations of wages (a really
"iron" wage could not fluctuate). Why capital does not possess this
power we shall demonstrate later (see Part V, The Free-Money Theory of
Interest). If capital had power to reduce the proceeds of labour on freeland to
a minimum corresponding to the "iron wage", the yield of capital, as
expressed in the rate of interest, would necessarily share the fluctuations to
which the product of labour on freeland is obviously subject. But this is not
the case, for, as we shall show later, pure interest, which is here in
question, is a remarkably stable quantity, so remarkably stable, indeed, that
we are fully justified in speaking of an "iron" return on capital. So
if besides this fixed quantity of interest, wages were also a fixed quantity,
where - if rent moves on independent lines - would be the reservoir to collect
the fluctuations of the product of labour?
14. INFLUENCE OF CAPITAL-INTEREST ON RENT AND WAGES
In making up his accounts, the
settler on freeland must enter a charge for interest on his working capital.
Interest must be separated from the proceeds of his labour, no matter whether
the capital is his own or borrowed. For interest has nothing in common with
labour; it is governed by entirely different laws.
And the working landowner must also
make this separation of capital-interest from the proceeds of his labour.
If both settlers on freeland and
farmers on rented land have to pay the same rate of interest for the necessary
capital, it might be imagined that the rate of interest had no effect on rent.
But that is an error. With labour and means of production any amount of new
land can be created, often in close proximity to cities. And the lower the rate
of interest, the easier it is to reclaim waste tracts. The employer demands
from the reclaimed land only an amount of interest equal to the rent of a field
bought for the same capital outlay. With freeland of the first and second
classes freight sometimes swallows up the larger part of the product of labour,
but with reclaimed freeland it is capital-interest that absorbs the expected
rent. Whatever the nature of the proposed reclamation, whether it is the
drainage of the Zuider Zee, recently decided upon, or the cultivation of
moorland, or the clearing of virgin forests, or the irrigation of deserts, or
the blasting and removal of rocks, the first question is always the amount of
interest on the capital required, which is then compared with the rent demanded
for land of the same quality. If the rate of interest is high, the comparison
Will be discouraging, and the moor will be left uncultivated. If, on the other
hand, the rate of interest is low, the undertaking will promise success. If the
rate of interest fell from 4 to 1%, for example, many land improvements which
cannot be undertaken today would become profitable.
With interest at 1% it would pay to
turn the water of the Nile into the Arabian desert, to dam off the
Baltic and pump it dry, to put the
Luneburg Heath under glass for the culture of cocoa and pepper. With interest
at 1% the farmer could also plant orchards where today he cannot do so because
of the interest he would have to pay for 5 or 10 years on the capital invested
while waiting for the future harvests. In a word, at 1 % it would be possible
and profitable to bring all deserts, swamps and moors into cultivation. All the
above proposals are not, of course, to be taken literally.)
A fall of the rate of interest would
not only enlarge the area under cultivation, it would also enable men to
extract double or treble the amount of produce from the present area through
extended use of machinery, construction of roads, replacing of hedges by
fences, construction of pumping stations for irrigation, drainage of the soil,
planting of orchards, provision of appliances to protect the fields from frost
and a thousand similar improvements. This, again, would necessitate a reduction
of the cultivated area, and make freeland, the great menace to rent, more accessible.
A reduction of the rate of interest
would, further, allow transport-facilities for wheat from abroad, (seaports,
canals, ocean steamers, railways, silos) to be run more cheaply, which would
lower the freight charges on the produce of freeland. And every dollar saved
here means a dollar less for rent. Now the interest on the money invested in
means of transport constitutes a very considerable part of freight charges. For
the European railways in 1888, with an average rate of interest of 3.8%, the
ratio between working costs (upkeep of the permanent way, salaries and wages,
coal, etc.) and interest was 135:115. Interest, therefore, very nearly ,
equalled the running costs, so that a reduction of the rate of interest from 4
to 3% would have allowed a reduction of the freight charges of nearly one
eighth.
Running costs = 4, interest on
capital = 4, freight charges = 8
" = 4, " = 3, " = 7
" = 4, " = 2, " = 6
" = 4, " = 1, " = 5
" = 4, " = 0, " = 4
That is to say, with interest at 0%
railway freights might be reduced by one half. With ocean freights the ratio of
9 costs to interest is not the same, although here, too, interest plays an
important part: ships, working capital, harbours, canals (Panama, Suez),
coaling stations, equipment of coal mines etc. - all this demands the regular
rate of interest, and this interest is a component of freights, a charge on the
labour-proceeds of freeland-settlers of the first and second classes, which are
of such decisive importance for wages and rent.
Thus the reduction or elimination of
interest would reduce freights by one half, and in this manner freeland would,
economically speaking, be brought 50% nearer, the competition of foreign wheat
becoming correspondingly keener.
But what would happen to rent if the
arable area close at hand were multiplied in this manner beyond the need for it
? What would happen to rent if freeland, which determines wages, could be
increased at pleasure, and that too, close at hand, so that the difference
between the product of labour of the freeland-farmer and the proceeds of his
labour became less and less ? Why emigrate to far-off Canada, to Manitoba, and
from there ship wheat burdened with freight costs, to Holland, if we are able
to grow the wheat on the soil of our own Zuider Zee? If the rate of interest
falls to 3, 2, 1 or 0%, every country will be able to provide bread for its
population. The limit to intensive cultivation is set by interest. The lower
the rate of interest, the more intensive is the cultivation of the soil.
We can here observe the close
alliance that exists between interest and rent. So long as there are wastes,
marshes and deserts to reclaim, so long as land can be technically improved, a
high rate of interest, the ideal of the capitalist, is at the same time the
bulwark of the landowner. If the rate of interest fell to zero, rent would not,
indeed, disappear completely, but it would be dealt a staggering blow.
of a fall of interest on the rent of
building land is complex. Interest on the building capital is a far larger
component of house-rent than is the ground-rent (in the country and in small
towns the ground-rent is often less than 5 % of the rent of a house, whereas
interest on the building capital in such cases forms 90% of the total rent). A
fall of interest to 1 % or 0 % would therefore mean a great reduction of
houserent, and this of course would react on the amount of accommodation
claimed by the individual families. The masses which today, because of high
house-rents resulting from interest, must content themselves with very
inadequate housing accommodation, would demand, and be able to pay for, roomier
dwellings. But roomier dwellings mean larger building sites and therefore
increased groundrents. On the other hand a fall in the rate of interest would
reduce railway and train fares, and the consequent shifting of the population
to the suburbs would tend to counteract the rise of ground-rents in the city.
)
15. SUMMARY OF RESULTS ATTAINED SO FAR
The wage of the average worker is
equal to the proceeds of labour of the average cultivator of freeland and is
entirely determined by these proceeds. Every modification in the proceeds of
labour of the cultivator of freeland is transmitted to wages, no matter whether
such modifications are brought about by technical improvements, by scientific
discoveries, or by legislation.
The so-called "iron law" of
wages is therefore an illusion. For the individual, the wage oscillates about
the amount mentioned under 1. It may rise above this amount in the case of
specially efficient work, but it may also fall short of it, just as it may even
fall short of the minimum standard of existence. The whole wage-scale for skilled work up to
the highest levels is based on the labour-proceeds of the cultivator of
freeland.
Rent on land is what remains of the
produce of the land after deducting wages (and capital interest). As the amount
of this deduction (wage) is determined by the proceeds of labour on land, rent
is also determined by the proceeds of labour of the freeland-farmer.
Interest is the close ally of
rent.
It cannot be asserted without
qualification that technical progress always benefits rent. The contrary is
often true. Progress and poverty are not necessarily coupled. Progress and
growing general prosperity as often go hand in hand.
Nor can it be definitely stated
whether the burden of a tax on land can, or cannot be shifted. The question can
be definitely answered only when the destination of the revenue from the
land-tax is indicated. The land-tax may hit rent twice (first, through the tax
itself, secondly, through the increase of wages) or it may benefit rent by more
than its amount.
If the yield of the tax on rent is
employed for the benefit of the cultivators of freeland, for instance as a
premium on imported grain or as a subsidy for the cultivation of waste land,
the State, if it wishes, can confiscate rent completely. The burden of a tax on
rent, when the yield of the tax is so employed, cannot be shifted.
The price of land increases: With
increase of quality and agricultural prices. With decrease of wagerates and
rate of interest.
16. RENT OF RAW MATERIALS AND BUIILDING SITES, AND ITS
RELATION TO THE GENERAL LAW OF WAGES
Whether wheat comes from Canada,
from Argentina, from Siberia, or from a neighbouring farm, whether it be the
duty-burdened wheat of a toiling German emigrant or duty-protected wheat of a
wealthy Pomeranian squire, does not concern the miller. If the quality is the
same, so also is the price.
This is true of all commodities.
Nobody inquires about the cost of production of the goods offered for sale;
everybody is indifferent about their origin. It makes no difference whether one
man has been enriched by them and another ruined; if the quality is the same,
so is the price. This is clearly seen in the case of coins. Nobody inquires
where, when, or how the gold of the individual coins was obtained. One coin may
have been bloodstained plunder, another the product of a toil-worn gold digger,
but they circulate indifferently side by side.
Whatever the difference in the costs
of production of the individual competing commodities - the price remains the
same. This is known to everyone who uses raw materials, and it is known also to
the owner of the land on which the raw materials can be raised. If, for example,
a city needs paving stones for a new street, the proprietor of the nearest
quarry will at once estimate, the distance from the street to the nearest free
quarry of equally good paving stones. He will then calculate the cost of
carrying the stones from there to the street where they are needed, and the
price is made. This price the city will have to pay, because only from this
price upwards can competition come into play, and competition determines price.
(The wages in both quarries are assumed to be the same, and may therefore be
here left out of account).
If, however, direct competition is
entirely lacking, if there is no free quarry within reachable distance, and the
proprietor in consequence demands excessive prices for his paying stones, competition
will be sustained by substitutes, in this case, say, wood-pavement, macadam,
gravel, asphalt, or a railway; or the construction of the street may be
abandoned. In the latter case the advantage expected by the city from the
construction of the street would be the only competition which the proprietor
of the quarry need take into account.
The same is true of all other raw
materials without exception. If someone requires lime for a cement factory,
clay for a brickyard, bark for a tannery, coal, iron ore, wood, water, building
stones, sand, oil, mineral water, wind for his windmill, sun for his
sanatorium, shade for his summer-house, warmth for his grapes, frost for his
skating rink, the landowner who happens to be in possession of these gifts of
nature will exact payment for them, just as does the quarry-owner for his
paving stones, and always on exactly the same principle. The circumstances may
be different in each separate case; competition of substitutes may limit the
greed of the land-owner to a greater or less degree; but always the same law
holds good: the landowner exploits the advantages which the products, the
situation or the nature of his property offer, in such a manner as to leave the
purchaser for his labour only what he would have obtained if he had been forced
to procure his raw material from waste land, from the desert, or from
freeland.
From these considerations we deduce
a proposition which is of great importance for the general law of wages:
The product of the poorest, remotest
and therefore often ownerless sources of raw materials, loaded with freight
charges and with the wages paid to work the more favoured sources of similar
materials, forms the basis of the price of these materials. Whatever the owners
of the favoured sources save in the cost of production, is rent.
The consumer has to pay for all the
products of the earth, for all raw materials, as if they had been produced on
waste land at great expense, or conveyed at great expense from ownerless
land.
If the product of a man's work on
the poorest soil were equal to the minimum of what man needs to subsist, the
private ownership of land would make the " iron law of wages " a
reality; but as we have seen, such is not the case. For this reason, but only for
this reason, can wages rise above the minimum of existence.
The ground-rent of cities, which in
our industrial age very nearly equals the total rent on agricultural land, is
determined on exactly the same principle, though in somewhat different
circumstances.
The value of the land upon which
Berlin is built was estimated in 1901 at 2911 million marks which, with
interest at 4% corresponds to a rent of 116 millions. This sum alone,
distributed over the 4 million hectares of the province of Brandenburg, is equal
to a rent of 30 marks a hectare. With the groundrent of the other towns of the
province added, the urban rent may amount to about 40 marks a hectare, a sum
which, considering the poverty of the soil and the large areas of water, swamp
and forest, possibly exceeds the rent on agricultural land. The position of the
province of Brandenburg, a region with poor soil yet containing the capital of
the German Empire is, indeed, exceptional; nevertheless these figures show the
great importance of urban ground-rent at the present day.
These figures are likely to surprise
many readers; but, as someone has justly remarked: it is becoming doubtful
whether, measured by the rental, our great landed estates are not to be looked
for in Berlin rather than, as hitherto, in Silesia.
How is this curious phenomenon to be
accounted for; what determines the rent of building land, and what is its
relation to the general law of wages ?
In the first place we must explain
why men congregate in cities in spite of the high ground-rent; why do they not
spread all over the country ? Calculated by the above figures the average
ground-rent for every inhabitant of Berlin is 58 marks, that is, for families
of 5 persons 290 marks yearly; an expense which is entirely avoided in the country,
for the ground-rent of the average country cottage is so trifling that it could
be paid with the contents of its earth-closet. And the hygienic advantages of
life in the country contrast strikingly with the miserable housing conditions
in towns. There must, therefore, be other weighty reasons to make people prefer
the town.
If we assume that the social
advantages of the town are cancelled by its disadvantages (bad air, dust, noise
and numerous other offences to our senses), all that is left to balance the
expense of urban life is the economic advantage of living in a town. The
interdependence and co-operation of the city industries must afford advantages
over isolated industry in the country which in the case of Berlin
counterbalance the 116 millions of ground-rent. If it were not so, the growth
of cities would be quite unaccountable.
No industry can be established in
the country which, from its seasonal character, occupies many workers today,
and few or none tomorrow; for the worker must work all the year round. In the
city the varying demand for labour in the different industries is more or less
levelled, so that workmen dismissed by one manufacturer are engaged by another.
In this way a workman has greater security against unemployment in a town than
in the country.
In the country the manufacturer
lacks opportunity for the exchange of ideas, the stimulus given by intercourse
with other businessmen. Workmen trained in different factories and acquainted
with various methods are also a considerable asset to the city manufacturer as
compared with his competitor in the country. Thrown entirely on his own
resources, and compelled to employ workmen deprived of intercourse with workmen
from other industries and other countries, the country manufacturer is apt to
lag behind in the adoption of improvements. He also often lacks the facilities
afforded by the city for the sale of his products. Purchasers from all parts of
the country and from other countries flock to the city where they find
everything they need, collected in one place. The city manufacturer is visited
by foreign customers who draw attention to the consumers' wishes, and moreover
give him valuable information about market conditions, prices, and so forth.
The country manufacturer is deprived of all this. Instead of being visited by
his customers he must sacrifice time and money in travelling to visit them. He
must collect his information about prices of raw materials, market conditions
abroad and the solvency of his customers in round-about ways that are often
anything but reliable.
Furthermore he is forced to lay in
much larger stocks of raw material than his competitor in town who is able to
procure everything immediately when needed; and if through some oversight the
country manufacturer runs short of some article, perhaps only a screw, the
whole factory is brought to a standstill until the missing part has been sent
from "town". Or if a machine breaks down, a mechanic may have to be
summoned from town, and until he arrives the factory is again idle.
In short, the disadvantages
connected with the factory itself, with the workmen, the purchase of raw
materials and the sale of finished goods, are so many that the country
manufacturer forced to compete with a rival in town cannot possibly pay the
same wages as the latter. Thus all that he and his workmen save in ground-rent
is deducted from the proceeds of their labour.
Hence the only industries that can
develop in the country are those which require so much space that all disadvantages
are counter-balanced by the saving on ground-rent; or those which cannot be
carried on in towns (saw-mills, brickyards, rolling mills) or are forbidden by
the police for hygienic reasons (lime-kilns, powder-mills, tanneries, etc.); or
those which, having a simple technical organisation, allow the manager to
establish his commercial headquarters in town. In every other case the town is
preferred.
We know therefore where the money to
pay the 116 millions of marks ground-rent of the city of Berlin comes from, and
we also know what sets the limit to the growth of cities. The advantages of
combined work have been calculated in money and pocketed as ground-rent by the
landlords.
If the city grows, its economic
advantages grow, and ground-rents grow also. And if ground-rents grow out of
proportion to the advantages of the city, its growth is interrupted.
If you wish to enjoy the advantages
afforded by the city for your trade, you must pay the landlords for these
advantages; otherwise you are free to establish your factory, shop, or dancing
hall in the woods and fields. Calculate what is more advantageous, and act
accordingly. Nobody prevents you from settling outside the city gates. If you
can induce your customers to tramp out to you through rain and snow, dust and
mud, and there to pay the same price as in the centre of the city, so much the
better for you. If you think it unlikely, then pay the ground-rent and
establish yourself in town. You have indeed another possibility, you can try
selling your goods cheaper outside the city. Some customers will be attracted
by the cheaper prices; but where is the advantage? What you save on rent, you
lose in the price of the goods sold.
Ground-rents are thus determined by
precisely the same law that governs the rents of agricultural land and raw
materials. All the advantages of the city (among which we should mention the
division of labour), are reaped by the ground-landlord. Just as German wheat is
sold for the price it would have fetched if it had been grown in Siberia and
taxed at the frontier, so the goods produced in a city must be exchanged at the
prices they would have fetched if loaded with all the disadvantages of goods
produced far away from industrial centres.
Agricultural rent captures all the
advantages of situation and nature, leaving waste-land and wilderness for the
cultivator; city ground-rent claims for itself all the advantages of society,
of mutual aid, of organisation, of education, and reduces the proceeds of those
engaged in city industry and commerce to the level of producers isolated in the
country.
17. FIRST GENERAL OUTLINE OF THE LAW OF WAGES
The products that remain after
deduction of rent and capital-interest, form the wage-fund to be shared among
all workers (day-labourers, clergymen, merchants, physicians, servants, kings,
craftsmen, artists). When everyone is free to choose his trade, the division is
made according to the personal capacity of each, by demand and supply. If
choice of occupation were completely free (it is not, but might be) everyone
would actually obtain the "largest" share in the distribution. For
everyone tries to obtain the largest share, and the size of the share is determined
by demand and supply or, ultimately, by the choice of occupation.
Thus the relative amount of the wage
depends on the choice of occupation, that is, on the individual. The absolute
amount of the wage on the contrary, is quite independent of the individual, and
is determined by the amount of the wage-fund. The larger the contributions of
the individual workers to the wage-fund, the larger will be the share for each.
The number of workers is irrelevant; if there are more workers, the absolute
size of the wage-fund grows, but the number of those entitled to a share grows
likewise.
We now know the amount contributed
by the different categories of workers to the wage-fund:
The contribution of agricultural
workers is equal to the sum of products which an equal number of agricultural
workers could grow on freeland - less freight, interest and import-duties,
which we have to conceive as being reckoned in produce.
The contribution of other producers of raw
materials is equal to the sum of products which they could bring to market from
the poorest, remotest, and therefore ownerless sources - less interest. The contribution of industrial workers,
merchants, physicians, artists, is equal to the sum of products which they could
produce without the advantages of mutuality and organisation, and isolated from
populous centres - less interest.
If we pool all these products and
distribute them according to the present-day wage-scale, everyone gets exactly
the products which he can actually procure in the shops and markets with his
present wages.
The difference between this amount
and the total produce of the aggregate work performed goes to make up rent and
capital-interest.
What, then, can the workers (always in the broadest
sense of the term) do to enlarge the wage-fund, to obtain a real all-round
increase of wages, which cannot be neutralised by an increase in the cost of
living ?
The answer is simple: they must keep
closer watch on their wage-fund; they must protect it from parasites. The
workers must defend their wage-fund as bees and marmots defend theirs. The
whole product of labour, with no deduction for rent and interest, must go into
the wage-fund and be distributed to the last crumb among its creators. And this
can be achieved by two reforms which we have named "Free-Land" and
"Free-Money".
PART II. FREELAND
1. THE MEANING OF THE WORD FREE-LAND
Competition among men can be carried
on equitably and in accordance with its high purpose only if all special
private or public rights over land are abolished.
All men without exception have an
equal right to the earth without distinction of race, religion, culture or
bodily constitution. So everyone must be allowed to move wherever his heart,
his will, his health prompt him to go, and there to enjoy the same right to the
land as the natives. No private individual, no State, no society may retain any
kind of privileges over the land. For we are all natives of the earth. The idea of Free-Land admits of no
qualification. It is absolute. In relation to the earth there are no rights of
nations, no prerogatives of sovereignty, no rights of self-determination of
States. Sovereignty over the earth rests with men, not with nations. For this
reason no nation has the right to erect boundaries and to levy import-duties.
Free-Land means that the earth is to be conceived as a globe on which there is
no import or export of goods. Hence Free-Land also implies universal free-trade
and complete elimination of all tariff boundaries. National boundaries must
become simply administrative boundaries, such as, for instance, the boundaries
between the separate cantons of Switzerland.
From this description of Free-Land it follows that such expressions as
"English coal", "German potash", "American oil"
and so forth can be understood only in a geographical sense. For everyone, no
matter to what race he may belong, has the same right to English coal, German
potash and American oil.
The land is leased to the
cultivators by way of public auction in which every inhabitant of the globe,
without exception, can compete.
The rent so received goes to the
public treasury and is distributed monthly in equal shares to mothers according
to the number of their young children. No mother, no matter from where she
comes, will be excluded from this distribution.
The parcelling of the land is
governed entirely by the needs of the cultivators. That is, small lots for small
families, large lots for large families. Also large tracts for communistic,
anarchistic, socialdemocratic colonies, for co-operative societies, or
religious communities.
Any nation, State, race,
language-community, religious body or economic organisation seeking to restrict
Free-Land in any way is to be outlawed.
The present landowners will receive
full compensation, in the form of government securities, for the loss of their
rents.
2. FREE-LAND FINANCE
The State purchases all private
property in land-agricultural land, forests, building sites, mines, gravelpits,
water-power. And the State pays for what it purchases, it compensates the
landowners.
The purchase-price is based on the rent which each piece
of land hitherto yielded or would have yielded. The rent thus calculated is
then capitalised (*Capitalisation of rent means calculation of the sum
of money which would yield interest equal to the rent.) at the mortgage rate of interest, and this amount is paid to the
landowners in interest-bearing State securities; not one penny more or
less.
But how can the State pay the
interest on such tremendous sums ? The answer is: with the rent of the land,
which, of course, now flows into the public treasury. This revenue is equal to
the amount of interest to be paid, not one penny more, not one penny less,
since the debt is simply the rent of the land capitalised.
Suppose, for example, that the annual rent of the land
is one billion dollars. (*Billion: Throughout this book, in
accordance with the convenient American (and French) notation, the word
"billion" denotes "one thousand millions". The German word
is "milliard".) The compensation paid by the
State, at a rate of interest of 4%, then amounts to 25 billion dollars, and the
interest on this sum, at the same rate of interest, is also one billion
dollars. The sum paid out and the sum received are the same.
The size of these figures need cause
no alarm, for the size of the debit is measured by the size of the credits. (*At
the present moment, indeed (November 1919) there is practically nothing left to
redeem. The German debt for reparations, which is equivalent to a first
mortgage, will claim the greater part of German rents. Already a large German
estate can be bought for the price of a few acres of Swiss land.) In itself nothing is either great or small. France though burdened
with a national debt of 35 billion francs and as much again for private
mortgages is piling up billions upon billions in foreign State securities. (*
Written before the war.) The capacity of the reservoir
is great. It would be the same with the debt resulting from nationalisation of
the land. The immense debit would be balanced by an immense credit. It would
therefore be quite superfluous to calculate these sums in advance. If the
amount is 100 billions, good; if it is 500 billions, good again. For the State
finances the entry is transitory. These billions troop through the public
treasury without leaving a trace. Is a banker alarmed when entrusted with a
fortune ? Is the President of the Reichsbank alarmed at the sums, however
great, that pass through his ink pot ? Not at all, he sleeps as soundly as the
director of the Bank of Heligoland. Have the debts of the Prussian State become
more oppressive since the railways were bought by the State and paid for with
State securities ?
It may indeed be objected that the
State does incur a risk in connection with the nationalisation of the land, in
so far as rents are determined by fluctuating economic factors (tariffs,
freights, wages, currency-standards), whereas the rate of interest on the debt,
like the debt itself, is fixed on paper.
Such a risk exists, and strangely
enough its existence is exploited by the landowners as an argument against
nationalisation. For how have the landowners protected themselves hitherto
against the shrinkage of rent ? Have they not always, in such cases, appealed
to the State for help, shifting the whole burden of their loss to the State
which they are now so anxious to protect from risk ? And they omit of course to
mention that where there is a risk there is usually also a chance of profit;
they are wont to transfer the risk to the State, but to claim the whole of the
profit for themselves. With regard to the private ownership of land the State
has hitherto always played the part of a loser in a lottery. For the State the
blanks - for the landowner the prizes. When rents increase, the beneficiaries
never propose to restore to the State what they have received from it in times
of need. In former times the landowners were able to help themselves. They
aggravated the conditions of slavery or serfdom, and when slavery could no
longer be maintained they forced the State to help them by restricting freedom
of movement, whereby wages were depressed below their natural level. And when
such methods became too dangerous, the State was requested to come to their aid
with the bimetallic swindle, that is, to sacrifice the currency-standard, and
thus by a shameless inflation of prices, to liberate the indebted landowners
from the burden of their debts, at the expense of the rest of the population.
(This sentence will be more easily understood later on by readers who are as
yet unfamiliar with the problems of currency.) When this attempt failed through
the opposition of the other class of receivers of unearned income, namely the
bondholders, and nothing more could be gained by force, the landowners changed
their tactics and whined for sympathy. To justify their demand for
protectiveduties on agricultural produce they called attention to the
"plight of agriculture". To protect and increase rents the mass of
the people were to pay higher prices for bread. Thus it has always been the
State, the people, that took upon
itself the risk connected with landed property. A risk borne by so broad and
powerful a class as the landowners is in practice equivalent to a risk borne by
the public treasury. After nationalisation of the land the only change would be
that, in return for the risk incurred, the State would have a chance of
profit.
Moreover, from the point of view of economic life as a
whole there is no risk whatever in the decline of rents; from this standpoint,
indeed, even their disappearance would be no loss. The taxpayer, who has at
present to deduct from his work not only taxes, ,but also rent, could easily
bear a larger tax if relieved of the burden of rent. The tax-paying capacity of
the people is always in inverse ratio to the power of the landlords. (*
Rent on French land fell by 22.25% in the period 1908-1912, as compared with
the period of 1879-1881; the price of land falling by 32.6%, In 1879-1881 a
hectare cost 1830 francs, in 1908-1912 only 1244 francs.)
At first nobody gains or loses by
the redemption of the land. The former landowner receives as interest from the
State what he used to receive as rent from his landed property, while the
State, through its ownership of the land, receives rent equal to the interest
on the State securities.
The net gain to the State will begin
only with the gradual amortisation of the debt through the currency reform
which we discuss later.
With this reform the rate of
interest (both on money-capital and on real capital) will within a short space
of time sink to the lowest point permitted by international market conditions,
while the international application of the reform would reduce pure interest to
zero.
It will therefore be prudent to
grant the holders of the land-nationalisation bonds only as much interest as is
necessary to maintain the parity of these securities. For the price of
securities bearing a fixed rate of interest must respond to all the
fluctuations of the market rate of interest. If, therefore, the price of the
State-securities is to remain stable, the rate of interest must be adjustable.
It must rise and fall with the market rate of capital-interest, this being the
only way in which these State securities can be protected against speculation.
And it will certainly be in the public interest to protect a capital of from 50
to 75 billion dollars against the raids of speculators, especially as these
securities will in many cases be held by persons without financial
experience.
We propose to introduce the money
reform simultaneously with the nationalisation of the land. Its effect will be
to reduce the market rate of interest, so the rate of interest on the
nationalisation securities will also be automatically reduced, from 5 to 4, 3,
2, 1, - and finally 0%.
The finances of land-nationalisation
will then present this aspect:
The rents of a country amount
annually to, say, 10 billions
With interest at 5%, the State pays
the land-owners an indemnity of 200
billions Or, with interest at 4%, an
indemnity of 250 billions
The interest to be paid on 200
billions at 5% is 10 billions
If the market rate of interest now
falls to 4%, the interest on the 200 billions must be reduced to 8 billions
Whereas the rents at first remain
stationary at 10 billions
Thus the finances of the
land-nationalisation show an annual credit balance of 2 billions
This balance will be used to cancel part
of the debt, and the sum on which interest is to be paid will be reduced by
this amount, whereas the rents continue to flow, undiminished, into the public
treasury. This annual surplus will increase in proportion to the decline of the
general rate of interest, and will finally, when interest has fallen to 0%,
equal the full amount of the rents - which will also, it is true, decline with
the fall of interest, though not to the same extent. (See Part I, Chapter
14.)
With such a development, the whole
of the great debt arising from nationalisation of the land is completely
cancelled in less than 20 years.
It may be mentioned that the present
exceptionally high rate of interest on the war loans, which would be adopted as
the capitalisation rate, would be particularly favourable for nationalisation
of the land, for the higher the rate of interest, the smaller is the capital
sum to be paid as indemnity to the landowners. For every $1000 of rent the
indemnity to be paid to the landowners is:
at 5% = $20,000 capital at 4% =
$25,000 capital at 3% = $33,333 capital
Whether it is desirable to shorten
still further the period of transition and adjustment granted by the above
scheme to the beneficiaries of rent, I shall leave it for others to decide. The
means to do so will not be lacking. The effects of the monetary reform proposed
in Part IV of this book are far-reaching. The money reform allows economic life
to develop freely, giving full scope to modern means of production which, in
the hands of modern highly-skilled workers, are capable of greatly increased
output, and it also puts an end to economic crises and stoppages of work. The
taxpaying capacity of the people will increase enormously. If, therefore, it is
desired to make use of these forces for a more rapid cancellation of the State
debts, the term indicated above can be greatly reduced.
3. FREE-LAND IN PRACTICE
After the land has been nationalised
it will be divided according to requirements of agriculture, housing and
industry, and leased by public auction, for terms of 1, 5, 10 years, or for
life, to the highest bidders. The leaseholders will be given certain securities
for the stability of the economic factors upon which they base their offer, so
that they cannot be crushed by their contract. This object could be achieved by
the guarantee of minimum prices for agricultural products, the currency being
adapted to these prices; or by reduction of the rent in case of a general rise
of wages. In short, as the purpose of the reform is not to harass the farmer,
but, on the contrary, to create and maintain a flourishing state of agriculture
and a healthy farming class, everything possible will be done to bring the
yield of the soil and farm-rent into permanent agreement.
The possibility of nationalising
agricultural land has been repeatedly demonstrated by experience. Land
nationalisation converts the whole land of the country into leasehold farms
held from the State, and leasehold farms, both private and national, already
exist in every part of Germany. Through nationalisation we simply make an
existing institution universal.
Leasehold tenure has been objected
to on the ground that the tenants will be more inclined to impoverish the soil
than the present owners who are personally interested in keeping the soil in
good condition. The leaseholder, it is said, squeezes everything out of the
soil and then moves on.
This is about the only objection
that can be made against leasehold tenure; in no other respect is there any
difference between tenants and owners, in so far, at least, as the welfare of
agriculture is concerned. For both pursue the same object, namely, to obtain
the highest yield with the minimum of labour.
That farming methods tending to
exhaust the soil are by no means a peculiarity of leaseholders may be seen in
America, where some wheat farmers squeeze their soil to the point of complete
exhaustion. Wheat farms that have been so exhausted may be had by the hundred
for small sums. In Prussia, on the other hand, the State farms are said to be
farmed on model lines. And these farms are worked by leaseholders.
But in any case exhaustion of the
soil by the tenants can easily be prevented.
The tenant can be given a lease of
his farm for life.
Clauses can be introduced into the
contract rendering exhaustion of the soil impossible. If a leasehold farmer exhausts the soil, the
fault invariably lies with the proprietor, who allows the farmer to adopt such
methods simply to obtain a higher rent for himself, for a few years. In this
case it is not the tenant but the landowner who is guilty of exhausting the
soil. Sometimes the proprietor consents to short-term leases only because he
does not wish, through granting a longer lease, to lose the chance of a
favourable sale. Under such conditions he will not of course find tenants
willing to improve the soil, but the evil in this case is not the system of leasehold
tenure, but the system of private ownership of the land.
If the landlord wishes to make
exhaustion of the soil impossible he can draw up the contract accordingly. If
the farmer is bound by contract to keep enough cattle to consume the fodder grown
on the farm, and is forbidden to sell hay or straw or farmyard manure, this
clause alone is sufficient to protect the soil.
If, in addition to this, the farmer
is given full security that the farm will be his for life if he so desires,
with a prior right of tenancy for his widow or children, there is no fear of
his exhausting the soil, unless indeed his rent is too high, so that he has no
interest in prolonging his contract. In this case, however, the above mentioned
clause would suffice to prevent exhaustion of the soil, and a similar clause
could be devised to meet other conditions. There are soils unsuitable for
cattle-breeding but very suitable, say, for wheat-growing. In such cases the
farmer could be bound by contract to return to the fields, in the form of
artificial fertilisers, what he abstracts from them through the sale of the
wheat.
It may also be mentioned that since
the discovery of artificial fertilisers, exhaustion of the soil is no longer
such a grave problem as it was when the only method of restoring fertility to
exhausted soil was to let it lie fallow. Formerly it took a whole lifetime to
restore an exhausted field, now fertility is restored promptly by the use of
artificial manure.
The condition of Ireland is pointed
to as a warning against careless farming by tenants, but we must here remind
our readers of the most important feature of nationalisation of the land,
namely that rents will no longer enrich private individuals but flow into the
public treasury whence they will be restored to the people in the form of
reduced taxes, endowment of motherhood, widows' pensions and so forth. If the
rents which the absentee landlords, year in, year out, for 300 years, have
abstracted from Ireland to spend in idleness elsewhere, had been left to the
Irish people, the condition of that country would be very different.
Other examples, such as the Russian
"Mir" and the German commonages have been mentioned as warnings
against leasehold farming. But here again, as in the case of Ireland, the
comparison with nationalisation is inadmissible. In the "Mir" a new
distribution of the land takes place regularly every few years, when by deaths
and births the number of members of the commune has changed; so that no one
ever remains in possession of the same piece of land for any length of time. If
a member of the Mir improves the soil, he has to share the benefit with the
whole Mir, so his personal gain is small. This system inevitably leads to
negligent cultivation, to exhaustion of the soil and impoverishment of the
whole community. The Mir is neither communism nor individualism; it has the
disadvantages of both and the advantages of neither. If the Russian peasants
farmed their land jointly after the fashion of the Mennonites, the common interest
would teach them to do what the landowner does for the improvement of the soil.
And if they reject communism they must accept the consequences and adopt a
system of through-going individualism.
It is the same with many of the
German commons which are generally reputed to be in a wretched condition. The
mistake is here the short tenures which encourage rapacious methods of farming.
It almost looks as if the village councils were bent on discrediting the common
property in order to pave the way for dividing it up; a plan which has been
successfully practised in the past. If this suspicion is well founded the poor
condition of the common lands should be attributed to the system of private
ownership, for it is the hope of converting the commonages into private
property that causes their neglect. If the proposal to divide up the commons
were made punishable, and the land were declared the inalienable property of
the communes, this deplorable state of matters would be quickly remedied.
What the farmer really needs is the
assurance that whatever money and labour he expends on improving the soil will
benefit him directly and personally, and the rent-contract must be devised to
give him this assurance - as it easily can be.
The most important land improvements
cannot however be undertaken without infringing the principle of private
ownership of the land. How, for instance, is a private individual to construct
a road to his fields across the property of his neighbour who may be his enemy ?
How do we construct a railway line or a canal through the property of 1000
private individuals ? Here the principle of division of property and of private
ownership of land must always give place to legal expropriation. No private
individual can construct dykes as a protection against floods along coasts and
rivers. The same is true of the drainage of swampy land, where the plan must
ignore boundary fines and be adapted solely to the lie of the land. In
Switzerland 75,000 acres of land were drained by turning the Aar into the Lake
of Biel, an enterprise which required the co-operation of four cantons. In this
case the private proprietors could have done nothing whatever, and cantonal
ownership had also to be disregarded. In the correction of the course of the
Upper Rhine even the principle of Swiss national ownership was not enough; for
the undertaking could be carried through only by an arrangement with Austria.
How is the private owner on the Nile to get his water for irrigation ? Is the
principle of private ownership to be extended to afforestation, on which the
climate, the condition of the water courses, navigation, and the health of the
whole people depend ? Even the food supply of the population cannot safely be
left to the private proprietor. In Scotland, for instance, a few landlords,
protected by the laws of private property, depopulated a whole area, burning
down the villages with their churches, simply to turn it into a game preserve.
The same thing is done by the great landed proprietors in Germany who, under
pretext of anxiety about the food-supply of the people, demand protective
duties which increase the price of the people's bread. The principle of private
ownership of land is incompatible with the interest of hunting and fishing, or
the protection of wild birds. And the incapability of private property to fight
pests, such as cockchafers and locusts, has been seen in Argentina, where each
proprietor confined his efforts to driving the locusts off his fields into
those of his neighbour - with the result that these insects multiplied and for
three years in succession completely destroyed the wheat crop. Only when the
State disregarded private property and had the locusts destroyed wherever they
were found, did they disappear. It is much the same in Germany with regard to
the fighting of pests. What for instance can the individual vineyard proprietor
do against phylloxera ?
Private ownership fails wherever the
motive of selfishness of the individual fails, and that usually happens when
there is a question of the improvement or protection of the land. If we were to
believe the German agrarian party, the principle of private property in land
would have to be completely abandoned, since "the plight of
agriculture" (meaning the plight of the receivers of rent) of which they
complain, can only, according to them, be removed by the forcible interference
of the State, acting through protective-duties. So the private owner, according
to the landowners, can do nothing for the plight of agriculture.
Private ownership, through the right
of succession, necessarily leads to the division of land or to mortgaging.
Exceptions are rare, being limited to the case of an only child.
The division of land leads to those
dwarf farms which produce general poverty, and mortgaging makes the landowners
so dependent on currency policy, interest, wages, freight-rates and
protective-duties that in practice scarcely anything remains of private
property in land. What we have today is not private ownership of land, but the
politics of private ownership of land.
Let us suppose, for example, that
agricultural prices fall heavily in consequence of one of the frequent blunders
in currency policy, such as the introduction of the gold standard. How is the
farmer to raise the interest for his mortgage? And if he does not pay the
interest, where is his property ? How is he to protect himself except by his
influence on legislation, which allows him to regulate the currency, and
consequently the burden of his mortgage, according to his desire ? And if the
rate of interest rises, how is he to escape the hammer of the auctioneer ?
The landowner is forced to cling to
legislation. Unless he takes an active part in politics, and controls currency,
import-duties and railway rates, he is lost. What would become of landowners if
it were not for the army ? If the yellow peril becomes a reality and a man
without property finds Mongolian rule still more irksome than Prussian
discipline, he can throw down his tools and emigrate with his wife and children
and a bundle of clothes. So can the landowner - if he is prepared to abandon
his landed property.
Thus private ownership of land can
be maintained only with the aid of politics, being in itself a product of
politics. It may be said that private ownership of land is the embodiment of
politics. Without politics there can be no private ownership of land, and
without private ownership of land there can be no politics. After
nationalisation of the land, politics would become a thing of the past.
After nationalisation of the land,
agriculture loses all connection with politics. Just as even today leasehold
farmers as such have no immediate interest in the currency, import-duties,
wages interest, freight-rates, construction of canals, extermination of pests;
that is, in the "great" - and sordid - problems of contemporary
politics, simply because in the terms of their leases the influence of all
these factors is already allowed for; so, after nationalisation, all farmers
will watch the proceedings of Parliament without excitement. They will know
that every political measure affecting the rent of their land will be reflected
in the terms of the lease. If import-duties are introduced to protect
agriculture, the farmer knows that he will have to pay, in the form of a higher
farm-rent, for this protection; hence he is indifferent to the proposed
duties.
When the land is nationalised the
prices of farm products may, without injury to the public interest, be forced
so high that it will pay to cultivate sand dunes and boulder-strewn mountain
slopes; even wheat growing in flower pots could be made profitable without
allowing the cultivators of fertile soil to derive any private advantage from
the high prices, since the amount paid on their leases would keep pace with the
rise of rent. Patriots who are anxious about the provisioning of their country
in war-time should study this remarkable aspect of land nationalisation. With a
tenth of the money thrown to the receivers of rent through the wheat-duties,
Germany might have converted all her moors, heaths and wastes into fertile
soil.
The amount of railway and canal
freights, and the politics connected therewith, will not concern the
leaseholder any more directly than the ordinary citizen. For if changes in
freights were to benefit him, the increase in his rent would annul the
advantage.
With nationalisation of the land, politics will, in
short, cease to interest the farmer personally, he will be concerned only with
legislation for the common weal, with objective politics. Objective politics
are, however, no longer politics, but applied science.
It may here be objected that if
farmers are able to secure longterm or lifelong leases, they will still be
affected by legislation and tempted to seek their private advantage at the
expense of the common weal. The objection is valid, but does it not apply with
still greater force to the existing private ownership of land, which allows the
benefits of legislation to be converted into hard cash in the selling price of
the land, as may be seen from the present high price of land resulting from
protective-duties ? After nationalisation of the land, however, the taint of
politics may be altogether removed by reserving to the State, in the case of
lifetime contracts, the right of having rents officially re-adjusted from time
to time, just as is now done with the rates on land. (In the case of short-term
contracts the rent is adjusted by the farmer himself through the public auction
of the lease.) For if the farmer knows that all the advantages to be expected
from politics will be converted into rent for the revenue department, he will
give up the attempt to influence rent by legislation.
Allowing for all these
circumstances, we may sketch a lease contract after nationalisation of the land
somewhat as follows:
NOTICE
The lease of the farmstead known as
"The Chalk Farm" is advertised for public auction. The auction will
take place on St. Martin's Day, and the lease will be granted to the highest
bidder.
The farm is estimated to occupy one
man in full work. The house and stables are in good repair. Rent hitherto $100.
The soil is of the fifth quality, the climate suitable for strong constitutions
only.
Terms:
The farmer undertakes by contract to
fulfil the following conditions:
To sell no fodder. He must keep
sufficient cattle to consume the entire crop of hay and straw. The selling of
stable manure is forbidden.
To restore to the soil, in the form
of chemical fertilisers, the minerals abstracted from it by the sale of grain;
for every ton of grain 200 lbs. of basic slag or its equivalent.
To keep the farm buildings in good
repair.
To pay the rent in advance or give
security for its payment.
The State Land-Department
undertakes:
Not to give the tenant notice to
quit as long as he fulfils his engagements.
To grant a prior right of tenancy to
the widow and direct heirs of the tenant in the form of 10% rebate on the
highest bid obtained at the auction.
To cancel the contract at any time
at the request of the tenant, on payment by him of a fine equal to one-third of
the annual rent.
Not to alter the freight-rates for
grain within the duration of the contract.
To establish accurate wage
statistics and, in the case of leases for life, to reduce the rent if wages
rise, and to raise it if wages fall.
To construct any new buildings that
may prove to be necessary, in return for an increase of the rent equal to the
interest on the capital outlay, plus depreciation, etc.
To insure the tenant free of charge
against accident, sickness, hail, floods, cattle-diseases, fire, phylloxera and
other pests.
The crucial question for the
practicability of land nationalisation is this: Will tenants be forthcoming on
the above conditions ? Let us suppose that there are but few, so that
competition at the auctions is slight. What would be the result ? The amount
bid would be low; it would be less than the real rent, and farmers would make
correspondingly higher profits. But must not these higher profits act as a
stimulus to the farmers who had held back because they were unable to
appreciate the new conditions, and had consequently decided to await the
verdict of experience ?
It is therefore certain that after a
short experimental period competition at the lease auctions would raise
farm-rents to the level of the highest rent the land could bear; especially as
the risk of the tenure under the new conditions would almost disappear, since
the net proceeds of the farm could not possibly fall below the average rate of
wages. The farmer would always be assured the average wage for his personal
labour, and over and above that he would have the advantage of liberty,
independence and freedom of movement.
Let is be further remarked that
after nationalisation a farmer would have to be appointed in every locality to
supervise the execution of the rent contracts. In every province and district
an illustrated list of the farms to be let would be published annually,
containing everything that farmers require to know as to the size and the
situation of the farms, the crops grown, the prices of farm produce, the farm
buildings, previous rent, schools, climate, game and hunting, social conditions
and so forth. Since the purpose of nationalisation is not to exploit farmers,
great care would be taken to inform tenants about both the advantages and the
disadvantages of the farmsteads - whereas at present the landowner never
mentions the disadvantages. Many of them, such as damp farmhouses, night
frosts, etc. are concealed and can be discovered by the tenant only by indirect
enquiry.
The following is a summary of the
effects of nationalisation of agricultural land: Abolition of private profit
from rent, and consequent elimination of what is called "agricultural
distress", of protective-duties and politics as we know them. Abolition of
private ownership of land, hence elimination of mortgages, of subdivision of
the land and of family quarrels after inheritance. No landlords, no landslaves,
but instead general equality. No landed property, and therefore complete
freedom of movement and settlement, with all its beneficent consequences for
the health, character, religion, culture, happiness and joy of life of mankind.
In mining, nationalisation of the
land is even simpler to carry out than in agriculture. Instead of leasing the
mines, the State could invite employers and co-operative societies to tender
for working the mine and accept the lowest tender per ton of output. The State could
then sell the output to the highest bidder. The difference between the two
prices is rent, and goes into the public treasury.
This simple method can be applied
where machinery of a permanent kind is unnecessary; as for example in the case
of peat, moors, brown-coal deposits, gravel, clay and sand pits, quarries,
certain oilfields, etc. It is the system at present generally adopted in State
forests, where it has long been found satisfactory. The administration of the
forest agrees with the workers in public contract on the wage to be paid for a
cubic meter of timber, the lowest bidder obtaining the contract. The timber is
felled and trimmed into piles of certain standard dimensions and then sold by
public auction. Fraud is almost impossible, because the buyers at once complain
if given short measure. It would be the same in surface mining. The buyers
would supervise the work at the pits. The workers could, if they wished,
co-operate, and so dispense with the services of an employer (a system which, by
the way, they have yet to learn), because no capital worth mentioning is
required. The pit belongs to the State; and the workers need only their
implements.
In coal pits, as in deep mining
generally, the matter is more complicated, as plant is required. There are,
however, several solutions, all workable.
The State provides the plant;
insures the workers against accidents, and for the rest proceeds as above; that
is, the raising of the mineral is given by contract to the individual workers.
This method is in general use in private and State-owned mines.
The State provides the plant, as
above, and gives a contract for the working of the mine to cooperative
societies. This system is not, as far as I know, at present in use. Its
introduction would be advantageous for communistic workers, for they would
thereby learn to govern themselves.
The State leaves both the working of the mine and the
provision of the plant to the co-operative societies and pays the society a
contract price, to be fixed by competition, for the output, which it sells to
the highest bidder as in the first and second systems.
A fourth system leaving the sale of
the output also to the workers cannot be recommended, because the selling price
is dependent on too many factors.
For large mines with thousands of
workers the first system would probably be the best, for mediumsized mines the
second system, and for the smallest mines the third system.
The difference between the selling
price and the running costs would be paid into the public treasury as
rent.
For the sale of the produce of the
mines two systems could be applied:
A fixed price year in year out. This
system could be applied wherever production can be indefinitely increased, so
that the demand from the fixed price can at all times be satisfied. Uniform
quality of the products is an essential condition for this system.
Public auction. This system could be
adopted where the products are of unequal quality and the output cannot be
adapted to meet any possible increase of demand.
If the Products were sold at fixed
prices and an increased demand at these prices could not always be satisfied,
speculation would come into play. Where the quality is not uniform, sale by
public auction is the only way of avoiding complaints.
Water-power is a peculiar kind of
product of the land, which in some regions is already of great importance and
is destined to become still more important with the progress of technical
science. For the larger power stations which supply towns with light and with energy
for tramways, municipal enterprise would be simplest, especially as the running
of such power stations offers few difficulties. In the case of lesser water
power used directly for industries such as flour-mills and saw-mills, the sale
of power at a uniform price, to be adjusted to the price of coal, would be more
practical.
Somewhat greater are the
difficulties of nationalising the land on which towns are built, if it is
desired to exclude arbitrary management and nevertheless secure for the State
the full rent. If we are satisfied with a moderately efficient solution, the
leasehold system existing in the greater part of London could be adopted. By
this system the land is secured to the tenant for whatever use he likes for a
term of 50 to 70 years (in London 99 years), the annual rent being fixed in
advance for the whole term of the tenure. The rights of the tenant are
negotiable and inheritable, so the houses erected on the land are saleable.
Thus if in the course of time (and in 100 years many things may change)
ground-rents rise, the tenant is the gainer; and the gains - in London for
example - may be very large; if, on the other hand, ground-rents fall, the
tenant has to bear the loss, which may also be very large. As the houses
erected on the land serve as pledges for the payment of the rent, the tenant
cannot escape the loss. The full rent of the house serves as security for the
landlord.
But cities, as the history of
Babylon, Rome and Venice teaches us, are subject to vicissitudes, for little is
needed to sap their vitality. The discovery of the sea-route to India brought
Venice. Genoa and Nurnberg low, deflecting the traffic to Lisbon; and with the
opening of the Suez Canal Genoa was resuscitated. The same is likely to happen
with Constantinople after the opening of the Baghdad railway.
Furthermore we must here recall that
our present currency laws offer no guarantee whatever that currency policy may
not any day be directed, at the bidding of the creditor class, towards a
general fall of prices such as occurred in 1873 when silver was demonetised.
The possibility always exists that gold, in its turn, may also be demonetised,
and the supply of money then reduced so as to cause a general fall of prices of
say 50%, by which the fortunes of private and public creditors would be
doubled, at the expense of the debtor class. In Austria this was done with
paper money, in India with silver, so why should not the same trick be played
with gold?
Thus there is not the slightest
guarantee that ground-rents will be maintained during the whole term of the
contract at the level on which the lease was based. The influence of politics
and a thousand economic circumstances - to which must be added the probability
that after nationalisation of the land the present tendency of the population
to concentrate in towns will be reversed - make long-term leases exceedingly
risky, and for the risk the lease-giver, in the present case the State, must
pay in the form of a reduced rent.
Another question is, what becomes of
the buildings after the expiration of the tenure? If the buildings fall to the
State without compensation the lease will take care, in building his house, not
to make it last longer than the term of his lease, so in the majority of cases
the buildings will have to be pulled down when they lapse to the State. To a
certain extent it is an advantage if houses are not built for eternity, since
every time they are rebuilt new technical improvements can be incorporated; but
the disadvantages are far weightier, as may be seen in the case of the French
railways. The land occupied by these railways was leased to private railway
companies for 99 years with the condition that at the expiration of the lease
the whole should lapse to the State without compensation. The result is that
construction and maintenance have been adapted to this clause. The State is not
to succeed to more than can be helped; it is to come into possession of
railways in articulo mortis, of scrap-iron and debris. It is in consequence of this
short-sighted contract that the French railways give such an impression of
neglect - even now, long before the expiration of the contracts. The same thing
would happen if building sites were let with the condition that on expiration
of the lease the buildings should lapse to the State.
A somewhat better plan would be to
have the buildings valued and paid for by the State. But on what principle is
the valuation to be made? There are two possibilities:
Valuation according to usefulness
(building plan, layout).
Valuation according to building
costs.
If compensation were determined
simply by building costs and state of repair, the State would have to pay dear
for many a useless, bungled building only fit to be pulled down. The builders
would make short-sighted, ill-considered plans, knowing that, whatever the
result, the State must pay the cost. On the other hand if we leave building
costs out of account and base the valuation on other considerations, the
building plans would have to be submitted for approval to the State, which
would mean bureaucracy, tutelage and red tape.
Hence the best method seems to me to
be the following: to lease the building sites for an indefinite period; not,
however, at a rent fixed in advance for ever, but at a rent adjusted in
accordance with a revaluation of ground-rents, to be undertaken by the State at
regular intervals of 3, 5, or 10 years. In this way the builder's risk in
connection with the ground-rent would be reduced almost to nil, while the State
would collect the full rent without having to trouble about the buildings. The
whole responsibility for the best use of the building-site would rest with
those whom it concerns, namely the builders. Perfect accuracy in calculating
ground-rent and consequently the amounts to be paid for the leases, cannot, of
course, be expected, but it would at any rate be possible to adjust the amount
payable on the leases so as neither to kin enterprise nor to defraud the State.
In order to calculate the
ground-rent for the different parts of a city the State could itself build a
tenement house in every quarter of the city. The building plan would be devised
with a view to securing the highest possible rent. From the yield of the building,
interest on the building capital (as long as interest exists), repairs.
depreciation, fire-insurance etc. would be deducted and what remained would be
the ground-rent for all other buildings situated in the same street or in an
equally good locality.
Even by this method ground-rent
could not be calculated with perfect accuracy, since a great deal would depend
on the building plan of the normal tenement house. It would be necessary,
therefore, to devise this normal plan with special care. But in any case the
builders would never have any reason to complain, since shortcomings in the
normal tenement would result in a reduced yield of rent, and this deficit would
affect the calculation of ground-rent and result in a lowering of the
ground-rent for all building sites.
With this plan builders would have a
direct personal interest in keeping their houses in good repair and in devising
wen throughout building plans; for every advantage of their houses over the
normal house would be to their profit.
Finally we should mention that as
the principal factor in the calculation of the amount of ground-rent in the
rent of houses is the rate of interest on the building capital, it will be
necessary to determine in advance, that is, before the contracts are signed, by
what method the rate of interest is to be computed. In the calculation of the
ground-rent it makes a vast difference whether the interest paid on the
building capital is reckoned at 4, 3.5, or 3%.
Suppose for example, that the
capital for a building scheme is $100,000, the house-rent $10,000, and the rate
of interest 4%. The interest on the building capital is then $4000, so the
ground-rent, that is, the rent to be paid on the lease is $6000. But if the
rate of interest is 3 %, only $3,000 would be deducted from the rent of the
house, so the ground-rent would be raised to $7,000 a difference which, if not
founded on an incontestable, contractual basis, would cause a chorus of
complaint. A fall in the rate of interest from 4% to 3% would make a difference
of at least 20 million marks in the calculation of the ground-rent for the city
of Berlin. It is therefore clear that the rate of interest upon which the
calculation is based must not be subject to arbitrary manipulation.
In the following part of this book,
treating of the money reform, there is a full discussion of the computation of
pure capital-interest, to which the reader is referred. I here suggest, quite
independently of the other discussion, that the average dividend of all home industrial
shares quoted on the Stock-Exchange should be taken as the rate of interest for
building capital. In this way building capital would be assured the average
yield of industrial capital, the building industry would in consequence be
freed from all risk and would attract a large bulk of capital, to the benefit
of the tenants. For everyone desiring a safe investment would invest his money
in houses, which would always yield the average dividend.
This rate of interest would, of
course, be used only for calculating the ground-rent of the normal tenement
house.
The normal tenement house on an area
of 500 square yards yields $10,000
The building capital, less the usual
amount written off for depreciation is
$100,000
The average dividend on industrial
shares is 3.5 %. The capital interest to be deducted from the rent therefore
amounts to $3,500 Leaving for ground-rent $6,500
or $13 per square yard.
Without taking into account
modifications which can be finally determined only by experience, we therefore
obtain the following broad outline of a lease contract between the State and
the builder.
The State grants the builder a
hereditary lease of the building site No. 12 Claudius Street. The ground-rent is calculated on the basis of
the estimated ground-rent of the normal rented house situated in the same street.
The ground-rent of this normal rented
house is the rent obtained by public auction of the lease of the house, less so
much per cent for depreciation, repairs and insurance, and less interest on the
building capital.
For the calculation of ground-rent,
the rate of interest on the building capital will be considered equal to the
average annual dividend of the industrial shares quoted on the Berlin
Stock-Exchange.
4. EFFECTS OF NATIONALISATION OF THE LAND
We shall not have to wait for the
effects of land nationalisation until the last certificate of the
nationalisation loan is redeemed and burnt, for they will appear on the day on
which expropriation is decreed by law. And the effect of nationalisation will
be first manifested in Parliament and politics.
Like the builders of the tower of
Babel, Parliamentary representatives will suddenly no longer recognise each
other. They will return to their homes transformed men, with new and higher
aims. The thing they stood for hitherto, the thing they upheld or attacked, for
which they collected a thousand weighty or frivolous arguments no longer
exists. By a stroke of magic the reeking battle-field of political strife has
been converted into a peaceful graveyard. No advantage can now be derived by
private individuals from rent, and what was Parliament but a Stock-Exchange
where bears and bulls growled and bellowed over the rise and fall of rent on
land? "A betting-den for higher tariffs", so it was termed by one who
took part in its debates. It is a fact that latterly the proceedings of Parliament
have turned almost exclusively on matters either directly or indirectly
affecting rent on land.
Rent on land is the starting point
for all legislation initiated by the Government; it is the axis on which the
thoughts of the party in power consciously or unconsciously turn, in Germany
and everywhere else. If rent on land is safe, all is well.
The long and sordid debates on the
wheat-duties turned upon rent on land. All the difficulties in connection with
the German commercial treaties were created by landed interests. During the
protracted deliberations about the German Midland Canal it was the opposition
of the landowners that had to be overcome. All the small natural liberties that
we enjoy today, such as freedom of movement and settlement, the abolition of
slavery and serfdom, had to be won from the landlords by force of arms, for the
landlords used powder and shot to defend their interests. The long and
murderous civil war in the United States was simply a struggle against
landlords. The opposition to every kind of progress proceeds from the
landlords; if it depended on them, freedom of movement and settlement and
universal suffrage would long since have been sacrificed for the benefit of
rent on land. Schools, universities and the Church were from the outset
subordinated to the landowners' interests.
With nationalisation of the land all
these troubles instantaneously disappear. Agrarian politics will melt like snow
in the sun of liberation of the soil. With the abolition of private property in
land every private pecuniary interest in politics vanishes into thin air. No
one will be able to fill his pockets in Parliament. And politics that are no
longer inspired by private interests, but by solicitude for the common weal,
are not politics but, as we said, applied science. The representatives of the
people will go deeply into the affairs of the State; they will be obliged to
adopt methods of work which rule out passion and to examine sober matters
soberly with the help of expert knowledge and statistics.
But as well as the politics of the
landlords, the politics of their opponents will also become superfluous. Why
were the Socialists, the Liberals, the Democrats delegated to the Reichstag?
Simply to protect the interests of the people against the predatory instincts
of the landlords. But defenders become superfluous when aggressors disappear. The
whole liberal party programme will be realised as a matter of course with
liberation of the land. Nobody will think of questioning or criticising this
programme, or even of examining it for everybody is at heart a liberal. What
was reaction, what was the conservative party programme? It was rent on land
and nothing else.
With the nationalisation of the land
even the reactionary landowners of yesterday will think liberally and
progressively. They were men like the rest of us, neither better nor worse; they
were keen on their interests, as is every normal individual. They were not a
race apart. They were united, merely by their common material interest which
is, however, a bond of great strength. With nationalisation of the land the
land-owning class will become merged in the great mass. Even the junkers of
yesterday will become democrats, for what is a junker without land? Landed
property and aristocracy are one and the same thing. You can read in the face
of an aristocrat how many acres of land he owns, and the amount of his
rental.
So what function remains for party
politicians ? Everything will become so simple and natural when rent on land no
longer stands in the way of every innovation. "Open the road to
progress" was the slogan of liberalism, and now the road is really open.
Legislation will nowhere clash with private interests. Liquid capital will
indeed continue to exist, it will even be increased by many billions through
the conversion of landed capital into liquid capital (State securities). But
liquid capital being transferable from one country to another, is international
and subject to laws quite different from those of landed capital. Politics can
render no service to liquid capital. (This proposition will be more fully
explained and substantiated when we come to study the theory of interest).
Liquid capital, moreover, being subject to the competition of foreign
countries, must be on the alert for progress in every direction, and is
therefore inevitably forced into the path of liberty.
With the abolition of private
property in land the political antagonism of town and country will cease, and
both will join in striving for the same aims. If, for instance, agriculture
were for any reason placed in a privileged position, workers would desert
industry for agriculture, and by competition at the public auctions of leases
force up farm-rents, until the special privilege of agriculture again
disappeared, and the equilibrium between the proceeds of labour in industry and
agriculture was restored. Special privileges attaching to industrial work would
disappear in the same manner. For the land would be at the disposal of
everybody on equal terms. After nationalisation of the land agriculture and
industry can never find their interests in conflict. Agriculture and industry
will for the first time be fused into a homogeneous economic and political
entity, an overwhelming majority, with which everything, and against which
nothing, can be attained.
It would lead us too far afield to
discuss in detail all the effects of land nationalisation in the sphere of
politics, but the foregoing general discussion suffices to show that with
nationalisation of the land, party politics or, indeed, politics of any kind in
the present sense of the word will disappear; for politics as we know them and
rent on land are identical. Parliament will not indeed become superfluous, but
it will be called upon to solve very different problems - problems from which
the private interests of individuals will be wholly excluded. Scientific
sessions will be held, and instead of sending to Parliament representatives who
have to decide a great number of heterogeneous questions and in the end come to
assume competence in everything, we shall elect experts for each special
question. In this way each question will be settled by expert and scientific
methods. What is demanded of a member of Parliament today ? He must pronounce
on army and navy, on school and religion, arts and sciences, medicine
(compulsory vaccination), commerce, railways, post-office, game laws,
agriculture, and what not. Our omniscient representatives must even decide
matters of currency policy (for example the introduction of the gold standard),
although 99% of them have not the faintest notion what money is, or what it ought
to be. Is it fair to blame these harried persons for not possessing expert
knowledge about anything ? (* The State could and should be
completely relieved of the burden of State schools, State Church, State
universities and many other such institutions which have been forced upon it by
the landlords for the purpose of diverting the attention of the people from the
real subject of contention.) These jacks-of-all-trades
will vanish with the nationalisation of the land, and the people will choose as
their representatives experts whose legislative powers will be confined to one
special question. And with the settlement of this question their power will
come to an end.
Nationalisation of the land will
affect social conditions no less profoundly than politics, and here again from
the moment that expropriation is decreed.
The consciousness that all men and
women have now an equal right to their native soil will inspire them with pride
and be expressed in their looks. Everyone will hold up his head and even State
employees will lose their attitude of tame submission. They will all know that
they have a safe refuge in the soil, a faithful mother offering her protection
to those in adversity. For the land will be at the disposal of all, on equal
terms for everyone, rich or poor, man or woman, capable of cultivating the
soil.
Here it will probably be objected
that even at present there is no lack of opportunity of renting and cultivating
the soil. It must not, however, be forgotten that rent on land at present goes
into the pockets of private persons, and that consequently everyone has to work
cruelly hard to earn his living. With nationalisation of the land, rent on land
will go into the public treasury and so benefit everyone directly in the form
of State services. In this way the work necessary to earn a living will be
reduced; it will suffice, to cultivate six or seven acres instead of ten, so
many an official whose health has suffered in the city air will be able to earn
his bread as a farmer. This development will of course be still more marked
when, in consequence of the money reform to be described later,
capital-interest disappears. Four acres will then suffice where to-day ten have
to be cultivated.
This economic strength and economic
independence will of course change the whole relationship of man to man;
manners, customs, speech and character will become freer and nobler.
After abolition of private ownership of rent, and still
more after abolition of capital-interest, every healthy woman will be able to
earn her living and that of her children in agriculture. If three acres instead
of ten suffice for this purpose, a woman's strength will suffice where today a
man's full strength is required. And would not the return of woman to agriculture
be the happiest solution of the problem of "feminism" ?
A proposal has been made to pay
mothers a national rent for their services in rearing their children, a rent
equivalent to the use of the soil by primitive woman. It is proposed to pay
these mothers' rents from rent on land, in opposition to the proposal of Henry
George by which rent on land would be used for the remission of taxation.
There is much to recommend this
proposal. In the first place rent is ultimately the creation of the mothers, since
it is they who create the population which gives rise to rent. On the principle
of "suum cuique" mothers have undoubtedly the strongest claim to rent
on land. And we are led to the same conclusion if we compare primitive woman
who commands, like a queen, all the gifts of nature about her, with the
poverty-stricken women of our proletariat. The comparison shows that with us
rent on land is stolen from the mothers. Among the primitive peoples of Asia,
Africa and America there is no mother so utterly destitute of all natural
resources as the proletariat women of Europe. The primitive worn an owns her
whole surroundings. She takes wood for her fire where she finds it, and builds
herself a hut where she chooses. Her hens, geese, goats, kine, feed around the
hut. Her dog guards the cradle. One boy takes trout from the brook; in the
garden the older children sow and reap, others come back from the forest with
firewood and berries; the eldest son brings in the deer he has killed on the
mountain. And in the place of all these natural gifts we have enthroned the
obese, inert, ignoble figure of the rentier. To imagine the situation of a
pregnant proletarian woman, who has nothing in all nature around her on which
she can lay her child, is to realise that if with our present economic system
we cannot do without boundaries and rents, these rents belong by right to the
mothers.
According to calculations, the data
for which, it is true, are at present incomplete, about $12 a month could be
distributed out of rent on land for every child below the age of fifteen. With
this support and the relief from the present interest-tribute, every woman
would be able to bring up her children in the country without being forced to
depend on the financial support of man. Economic considerations would no longer
be able to crush the spirit out of women. In sexual matters her inclinations,
wishes and instincts would decide. A woman would then be free to consider the
mental, physical and raceimproving qualities, and not merely the money-bags of
her mate. Women would thus recover the right to choose their mates, the great
right of natural selection, which is something vastly more important for them
than the illusory right of choosing their political representatives.
With nationalisation of the land
everyone will have at his disposal the whole soil of his country, and when
nationalisation becomes universal, the soil of the whole world. Compared to
that the kings of today are beggars. Every newborn babe, legitimate or
illegitimate, will have 195,550,000 square-miles, 125,792 million acres of land
at his disposal. And everyone will have the right to move freely and settle
anywhere; no one will be bound to the soil like a plant. Those whose native air
does not agree with them, who dislike the society in which they are placed, or
who for any other reason desire a change of abode, may cancel their
lease-contract and move on. In this way the German peasants who, as in the
times of serfdom, cling to the soil and have never seen further than their
church-towers, will be set in motion and made acquainted with new customs, new
methods of work, new thoughts. The different peoples will learn to know each
other and to see that no people is any better than any other people, that the
social life hitherto created by all of them is vicious and discreditable. And
since men as a rule are more ashamed of their vices among strangers than at
home among friends and relations, it may be expected that intercourse with
strangers will purify and ennoble morals.
Nationalisation of the land
penetrates into the depths of human nature to transmute and remould it. A
slavish spirit still exists among men since the period of serfdom (among
masters no less than among serfs) simply because private property in land, the
foundation of slavery, still exists. This slavish spirit will disappear finally
with the disappearance of landed property. Man will again stand erect just as a
young fir-tree, relieved from the weight of snow, swings back vigorously to its
natural poise. "Man is free even though born in fetters", says
Schiller. Man adapts himself to every influence, and every gain during the
process of adaptation is transmitted to the coming generations. But servility
cannot be inherited, so the disappearance of private property in land will
leave no scar in the moral tissue of the slaves.
From the economically-founded and
therefore genuine, deep-rooted liberty resulting from nationalisation of the
land we are justified in expecting the fruits of civilisation that we had
formerly looked for in vain. Political peace within our frontiers will be
reflected abroad, as inner peace of the soul is reflected in the face of man.
The brutal and vulgar tone, inevitable when social relations have been
perverted by rent on land, is transferred to political life and poisons our
relations with foreign countries. The never-ending conflict of interests
resulting from private ownership of land has accustomed us to see an enemy in
every neighbour and in every neighbouring nation - enemies we must prepare to
oppose by arms. For nations do not at present face one another as men and
brothers, but as landlords. If private ownership of land is abolished in two
countries the only possible cause of strife between them disappears. Instead of
envious landgrabbers we shall then be men with nothing to lose from mutual intercourse
and everything to gain, namely enrichment of our professional activity, our
religion, our art, our manner of thinking, our morality and legislation. When
the land is nationalised, no private individual will derive any profit from
higher rents, and if such is the case in the neighbouring countries also, there
will be no one to derive any advantage from import-duties which at present
embitter international relations, create dissension, instigate defensive
measures and cause such confusion that the nations are driven to war to
preserve their status. With nationalisation of the land, and still more with
the money reform to be described later, free trade will be a matter of course.
And if free trade is allowed to expand and gather force for a few decades, men
will come to understand how intimately the welfare of the nations is bound up
with it. The whole people will then take anxious care to cultivate friendly
relations with neighbouring countries; families will begin to have ties of
kinship across the border, friendship between artists, scholars, scientists,
workmen, merchants and religious leaders will form the peoples of the world
into a league of nations which time and common interests
will consolidate. Without private
property in rent, there can be no war, because there win be no
customs-barriers. Nationalisation of the land means universal free trade and
universal peace.
The effect of such a land reform on
war and peace has so far been only superficially studied. This is as yet an
unexplored domain which the German land reformers have never penetrated. There
is here rich material for a comprehensive work. Who will assume the task?
Gustav Simons, Ernst Frankfurth and Paulus Klüpfel, who had prepared themselves
thoroughly for this labour, and were the right men to undertake it, have been
carried off by death in the midst of their activity.
In "Free-Land, the Fundamental Condition of
Peace", I have traced the bare outline of this great problem. (*
"Freiland, die eherne Forderung des Friedens" (spoken at Zürich,
1917) and Gesell's other address on peace: "Gold und Frieden ?"
(spoken at Bern, 1916) have been reprinted in all subsequent German editions
and in the French edition of The Natural Economic Order.)
With regard to the general law of
wages it only remains to be said that after nationalisation of the land and
cancellation of the debt contracted for that purpose
all rent on land will flow into the
wage fund
and the total proceeds of labour
will then be equal to the total product of labour, less capital-interest.
5. THE CASE FOR NATIONALISATION OF THE LAND
Normal man claims the whole earth as his own. He
considers the whole earth, not merely part of it, as a member, a vital organ of
man. And the problem is, how every man can attain the full use of this vital
organ.
Division of the earth is out of the
question since by division every man gets a part only, whereas he needs the
whole. We cannot satisfy the claims of the members of a hungry family to the
soup by smashing the soup-tureen and tossing a fragment to each. Moreover at
every birth and burial the partition would have to be made afresh, quite apart
from the fact that the shares for distribution all differ in situation,
quality, climate, etc., so that everyone must choose for himself. One man would
like to have his share on a sunny mountain height; another makes for the
neighbourhood of a pub. Partition, at present usually by inheritance, takes no account
of such wishes, so the beer-drinker must descend daily from his mountain height
to quench his thirst, while the other longs for the sunny heights, and
languishes mentally and physically in the air of the valley.
No one is satisfied by partition
which chains men to their birthplace, especially if, as is usually the case, an
exchange of shares is hampered by transfer taxes. Many a man would like to move
off for his health's sake; many another has incurred the enmity of his
neighbourhood and had better shift his quarters. But their landed property
holds them fast.
The transfer tax in many parts of
Germany amounts to 1 - 2 - 3%, and in Alsace to as much as 5%. If we consider
that landed property is in most cases mortgaged up to three-quarters of its
value, we can understand the seriousness of this obstacle; the transfer tax
claims one-fifth of the sum received by the seller, one-fifth of the buyer's
capital. So if a man changes his abode five times - which is not too often for
his proper development - his whole fortune is absorbed in taxes. And the
unearned increment tax advocated by the land reformers, which is collected only
on transfer, makes matters still worse.
Young farmers thrive in the north;
but when a man gets on in years and his blood circulates less vigorously, a
temperate climate is often preferable, while old people feel happiest in the
south. How are we to meet all these and a thousand other wishes by means of
partition ? A man cannot carry his land about like his luggage. Is he to sell
his share to buy another? Ask those who, without being able to keep a constant
lookout on the market, have been forced by circumstances to sell their property
repeatedly. They fare like the peasant who took a cow to market and after a
series of exchanges brought home a canary bird. The owner of land is forced to
wait for a chance of selling and a chance of buying, but when he is waiting
time flies, and in the end he often prefers to renounce the advantages which he
might have obtained from a change of abode. Many farmers would like to move to
the neighbourhood of the city to enable their gifted children to attend the
schools; many others would like to escape from the neighbourhood of the town to
bring up their children amidst virgin nature. Many a good Catholic, forced by
an inheritance to settle among Protestants, longs to get back to a Catholic
neighbourhood. Landed property cuts off all these satisfactions, and converts
all men into chained cattle, serfs, slaves of the soil.
On the other hand, many a farmer
whose only desire is to cultivate to his dying day the field his forefathers
have ploughed from time immemorial is evicted by a creditor or a usurer, or by
the taxgatherer. The laws of property drive him out of his property.
Or again, a farmer inherits a share
of his father's land but to work it is forced to mortgage his
"property" up to 90 % of its value to pay the shares of his brothers
and sisters, and is crushed by the burden of the mortgage. A slight rise of
wages, a slight decline in rent (which may be brought about simply by a
reduction of shipping rates) suffices to make it impossible for him to pay the
interest on his mortgage, and brings the whole farm under the hammer. The
so-called "agricultural distress" which afflicted German landowners
was a consequence of the debts inevitably contracted by the heir to land, and
is an inseparable concomitant of private ownership of land. The "happy
heir" of landed property drudges and calculates, seeks relief through
pot-house politics, but his property gradually drags him down.
Still more disastrous are the
consequences when the, earth is divided up in the form of collective or
communal property, as advocated by the co-operative movement. The sale of a
share is then impossible, so if a man leaves the community he loses his share.
The transfer tax is here replaced by a removal tax of 100%. There are parishes
that not only levy no taxes but actually distribute ready money. Not to forego
this income many stay in the parish although climatic, political, religious or
social conditions, or the beer or wages do not satisfy them. Nowhere is there
more litigation, quarrelling, manslaughter, nowhere more wasted lives, than in
these wealthy communes. Wages must also be lower in such communes than
elsewhere, since liberty to choose a profession according to one's personal
inclination, so necessary for success in any calling, is greatly restricted by
lack of freedom of movement. Everyone is thrown back upon local industries, and
a man who might have made his fortune as an astronomer or a dancing master
keeps body and soul together as a woodman - simply because he cannot make up
his mind to forego his share of the common property.
The same disadvantages, magnified
and more dangerous, result from the division of the earth between the different
nations. No one nation is or can be satisfied with the share allotted to it,
since every nation, just as every individual, needs for its proper development
the whole earth. And if the share is insufficient, what is more natural than
the desire for conquest ? But conquest requires military power, and history
teaches us that military power decreases with the growth of the territory over
which it is distributed; so there is not the slightest possibility of uniting
all nations by conquest. Conquest, therefore, is usually limited to certain
shreds and patches of the earth which change from hand to hand. For what one
nation gains by conquest another nation is bound to lose; and as this other nation
has the same desire for expansion, it prepares for reconquest and awaits a
chance of falling on its neighbour.
In this way almost every nation has
attempted to obtain possession of the globe by conquest, and always with the
same negative result. The sword, like any other tool, becomes blunted with use.
And what sacrifices are called for in these futile attempts Blood and sweat in
streams; piled-up corpses; vast treasures squandered - and all in vain! Today
the political map of the world looks as patched and ragged as a tinker's coat.
New barriers are daily erected, and each nation guards more jealously than ever
the beggar's mess it has inherited.
Is there any reasonable hope that
some day a conqueror will arise who will unite us ? Let us not indulge in such
pernicious fancies. Partition leads to war, and war results in patchwork. But
man needs the whole earth, and not merely a patchwork of hostile nations. As
long as this fundamental need of every individual and every people remains
unsatisfied, there will be war; man against man, people against people,
continent against continent. And it should be noted that wars arising from such
causes must necessarily have an effect contrary to that intended by the
belligerents; for war produces separation not union, diminution not
enlargement, chasms not bridges.
It is true that there are people who
feel at home in a smoky taproom, and uncomfortable on a mountain top. Prussians
of the old school, for example, shrank from affiliation with the German Empire,
frightened by the new splendour. For the partition of the earth has produced a
poor-spirited race.
Away then with this foolish
puppet-show of armaments, frontiers, tariff-barriers and registers of landed
property ! Mankind requires something better than broken fragments of the
globe. Suum cuique that is, to each the whole.
But how can this ideal be realised
without communism, without affiliating all nations into one great World-State,
without abolishing the national independence of the separate peoples ?
Our answer is: By the Free-Land
reform.
With the introduction of Free-Land
all the land situated within the national boundaries is made accessible to each
inhabitant of the country and is proclaimed his property. Does not this
proceeding grant everyone the kind of land he longs for, and consequently
satisfy every desire, indeed every caprice ? In this way the impedimenta of
removal are reduced by the whole weight of the landed property and freedom of
movement and settlement becomes an economic as well as a legal reality.
Let us go into the matter more
closely. A peasant is working a large farm with his sons on the north German
plain. But the sons do not care for farming and go to the city to take up some
trade. The farm becomes too large for the peasant whose strength is decreasing
through age and failing health. He would prefer to take a smaller farm and at
the same time realise the dream of his youth: to live in the mountains. He
would also like to settle somewhere in the vicinity of Frankfort, because his
sons are established there. Such a change would at present be difficult, for a
peasant almost impossible to carry out.
With Free-Land the case is
different. The peasant has no landed property, so he is free to move, like a
bird of passage. He has not even to wait for the expiration of his lease, since
he may cancel the contract any day by paying a fine. So he sends for the
illustrated list, regularly issued by each province, of the farms to let, and
marks the farms which seem most likely to suit his requirements. There will be
no lack of choice. If the average duration of a lease is assumed to be 20
years, one farm out of every twenty would become vacant every year, that is,
some 150,000 farms of an average area of 25 acres: large farms and small farms,
to suit all requirements in the mountains, on the plain, on the Rhine, on the
Elbe, on the Vistula, in Catholic and in Protestant localities, in
Conservative, Liberal, Socialist constituencies, in marshy land, in sandy land,
on the sea-coast, for cattle-breeding, for beetroot growing, in the forest, in
foggy regions, on clear streams, in the smoky "Black Country", in the
neighbourhood of the city, the brewery, the garrison, the bishop, the schools,
in French or Polish speaking territory, for consumptives, for weak hearts, for
strong men and for weak ones, for old and young - in short, 150,000 different
farms annually to pick and choose from, waiting for him to come and try his
luck. Cannot every man then say that he owns the whole of his country ? In any
case he cannot possess more than one piece of land at a time, for to possess
something means to sit on it. Even if he were alone on the earth, he would have
to decide for one piece of land.
He must, indeed, pay a farm-rent,
but in so doing he is merely giving back the rent of the land which is not the
product of the soil, but of society (the word means what is given back). And
man has a claim on the earth, but not on men. If, therefore, he restores to
society, as rent for his farm, the rent that he collects from society in the
prices of his farm products, he simply acts as an accountant or tax gatherer;
his right to the soil remains intact. He gives back to society what it has paid
him in advance in the price of the products of the soil, over and above his
labour. But since the farmer himself is a member of society, he, also, receives
his share of the farm rent. So in reality he pays no rent at all; he merely
hands over the rent collected by him, in order that his account with society
may be settled more accurately.
Free-Land realises completely the
right of every individual to the whole land of his country. But the whole land
of his country is not enough to satisfy a man conscious of his own worth. He
demands the whole world as his property, as an integral part of his
personality.
This difficulty, also, is overcome
by Free-Land. For let us suppose that Free-Land is extended to all countries; a
supposition by no means unreasonable when we consider how easily national
institutions cross frontiers and are adopted by the whole world. Suppose, then,
that Free-Land is universally adopted by international agreement, and that
immigrants are given equal rights with citizens, as they are at present with
regard to most laws. In that case has not every individual realised his right
to possess the whole globe? The whole world from now on forms his absolute
property wherein he may settle wherever he pleases (just as he can today, if he
has money), and without expense, since the rent paid for the farm is, as we
have seen, not a levy on the soil, but a return for the rent which he levies on
society in the prices of his products. and which is given back to him in the
services of the State.
Free-Land, then, puts every man in
possession of the whole world which henceforward belongs to him and is, like his
head, his absolute property. The world which he inhabits will have grown part
of him and cannot be taken from him because of a dishonoured bill, a mortgage,
or a security for a bankrupt friend. He can do as he pleases: drink, gamble,
speculate, but his property is safe. The amount of his landed property is the
same whether he has to share his heritage with twelve brothers and sisters, or
whether he is an only child. Quite independently of his character and actions,
the earth remains his property. If he does not deliver to society the rent
collected in the prices of his field products, he will be placed under
guardianship, but none the less the earth remains his property.
Through nationalisation of the land
every child is born a landowner and more, for every child, legitimate or
illegitimate, holds the globe in his hand, like the Christ-Child at Prague. No
matter what the colour of a man's skin, black, brown, white or yellow, the
undivided earth belongs to him.
Dust thou art and to dust returnest.
It seems little, but beware of under-estimating the economic significance of
this dust. For this dust is a part of the earth which belongs to the
landowners. In order to come into being and to grow you need parts of the
earth; even a small deficiency of iron in your blood will undermine your
health. Without the earth and, if it belongs to the landowners, without their
permission, no one is permitted to be born. This is no exaggeration. The
analysis of your ashes shows a certain percentage of earthy matter which no one
can draw out of the air. This earthy matter was at one time in the earth and it
has either been bought from a landowner or stolen; there is no other
possibility.
In Bavaria permission to marry was
made dependent on a certain income. Permission to be born is denied by law to
an those who cannot pay for the dust needed to construct a frame of bone.
But neither is anybody allowed to
die without permission of the landowners. For to dust thou shalt return, and
this dust takes up space upon the earth which the landowner may be unwilling to
grant. If a man dies somewhere without permission of the landowner he robs the
landowner, so those who are unable to pay for their burial-place go straight to
hell. Hence the Spanish saying: He has no place whereon to drop down dead. And
the Bible: The Son of Man has not where to lay His head.
But between the cradle and the
coffin lies the whole of life, and life, we know, is a process of combustion.
The body is a furnace in which a constant heat must be maintained, if the spark
of life is not to be extinguished. This warmth we maintain inwardly by
nutrition, outwardly by clothes and shelter. Food and clothing and building
material are, however, products of the earth, and what happens if the owners of
the earth refuse us these materials ?
Without permission of the owners of
the earth, then, nobody may eat, or be clothed, or live at all.
This, also, is no exaggeration. The
Americans deny the Chinese the right of immigration; the
Australians keep all men whose skin
is not pure white away from their coasts. Even shipwrecked Malayans seeking
shelter on the Australian coast have been pitilessly turned away (*Land
Values 1905 p. 138.) And how do our own police deal
with those who do not possess the means to buy the products of the earth ? You
have got nothing, yet you live, therefore you steal. The warmth of your body, a
fire maintained with the products of the soil, is evidence of your misdeeds and
reason enough for locking you up! That is why travelling journeymen always
carry a sum of money which they never touch.
We frequently hear the phrase: Man
has a natural right to the earth. But that is absurd, for it would be just as
correct to say that man has a right to his limbs. If we talk of rights in this
connection we must also say that a pine-tree has the right to sink its roots in
the earth. Can man spend his life in a balloon ? The earth belongs to, and is
an organic part of man. We cannot conceive man without the earth any more than
without a head or a stomach. The earth is just as much a part, an organ, of man
as his head. Where do the digestive organs of man begin and end ? They have no
beginning and no end, but form a closed system without beginning or end. The
substances which man requires to maintain life are indigestible in their raw
state and must go through a preparatory digestive process. And this preparatory
work is not done by the mouth, but by the plant. It is the plant which collects
and transmutes the substances so that they may become nutriment in their
further progress through the digestive canal. Plants and the space they occupy
are just as much a part of man as his mouth, his teeth or his stomach.
But man, unlike the plant, cannot
remain satisfied with part of the earth; he needs the whole; every individual
needs the whole undivided earth. Nations living in valleys or islands, or shut
off by tariffbarriers, languish and become extinct. Trading nations, on the
other hand, that spice their blood with all the products of the earth, remain
vigorous and populate the world. The bodily and spiritual needs of men put out
roots in every square foot of the earth's surface, embracing the globe as with
the arms of an octopus. Man needs the fruits of the tropics, of the temperate
zones and of the north; and for his health he needs the air of the mountains,
the sea and desert. To stimulate his mind and enrich his experience he needs intercourse
with all the nations of the earth. He even needs the gods of other nations as
objects with which to compare his own religion. The whole globe in splendid
flight around the sun is a part, an organ, of every individual man.
How, then, can we suffer individual
men to confiscate for themselves parts of the earth as their exclusive
property, to erect barriers and with the help of watchdogs and trained slaves
to keep us away from parts of the earth, from parts of ourselves - to tear, as
it were, whole limbs from our bodies ? Is not such a proceeding equivalent to
self-mutilation ?
The reader may be unable to accept
this comparison on the ground that amputation of a piece of land causes no loss
of blood. But would that it caused no more than ordinary loss of blood ! An
ordinary wound heals. You lose an ear or a hand; the flow of blood is staunched
and the wound closes. But the wound left in our body by the amputation of a
piece of land festers for ever, and never closes. At every term for the payment
of rent, on every Quarter Day, the wound opens and the golden blood gushes out.
Man is bled white and goes staggering forward. The amputation of a piece of
land from our body is the bloodiest of all operations; it leaves a gaping.
festering wound which cannot heal unless the stolen limb is grafted on
again.
But how ? Is not the earth already
torn into fragments, cut up and parcelled out ? And have not titledeeds been
drafted that record this parcelling and must be respected ?
But this is nonsense. For who was it
that drew up and signed these title-deeds ? I myself have never consented to
the partition of the earth, to the amputation of my limbs. And what others have
done without my consent cannot bind me. For me these documents are scraps of
paper. I have never consented to the amputation that makes me a cripple.
Therefore I demand back my stolen property and declare war on whoever withholds
part of the earth from me.
"But there, on these faded
parchments, stands the signature of your ancestors !" It is true that my
name occurs there, but whether the signature was forged or genuine, who knows ?
And even if the signature on the parchment is genuine, I can read between the
lines that it was extorted by force, since no one will sacrifice his limbs unless
in immediate danger of his life. Only a trapped fox bites off its own leg.
Again, is anybody in duty bound to recognise the debts of his forbears ? Are
children to be held responsible for the sins of their forefathers? Are parents
to be allowed to mutilate their children ? May a father sell his daughter
?
One suspects that our ancestors
tippled away the earth, like the old Germans who, in their cups, staked their
wives and children. For only drunken fools sell themselves or their limbs; only
drunken fools could have voluntarily signed the documents that gave away the
land. If an inhabitant of Mars came among us for the purpose of buying land
here to take with him, is conceivable that he would be allowed to carry off
parts of the earth, great or small ? Yet it makes no difference whatever to the
bulk of the population whether the riches of the earth are carried off to Mars,
or whether a landowner takes possession of them. For when the landowner has
collected his rent he leaves nothing behind but waste and desert. If our
landowners were to roll up the whole of the arable surface of Germany and carry
it off to Mars - it would make no difference to the rest of the population.
During a period of famine Russian landlords living in luxury in Paris exported
great quantities of wheat from Russia, until even the Cossacks felt the pinch,
and exports had to be prohibited to maintain order.
The signatures in the land register
were extorted by the dagger, or procured through fraud or through the brandy
bottle. The land register is the criminal record of Sodom and Gomorrah and if
landowners, in their turn, were to declare themselves willing to assume
responsibility for the actions of their ancestors, they would have to be
clapped into prison for fraud and extortion.
Jacob defrauded Esau of his pastures
by means of a mess of pottage, when the latter returned famished from the wolf
hunt. Are we to give our moral sanction to this transaction by keeping the
descendants of Esau from the use of these pastures with the help of the police
?
We need not however go back to Esau to
discover the origin of such title-deeds. "The settlement of most countries
originally took place by way of conquest, and even in modern times the existing
division of the land was often enough again changed by the sword." (*
Anton Menger: The Right to the Full Proceeds of Labour.)
And how is the occupation of a
country carried out to-day, before our eyes ? For a bottle of brandy for
himself and some finery for his consort, the Herero king sold the land which he
had taken from the Hottentots. Millions of acres which his people used as
pasture for their herds ! Did he know what he was doing when, bemuddled with
the fumes of alcohol, he put the treacherous cross at the foot of the document
? Did he know that this document would be kept as a precious relic in a steel
safe and guarded day and night by sentinels ? Did he know that his whole people
would be nailed to that cross; that henceforward he would have to pay a rent
for each head of cattle - he, his children, his grandchildren, today, tomorrow,
for ever ? He did not know this when he drew on the document the sign of the
cross, taught him by the missionaries, for how can a man be cheated and
defrauded by the sign of Christ ? If he had signed the document knowingly he would
have been a traitor deserving to be hanged on the nearest tree. But he did not
know, for when practice taught him what the document meant, he took up arms to
drive away "the treacherous savages" (in the German press the unhappy
natives, who were carrying on their "war of independence" with the
only weapons at their disposal, were usually styled incendiaries, thieves,
treacherous savages and so forth). Of course it availed the Hereros nothing.
They were hunted down, and the few that escaped were driven into the desert
where they will starve. (See General Trotha's proclamation).
The land occupied in this manner was
then distributed as follows, according to an official report: (*Deutsche
Volksstimme, 20 December 1904.)
Square Miles
1. German Colonial Company for South West Africa 51,300
2. German Settlement Company
7,600
3. Hanseatic Land, Mining and Commercial Company 3,800
4. Kaoko Land and Mining Company
39,900
5. Southwest Africa Company Ltd.
4,940
6. South Africa Territories Ltd.
4,560
_______
Total 112,100
That is 70 million acres.
What have the six proprietors given
for these 70 million acres of land ? A brandy bottle, a mess of pottage. This
is what is being done in Africa, in Asia, in Australia.
In South America matters were still
further simplified; the document with the sign of the cross for a signature was
dispensed with. General Roca, afterwards President, was sent out with a horde
of soldiers to drive the Indians off the fertile grazing grounds of the Pampas.
The majority of the Indians were shot down, the women and children were dragged
to the capital as cheap labour, and the remainder were hunted across the Rio
Negro. The land was then distributed among the soldiers, most of whom hastened
to sell their claims for brandy or trinkets.
(* "The Argentine consul
general reports that recent sales of large estates in Argentina show clearly
how greatly the values of landed property have risen in that country. In the
Pampa territory Antonio Devoto bought an area of 116 leguas with 12,000 head of
homed cattle, 300,000 sheep etc. from the British South American Land Company
for 61 million dollars, or about 50,000 dollars a legua of 2,500 hectares. -
José Guazzone known as the wheat king, bought 5 leguas at 200,000 dollars a
legua in the district of Navaria in the province of Buenos Aires. - The Jewish
Colonisation Company bought 40 leguas, partly in Piqué, partly in the Pampa
Central, for 80.000 dollars a logua, which the seller, Federico Leloir had
bought in 1879 for 400 dollars a legua. - All this land in the Pampa was
liberated from the Indians in 1878 and sold publicly by the in 1879-80 for 400
dollars a legua. It is specially suitable for cattle-breeding and its value has
meanwhile increased 150 to 200-fold, which is a good index of the prosperity of
the country". Hamburger Fremdenblatt, Dec. 22, 1904.
To this we may add that the
increase in the price of the land is in reality far greater. The 400 dollars a
legua were payable in "moneda corriente", which was only worth one
thirtieth of the present-day peso (dollar). So the increase was 30 times 200,
that is, 6,000-fold. it is said that many of the soldiers sold their shares for
boxes of matches (Cajas de fosforos.).)
This is how the sacred, inviolable
rights of the present owners to what is probably the most fertile soil in the
world were acquired. The pasture of millions of sheep, horses, cattle, the land
for a great nation which is coming into existence, is today the private
property of a handful of men who obtained it for a few quarts of brandy.
In North America territories quite
recently settled were largely uninhabited. Everyone could take as much as he
pleased. Every adult, man or woman had a claim to 160 acres of land, so that
families with six grown-up children were able to claim 1000 acres. Anyone who
agreed to plant a few trees was allowed to claim double the amount, 320 acres.
After six years the occupiers were given title-deeds, and the land was then
saleable. Through the purchase of such homesteads for trifling sums (much could
not be asked for something that could be claimed elsewhere for nothing)
latifundia of many thousands of acres were formed. Price: A quart of brandy, a
dishonoured bill, a mess of pottage. In California two Luxembourg farmers,
Muller and Lux, today own an estate so large that Prussia could easily be
fitted into it. Price: A quart of brandy, a mess of pottage.
The Northern Pacific Railway
obtained gratis from the Canadian Government permission to construct the
railway, and in addition to this privilege it received as a gift a strip of
land 40 miles wide on each side of the railway. Consider what that means: 40
miles right and left of a line 2000 miles long! Price: Nothing at all !
With the Canadian Pacific it was
much the same. In a pamphlet issued by this company it is stated that "The
company took over the construction of the 1920 miles, for which it obtained
from the Government valuable privileges and liberties and, further, 25 million
dollars in money, 25 million acres of land, and 638 miles of railroad already
constructed".
Let it not be imagined that the
projected railway was to be considered the return for these gifts. The above
pamphlet states that the railway is to remain the property of the company. But
where, then, it will be asked, is the return for the 25 million acres of land,
the 25 million dollars, the 638 miles of railroad already constructed and the
valuable privileges ? The answer is, a mere bagatelle, namely, the risk in
connection with the interest to be paid on the capital.
Thus by a stroke of the pen 25
million acres of arable soil in one of the most fertile, most beautiful and
healthiest of countries passed into private ownership. No one even took the
trouble of looking at the land that was to be given away as a gift. Only during
the construction of the railway was the extraordinary fertility of the soil,
its wealth in minerals, and the beauty of the landscape "discovered".
And this happened not in Africa, but in Canada, which is renowned for its
excellent administration.
Such is the origin of private
ownership of land at the present day in countries upon which Europe is as
dependent as upon its own fields.
Knowing therefore how private
ownership of land is established today, need we investigate how it originated yesterday
? "Peor es menearlo", says the Spaniard: The more you move it about,
the worse it becomes. Are we to inquire of the Church in what colours hell was
painted when the dying dame bequeathed her landed the property to the Church ?
Are we to inquire of the counts, the dukes, the barons by what treasonable
means they obtained from a weak emperor the transformation into their absolute
property of the land which they only held as wages for military service ? Or
how they availed themselves of the incursions of marauding neighbours as a
welcome opportunity for extorting privileges and landed property from the
emperor? "Peor es menearlo". The more you stir it up, the more it
stinks. Are we to ask the English landlords how they came by their landed
property in Ireland ? Pillage, rapine, murder, high treason and legacy hunting:
these would be the answers to our queries. Anyone not satisfied with these
answers can collect full information about the origin of landed property in the
old ballads and drinking songs, and from observation of the pitiful physical
and moral decay of the race. He will be convinced that our ancestors were a
band of drunkards who tippled away the heritage of their descendants, careless
of the fate of the coming generations. After us the Deluge, was their
motto.
Are we, then, to maintain this venerable institution
bequeathed to us by these drunken Falstaffs, out of pious veneration of the
bottles that were emptied at its origin, or out of gratitude for the degenerate
blood and crippled limbs which they have bequeathed ?
The deeds of the dead are not the
measure of our actions. Every age has its own tasks to accomplish, which demand
its whole strength. Dead leaves are swept from the trees by autumn gales; dead
mole on the field track, the droppings of the grazing herds are carried
underground by Nature's scavengers. Nature, in short, takes care that dead
matter shall be removed from sight, so that the earth may remain eternally
fresh and young. Nature hates mementoes of death. The pallid skeleton of a pine
tree never serves as support and ladder for new vegetation; before seeds can
germinate, dead tree must be felled by the storm. In the shadow of old trees
young vegetation cannot prosper; but no sooner are they gone than everything
begins to grow and flourish.
Let us bury with the dead their
title-deeds and laws. Let us pile up the registers of landed property as a pyre
for the dead. A coffin is too narrow for a bed, and what are our land-laws and
land-registers but coffins in which the corpses of our ancestors lie buried
?
Burn, then, such mouldering rubbish!
It is from the ashes, not from the corpse, that the Phoenix arises.
6. WHAT FREE-LAND CANNOT DO
Such are the far-reaching consequences of
nationalisation of the land; but nevertheless the importance of this reform -
great though it is - must not be exaggerated. Free-Land is not, as many are
inclined to imagine, a panacea. Henry George was of opinion that Free-Land
would eliminate:
Interest, Economic Crises,
Unemployment.
He did not, indeed, support this
belief with the same confidence and wealth of ideas as his main contention, and
this lukewarmness proves that he was aware of his lack of clear insight and had
doubts about this part of his theory. But these doubts are not shared by his
disciples.
What with Henry George was not much
more than an opinion held without deep conviction became with his disciples an
unquestioned dogma. The only exception is Michael Flürscheim; and it was for
this reason that he was unpopular with the other land reformers, although it
was he who succeeded in reviving the idea of land reform in Germany.
Free-Land influences the
distribution of the product; unemployment and economic crises however are not
problems of distribution, but problems of exchange or commerce, even interest,
although it influences the distribution of the product for more powerfully than
does rent on land, is merely a problem of exchange, for the action that
determines the amount of interest, namely the ratio in which existing stocks of
products are offered in exchange for products of the future, is an exchange,
and nothing but an exchange. With rent, on the other hand, no exchange takes
place, the receiver simply pockets the rent without giving anything in return.
Rent is a part of the harvest, not an exchange, and that is why the study of
the problem of rent can offer no basis for the solution of the problem of
interest.
The problems of unemployment,
economic crises and capital-interest cannot be answered unless we examine the
conditions under which exchange takes place. Henry George did not undertake
this examination, nor have the German land reformers made the attempt; and for
this reason they are utterly unable to explain the existence of
capital-interest, economic crises and unemployment. Henry George's theory of
capital-interest, still held, to their confusion, by the German land reformers,
is an incredibly crude "theory of fructification", which utterly
fails to account for any phenomenon connected with capital-interest or unemployment.
And his theory of economic crises (disproportion between the consumption and
the incomes of the rich) is equally superficial.
This has been the weak spot of the
land reform movement hitherto. It was asserted that land reform would in itself
solve the social problem, but no satisfactory scientific explanation of the
most serious drawbacks of our economic system was forthcoming. And the land
reformers, besides failing to produce a theoretic explanation, were also unable
to suggest practical remedies for the drawbacks of our economic system. The
wage-earners, to whom, also, the land reformers promise salvation, cannot be
rescued from their desperate plight solely by nationalisation of the land. They
demand the full proceeds of labour, that is, the abolition of both rent on land
and capital-interest; and they also demand an economic system excluding crises
and unemployment.
This exaggeration of the effect of
land nationalisation has caused incalculable damage to the whole movement.
We shall now examine the condition
under which capital-interest, crises and unemployment are produced, and we
shall discuss the measures necessary for the removal of these evils. We are
thus about to approach what is notoriously the most intricate of all economic
problems. The reader need not, however, be alarmed, for the problem has been
rendered perplexing only by pseudo-scientific methods of investigation; in
reality the facts are rigorously co-ordinated; and we have only to begin at the
right place to discover the co-ordination.
PART III. MONEY AS IT IS
INTRODUCTION
Metal money of the present day is in
all essentials identical with the money that exchanged the products of
antiquity. Gold money unearthed from the ruins of Athens, Rome or Carthage is
universally acceptable and circulates freely with the money of modem Europe or
America. Apart from possible differences in the fineness of the gold, a
kilogram of coins with the stamp of a Roman emperor is equal to a kilogram of
coins with the stamp of the German mint. Our money has all the characteristics
of the money that Lycurgus banished from Sparta. Money is perhaps the only
State-Institution that we have adopted unchanged from antiquity.
But our knowledge of the nature of
money is by no means proportionate to its great antiquity. Lycurgus recognised
that money made of precious metal disrupts the State by dividing the people
into rich and poor. We will not here discuss whether he did well in banishing
money, in casting out the good with the bad. But even today we are as far from
understanding the recognised evils of money as was Lycurgus. We can applaud
Pythagoras for saying "Honour Lycurgus who banished gold and silver, the
root of all evil" or sigh with Goethe "Nach Golde drängt, am Golde
hängt doch alles. Ach wir Armen!" - but we can go no further. The
question, What is wrong with money ? Why is money a curse to mankind ?
meets with silence. Even our
economists are so perplexed by this problem that instead of investigating it
they prefer simply to contradict Lycurgus and Pythagoras and to ascribe the
alleged shortcomings of money to defective observation. The Spartan Moses is
thus classed among tamperers with the monetary standard, and the great
mathematician among moral fanatics.
This failure of science is less due
to defects of the human understanding than to certain external circumstances
unfavourable to the scientific consideration of monetary theory.
The subject itself repels
investigators. Lofty idealists can easily find subjects of investigation more
attractive than money. Religion, biology, astronomy, for example, are
infinitely more edifying than an investigation of the nature of money. Only the
prosaic man of figures feels attracted by this step-child of science. It is
comprehensible, it does honour to human nature, that the investigators who have
penetrated into the dark continent of monetary science can still be counted on
the fingers.
Again, the unfortunate methods
hitherto employed. and the connection of the investigation with the now happily
moribund doctrine of value, have increased the natural aversion to this branch
of science. The pedantic obscurity with which monetary theory has been treated
by scientists has caused the public to despise a subject which is nevertheless
of vast importance to human development. (The forgotten literature of
bimetallism is a praiseworthy exception). Even at the present day the monetary
standard seems to the great majority of the public to be simply a certain
weight of fine gold, and gold is for most men a substance of small importance.
Since the object of monetary theory is held in low estimation, no one buys
monetary literature, and the risk of publishing works on monetary theory is too
great for most publishers. Much good writing about money has probably remained
unpublished - another circumstance that keeps investigators away from monetary
problems. Only authors who can afford to publish at their own expense can
occupy themselves with the problem of money.
To the latter statement there are
exceptions. The works of our university professors are at least bought by
students and State libraries, and find publishers. But the exclusion of
criticism of the existing order from university teaching prevents university
professors from penetrating far into the nature of money. The probe of official
science does not go deep, it recoils from the hard underlying layer of
controversy. What is true of money is true also of the theories of rent,
interest and wages. A university professor who ventured to investigate the
controversial basis of these problems would convert his lecture-hall into a
field of battle. Controversial matters, politics, theories of wages, rent,
interest and money, are
out of place in the university, and
for this reason economic science must languish in the hands of our professors.
A professor has scarcely gone a spade's depth into his subject when the menace:
"Thus far but no further !" rings in his ears.
Added to these external difficulties
is the fact that the theory of this thorny subject requires knowledge which can
only be obtained in practical commerce, and that commerce usually attracts
natures incapable of theoretical investigation. Commerce requires men of
action, not theorists and ideologists. Commercial pursuits were also, until
quite lately, considered dishonourable; Mercury, the God of Merchants, was also
the God of Thieves. Commerce was a profession for those who had failed in the
schools. Intelligent sons were sent to the university, the rest to the
counting-house.
Such is the explanation of the
startling fact that although in every other sphere science passes from triumph
to triumph, we have as yet no sound definition or theory of metal money. Metal
money has been in existence for 4000 years, has during a hundred generations
passed through thousands of millions of hands, yet in the management of money
every country in the world is guided, not by science but simply by
routine.
The lack of a sound theory of money
is the reason why the phenomenon of interest has never been satisfactorily
explained. For 4000 years we have paid and received countless thousands of
millions in interest, yet science is at the present day incapable of answering
the question "Whence and why does
the capitalist receive
interest ?" (* Boehm - Bawerk, History and Criticism of Theories
of Interest.)
Attempts to solve the problem of
interest have not, indeed, been wanting. As an obvious disturber of the peace,
interest has received a far larger share of public and scientific attention
than money. All economists of note have dealt with this problem, especially the
socialists whose whole effort is fundamentally directed against interest.
But in spite of all these attempts
the problem of interest remained unsolved.
The failure is not due to the
difficulty of the subject, but to the fact that capital-interest (interest on
loans as well as interest on real capital) is the child or by-product of our
traditional form of money and can therefore be scientifically explained only
with the help of a theory of money. Money and interest, to superficial
observers inseparable friends, have also a close inner connection, a connection
in theory. A theory of interest can only be deduced from a theory of
money.
But theorists upon interest have
always, for the reasons given above, neglected the study of money. Marx, for
example, can never have given the theory of money five minutes attention -
witness his three large volumes upon interest (capital). Proudhon under-rated
money less and came nearest to solving the problem of interest.
In the following investigation,
begun by chance and helped by favourable outer circumstances, I now offer
science, commerce and politics the long sought-for theory of money and
interest.
What I investigated was controversial
matter. Am I to blame that what I discovered must stimulate sweeping changes in
the social order ?
Summer 1911
Silvio Gesell
1. HOW THE NATURE OF MONEY IS REVEALED
If the inscriptions on coins are
supposed to furnish information about the nature of money, it must be admitted
that the information is scanty. The inscriptions run "10 Marks",
"10 Francs" or "10 Roubles", and if we fail to deduce the
nature of money from these words, the marginal comment "Mit Gott" or
"Liberté, Egalité, Fraternité" will hardly bring us
enlightenment.
If we compare the present German coins with the old
Prussian thalers it is noticeable that the inscription no longer states the
quantity of fine metal contained in the coins. As the indication of weight was
often a convenience (* The coin became a legally certified weight with
which anyone could check a shopkeeper's weights. The number of coins in a sum
of money could be determined by weighing, and conversely the weight of a given
number of coins in a sum of money could be determined by
counting) , its omission must have been intentional.
Why was it omitted ? Perhaps because the indication of weight as inscribed on
the Prussian thalers, suggested problems that could not be solved by the
monetary theories then prevalent theories that still hold the field today. By
suppressing the indication of weight on the new coins, the monetary authorities
at least avoided the danger of becoming involved in contradictions.
If "XXX Thalers are a pound of
fine silver" (* "XXX ein Pfund Fein" the inscription on
the old Prussian thaler) then a pound of fine silver is
XXX thalers, and the conception "thaler" becomes by this inscription,
by this inscription, simply a unit of weight reserved for silver, just as in
England special units of weight are used for certain commodities. (Diamonds,
for instance, are weighed by carats. In Neuchâtel a "mesure" of
apples or potatoes contains 20 litres and a "mesure " of grain 16
litres).
But if a pound of fine silver is
thirty thalers, if, as the inscription and the theory of the thalers assert,
the coin is identical with a certain weight of silver, how can silver be
demonetised ? How can the thirtieth part of a pound of silver be separated from
a thaler ? Is it possible from one conception to make two, namely
"silver" and "thaler" ? Before the year 1872 XXX were one
pound of fine silver, but after that date no longer so. If the latter statement
is possible (and it is a fact), the first statement can never have been true,
and the inscription on the coins represented to us as one conception what had
always been two conceptions - the thaler, and the material of which the thaler
was made. Only the weight of the thaler was equal to the thirtieth part of a
pound of fine silver, one pound of silver was necessary to make thirty thalers,
just as one pound of iron is necessary to make a horseshoe. A thaler was no
more a certain quantity of silver than a house is a pile of bricks, or a pair
of shoes is a yard of leather. The thaler was a product manufactured by the
German mint and quite distinct from silver. And, in spite of its inscription,
it was that as much before as after the demonetisation of silver.
The inscription made the thaler and
its material one and the same conception; the demonetisation of silver proved
the existence of two conceptions in the thaler. The withdrawal of the right of
free coinage of silver made the thaler transparent, so that through the silver
we saw its inner nature. We had believed that a thaler was merely silver, but
now we were forced to recognise that it had also been money. We had denied the
thaler a soul until, at its death, a soul left its body before our eyes. Up to
the withdrawal of the right of free coinage the subjects of Prussia had seen
only silver; now for the first time was revealed to them, in the conjunction of
silver and a law of the State, the existence of a peculiar manufactured
product, namely money.
Before the closure of the mints to
silver, the explanation of money given by theorists, both monometallists and
bimetallists, passed without contradiction; but the demonetisation of silver
showed that although coins are struck from metal bars, metal bars are not for
that reason coins.
"Coins are bars of metal the
weight and fineness of which are attested by the stamp."
(Chevalier, La Monnaie, p.39)
"Our German mark is simply the
name for 1/1395 of a pound of gold."
Otto Arendt.
No one saw that the free coinage of
silver, which in practice, of course, converted coins into bars of metal and
bars of metal into coins, was a law, a law made by the State and dependent upon
the will of legislators. No one saw that the thaler was a manufactured article,
a product of legislation, the silver being but the arbitrarily chosen raw
material of the thaler. The law made the thaler; the law umnade it; and what is
here stated of the thaler applies, of course, also to its successor, the German
mark. The right of free coinage of gold, which today in practice identifies
coins with gold. is the work of our legislators. The means which called this
right into existence may withdraw it. The right may be challenged at any time
if the opinion prevails that much which was taken for granted at the adoption
of the gold standard cannot stand the test of criticism. But if this happens,
if the mints are closed to gold - and the recognition of the notes of the
Reichsbank as legal tender is a first step in this direction - what is then the
relation of gold to our money ? Merely that, like copper, silver, nickel and
paper, it is used as a material in the manufacture of money; that is to say,
the relation that obtains between stone and house, leather and boots, iron and
plough. All trace of identity between money and the material of money would
disappear, and the distinction between gold and the mark would be as apparent as
the distinction between silver and the thaler, or between hats and straw.*
(* The theory of the gold standard
is at present in such confusion that it would be difficult to formulate it in
words. During the discussions which preceded the adoption of the gold standard
in Germany, the bullion theory in its crudest form still held the field.
"The value of money is the value it gives itself" said Bamberger;
"and gold forces itself forward as money by virtue of its properties as
metal."
How can we reconcile with this
assertion the fact that a few years later there appeared in Germany "A
Society for the Protection of the German Gold Standard" ? Did gold no
longer force itself forward as money by virtue of its properties as metal ? And
how did they come to speak of a "German" gold-standard ? If, as the
theory proclaims, the German mark is simply a certain weight of gold, it is no
more German than French, Russian or Japanese. Or does the mine or melting-pot
produce German gold, and how is this gold distinguished chemically from other
gold ? The title of this society, like the leaflets it publishes, contains
almost as many contradictions as words.
As an example of the state of
monetary theory in Germany as lately as ten years ago, it may be mentioned that
the appeal for membership of this society was signed by persons absolutely
without professional experience in monetary matters. Mommsen and Virchow gave
their names as indifferently as they would have given them for the foundation
of a society of goat-keepers. To them the monetary standard was a trifle, a
minor controversy to be decided offhand.)
We must therefore make a sharp
distinction between money and its raw material, between the German mark and
gold. Money and its material can never be considered one, for between them lies
the law which today unites, but tomorrow may separate them.
This distinction between money and
its raw material has always existed. It existed in a concealed form during the
free coinage of silver, and it exists in a concealed form with the gold
standard. But the distinction was revealed to everyone by the withdrawal, the
legal arbitrary withdrawal, of the right of free coinage of silver. The
distinction is equally apparent at the present day to those who have learnt
from the history of silver that the privileges of money are not inherent in any
metal, but can be transferred by law from one material to another.
But what do our legislators now
think when the currency question arises, when, for example, they take up a
German mark and ask themselves what it is ? Are they conscious that the German
mark has never been legally defined, that none of the current monetary theories
is compatible with the German monetary standard; that the promotion of the
German banknote to legal tender deprives the orthodox theory of the gold
standard of its last support; that the inscription upon our banknotes has
become nonsense ?
"The Reichsbank promises to pay
bearer at sight 100 Marks German Standard" - so runs the inscription, and
monetary theory declared that the banknotes can circulate only because of this
promise to pay. But the inscription has been implicitly cancelled by the
declaration that the notes themselves are legal tender. Yet the notes continue
to circulate. How is this possible ? The German peasant, for example, consented
formerly to sell his cow for 1000 silver marks which, if melted, would yield
only 400 marks worth of silver, and he is now willing to give his best horse in
exchange for a banknote which, both from a material and a theoretical point of
view, he must regard as a scrap of paper!
The inscription on the notes should
be brought into harmony with facts. Upon the notes as upon the gold and silver
coins should be written simply 10 - 20 - 100 marks. The rest of the
inscription, especially the word "pay", should be cancelled. This
word is used in promises to pay (promissory notes, bills of exchange and so
forth); and banknotes are not promises to pay. With promises to pay, especially
those of the State, the holder receives interest; but with banknotes the
opposite is true, the drawer, that is, the State, receives interest.*
(*With the present note-issue
of 10 billion marks, the State draws 500 million marks interest annually.)
The drawer or issuer of banknotes,
the State, is really the creditor, and the holder of the banknote is the
debtor. "The Reichsbank promises to pay the holder..." should be
changed to "This is 100 Marks." Banknotes in spite of their
inscriptions, can never be promises to pay. Credit paper without interest is,
under present conditions, inconceivable. But where, except in the inscriptions
on banknotes, do we find credit paper which costs the holder (creditor)
interest and brings in interest to the issuer (debtor), and at the same time
stands at par with real interest-bearing paper ? The German Imperial Loans,
which bring the holders 3 % interest annually, stand to-day (1911) at 84.5; the
German banknote, which costs the holder annually 4, 5, 6, 8.5 % interest,
stands at par. (*The Reichsbank discounts commercial paper
indifferently with its notes or with gold. It receives the same interest for
both. Yet it counts the gold as part of its capital and the notes as part of
its debts !) The law and present-day monetary theory
treat both kinds of paper alike, regarding each of them as promises to pay,
promises to pay made by the same debtor !
Legislation and pseudo-scientific
theory so full of contradiction must be swept away.
The cellulose of the banknotes, like
copper, nickel, silver or gold, is raw material for the manufacture of money.
All these different forms of money have an equal share in the privileges of
money and are interchangeable. They are all subject to the same effective
control of the State. Nobody buys papermoney with metal money of the same
State; one is simply changed for the other. The promise of payment on banknotes
should therefore be cancelled and the new inscription should run: "This is
ten, one hundred, one thousand marks German standard."
A banknote circulates at par with
metal money not because of, but in spite of, its inscription.
(* When paper falls below par, the
metal money, in accordance with Gresham's law, flows out of the country. The
paper-money then circulates alone.)
What forces, we now ask, make the
issuer of a banknote an interest-receiving creditor, and the holder an
interest-paying debtor ? Undoubtedly the miracle is due to the fact that the
note has the privilege of being money. We must therefore examine more closely
the nature of this privilege.
2. THE INDISPENSABILITY OF MONEY AND THE INDIFFERENCE
OF THE PUBLIC TO THE MONEY-MATERIAL
We owe it to the division of labour
that we produce more than we consume. Liberated thus from the compulsion of
immediate needs, we can devote time, provisions and work to the perfection and
multiplication of our means of production. Without the division of labour we
could never have accumulated our present wealth of means of production, and
without these means of production our labour could not have attained the
hundredth part of its present fertility. The greater part of the population
therefore owes its existence directly to the division of labour. Sixty millions
of the sixty-five millions in Germany exist solely through the division of
labour.
The products of divided labour are
not goods for immediate consumption by the producer, but wares, things useful
to the producer only as means of exchange. A cobbler, a carpenter, a general. a
teacher or a day-labourer cannot consume the immediate product of his own
labour. Even a farmer can do so only to a very limited degree. They must all
sell what they produce. The cobbler and carpenter sell their products to their
customers; the teacher and general sell their services to the State; the
daylabourer sells his services to his employer.
For most products the compulsion to
sell is absolute; for industrial products this is a rule without exceptions.
For this reason work is at once interrupted if a disturbance occurs in the sale
of the products. Will a tailor continue to make clothes for which he cannot
find customers ?
But sales, mutual exchanges of
products, are effected through the medium of money. Without the intervention of
money no wares can reach the consumer.
It is indeed not altogether
impossible to dispose of the products of the division of labour by barter, but
barter is so cumbersome and requires so many complicated preparatory
arrangements, that producers generally cease work rather than have recourse to
it.
Proudhon's banks for the products of
labour were an attempt to re-introduce barter. Modern department-stores would
serve the same purpose as these banks, for to establish barter I need only find
someone who will buy what I produce and pay with what I need in return. A
department-store which provides everything must of course buy everything. The
only necessary preliminary condition of barter would be here fulfilled, and
within the walls of a department store price-tickets might easily replace
money, on condition that all customers of the store were its purveyors and
vice-versa.(
(* Much confusion has been caused
in economic literature by the old fallacy that since price-tickets can be
substituted for money within the walls of a department-store, money is
therefore equivalent to these tickets.
Money is an independent commodity and
its price must be determined afresh, by the sale itself, every time it changes
hands.
When selling his products, the
receiver of money never knows what, in his turn, he will receive for the money.
That is something only to be determined by another sale, generally at another
time, in another place and with other persons. When price-tickets are used
instead of money, the amount and quality of the return service must be exactly
determined beforehand. This is true barter, and the price-ticket has the function
of a unit for calculation, not of a medium of exchange. To the cabinet-maker,
for example, who offers his chairs for sale in the department-store, it is a
matter of indifference whether the hat he intends to buy is marked 5 or 10 on
the price-ticket, for he will of course calculate the price of his chairs in
accordance with these figures. He reduces all the prices in the store to terms
of chairs.
In a socialistic State, with all
prices fixed by the Government, price tickets could replace money. Committees
of appeal and written complaints would take the place of bargaining between
individuals. The individual would receive for his product a priceticket and a
book for complaints. With an economic system based on money, bargaining about
the price takes the place of the committees and the book of complaints.
Differences of opinion are settled on the spot by the parties concerned,
without the intervention of the law. Either the transaction does not take
place, or the price is legally valid beyond the possibility of appeal.
Herein lies the distinction between
price-tickets and money.
The frequent confusion of
price-tickets and money in economic literature is, no doubt, mainly due to the
fact that both money and price-tickets can be made of any material, and that in
neither case has the material any influence upon prices, unless the material of
which money is made influences the quantity of money in circulation. Of late
years many economists have been ca ht in this pitfall-Bendixen, Liefmann and
many pupils of Knapp. Indeed the only investigators to escape it were those who
perceived the true nature of money (as revealed, for example, by the
demonetisation of silver described in the previous chapter).)
Wares must therefore be sold for
money; that is, there exists a compulsory demand for money equal in amount to
the stock of wares. The use of money is therefore as indispensable to all as
the division of labour is advantageous to all. The more advantageous the
division of labour, the more indispensable is money. With the exception of the
small farmers who consume almost all they produce, the whole population is
unconditionally under an economic compulsion to sell its produce for money.
Money is the essential condition of the division of labour as soon as the scope
of the latter exceeds the possibilities of barter.
But what is the nature of this
compulsion? Must all who wish to participate in the division of labour sell
their produce for gold (silver etc.), or must they sell it for money ? Money
was formerly made of silver, so all wares had to be sold for thalers. Money was
then divorced from silver, Yet the division of labour remained, the exchange of
products proceeded. It was not, therefore, silver on which the division of
labour depended. The demand for a medium of exchange caused by the wares was
not a demand for the material of the medium of exchange. The money need not
necessarily be made of silver. This is now proved, once and for all, by
experience.
But must the medium of exchange be
made of gold ? Does a peasant who has grown cabbages and wishes to sell them to
pay a dentist, need gold ? Is it not, on the contrary, a matter of complete
indifference to him, for the short time during which, as a rule, he retains the
money, of what substance the money consists ? Has he, as a rule, even time to
look at the money ? And can one not use this circumstance to make money out of
paper ? Would not the necessity of offering the products of the division of
labour, namely the wares, in exchange for money still exist, if we substituted
cellulose for gold in the manufacture of money ? Would such a transition cause
the abandonment of the division of labour, would the population prefer to
starve rather than recognise cellulose-money as the instrument of exchange
?
The theory of the gold standard
asserts that money, to serve as the medium of exchange, must have an
"intrinsic value", since money can exchange only as much
"value" as it contains, somewhat as weights can be raised only by
weights. But as cellulose-money has no intrinsic value, it cannot exchange the
wares, which have value. Nought cannot be compared with one. Cellulose-money
has no relation to the wares because it lacks "value" and is
therefore an impossibility.
The advocates of the gold standard
still hold to these arguments but in the meantime paper-money is quietly taking
possession of the world. It is true that the fact is still denied, the
theorists now speaking of "transferred" forces. Paper-money, they
say, is in use in every country, but it passes current only because it is
rooted in gold. If there were no metal money in existence, paper-money would go
to pieces like a sparrow's nest in a falling tower. The holder of paper-money
is promised gold, and this promise gives paper life. The "value" of
the gold is transferred to the paper by the fact or promise of conversion in to
gold. Paper-money is like a bill of lading which can indeed be sold, but loses
its value if the goods it represents disappear.
If the gold or the promise of
redemption is removed, all paper-money is reduced to waste-paper. Hence what
supports paper-money is merely a "transferred value".
This is about all that is said
against the possibility of paper-money, and the argument seems so conclusive
that almost everyone who trusts his own power of judgement denies, without
further consideration, the possibility of paper-money.
(The practical question whether
paper-money has advantages or disadvantages in comparison with metal money will
be considered later. We shall first answer the question whether cellulose can
serve as raw material for money, whether paper can be transformed into money
which, without depending on any particular commodity, especially gold or
silver, can circulate and perform the functions of a medium of exchange).
Money, it is stated, can only redeem
or exchange a value equal to its intrinsic value. But what is this so-called
value which bars the road to our understanding of paper-money - which declares
papermoney to be a hallucination ? For paper-money does exist and circulate in
many countries, and in some countries it circulates unconnected with metal money.
Where it exists, moreover, it demonstrates its existence in the form of the
millions that it brings to the monopolises of its manufacture. If paper-money,
judged by the theory of value, is a hallucination, these millions, judged by
the same theory, should also be regarded as a hallucination. The millions which
the German Government gains by the issue of paper-money, the 7% dividend of the
Reichsbank, are, according to the theory of value, a hallucination. Or should
the roles be reversed ? Is it the theory of value which is a hallucination
?
3. SO-CALLED "VALUE"
"German gold money has full
value, that is, its value as money is fully covered by its value as a
substance. Fine silver has only half the value of the coined thaler, and it is
the same with our silver money; it is undervalued, that is, its value as a
substance is less than its value as money." "Healthy States have always aimed at
money with an intrinsic value and a constancy of value which no one could
doubt."
(Helfferich, The Currency Question,
p. 11 and 46.)
"Gold and silver have always had a
universally recognised value. These metals were collected as a means of
providing purchasing power and served therefore as a store of value. Coins soon
became more than instruments of exchange; it became customary to measure the
values of all products by the value of money. Money became a measure of value.
We estimate all values by money. We become aware of all changes of value as
changes in the relation to the value of money. The value of money seems to be
the measuring-rod by which everything else is measured." (Otto Arendt, Leading Principles of the
Currency Question.)
In these controversial works by two
upholders of the metallic standard, one of the gold standard and the other of
bimetallism, the same fundamental importance is attached to "value."
There is no discussion of the question "What is value ?" or of
Gottl's critical inquiry "Does the term 'value' denote an object, a force
or a material ? The two opponents agree in accepting without question the
existence of a reality called value; in this fundamental matter they are
completely at one. Both use the word "value" in its various
connections without constraint, as if they had never beard of a "problem
of value," an "investigation of value" or a "doctrine of
value." Both consider the expressions "substance containing
value" (Wertstoff), "value as a substance" (Stoffwert),
"intrinsic value," "constancy of value",
"measure of value",
"preserver of value" (Wertbewahrer), "conserver of value"
(Wertkonserve),
"concrete value"
(Wertpetrefakt), "store of value" (Wertspeicher), "medium for
transfer of value"
(Werttransportmittel), as unambiguous. (*
"We must admit that gold is of great importance as a measure of value but
of less importance as a store of value (Wertspeicher)." I. A. F. Engel in
the Hamburger Fremdenblatt, February 1916. ) Both
authors tacitly assume that their readers will understand these expressions as
accurately as would appear to be necessary for the comprehension of their
books.
Now what does science say of this
expression "value" ?
Those who wish to know should read
Gottl's work: "The Idea of 'Value,' a Veiled Dogma of Political
Economy." Out of deference to his colleagues the professor does not openly
express what his book so clearly proves, that "value" is a hallucination,
a mere product of the imagination.
Marx, whose economic system is
founded upon a theory of value, uses almost the same words: "Value is a
phantom" - which does not, however, prevent him from attempting to conjure
up this phantom in three bulky volumes. Abstract from the worked-up substances (*
" Products of labour " in Marx's
words, but the expression is
misleading. What remains after this abstraction is not a property but simply
the history of the object-
the knowledge that a human being has worked upon it.) all material properties, says Marx, and only one property remains,
namely value.
Anyone who has let these words,
which occur at the very beginning of "Capital", pass without finding
anything suspicious in them, may safely read on. He cannot be further perverted.
But he who raises the above question: "What is a property separated from
its substance ? - he who endeavours to grasp this fundamental statement in
Marx's "Capital" and to clothe it in material terms, will either be
perplexed, or pronounce it to be nonsense and its point of departure an
illusion.
How can the human brain, which is
substance, grasp, record, classify and develop such a complete abstraction ?
What relations and transitions could we depend on in forming this idea ? To
comprehend something means to hold fast somewhere to its substance (comprehend
- prehendere), to have found already present in our mind objects (notions) of
comparison with which the new idea may come into relation. But an abstraction
divorced from every kind of substance and energy eludes the grasp of the
understanding as the cup eluded the grasp of Tantalus.
Marx's abstraction cannot be
demonstrated in any crucible. It disconnects itself from everything that is
material just as completely as from our understanding. But, strangely enough,
this complete abstraction has one "property" and this property is its
origin, its origin in human work. (* "Sieht man vom
Gebrauchswert der Warenkörper ab, so bleibt ihnen nur
noch eine Eigenschaft, die von Arbeitsprodukten." Marx, Kapital, Vol.1,
p.4.) It is indeed a peculiar property calculated to
convert language into jargon ! By this theory German money would have different
properties according to whether its material was treasure buried by the Huns,
or the gains of an honest gold miner, or the bloodstained millions wrung from
France. The origin of a product is part of its history, not one of its
properties; otherwise the assertion (not infrequently heard) that rareness is
one of the properties of gold, would also be correct. Yet this assertion is
sheer nonsense.
But if things are as here explained,
if Marx mistook the origin and history of products for their properties, it is
not surprising that in the sequel he saw strange visions and began to fear the
"phantom" he had raised.
I have quoted Marx, but the other
investigators of value are no whit better. None of them has succeeded in
separating out the "material of value", or in connecting the
"property of value" with any substance and so bringing it before our
eyes. "Value" soars above substance, intangible, unapproachable, like
Erlkönig in Schubert's song.
These investigators are unanimously
of Knies' opinion that "the theory of value is of fundamental importance
in economic science". But a theory so important in economic science should
be still more important in economic practice. How, then, can it be explained
that, in the economic life of the community or of the individual, the theory of
value is unknown? If this theory were really of such fundamental importance, one
would expect to find on the first page of every German ledger, after the words
"Mit Gott", the theory of value recognised by the firm and intended
to guide its business policy.
Should it not further be assumed
that every business failure is due to a defective foundation, that is, to an
incomplete or erroneous theory of value ?
If the theory of value is of
"fundamental importance" in economic science is it not an astonishing
fact that this so-called value is unknown in business life ? In every other
sphere of human activity science and life go hand in hand; in commerce alone
nothing is known of the principal theory of the science with which it is
connected. In commerce we find only prices, prices determined by demand and
supply. A business man speaking of the value of a thing means the price that
its owner would probably obtain under the given circumstances of time and
place. Value is therefore an transaction is converted into estimate which upon
completion of a measured quantity of exchange products, that is, a price. Price
can be measured to a nicety, value can only be estimated, that is the sole
difference. A theory of price must therefore apply equally to price and to
value. A separate theory of value is superfluous.
The expressions employed without
definition by the two writers upon monetary standard whom we quoted at the
beginning of the chapter have, in the current use of language, somewhat the
following meaning: Gold has a "property", its so-called value. This
"property", like the weight of gold, is inherent in its substance:
"value as a substance" (Stoffwert). This "property" is,
like the weight and chemical affinities of gold, inseparable from gold:
"intrinsic value", unchangeable, indestructible: "constancy of
value". Just as gold cannot be conceived without weight, neither can it be
conceived without value, weight and value are simply marks of substance. One
kilogram of gold is one kilogram of value: the value of the substance equals
the substance containing the value.
The presence of value can be
demonstrated on the weighing-machine: "fully-valued". Whether there
are any other processes for detecting value has not yet been established.
Litmus paper seems to be insensitive to value, the magnetic needle is not
deflected by it; it withstands the highest known temperatures. Indeed our whole
knowledge of value is still somewhat meagre, we only know that it exists. This
is unfortunate, considering the "fundamental importance" of value in
science and in life. New possibilities are, however, opened up by Dr.
Helfferich's discovery that with some "substances containing value"
(Wertstoffe) the value is not always proportionate to the Substance. The
substance containing the value is greater or smaller than the value of the
substance. He has discovered that the value of silver money is twice the value
of the silver used in its manufacture. Silver money thus contains value in
double concentration, and we have therefore an extract of value. This important
discovery gives a quite new insight into the nature of value. It shows that
value can be extracted, concentrated and, as it were, separated from its
substance. We may therefore hope that science will at some future date be able
to produce chemically pure value. But here again we have a contradiction. In a
roundabout way we have reached the theory of a paper-money standard. But this
theory is based solely on price and leaves the theory of value severely
alone.
Value is, then, a fantasy
(* In trade the word value means an estimate of the price
that can be obtained for a product. The value of a product is its probable
price, allowing for the state of the market. Stocktaking is dependent on "
value " in this sense.
Whether the estimate was correct
appears later in the selling price.), and this explains
the pronouncement of
Zuckerkandl: "In the theory of value almost
everything is still in the stage of controversy, beginning with the terminology
employed" (* Since the matter is of " fundamental
importance," it would have been well if Zuckerkandl had informed us what
the word " almost " is meant to exclude. Is the only
non-controversial matter in the theory of value the alphabet used to write it
down). And, of Boehm-Bawerk: "In spite of
numberless efforts, the theory of value was and is one of the darkest, most
confused and controversial parts of our science."
Fantasies are cheap. Examined by
themselves they may form a closed system and so appear acceptable to our
understanding. Like miracles they are above nature, they grow and thrive in the
brains of men. Translated into reality, however, they at once come into
collision with facts. Fantasies have no place in the world of reality; they
vanish into thin air. And nothing is more real than economic life, whether of
the community or of the individual. Matter and energy - anything unconnected
with these can be nothing more than a cheap product of the imagination. Such is
value. A science sprung from the illusion of value can only engender illusion
and is doomed to sterility. Elsewhere science fructifies practice, elsewhere
science is the pole-star of practice; but practical economic life is even today
left to its own devices. Science is here inarticulate, since beginning with the
terminology employed, almost everything is still in the stage of
controversy". The science based upon doctrines of value possesses as yet
no theory of interest, no theory of wages, no theory of economic rent, no
theory of crises and no theory of money, although attempts to construct them
have not been lacking. It is incapable of giving the scientific explanation of
the simplest daily occurrences, it can foresee no economic event, nor can it
predict the economic effect of any legal measure (such as for instance, the
possibility of shifting the burden of the wheat-duty or land-tax).
Neither merchant, nor speculator,
nor banker, nor employer, nor journalist, nor deputy, nor statesman, can avail
himself of this science as weapon or shield; no single German commercial
undertaking, not even the Reichsbank, is guided by theoretical considerations.
In parliament the science that has taken value as its foundation is passed by
unnoticed, not even one of its theories can boast of having influenced
legislation. The characteristic of this science is its complete sterility.
Only among those whom fate has
excluded from commercial life so that they know of commerce, speculation,
profit, merely by hearsay - only amongst wage-earners has the theory of value
found disciples. The wage-earners allow themselves to be guided in practical
affairs, particularly in their political activities and their wage-policy, by a
theory of value. This phantom haunts the brains of our socialists. In the
rayless depths of the coal-mine, in the roar and dust of the factory, in the
smoke and vapour of the furnaces, the naive belief that something called value
really exists and is of practical importance has gained a hold on men's
minds.
If this sterility were the only
drawback of the matter, we might put up with it. Thousands of our best
intellects have wasted their time in futile theological speculation, so if
their number is swollen by a few dozen men who cannot extricate themselves from
speculation upon the idea of value we may lament the waste, but the loss, in a
nation of many millions, hardly amounts to much. The belief in value costs us,
however, more than the profitable co-operation of these men. For though the
doctrine of value is completely sterile, something is still hoped from it by
many who but for this hope would themselves devote their labours to more
fruitful endeavours in this sphere. The doctrine is thus pernicious by its mere
existence.
There are in Germany many business
men of judgement and intelligence, men alert for theoretical knowledge in every
branch of human activity. But these men anxiously avoid theoretical
explanations connected with their calling (for such are economic questions in
relation to the business man). Business men are the first to feel the effects
of mistaken legislation; they have to pay for its consequences, or at least
temporarily advance the money to meet the costs; they are buffers between
legislation and the economic life of the community, and always in danger of
being crushed in some crisis; yet they anxiously shrink from taking part in
discussion of the theoretical problems of their pursuit. For what reasons ? For
two: first, these men, educated in the approved German mental discipline,
cannot shake off their belief in authority; they think that science is well
cared-for in the hands of our professors.
(* Whether this opinion is
well-founded may be judged from the following quotation (Bund der Landwirte,
7-8-1915): "Ruhland, from the start, entertained the idea of furnishing
the scientific theories necessary for putting agriculture, industry and commerce
permanently upon a sound practical basis. He therefore rejected from the
beginning the interpretation of the task of economic science laid down by
Roscher and Schmoller: 'Economic science is concerned with what exists or has
existed, but not with what should exist' (Roscher). 'Science is not concerned
with influencing directly the settlement of the questions of the day. That is
the task of the statesman' (Schmoller)."
Schmoller and Roscher had quite
rightly recognised that we have as yet no true economic science but only the
economics of a class-State and that the study of the anatomy of this State is
no task for a university. But unfortunately they refused to draw the final
conclusion from this recognition; that the study of the economics of a
class-State is no business for a university either.
What a mischievous germ of
corruption such a science is for the universities is expressed by Professor
Brentano (Der Unternehmer, p. 6): "In the teaching of economics a truth is
recognised only as long as it coincides with the interests of a powerful party,
and then only as long as this party remains powerful; if another party becomes
more powerful, the most erroneous doctrines are rehabilitated if they appear to
serve its interests.")
Secondly, with their clear and sober
understanding they cannot comprehend the theory of value expounded by the
professors, or even gasp the subject-matter of this theory, and they are
ashamed to confess in public this intellectual incapacity.
These sceptical observers, among
them many Jewish stockbrokers with the keen intellects of their race, are not
to be put off with empty phrases of almost manifest absurdity. Only the fear of
making themselves ridiculous prevents them from declaring publicly that the
subject-matter of the theory of value is invisible to them, like the king's
shirt to the child in the fairy-tale.
Incalculable mischief has been done
to both the practice and the science of economics by this flimsy product of
illusion. A science sprung from a phantom of the brain has caused the whole
nation to mistrust its own power of understanding and prevented the
investigation of the laws of the people's well-being from becoming the people's
science.
A currency administration guided by
a theory - any theory - of value is doomed to sterility and inactivity. For
what can be administered in the "intrinsic value" of gold ? The
illusion of value precludes progress in matters of monetary administration. No
other explanation is needed of why the monetary system of today is the monetary
system of 4000 years ago. It is the same, at least in theory; in practice we
have gone over to a paper-standard, noiselessly and stealthily, it is true,
since the fact must be concealed. For if our professors hear about it, their
cries of alarm might cause immense damage - paper-money, money without
"intrinsic value", being, in their opinion, fundamentally impossible
and therefore certain to collapse.
4. WHY MONEY CAN BE MADE OF PAPER
The Fact
Paper-money, such is the contention,
is impossible, since money can exchange only its own "intrinsic
value", its "value as a substance", and paper-money has no
"value as a substance".
In striking contradiction to this
contention stands the plain fact that the enormous present-day exchange of
products is effected throughout the world almost exclusively with paper-money
or with banknotes only partly covered by gold. One can travel around the world
in any degree of latitude and spend or receive nothing but paper-money.
Germany, England and Turkey are, as far as I know, the only civilised countries
today with a preponderatingly metallic circulation; elsewhere gold coins are
met with only exceptionally.
(* Since this was written in 1907,
the last gold coins have disappeared from circulation.)
In Norway, Sweden, Denmark, Austria,
Holland, Belgium, Switzerland, Russia, Italy, France, Spain,
Greece, the United States, Canada,
Mexico, Brazil, Argentina, Paraguay, Chile, Australia, New Zealand, British
India, Japan, the Dutch Indies, that is, over almost the whole world, commerce
is conducted with paper-money or banknotes and so-called subsidiary or token
coins. Those who want gold must travel to the capital and ask for it at the
counters of the Bank of Issue. Even then they often receive the gold only in
bars and upon payment of a premium. In ordinary business transactions nobody
demands payment in gold in any of these countries; indeed, in many of them,
such as Argentina, Uruguay, Mexico and India, there are no gold coins in the
national monetary units.
If we buy in Germany, with gold
coins, drafts on any of these countries, the drafts are always paid in
paper-money or, if we raise no objection, with a bag of silver coins, that is,
in coins which, to use Helfferich's terminology, would lose half the
"substance of their value" (Wertstoff) if struck with a hammer.
These banknotes do indeed promise
the holder, according to their inscription, a certain quantity of gold, hence
the general opinion that they are not paper-money. But this circumstance is not
a sufficient explanation of the fact that for one rouble, rupee or dollar in
gold, there exist three or more roubles, rupees or dollars in paper-money.
Two-thirds of the banknotes in circulation are not covered by gold, two-thirds
of the banknotes must therefore owe their existence and properties to causes
other than the promise of convertibility. Somewhere or other, in commerce, on
the stock-exchange or elsewhere, forces must exist which prevent the holders of
banknotes from taking advantage of the promise of convertibility. Otherwise the
fact would be inexplicable that for 10 - 20 - 100 years the creditors of the
Bank of Issue (the holders of the notes) make no use of their rights. Forces
must also exist which for generations keep the coins out of the
melting-pot.
I shall soon trace these forces to
their origin. For the moment I only wish to establish their existence, to
prepare the reader for the assertion that in all these countries, in spite of
the inscriptions on the banknotes, the currency is paper, not metal money.
If the State prints on a piece of
paper:
"This is 100 grammes of
gold",
all the world believes the assertion, and such a scrap
of paper may circulate for years at par with massive gold. Sometimes it may
even bear a premium in relation to gold. (* In Sweden
in 1916, 105 kronen in gold were paid for 100 kronen in paper-money. The
substitute products of the war were dear and bitter. Only the substitute for
gold, paper-money, failed to make us sigh for peace.)
But if the same State, on a similar
piece of paper, promised a milch cow, all the holders of such papers would
arrive next day with a halter for the cow.
Now if a piece of paper can for
generations, for an interminable series of people in the most varied economic
situations, represent completely a certain quantity of gold, whereas the same
piece of paper could not represent for twenty-four hours a cow or any other
article of use, this proves that, for all the essential properties coming into
consideration, paper and gold coin are for all men interchangeable, that is,
indifferent. Gold discs or paper in the form of money perform for all men the
same services. Further, if the promise of conversion were the covering of the
banknotes which keeps them in circulation, if banknotes should be regarded
simply as promises to pay, if the issuer were debtor and the holder creditor as
with bills of exchange, then the Banks of Issue would have to pay their
creditors, that is, the noteholders, interest. Interest is paid by the debtor
upon every other kind of promise to pay, without exception. But with banknotes
the relation is inverted. Here the debtor, the bank, receives interest, and the
creditor, the holder, pays interest. Banks of Issue can consider their debts
(banknotes, right of issue) as their most valuable capital. To produce this
miracle, to reverse so completely the relation between debtor and creditor,
extraordinary forces must be at work in banknotes removing them from the
category of promises to pay.
Furthermore, if banknotes are to be
considered as promises to pay by the State, the fact remains inexplicable that
these promises to pay, only one-third covered, without a sinking-fund and
bringing the holder no interest, are usually at a premium in comparison with
the ordinary loans of the State which bear interest and are covered by the
power of the State to levy taxes. A German 100-mark note, for example, upon
which interest is paid by the holder, is equal to 117 marks of the German
Imperial Loan which brings in 3% interest to the holder.
Relying on these facts, therefore,
we deny that it is the promise of conversion that gives life to banknotes and
ordinary papermoney. We assert that forces must exist elsewhere in commerce
which play the part at present erroneously assigned to the metal reserve
(so-called covering), or to the promise of conversion. These forces, hidden for
the moment, which turn a promise to pay (banknote) into capital, and force the
creditor to pay interest to the debtor, are, we maintain, strong enough by
themselves to assure the functioning of money in the market. Relying on these
facts we assert that money can be made out of paper which, without any kind of
promise of conversion, without resting on any particular commodity (gold, for
example), bears only the following inscription:
"One Dollar" (or
"Mark", "Shilling", "Franc", etc.)
or "This Piece of Paper is in
itself one Dollar."
or "This Piece of Paper is in
commerce, in State-Treasuries and in Courts of Justice legal tender for
100 Dollars." or, to express my
meaning, if not more clearly, at least more drastically:
"He who presents this Piece of
Paper for redemption at the Bank of Issue will receive 100 Lashes (negative
promise of payment).
In the markets and shops of the
country, however, the holder will receive in goods as much as demand and supply
allow him; that is, as much as, by bargaining, he can make his own."
I think that I have here expressed
myself with sufficient clearness and that there can be no further doubt about
what I mean by the expression paper-money.
Let us now investigate the forces
which make it possible that men will scramble for papers with any of the above
inscriptions, that men will work in the sweat of their brow to earn such
papers, that men will give their produce, goods with "intrinsic
value", in exchange for such papers, that men will accept bills of
exchange and mortgage deeds payable in such scraps of paper and hoard them as
so-called "stores of value", that men will "eat their bread in
sorrow and weep their nights away" brooding upon how they can obtain these
scraps of paper to meet an expiring draft - the forces which expose to bankruptcy,
sequestration and loss of honour, men who fail to meet their liability to
deliver, at a given time and place, papers with any of the above inscriptions -
the forces, finally, which allow men to live grandly, year in, year out,
without work or loss of property, because they have placed these papers
somewhere as capital.
What is the hidden source from which
such a scrap of paper - paper-money, the money of John Law and other
paper-money swindlers, the abhorrence of orthodox economists and little minds -
draws its force ?
Explanation of the Fact
If a person needs and wishes to
obtain something, and if the desired object happens to be in the possession of
another and cannot otherwise be obtained, he will usually be forced to offer
some of his possessions to induce the possessor of the desired object to
surrender it. That is, he will bring the object into his possession by giving
something in return. This he must do even if the object he desires is useless
to the other. It suffices for the possessor of the object to know that someone
needs it or, still more, is compelled to obtain it, for him to refuse to give
it for nothing; indeed, a man will often keep or gain possession of an object
solely because he knows that behind him comes another person who can employ the
object usefully. And the more urgent is the latter's need of the object, the
higher will the owner screw up his demands.
What we have here said seems at the
present day so natural and so obvious that many persons will consider its expression
superfluous; indeed, so far as I know, this is the first time the statement
occurs in a piece of economic writing. Yet this is the fundamental law of
present-day economic life, of commerce, of the economic relations between the
individuals composing a State and between these individuals and the State.
This "epoch-making
discovery" is not more stupid and obvious than Newton's discovery of the
law of gravitation, and it has the same fundamental importance for economic
science as Newton's law for physics.
In gaining possession of an object
which is useless to us, but which we assume or know will be sought after by
others, we can have only one purpose in mind, namely to embarrass others and
then to exploit their embarrassment. Our purpose is usury, for to bring someone
into embarrassment in order to exploit his embarrassment, is to practice
usury.
The fact that the exploitation is mutual may possibly
extenuate the offence, but it is nevertheless true that exploitation of our
neighbour's need, (*One must not always picture shivering beggars in
this connection. Rockefeller is in " embarrassment " when
fuel-substitutes interfere with the sales of petroleum. Krupp is in
embarrassment when the expansion of his factories requires the purchase of a
peasant's field. ) mutual plundering conducted with all
the wiles of salesmanship, is the foundation of our economic life. Upon this
foundation is built the whole fabric of exchange; it is the fundamental
economic law which automatically regulates the relations in exchange, that is,
the prices of all commodities. Remove this foundation and our economic life
would collapse. The only remaining method of exchanging commodities would be
the Christian, socialistic, communistic, fraternal method of mutual
giving.
Are examples necessary in
explanation ?
Why does the post-office charge two
cents for a letter and but one cent for a printed packet, although the service
rendered is the same ? Simply because the letter-writer is likely to have
urgent reasons for sending the letter, whereas the dispatch of the printed
packet would often be omitted if postage were higher. The letter-writer is
under compulsion, the sender of printed-matter is not, and solely for this
reason the letter-writer must pay double the postage.
Or why are chemists' shops in
Germany with a stock of 10,000 marks sold for half a million ? Because the
privileges granted to the chemist by the State allow him to charge higher
prices for medicines than would be possible with unrestricted trading. (This
explanation holds good even if we admit that, in return for the privileges, the
State requires scientific training).
Or why does the price of wheat often
rise in Germany in spite of plentiful harvests ? Because the import-duty
excludes competition and the German farmer knows that his countrymen must buy
his product.
It is indeed said that prices are
raised or lowered by "the state of the market". We try to ignore the
personal motive, the action, and to find a scapegoat to bear the odium of
usury, by saying that prices are determined by demand and supply; but how could
demand and supply and "the state of the market" exist without the
living agents who make the separate transactions ? It is these living agents
who cause the fluctuations of price, and the condition of the market is their
tool. And who are these agents but ourselves - the whole population? Everyone
who brings something to market is animated by the same spirit, namely, to
obtain the highest price that the state of the market allows him to obtain. And
everyone seeks to exculpate himself by speaking of something impersonal, the
state of the market, whereas in reality everyone is exculpated by the fact that
the exploitation is mutual.
Anyone, it is true, who asserts with
Karl Marx that commodities exchange themselves (in proportion, be it noted, to
their "intrinsic value") is spared the necessity of practising usury;
he need have no scruples in pressing his debtors or in letting his workmen go
hungry. For the usury is caused, not by him but by his property. It is not he
who exchanges; his shoe-polish exchanges itself for silk, wheat or leather. (*
Marx, Capital, Vol.1, p.3) The product makes the deal
and makes it by reason of its "intrinsic value".
But those of us who are unable to
grasp this ghostly property of commodities called value, and who therefore
regard the exchange of commodities as an action, and the commodities and state
of the market as accessories of this action, will be able to discover no other
motive for such action than the desire common to all owners of commodities, to
give as little as possible and to receive as much as possible. In every
exchange, from wage-negotiations to dealings in stocks, we observe that both
parties seek information about the state of the market. Sellers try to find out
whether buyers urgently require their commodities, and they are especially anxious
to conceal the fact that they are compelled to sell immediately. In short, we
soon convince ourselves that the principles of usury are the principles of
commerce in general, that the difference between commerce and usury is a
difference in degree, not a difference in kind. The merchant, the workman, the
stock-broker have the same aim, namely to exploit the state of the market, that
is, the public at large. Perhaps the sole difference between usury and commerce
is that the professional usurer directs his exploitation more against specific
persons.
Therefore I repeat: the effort to
call out the largest possible return service for the smallest possible service
is the force that directs and controls the exchange of commodities.
It is necessary to state this with
absolute clarity, since nothing but the recognition of this fact can enable us
fully to understand the possibility of paper-money.
Let us now assume that Jones has
somehow obtained possession of a piece of paper-money with which he can satisfy
none of his physical or spiritual needs, and that Robinson, to whom, for some
reason, it is useful, asks Jones to let him have it. The knowledge we have just
gained makes it clear that Jones will not hand over the piece of paper for
nothing.
But the mere fact that it cannot be
had for nothing would in itself transform the paper into papermoney, since all
that we expect of paper-money, for the moment, is that it should cost more than
the paper of which it is made. It must not be possible to obtain paper-money
gratis. Money fulfils its function because there is always someone looking for
it and forced to give something in exchange.
(*Orthodox and socialistic economic
theory deny the possibility of this return service, and must continue to do so,
for the return service would stamp the surrender of the paper as an exchange,
and an exchange would, to use the terminology of these theories, presuppose
"intrinsic" or "exchange" value. But we have assumed that
the piece of paper was in itself without
"intrinsic" or
"exchange" value. (It is immaterial, for the moment, whether we can
connect these terms with reality). The orthodox and socialistic doctrines of
value assert that a commodity can exchange only for the amount of value it
contains (exchange value) and if the pieces of paper-money in the hypothesis
have no exchange value, the exchange, the price given, is an impossibility. For
such an exchange there is, according to the doctrine of value, no "measure
of value" to "measure" the return service. Paper-money and
commodities are incommensurable quantities.)
To account for the possibility that
paper may become paper-money, it only remains to be proved that Robinson may
actually find himself compelled to obtain the piece of paper-money in the
possession of Jones. The proof is not difficult.
The products of the division of labour (*
By division of labour we mean here work which results in objects of exchange,
that is, wares, in contrast to primitive economic production which aims at the
immediate satisfaction of needs. The industrial division of labour, the
multiplication of the processes by which single products are manufactured, is technical
division of labour and should not be confused with the economic division of
labour.) wares, are from the outset destined for
exchange, that is to say, they have for their producers the same characteristic
that money has for an of us - they are useful only as objects of exchange. It
is only the prospect of exchanging his products, his wares, for other wares
that causes the producer to abandon the primitive form of production and to
adopt the division of labour.
But if wares are to be exchanged for
wares, a medium of exchange, what we call money, is a necessity. The only
alternative to a medium of exchange is barter, and barter, we already know,
becomes impracticable after the division of labour has developed to a certain
degree. It is easy to see that barter is possible only under quite primitive
economic conditions.
Money, a medium of exchange, is the
essential condition of a highly developed division of labour, of the production
of wares. For the division of labour a medium of exchange is indispensable.
But the nature of a medium of
exchange is such that the free production of the medium chosen must by some
means be excluded. If everyone were free to manufacture money according to his
own system, the variety of the money produced would disqualify it for the
purpose it has to fulfil. Everyone would declare his own particular product to
be money, and we should be back again to barter.
The necessity for unity in the money
system appears from the fact that not even a double standard was considered
workable. Or suppose that agreement had been reached to adopt gold as the
standard, but that the manufacture of the coins had been left free. Coins of
every shape, weight and degree of fineness would then be in circulation
together - an impossible situation. (Such "agreement" is in itself a
State action, for everything upon which we can reach agreement is the material
out of which the State is built).
By whatever method the unrestricted
manufacture of money is excluded; whether the result has been obtained by legal
enactment or by difficulties in the production of the money-material (gold,
cowryshells, etc.), whether the regulation of money has been conscious or
unconscious, whether the people willed it in solemn assembly or simply yielded
to the thrust of advancing economic forces - in any case we have here an action
of the people, and what is such a unanimous action of the people other than a
law, an action of the State? Thus the medium of exchange has always the
character of a State institution and this is equally true of coined metal,
cowry-shell or banknote. The moment a people has come - no matter how - to
recognise a certain object as money, this object bears the stamp of a State
institution.
The choice is, therefore, either
State money or no money. Freedom of enterprise in the manufacture of money is
an impossibility. This is too obvious to require further explanation.
(* Where natural products serve as
money, unrestricted production is eliminated by the choice of a money-material
(cowry. gold) which at that time and in that place cannot be produced in
unlimited quantities or cannot be produced at all.)
It is true that at present the
production of the money-material is unrestricted, and that the right of free
coinage in practice converts the money-material into money. But this is not an
argument against the above theory of money; for, in spite of the right of free
coinage, the money-material is not in itself money, as is strikingly shown by
the history of the Prussian thalers.
As the right of free coinage of gold
is granted by law, it is not a property of gold, and it can at any moment be
withdrawn by law (closure of the mints to silver).
But in any case the production of
the money-material is at present only nominally unrestricted. The natural
difficulty of gold production makes this freedom illusory.
Nor is this theory of money
incompatible with the fact that in many undeveloped countries (in the United
States, for instance, during the colonial period) powder, salt, tea, hides,
etc., were used as media of exchange. Here we have barter, not money. The salt,
tea, powder, etc. received in exchange for the pioneer's produce were used in
his household. These wares did not circulate, they never returned to their
starting-point, the port at which they were unloaded: they were bought because
of their material properties, and consumed. They had to be continually replaced
by new wares. But it is characteristic of money that it is bought, not because
of its material, but because of its function as a medium of exchange; it is not
consumed, but merely used as a medium of exchange. Money describes a circle around
which it continually moves; it returns repeatedly to its starting point. If a
package of Chinese tea is to be considered as money, it must have returned to
China after circulating for years through the American colonies, just as a
silver dollar of the United States may, in the course of trade, reach China,
circulate for years there and, again by way of trade, return to Colorado to be
paid out as wages to a miner and to descend once more into the mine from which
it came. Furthermore, the price of the package of tea continually increased in
proportion to the distance separating it from the port of entry, all charges
for transport, interest and middleman's profit being added to its price,
whereas the silver dollar could travel ten times around the world and be given
back to the miner for the price for which he originally supplied it . In most
countries coins 100 years old, or more, are in circulation. Such a coin may
have changed hands 100,000 times, yet no one in this long chain of holders has
ever thought of consuming, that is, melting it on account of its content of
gold or silver. For 100 years such a coin has been used as a medium of
exchange; for 100,000 holders it has been not gold but money; not one of the
holders has had any use for the money-material.
This, then, is the criterion of
money, that the holder should be indifferent to the money-material. Solely for
this reason, solely because of this complete indifference, can poisonous,
verdigris-coated copper coins, worn silver coins, handsome gold coins and gaily
printed slips of paper circulate side by side at parity.
The cowry-shells used as a medium of
exchange in the interior of Africa have a somewhat greater resemblance to
money. The shells are not consumed, the purchasers are much more indifferent to
them than are the purchasers of tea and powder. They circulate and so do not
need to be continuously replaced. Occasionally they may even reach their point
of departure, the coast. Here and there they may, indeed, be diverted from
their function as money and used as ornaments by the women, but their economic
importance is independent of this use. Cowry-shells - if not expelled by some
other medium of exchange - would certainly continue to be used as money, even
if they went out of fashion as ornaments. They would then be a true medium of
exchange like our copper, nickel and silver coins, or our banknotes, which can
be used only as media of exchange; they would be true money. And they could,
like our money, be called social or State money, the word "State"
being applied in a restricted sense to such undeveloped countries. The State
monopoly of the manufacture of money would be here preserved by the
impossibility of producing in Central Africa a kind of shell found on the
coast, thousands of miles away. (The shells can be obtained, like gold in
Europe, only by way of trade, by exchange.)
But if a medium of exchange is the
necessary condition for the division of labour, and if such a medium of
exchange is conceivable only as State money, as money produced or controlled by
the State, by means of special currency laws, what choice has the producer who
brings his wares to market and finds no other money than pieces of paper - the
State having decided to produce no other form of money than paper-money ?
If the producer rejects this money
(say because it is not in harmony with the orthodox or socialistic theory of
value), he must also give up hope of exchanging his produce and return home
with his unsold potatoes, newspapers, brooms or whatnot. He must give up his
trade and the division of labour, for he can buy nothing if he sells nothing,
that is, if he refuses to accept the money circulated by the State. The
producer's strike would came to an end in 24 hours; for 24 hours only could he
persist in his theory of value and his arguments about the fraudulency of
paper-money. For hunger, thirst and cold would then have done their work and
forced him to offer his wares in exchange for paper-money inscribed by the
State, let us say, with the following inscription:
"Anyone presenting this at the
Bank of Issue will receive 100 Lashes, but in the markets he will receive as
much merchandise as demand and supply permit him to obtain."
Hunger, thirst and cold (to which we
may add the tax-gatherer) force all those who cannot return to primitive
production, all those who desire to preserve for their work the advantages of
the division of labour (and that, in a modem State, means almost everyone), to
offer their products for the paper issued as money by the State. That is, all
these persons are forced to create, with their wares, a demand for paper-money,
and because of this demand the possessors of such paper will not surrender it
for nothing. They will ask as much for it as the market conditions allow them to
obtain.
Paper has therefore been transformed
into paper-money:
Because the division of labour has
great advantages.
Because the division of labour
creates wares, that is, commodities useful to their producers only as objects
of exchange.
Because at a certain stage in the
development of the division of labour, the exchange of wares becomes impossible
without a medium of exchange.
Because a medium of exchange, from
its very nature, is only possible as State money, or at least social
money.
Because the State, according to our
hypothesis, has provided no other money than paper-money. Because all possessors of wares are faced
with the alternative either of accepting the paper-money provided by the State or
else of abandoning the division of labour. And finally:
Because the holders of this
paper-money do not surrender it for nothing when they see that the producers
are in difficulties and must offer their wares for this paper.
The proof that money can be made of
cellulose is now complete, and I could at once proceed to the next question,
"How much produce will, or should, the piece of paper-money obtain for its
holder ?" But the importance of the subject induces me to take account of
the prejudices opposed to the idea of paper-money and to expose the
fallaciousness of the more prominent among them. By this course I hope to gain
the confidence of those judicious or cautious readers who are ready to admit
that the proof given above is logically deduced, but who fear that the premises
may be incomplete and the proof invalidated by some fact not yet
considered.
(* I again take the precaution of
mentioning that up till now I have discussed only the possibility of making
money out of paper. The question whether such money can have any advantages over
metal money remains quite untouched and will be treated later.)
Like others who have wrestled with
the problem of paper-money, I could have cut a long story short by saying that
the State could demand the payment of taxes, fines, etc. in paper-money.
If the State, for example, sold
postage-stamps, tickets on the State railway, timber from the State forests,
salt from the State mines only for paper-money manufactured by it, if
import-duties, tithes, education-rates, could be paid only in such paper,
everyone would of course consider this paper something highly valuable and
would refuse to part with it for nothing. The State would thus promise the
holders State services instead of gold, that is, many services instead of one
service. It would then be these services that give life to paper-money.
But this explanation, as will appear
later, would soon confront us, like all other paper-money reformers and
paper-money manufacturers, with insoluble problems. He who is unaware of the
real foundation of paper-money, as given in the seven points above, can trace
back no single economic phenomenon to its final cause.
Among the most conspicuous
"proofs" of the impossibility of paper-money is the assertion - we
may call it the chef-d'oeuvre of the bullionists - that wares can be exchanged
only for wares, since no one would give a useful object for a useless one, a
scrap of paper.
This argument seems so conclusive
that, as far as I know, all paper-money theorists have prudently avoided
dealing with it, probably because they were unable to see through the fallacy
involved. With its aid the advocates of a metal standard have always succeeded
in proving a priori the impossibility of paper-money and in repelling
scientific inquiry from this field.
"Wares can be exchanged only
for wares." That is undoubtedly true, but what is a ware ? A ware is the
product of the division of labour, and to their producers the products of the
division of labour are useful only as media of exchange. They are of no immediate
use, as we have already shown. What could a farmer who had grown 100 tons of
potatoes, or a cotton spinner employing a million spindles, do with their
products but sell them, that is, use them as objects of exchange ?
After this definition of terms the
assertion that wares can be exchanged only for wares requires a very different
interpretation. All it implies is, first (by the use of the term
"ware") that the possessor or producer of the thing to be exchanged
should have no use for it.
Secondly it implies that the thing
for which the ware is exchanged should also be useless to its possessor - and
is not this true of the piece of paper-money ? Is not this slip of paper, apart
from its property as money, an absolutely useless object ?
The assertion that "wares can
be exchanged only for wares" becomes therefore a proof that papermoney is
possible, not a proof that it is impossible. It is evidence against, not for,
the orthodox theory of metallic money.
If we turn now to the reason given
for the assertion: "For no one would give a useful object for a useless
one" we at once discover a fallacy. The assertion itself refers to wares,
and wares are always useless to their possessors: but the explanation refers
not to wares, but to useful objects, to goods for use.
Applied to our example, the above
argument runs as follows:
"Potatoes can be exchanged for
thread, since potatoes are useful to the farmer and thread to the cotton
spinner by virtue of their intrinsic value." This is obviously untrue.
What possible immediate use, we repeat, can the cotton spinner find for the
enormous quantity of thread ?
But if the explanation given is
untrue, that does not impair the truth of the assertion itself that "wares
can be exchanged only for wares". In order to make paper-money conform to
this contention, we must prove that it is just as much a ware as the wares
which it helps to exchange. We wish to leave no room for misunderstanding; we
claim for the piece of paper, for the gaily printed leaflet with the absurd
inscription:
"100 Lashes will be paid at
sight by the National Currency Office to the bearer of this paper, but in the
markets he will receive for it as much produce as by bargaining he can make his
own", of a ware, a ware obviously of enormous importance. We admit for
paper-money no borrowed, stolen or transferred properties. Above all we must
not recognise the piece of paper-money as a ware simply because the State
promises its holder some service unconnected with its function as money. On the
contrary, we wish to persuade the reader to endorse the apparent paradox:
"Paper-money is purely a ware,
and it is the only object which, even as a ware, is of use to us."
To be regarded as a ware, an object
must possess the following two characteristics:
It must be in demand, that is,
someone must want the object, or be forced to obtain it, and for this reason be
prepared to give another ware in exchange for it.
To create this demand the object
must of course be of use to the buyer, otherwise it is not sought for and
purchased.
Fleas, weeds and stenches are for
this reason not wares, nor are objects without an owner. But if an object is
useful (useful to the buyer, not to the seller), and if it cannot be obtained
gratis, all the conditions are fulfilled that make it a ware.
That paper-money satisfies the first
condition we proved when we demonstrated that money, State money, is an
absolute necessity for the division of labour, and that all possessors of
wares, are, by the nature of their possessions, compelled to offer their wares
for paper-money, that is, to create a demand for paper-money, if the State
provides no other form of money. If Germany demonetised gold as it demonetised
silver, and substituted paper for gold, the owners and producers of wares would
be compelled to accept this paper-money. One and all would have to create with
their produce a demand for the paper-money. Nay more, the demand for this
paper-money would be exactly as large as the supply of wares awaiting sale,
which in turn would depend upon the production of wares.
Paper-money therefore plainly
fulfils the first condition. Petroleum, wheat, cotton, iron have also, most
certainly, the characteristics of wares; they are among the most important
staple articles on the market. Yet the demand for these articles is not so
unconditional as the demand for paper-money. Everyone today who carries on a
trade and produces wares, that is, everyone who has given up primitive
production and takes part in the division of labour, creates with his products
a demand for a medium of exchange. All wares without exception are the embodied
demand for money - for papermoney if the State provides no other form of money.
But not all owners of wares buy iron, petroleum, wheat with the money obtained
for their products. For iron, petroleum and wheat there are many substitutes,
whereas for money the only substitutes are primitive production and barter, and
these substitutes would only come into consideration if 90% of the present
population, all those, namely, who owe their existence to the division of
labour, had starved to death.
The demand for paper-money is called
into existence therefore, by the fact that the products of the division of
labour are wares. The division of labour, which gives birth to wares, is the
inexhaustible source of the demand for money, whereas the demand for other
wares is far less urgent.
The origin of the demand for an
object can of course be explained only by the fact that the object demanded, in
our case paper-money, performs some service for the buyer (not for the present
possessor) or, in other words, is of use to him.
But this oblong piece of gaily-printed paper raised to
the dignity of money, the medium of exchange recognised by the State and
consequently the only medium of exchange - is it not a useful thing ? Is this
scrap of paper of no use which permits the workman, the doctor, the
dancing-master, the king, the clergyman to convert products or services,
utterly useless to them personally, into goods for consumption ?
Plainly we must here keep in mind,
not, as usually happens, the material aspect of the paper-money, the scrap of
paper itself, but the whole - the paper, that is to say, plus its public status
as medium of exchange, or money. We must think of money as a manufactured
product, as a manufactured product, moreover, which is protected by law and
monopolised by the State.
It is indeed true that if we deprive
paper-money of it's distinctive characteristic as the only legally recognised
and practically universal medium of exchange, what remains is but waste paper.
But is not the same true of almost any other object when considered simply as a
material, apart from its use ? Scrape together the colours of an oil-painting,
strike with a hammer a token coin, an inkpot, a souptureen, and what remains
but rubbish ? If we regarded a house as a pile of bricks, a king's crown as
metal, a book as paper, if we saw in everything merely its raw material, the
great majority of objects would have few advantages over waste-paper.
A piano is not used as firewood, a
locomotive as cast-iron, or paper-money for papering walls. So why, in the case
of paper-money, do we speak only of the material, the cellulose ? Why do we not
speak of the medium of exchange ? All other objects are considered in
connection with their intended use; and paper-money thus treated, that is,
regarded as the medium of exchange, is not a mere scrap of paper, but a highly
important, indeed indispensable, manufactured product, the most important and
useful of commodities.
That the cost of producing this
article is practically nil, subtracts nothing from its importance. We do not
seek in other products the sweat and blood of the producer. The building sites
of Berlin, with a total value of thousands of millions, have not cost a penny
to produce.
To understand paper-money,
therefore, we must pay no attention to the paper of which it is made; we must
accustom ourselves to think of it as an indispensable manufactured article,
one, in addition, protected by the State. We shall then have no difficulty in
recognising paper-money as something with all the characteristics of a ware. We
shall then find it a proof, not a refutation, of the proposition that wares can
be paid for only with wares.
Those who take the trouble to search
the literature of monetary theory will find money constantly treated, not as a
manufactured product with an exactly determined purpose (medium of exchange),
but as a raw material for industrial purposes (jewellery), its function as
money being regarded as merely subsidiary and transitory. Yet in many countries
coins struck 100 or 200 years ago are in circulation (such coins circulated
until quite recently in Germany), whereas wares a year old are, as a rule, more
or less unsaleable, and are written down at a merchant's stocktaking.
If money were but a raw material for
industrial purposes it would be purchased only as other wares are purchased,
namely on condition that it could be passed on with the addition of interest
and profit. But if the dollar already mentioned which, mined in Colorado, had
circulated 10 or 20 years in China before being used to pay wages in the
original mine, had on its travels been again and again loaded with interest,
transport-charges and profit, what would it have cost the miner who finally
received it ? Yet this loading would have been necessary if the dollar had
always been bought for the silver it contained, if no one had found that it
performed another service - namely the exchange of his products for consumable
goods.
Money is indeed the most
characteristic of wares, for money, especially paper-money, is used only as a
ware, a commodity for exchange. It is not, like other wares, bought to be
consumed in the factory or kitchen, that is, away from the market. Money is and
remains a ware, its usefulness lies entirely in its services as a ware of
exchange. All other wares are bought for consumption (except by merchants, for
whom both wares and money always remain wares). A person produces wares for
sale, but buys them for consumption; he sells wares, he buys consumable goods.
Money alone remains a it performs the service of exchange. Money, and above
ware, for all paper-money, is thus
the only useful ware.
The protagonists of a metallic
standard commonly think of metal money merely as raw material for the
goldsmith. A mark, says the bimetallist Arendt, is the 1392nd part of a pound
of gold, and the advocates of the gold standard had naturally no reason to
attack an opinion which deprived their opponent of all weapons for defence of
his cause.
(* Chevalier, La Monnaie, Paris,
1866, p.36. 11 1 must hold to this fundamental opinion that coins are simply
bars of metal, the weight and fineness of which are guaranteed by the
State.")
The champions of paper-money, who
should have begun by demolishing this fallacy, one and all evade the issue.
Obviously they have not recognised with sufficient clearness that money itself,
without regard to its material, is a useful, indeed an indispensable object:
and so, in devising the inscription on paper-money, they all felt themselves
constrained to promise the holder something independent of the function of
money, gold, interest, wheat, work, land and so forth. The exchange of wares,
made possible by money alone, evidently does not seem to them a service sufficient
to ensure a ready market for paper-money.
The only exception known to me is
the inscription on the paper-money issued in 1869 by the Province of
Buenos-Aires. Here, for the first time, the paper itself is declared money, and
the holder is not promised conversion. The inscription runs:
La Provincia de Buenos-Aires
reconoce este Billete por
un peso moneda corriente, 10 Enera
de 1869.
Translation: The province of
Buenos-Aires recognises this piece of paper as a peso (dollar) of national
money.
I have never been able to discover
whether this inscription was the result of insight, or of embarrassment, like
the wording of the present Argentine paper-money, which promises to pay the
bearer at sight so many pesos - in paper-money ! "La Nacion pagará al
portador y á la vista y por medio del Banco de la Nacion 100 Pesos moneda
nacional." Clearly nonsense, since a peso mon. nac. is nothing else than
the same paper peso. The bank promises to hand back the piece of paper handed
in for conversion.
The following proposal has been made
repeatedly and even in quite recent times: The State prints enough paper-money
to buy up the whole land of the nation and thus at once solves the greatest of
all social problems, the problem of how to return rents to the people. The land
is then security for the paper-money, but in accordance with the aim of the
proposal, is not given in exchange for the notes. The holder of the paper-money
has to be satisfied with the security of the land, just as the holder of a banknote
is supposed to be satisfied with the security of the gold in the cellars of the
bank (which is certainly not the case, for the holder of the banknotes
satisfies himself with the services performed by them as the medium of
exchange. If it were otherwise, he would, like the goldsmith in need of raw
material, go and fetch away the gold at once). From the standpoint of monetary
technique this is a crazy proposal. Here again it is overlooked that to mediate
the exchange of wares is a sufficient service for paper-money, and that if this
service is guaranteed (for which it is only necessary that no other form of
money should be issued), every other kind of service is superfluous.
The difficulty of grasping the
notion of money lies in the fact that the service we expect from it is so
completely independent of the money-material. The material is necessary only in
order that money may be visible and palpable, so that we can assure ourselves
of its existence and transfer it; by no means because we expect something of
its material part as such. Otherwise it would be impossible for a coin to
remain 1, 10 or 100 years in circulation, or for a banknote to remain 24 hours
outstanding. The quantity of money alone is of importance, for upon it, partly,
depends the magnitude of the supply of money and the amount of commodities that
we cay buy for it. Money considered as a material has no properties, or at
least no active, working properties, no properties that would be missed even if
entirely absent. Why, the Germans chose gold instead of silver for their money
simply because they had to yield sixteen times more commodities for one
kilogram of gold than for one kilogram of silver ! They got sixteen times less
money-material - that it why they preferred gold to silver !
Of every kind of goods for use,
without exception, the buyer says "the more the better", but of the
money-material, on the contrary, "the less the better". Money only
needs to be countable: the rest is mere ballast.
We buy honey because it tastes sweet,
beer because it intoxicates, lead because it is heavy, a footrule because it
measures a certain length, a quart measure because it has a certain cubic
capacity. But with money we do not ask for taste, weight, cubic capacity, or
any material characteristic, or anything for the direct satisfaction of our
personal wants. We buy money as a ware in order-to pass in on again as a
ware.
A proof of the general indifference
to the physical characteristics of money is the fact that not one person in a
thousand is able to state how much fine gold he is legally entitled to demand
for a dollar, a mark, a franc, or a five-pound note. The incredulous can easily
test the truth of this statement.
For this reason we ask of money only
that it should possess the fewest possible physical properties; for this reason
mankind has gradually and unconsciously adopted as money-material a natural
substance, gold, which of all substances has been most niggardly endowed with
properties. How poor in properties is gold in comparison with any other product
say a hammer, a book or a canary-bird ! Not for its colour, weight, bulk, ring,
smell, taste or chemical affinities has gold been chosen as money. Gold neither
rusts nor rots, neither grows nor decays, neither scratches, nor burns, nor
cuts. Gold is without life, it is the archetype of death.
In the substance of money we seek
negative, not positive, properties. The minimum of material properties is what
all men demand of the material part of money. Everyone feels for the substance
of money what the merchant feels for his wares, namely icy indifference. If the
shadow of gold suffices, the shadow of gold is preferred, witness the existence
and popularity of banknotes. The more negative the properties of a substance,
the more positive its advantages as a money-material. That is the whole secret
of a paper-money standard.
It is said that a universal
predilection for precious metals led to their adoption as money. I believe, on
the contrary, that the universal indifference of producers to gold and silver
was the reason why mankind could agree to recognise these metals as money. It
is easier to agree upon something indifferent, upon something neutral, than
upon something possessing positive properties that vary in effect for each man
according to his temperament. Of all natural products gold has the fewest
properties, the fewest uses in industry and agriculture. To no substance are we
so indifferent as to gold, hence the facility with which it could be adopted as
money.
Gold has an industrial use in the
manufacture of jewellery. But those who use money as a medium of exchange,
producers, workmen, farmers, artisans, merchants, the State, the courts of
justice, as a rule need no articles of jewellery. Young girls may covet gold
(often only because it is money); but young girls who are not producers need no
medium of exchange, they create no mercantile demand for money. The desires of
young girls can hardly be allowed to determine the material chosen for money.
Money, by far the most important means of economic intercourse, the essential
condition of the division of labour, must have some basis other than the
desires of the economically weakest members of the community - young girls with
a taste for self-adornment.
The material part of money has for
economic life about the same importance that the leather of a football has for
the players. The players do not concern themselves with the material of the
ball, or with its ownership. Whether it is battered or dirty, new or old,
matters little; so long as it can be seen, kicked or handled the game can
proceed. It is the same with money. Our aim in life is an unceasing, restless
struggle to possess it, not because we need the ball itself, the
money-material, but because we know that others will strive to regain
possession of it, and to do so must make sacrifices. In football the sacrifices
are hard knocks, in economic life they are wares, that is the only difference.
Lovers of epigram may find pleasure in the following: Money is the football of
economic life.
5. THE SAFETY AND COVERING OF PAPER-MONEY
The tender new idea which sprang
into being in the last chapter, germinating amongst the clods of prejudice,
must now be protected from the cold wind of doubt until it grows into a
vigorous thornprotected shrub. The idea of paper-money must give the common man
a feeling of security instead of making his flesh creep. The German peasant who
still often prefers to keep his savings in silver rather than in gold, must
come to prefer paper-money to silver because his hard head can no longer reject
the truth that, when all is well considered, the paper offers him more security
than gold or silver.
It is a question, therefore, of
showing not only that paper-money is possible, but also that it is
"covered" and secure. I wish to prove that whereas metallic money
can, without breach of law, be destroyed by the State that coined it,
paper-money can only fall with the State itself.
Otto Arendt's statement "our
German mark is but the name for the 1392nd part of a pound of gold" cannot
be refuted by the authority of the German currency laws. No law protects the
holder of specie or bullion from such a legal interpretation of the conception
of money. Indeed, the inscription on the former German coins, "XXX One
Pound Fine", and the present inscription on banknotes and treasury notes, "The
Bank (or the State as the case may be) promises to pay the holder . . .
etc." show that the composers of the inscriptions shared Arendt's views on
the nature of metal money. We can therefore easily imagine the following
situation: The State, for some reason, deprives gold of its monopoly as money,
just as, in the past, it deprived silver of its monopoly as money. But instead
of exchanging the coins for new money, it defaces the inscription on them by a
stroke of the hammer and returns the metal to its possessor with the words,
" You have now, on your own admission, all that you are legally entitled
to, a bar of gold of a certain weight. But this gold is henceforward not money.
The State has adopted another form of money and no longer recognises gold as
money, nor will it exchange the new money for gold. Gold coins were, in your
words and according to your explanation of the nature of money, protected by
their content in gold. You are
(lost page)
This is now no longer true since the
State, by a stroke of the pen, divorced silver from money. Let no one imagine
that a great popular movement was necessary to deprive silver of the privileges
it had for thousands of years enjoyed as money. The "great monetary
reform" was introduced in Germany by a few phrase-mongers, and without
risk or trouble defended by them against another half-dozen phrasemongers.
Read, if you have patience, these wordy duels throughout which monetary reform
is treated as it would have been treated by the Huns. Empty phrases, undigested
theories, cheap assertions, special pleading - such was the great conflict of
those days over monetary reform; and in every succeeding one, up to the present
time, the arguments have been quite as superficial. Nothing has ever been heard
of a medium of exchange, of the needs of the wares awaiting exchange, of the
division of labour. It really seemed as if the German mark were nothing more
than the 1392nd part of a pound of gold.
Assertions in favour of the gold
standard were taken for granted; nothing was tested; there was no trace of
scientific inquiry into the subject. Even today, after many bitter experiences,
we have no legal definition of the word "money" to which recourse could
be had in cases of doubt in the application of monetary laws.
It is also a fact that at the
present moment cultured men and women, to say nothing of peasants and
labourers, have childish ideas about the nature of money; that "many
persons, even economists of repute, have no thought-out theory of money".
(Knut Wicksell, Interest and Prices).
(* The post-war experiences of inflation, deflation
and stabilisation have convinced most people that the monetary standard is the
very foundation of national life. Nevertheless the new constitution of the
German Republic makes no mention of the monetary standard. After the German
Government had caused the greatest inflation the world has ever known, our
legislators, with German thoroughness (deutsche Gründlichkeit), determined in
lengthy debates the colour of the nation's flag-and completely forgot to
determine the standard of the nation's money.)
In these circumstances we are
justified in asking: Where are the security and covering of German money, of
the German mark ? They certainly do not lie in the metal. That is apparent from
the fact that silver, which was more closely united to German money than gold,
was in a day, without fuss or trouble, legally separated from it.
Nor is the security of money guaranteed
by the law, for a legal definition of the German mark is wanting - so
completely wanting, that the question: What, according to law, is a German mark
? invariably receives the same intelligent answer: "A mark is 100
pfennigs" - no matter to whom one may apply.
The only real security would be the
monetary education of a sufficient number of men who, in the event of
legislation affecting monetary standard, would form a bodyguard, so to speak,
to protect the mark from bunglers and swindlers. But at present this security
does not exist, for the indifference of the general public, of science, of the
press, of business men, to monetary theory is so great that it would be
difficult to collect among the millions of the German population a dozen persons
for a serious discussion of the subject.
Where, then, is the security of the
German mark ? Who or what protects it from bunglers and manipulators ? The
leaflets of the Society for Protecting the German Gold Standard ? Are not these
defenders also bunglers ? If the leaflets are examined attentively it is
apparent that the writers have no idea of what function money has to fulfil.
The fact is never mentioned that money should secure, accelerate and cheapen
the exchange of products; that the market, not the metal content, nor the
weight, is the criterion of the excellence of money. Money is here viewed from
the lowest possible standpoint, the standpoint of the goldsmith or banker. Yet
at present the victory rests with this Society !
That the metal content provides no
security or "covering" for the German mark we have proved from the
history of silver. The conclusion to be drawn from silver is so obvious that it
should suffice alone to brand as a falsehood the assertion that a mark is the
1392nd part of a pound of gold, and that it is sufficiently secured by its
metal content.
In addition it is well established
that through the play of forces known as Gresham's law(*), gold can be driven
out of a country by the issue of paper or silver money whenever the party in
power so determines.
(* Gresham's law: When in any
country the stock of money exceeds the needs of the exchange of products, the
result is a rise of prices. This rise of prices impedes export and facilitates
import. The balance of foreign trade consequently shows a deficit of export in
relation to import which is most easily met by the export of gold.)
Thus during the years 1872-1874,
when Germany was flooded with the French war indemnity, German imports exceeded
exports by 3646 million marks, or almost the whole amount of the indemnity. Yet
before the war German exports had exceeded imports.
This export of gold which means a
decrease in the stock of money in the country, reduces prices and therefore
automatically re-establishes equilibrium between export and import. But if the
State takes no heed of the warning given by the export of gold and continues to
increase the stock of money by the issue of paper-money, gold continues to
leave the country until importers begin to meet with difficulties in obtaining
gold (or foreign bills of exchange) to pay for their imports. These
difficulties are at once translated into a premium, or agio, upon gold, and
this premium then acts as regulator of foreign trade by putting difficulties in
the way of import and facilitating export. But at the same time the premium
renders the circulation of gold within the country difficult, since government
offices and courts of justice accept only paper-money, and the varying premium
is soon considered a vexatious concomitant of gold by the Public which becomes
unwilling to accept this form of money. Gold cannot circulate, it becomes
superfluous and collects in the banks where it lies fallow until sent abroad by
its possessors to seek interest. It thus happens that if within a country gold
and paper are in conflict, paper always wins. Paper-money, or base currency,
drives its rival, gold, over the frontier, and this "law" is called
Gresham's law in honour of the Elizabethan statesman who discovered, or rediscovered,
it.)
The State need only coin more
silver, or the Bank of Issue print more notes, and before long gold coins will
begin to cross the frontier. But if the law determines whether gold is driven
out by some other form of money, where is the security and covering of gold
money ? Silver and gold were in circulation in France when John Law began to
experiment with paper-money. The security of this French money was so perfect
that in a short time it disappeared, leaving paper-money only in circulation.
The experiment was repeated with the assignats during the French Revolution.
with the same result. Later still, when the war idemnity was being delivered to
Germany, the market was again cleared of gold by paper-money. Three times this
experiment has been repeated in France, and always with the same result. Three
times the security supposed to be given by metal has proved illusory. In
Scotland, England, Austria, Russia, Spain, Daly, the United States, South
America, metallic money has countless times, as often as the ruling power
(autocrats or people's representatives) desired, been expelled by paper. The
metal has never been able to protect the money of these countries from bunglers
and swindlers, just as the silver content of the thalers failed to protect
German money.
The belief that the mark is
protected from bunglers and swindlers by its gold content, shows complete
ignorance of monetary history.
But quite apart from Gresham's law -
whom did the metal content of money protect ? Obviously only the chance holders
of the coins, the holders of the four or five billions of coined money
circulating in Germany. But what importance has this comparatively quite
insignificant quantity of gold in comparison with the 500 billions of State
debts, mortgages, bills of exchange, leases and other rent agreements ? Are
these 500 billions also covered by the metal content of the five billions of
gold ? The only security for these 500 billions is the law; the law, not the
metal content of the coins, determines the meaning of the German mark in
mortgages, government securities, etc. Forty years ago all German mortgages,
securities and bills of exchange were payable in silver, yet the law forced
debtors to pay their debts in gold.
From this standpoint also, the
security given to the German mark by its metal content proves illusory.
The coined money of a country is a drop in the ocean of
uncoined money (* With a circulation of five billion marks in gold in
Germany, the circulation of bills of exchange was 40 billions, the amount of
mortgages 143 billions, etc.) (that is, all agreements
to pay money). Consequently the security given by the metal content of the
coined money is a negligible quantity. And at any time the play of forces known
as Gresham's law can remove even this infinitesimal security.
In the above-named countries when
gold and silver money was expelled by paper-money and copper coins, when in
many cases this paper-money became as worthless as the paper upon which it was
printed, all agreements between debtor and creditor-government securities,
mortgages, bills of exchange - sank simultaneously to the level of the
paper-money!
And so, once again, I put the
question: where was then the security of metal money ?
Money requires the State, without a
State money is not possible; indeed the foundation of the State may be said to
date from the introduction of money. Money is the most natural and the most
powerful cement of nations. The Roman Empire was held together more by the
Roman currency than by the Roman legions. When the gold and silver mines became
exhausted, and coins could no longer be struck, the Roman Empire fell asunder.
The fact that money is
indispensable, and that State control of money is also indispensable, gives the
State unlimited power over money. Exposed to this unlimited power the metal
covering of money is as chaff before the wind.
Money is as little protected by the
money-material from abuse of State power as the constitution of the State is
protected from arbitrary usurpation of power by the parchment upon which it is
written.
Only the State itself, the will of
those in power (autocrats or representatives) can protect money from bunglers,
swindlers and speculators - on condition that those in power are capable of
purposeful use of their power. Up to the present they have never,
unfortunately, possessed this capability.
What has here been said of metal money
applies, of course, also to paper-money. The material of paper-money offers no
security either to the holders of the money itself or to the holders of
promises to pay money (bills of exchange, government securities, titles to
pensions, leases and other rent agreements, insurance policies mortgages,
bonds).
Paper-money is in this respect
somewhat more insecure than metal-money; but, to compensate for this, it is
more completely protected by the State.
We have seen that the State, without
infringement of the law, and in complete harmony with current monetary
theories, can convert coins by a stroke of the hammer into the raw material of
which they were made, that the State can deprive gold coins of the privileges
of money; that the loss of the privileges of money would depress the price of
gold; that the State is bound by no law to compensate the holders for this loss
and that, if it decides to compensate them, it acts not in accordance with the
law but merely in accordance with fair play. And fair play is an elastic term,
much depends upon the class of society by which it is invoked.
(*The German landowners asked the State to increase the cost
of the nation's food by erecting tariff-barriers, and their request was
granted. The German working class asked the State to reduce the cost of food by
abolishing the tariff-barriers-and met with a stern refusal.)
The legal position of paper-money is
much stronger. The State cannot deprive paper-money of the privileges of money
without compensating the holders. By issuing paper-money the State has received
something for which it is in the holder's debt. This something must be given
back; from whatever standpoint the matter is considered, this cannot be denied.
The best proof of the duty of compensation is its obviousness.
The State deprived thalers of their privileges
as money and compensated the holders by exchanging thalers for new money. (*
That the holders of the thalers could suffer any loss through the withdrawal of
the privileges of money from silver was, and remains in contradiction with the
theory of metal money.) There was no legal right of
compensation, but sufficient grounds were discovered for this action apart from
the law. The State had, for example, by levying taxes, compelled its citizens
to purchase thalers. To pay his taxes, a peasant had first to purchase thalers
by selling his cow. Because the State demanded silver, the peasant had to buy
silver, even if he had no personal need for it. The State therefore undertook
the duty of assuring the sale of these thalers from which may be deduced the duty
of compensation.
Such a plea for the duty of
compensation deserves a hearing, but whether it would always obtain one is
another matter. It is useless pleading to deaf ears, and "none are so deaf
as those who will not hear". To plead for a right is, indeed, to
acknowledge a weakness.
If the German landowners had known,
when the gold-standard was being adopted in Germany, that the demonetisation of
silver would cause a slump in its price sufficient to have freed them from 50%
of their mortgage-debts contracted in silver thalers, their attitude to the
question of compensation might have been very different. Their later conduct
when they learnt, too late, how the matter really stood, justifies the belief
that they would have adopted the monetary theory whereby a thaler was declared
to be the thirtieth part of a pound of fine silver, and that they would then
have insisted on paying their debts, contracted in terms of silver, in uncoined
silver at the ratio of 1/30th of a pound of silver for every thaler. This would
have been an equally profitable and a more honourable line of conduct than the
one actually adopted, namely the raising of their rents through protective
duties.
With paper-money there are no such
uncertainties. There are no laws and no interpretations of law, no arguments to
support the State's duty of compensation, the duty being obvious. For this
reason the security of paper-money is greater than that of metal money.
Paper-money is secured by all the interests and ideals which weld a people into
a State. The paper-money of a State can only go down with the State
itself.
Besides the imaginary security of
money in relation to the absolute power of the State, a "covering" or
economic security is claimed for money. Granted that the State makes the best
possible use of its powers, granted that there is no abuse of power, there is
still no guarantee, say the advocates of a metal standard, that the holder of
money will be recouped for the outlay he has made in obtaining it. Metal money
contains in itself the material for meeting this outlay, it has "intrinsic
value" (for the moment it does not matter what meaning is attached to this
term), whereas paper-money has no content and must seek its covering elsewhere,
apart from its material.
This objection is void and shows
confusion of thought, as we have already learnt in the chapter "Socalled
Value" and in the above discussion of the security of money. The mere fact
that all the holders of the demonetised silver coins, without exception, made
use of the right of exchange, shows clearly that metal money is not a full
"covering" for the holder for his outlay in obtaining it. If it had
been a full covering, the holders would simply have kept the silver.
To what has already been said in
reply to the above objection, all that may be reasonably, though perhaps
superfluously, added is this:
A ware is covered as long as someone
is prepared to give the usual quantity of other wares or money in exchange for
it, in other words, as long as the demand for it does not fail. But no ware is
covering for itself. The division of labour and the word "ware" imply
that the product of the producer's labour is useless to him. What, we repeat,
can tailors, shoemakers or chemists do with their produce, or farmers with the
gold of the coins, if no one offers to purchase it from them ?
By the covering of money is meant
utility such as the possessor of goods for use (provisions, tools, etc.)
derives from their use. It is sought to provide the possessor of money with the
same kind of utility through the material of money. Money is to be
simultaneously a material for the satisfaction of personal needs. Money a ware
and is to be a hybrid, an impossibility. (*"Usually
when a German wants anything he also wants the opposite.", Bismarck) The moment the money-material became useful to all its possessors,
money would cease to exist. The utility of the money-material would force the
coins into the melting pot. But money is indispensable; therefore it must not
be consumed.
As long as the division of labour
exists, as long as we produce wares, products useless to us personally - so
long shall we need a medium of exchange, that is, money. The demand for money
is therefore permanent and continuous; it is based upon the division of labour,
the foundation of our existence. Why should anyone have the power of using up
and destroying money ? Would not the possibility of consuming the medium of
exchange endanger the exchange of wares and the continuation of the division of
labour ?
A covering of money such as the
above objection implies, does not, and cannot exist.
It is not the money-material, but
the function of money as the medium of exchange, that covers money and ensures
the economic demand for it. In the last analysis money is covered by the
inexhaustible treasures brought within reach of humanity by the division of
labour.
Except the division of labour, there
is no covering for money. The division of labour produces a neverending stream
of wares and a never-ending demand for a medium of exchange, for money,
regardless of what material the money is made. Whether the money is made of
gold, silver or paper has no influence upon the supply of wares, that is, upon
the covering of money; for whatever the form of money, the products of the
division of labour must be offered in exchange for it. Whether a farmer receives
gold or paper for his potatoes has no influence upon the quantity of potatoes
he brings to market, for in either case he brings all he can spare. Whether the
Reichsbank has 10 or 100 tons of gold in its cellars has no influence upon the
supply of wares, upon the demand for the medium of exchange. And since this
demand for it is the real covering of money (as of wares in general), therefore
the covering of money is independent of the money-material.
Wares, demand for money, and
covering of money are three different expressions for the same thing. Where is
the covering of a railway share ? Does it consist of rails and embankments ?
Everyone knows that the covering of a railway share is the mass of goods daily
offered for transport. The division of labour is the covering of the railway
share.
The same is true of shares in the
privileges of money, that is to say, of the possession of money itself. If
freight and passengers fail, the railway share is rubbish; if the division of
labour and the stream of wares ceases, money is the most useless of objects;
paper-money then becomes waste-paper, and metal money raw material for the
least important of industries.
To recapitulate what has been said
in this section:
The money-material is no security against
misuse of State power in monetary matters.
Even if we disregard the working of
Gresham's law, the money-material can only to a small extent cover coined money
(silver covered but 40% of the thalers). The thousand-fold greater volume of
contracts payable in money (mortgages, government securities) remains quite
uncovered.
If a certain form of money is
deprived of its privileges as money, the duty of compensation by the State is
obvious only in the case of paper-money. With metal money this duty must be
defended against the opposition of large sections of the community whose
interests are at stake. For this reason the security of paper-money is greater
than that of metal money.
The money-material cannot influence
the demand for money and cannot, therefore, serve as covering for money. The
money-material can neither cause, nor influence, nor control the demand for
money.
Money is, independently of its
material, at all times covered solely by the division of labour. The security of money can be attained only by
a sound conception of currency policy shared by the people and their
rulers.
6. WHAT SHOULD THE PRICE OF MONEY BE?
We have now shown, with all the
detail demanded by the importance of the subject that money can be made of
paper, or, in other words, that a higher price can be obtained for paper-money
than for the same amount of paper without the privileges of money.
Next comes the question: How much
higher should the price of paper-money be than the price of the paper of which
it is made ? What should be the ratio of exchange between money and wares
?
This is a question of importance, a
question of burning interest to the producer. Producers are indifferent to the
substance of money, which is for them merely unnecessary ballast; but their
attention is always aroused by the question: How much money do you ask for your
cow? or: What do you offer for my tools? For upon the answer depends the
success or failure of the whole process of production.
If there is a change in the ratio of
exchange between wares and money, everyone in selling his wares receives more
or less in money, and when selling his money receives correspondingly less or
more in wares. From this point of view, therefore, a change in the price of
money would be pretty much a matter of indifference.
But everyone does not immediately
buy wares with the money he has received; and for such persons it is certainly
not a matter of indifference whether prices have changed during the interval
between selling and buying. Still less are the prices a matter of indifference
to debtors and creditors. To them the question: How much of my produce must I
sell to meet the interest upon my debt and to provide for repayment? (or: How
much produce shall I receive for the money coming in as interest and repayment
for my loan?) is of vital importance. We shall also see that the question of
prices, considered simply from the technical standpoint of commerce, determines
the continuation or non-continuation of the exchange of wares, that is, of the
division of labour, the foundation of economic life.
To illustrate the importance of
prices, we shall at present consider only the relations between creditor and
debtor.
The assets of a debtor (mortgagor,
issuer of bonds, acceptor of bills, tenant, holder of life-insurance policies,
taxpayer) usually consist of wares, machinery, land, cattle, whereas his
liabilities always consist of a definite sum of money. And the debtor can
obtain money to meet his liabilities only by selling for money part of his
assets, usually his produce.
If the ratio of exchange of wares to
money changes, the ratio of the debtor's assets to his liabilities evidently
changes in the same proportion. Suppose, for example, that the price of wheat
is $62 a ton (the price in Germany after the introduction of the import duty on
wheat) and that a farmer needs one quarter of his harvest to provide for taxes,
insurance and interest, including redemption charges on mortgages (or for rent,
in the case of a tenant-farmer). If, now, the duty on wheat is removed, the
farmer may have to sacrifice one-third of his harvest to make the same
payments. This increase may mean the disappearance of the debtor's profits, and
his ruin.
The position is reversed if prices
rise, and it is also, of course, reversed if looked at from the standpoint of
the creditor, who gains exactly what his debtor loses, and loses exactly what
his debtor gains, through a change in the level of prices.
Credit has expanded enormously in
modern times. German debtors owe German creditors something
like three or four hundred billion marks. (*Throughout
this book, in accordance with American notation, a billion means 1,000
millions. The German word is " milliard.")
The interest and amortisation for this sum can be raised only by the sale of
the products of labour. A small change of prices is sufficient to throw a
burden of many billions of marks upon one of these two great classes, to the
benefit of the other.
An average fall of prices of 1%, the
commonest of events with our much-praised gold standard, throws a greater
burden upon the German debtor than the five billions of the war-indemnity of
1871 threw upon the French nation.
Or suppose a tax-payer pays $100
annually in direct and indirect taxes to meet his share of the interest and
sinking-funds on local and government loans. The ratio of exchange between
money and the product of his labour determines whether he must devote ten,
twenty or fifty days to earning the money.
Should our monetary policy aim at
raising prices in order to exploit the creditor for the benefit of the debtor,
or should we lower prices in order to enrich the stock-holding class ? Are we
to leave the determination of the question to creditors or to debtors; are we
to allow the monetary standard to be determined by egoistic motives of
individuals ? The answer is that private interests must never be considered in
the management of money. Money must be managed in the interests of economic
life as a whole, not in the interests of individuals.
Independently of time and place
money should always obtain the price it obtains today. What the holder of money
has paid for it in commodities he should be able to demand in commodities
tomorrow, or ten years hence. In this way the debtor pays back what he has
received, and the creditor receives what he has given, no more, no less.
That is self-evident and requires no
proof.
7. HOW THE PRICE OF MONEY CAN BE MEASURED WITH
PRECISION
(* By "Price of money" is
meant the amount of commodities that must be given -in exchange for a certain
amount of money.)
If the price of money is to remain
constant, proof must be given that it actually has remained constant.
If this proof is not forthcoming,
either debtors or creditors will be dissatisfied and demand the lowering or
raising of the price of money. The only way of silencing the complaints of
creditors and debtors is to prove in black and white that the price of money
has remained unchanged.
The conflict between the advocates
of the gold standard and the bimetallists turned upon the question whether the
price of money had changed. The question was debated on both sides under the
influence of an illusion, that of so-called "value" ("intrinsic
value", "store of value" etc.), and therefore could not be
settled. The finest scientific proofs of the bimetallists were again and again
reduced to absurdity by this fiction. If the bimetallists, by the help of
laboriously compiled statistics, showed that prices had fallen 10, 20 or 50%
since the introduction of the gold standard, the champions of the gold standard
replied that this objection was meaningless, since the question was not the
price of money but ist "value" ! - as indeed the bimetallists
admitted. The general fall in the price of commodities was ascribed to the
decrease of costs of production and transport, caused by technical progress.
Only a few convinced opponents of the theory of value could succeed in proving
that the introduction of the gold standard was a blunder through which debtors
(among them the State) were plundered to the profit of their creditors. The
bimetallists would have won, and won with ease, if they had confined the issue
to the price of money, but they disarmed themselves by their docile acceptance
of the illusion of "value".
The price of money can be expressed
only in commodities. If barter is excluded, the price of commodities can be
expressed only in one way, namely by a sum of money, but the price of money can
be expressed in as many ways as there are kinds and qualities of commodities,
terms for the delivery of commodities, markets for commodities. If we read
every current market report, price-list and catalogue in a country, we know
what, at that moment, its money is worth.
But if we need to find out whether
the price of money has changed, it is not sufficient simply to compare the
prices of commodities to-day with their prices of yesterday. For it is probable
that a large number has increased, and that another large number has decreased
in price.
At the same time a change in the
price of steam-coal, wheat and iron is, of course vastly more important than a
change in the price of needles, canaries or buttons.
An example will show what we mean:
-
1906 1907
A person paid for 1
tobacco-pipe $1.00 $1.10+
1 tin of boot-polish 0.50 0.60+
1 doz. steel pens 0.50 0.80+
1 hat 3.00 2.50-
1
pair of boots 4.00 3.00- 1 pair of trousers 11.00 10.00- ____ ____
$20.00 $18.00-
Thus although one half of these six
articles increased in price and the other half diminished, yet the
"average price" fell $2 or 10%. Judging by the above commodities the
buyer will observe an increase in the price of money of approximately 11 %. The
buyer receives 11 % more commodities for his money than formerly.
To establish equilibrium with the
time of the first measurement it is not necessary that the former
exchange-relation of the commodities to one another should be re-established.
It is sufficient if the price of money is lowered. All commodities must simply
rise 11% in price. Money has no influence upon the exchange-relation of the
commodities among themselves. If, simultaneously, boot-polish rises in price,
and a pair of trousers falls in price, that is the result of changed conditions
in the production and sale of these commodities. Only when, "on the
average", more or less commodities of the same quality are received for
the same amount of money, can we say that the ratio of exchange of commodities
and money has altered. And so, to re-establish the former equilibrium, an
increase of 11 % (11.1 %) must be made upon each of the above six articles, no
matter what their former prices were. We should then have: -
1 tobacco-pipe $1.10
+11.1% $1.22
1 tin of boot-polish 0.60 0.67
1 doz. steel pens 0.80 0.89
1 hat 2.50
2.78
1 pair of boots 3.00
3.33
1 pair of trousers 10.00 11.11
____ ____
$18.00 $20.00
The total is now $20, as
before.
This uniform proportionate increase can only
come from a cause acting uniformly upon all commodities, not from changes in
the Various costs of production, and money alone (* General
changes of price affect the relation between debtor and creditor, between the
earning class and the stockholding class. This affects the demand for, and
consequently the price of, the (very different) commodities bought by these two
classes. This reaction is not treated here, as it is immaterial to the
understanding of this part of the subject.) can act
uniformly Upon the prices of all commodities. To re-establish equilibrium we
need only bring more money into circulation until prices have risen 11 %.
To measure variations in the price
of money we must therefore determine the average price of commodities and
compare it with the average price of some former time.
Thousands of millions are here at
stake, since the price of money
determines the prosperity or ruin of
creditors and debtors. Careful work is therefore necessary; the method employed
must be proof against interested outside manipulation and give an exact
scientific result; otherwise there will be no end to the complaints of debtors
and creditors.
Unfortunately this exact,
unimpeachable result is not attained by the methods hitherto proposed. Dismayed
by the difficulty of determining officially the prices of millions of
commodities of different qualities, at different places, and of classifying
them according to their relative importance, statisticians have proposed to
choose a limited number of commodities from among the staple articles bought
and sold at the exchanges, and to estimate the relative importance of these commodities
by the amount of capital sunk in their production and marketing.
In this manner the "Index
numbers" of Jevons, Sauerbeck, Soetbeer and others have been
compiled.
To facilitate the understanding of a
matter of vital importance to economic life, I shall here print such a table -
with the prefatory remark that all the figures in it are drawn from imagination
and are used simply as illustrations.
Table for the Calculation of the
Average Price of Staple Commodities
1860 1880 1900 a
Price b
Quant. c
Total a
Price b
Quant. c
Total a
Price b
Quant. c
Total
1. Wool 1.00 100 100 0.80 90 72 0.70 40 28
2. Sugar 1.00 20 20 0.90 90 81 0.80 110 88
1. Flax 1.00 70 70 1.10 40 44 1.20 10 12
2. Cotton 1.00 20 20 0.90 40 36 0.80 60 48
1. Wood 1.00 150 150 1.20 100 120 1.30 80 104
2. Iron 1.00 50 50 0.80 100 80 0.70 130 91
1. Wheat 1.00 400 400 0.80 300 240 0.75 260 195
2. Meat 1.00 150 150 1.20 200 240 1.40 260 364
1. Indigo 1.00 30 30 0.80 5 4 0.75 1 (1)
2. Petroleum 1.00 10 10 1.10 35 38 1.20 49 58
1000 1000 1000 955 1000
989
Explanation: According to this table
the average price of these ten commodities changed from 1000 in the year 1860
to 955 in the year 1880 and 989 in the year 1900.
The quantities in the three columns
(b) must of course always be brought to the same total amount (here 1000) if
the result is to hold good. The figure chosen is unimportant, it is only
necessary that the ratios of the separate quantities among themselves in each
column (b) should be correct. If for instance, we reduced the sum of these quantities
in our table to 500 or 100, the final result would be the same; the relation of
the numbers 1000 - 955 - 955 would remain unchanged.
Each price in the first column (a)
is for the quantity of the commodity obtainable in the year 1860 for one dollar,
for example, 7.5 ounces of wool, 51 ounces of sugar, 6 ounces of flax, etc. For
this reason all the prices appear as one dollar in the first column. The prices
in the second and third columns (a), for 1880 and 1900, are for the same
amounts, the amounts of the commodities which were obtainable for one dollar in
1860; that is, again 71 ounces of wool, 51 ounces of sugar, etc.
To illustrate the chief difficulties
to be overcome with this method of determining the general level of prices, I
have chosen the commodities in such a way that a commodity of decreasing
importance in the economic life of the country is followed by a commodity of
increasing importance. Wool and sugar are an example. German sheep-breeding has
steadily declined during the last decades and wool has by no means the same
importance in German economic life as it had 40 years ago. At that time the
price of wool reacted upon the price of an enormous flock of sheep and upon the
rent of a large tract of country which was used for sheep-grazing. Today German
agriculture is hardly concerned in the price of wool. If the price of wool fell
from 100 to 50, scarcely one German farmer in a hundred would be aware of the
fact; wool-merchants, weavers and cloth-merchants alone would suffer.
Only by "weighting" the
price of wool with its quantity can we reduce the price in the above table to
its real importance. For this quantity, therefore, we have chosen the numbers
100 - 90 - 40.
Of sugar the reverse is true. The
German beet-sugar industry has expanded greatly since 1860, not alone
absolutely, but also in comparison with other industries. Many sheep-pastures
have been converted into beet-fields; large numbers of German farmers and
considerable amounts of capital in land, factories and stores are
affected by the price of sugar.
Sugar is therefore given a place of increasing importance in our table.
It is the same with the other pairs
of commodities, flax and cotton, wood and iron, wheat and meat, indigo and
petroleum.
If we can make sure: -
that the data are complete,
that the separate prices are
correctly ascertained,
that the estimates of the
comparative importance of the separate commodities are correct, the result, doubtlessly, will be
unobjectionable.
But this is a large assumption.
There are millions of separate commodities, and each commodity has numerous differences
of quality, as one can observe by turning over the pages of the catalogues of
the separate factories. Take, for example, a catalogue of photographic
articles, of drugs or hardware.
A thousand different articles strike
the eye. And how are the prices to be officially ascertained ? Factories have
for their different customers blue, red, green and white quotation-lists with
different rates of discount. Is the official price-collector to be given a
white or a green discount quotation ?
But if there were no other, simpler,
method of reaching a sufficient degree of accuracy, we might be content with an
approximate result, a determination, not of the average price of all
commodities but of 100, 200 or 500 of the most important staple articles.
If the work of collecting the prices
were left to the Chambers of Commerce, and the average were taken of the prices
collected by them, no great objection could be made from the standpoint of
impartiality towards debtors and creditors.
Absolute precision could not be
obtained since: -
The prices of commodities cannot be
exactly ascertained by third persons, especially if these persons are
government officials.
The estimation of the relative importance
of the different commodities is exceedingly intricate. But is this any reason why we should make no
attempt to measure the price of money ? The tailor measuring cloth does not use
the standard metre of Paris; his customers are satisfied with the use of the
wooden yard-stick. The rough result obtained by the above method of
ascertaining the price of money would be preferable to the wordy assertions of
the President of the Reichsbank. What do we know today of the price of money in
Germany ? Nothing but our own observation tells us, or what interested persons,
without proofs or facts, choose to assert.
Compared with this blind ignorance
an approximate measurement of the movements of the price of money would be
practically, and theoretically an immense advantage. Such a measurement would
perhaps bring surprises and embarrass the worshippers of the gold standard, but
is this any reason for renouncing it ? Does the judge when framing his
questions for the jury take into consideration the embarrassment of the thief ?
Is not a tallow-candle better than inky darkness, the doubt that science
suggests preferable to blind superstition ?
For 40 years we have been put off
with the assertion that the German monetary standard is an excellent standard,
and for 40 years we have waited in vain for the proof.
Statistics of prices collected by
the above method would give us a basis for examining the correctness of this
assertion. The reason why such statistics have not been compiled up to the
present is fear of the unwelcome light they would throw upon our present currency
administration. Routine hates science.
It is curious to observe how the same persons who are
blind to the acrobatics of the gold standard suddenly become meticulous pedants
and raise the claims of accuracy beyond all practical requirements when considering
a paper-money standard and the possibility of its measurement. The complaint
that within short periods of time, prices, under the gold standard, rise or
fall 10 - 20 - 30% is met with the counter-complaint that the proposed method
of measurement is not absolutely reliable, that it is not free from errors,
though possibly the existence of these errors cannot be proved. (*To
prove the errors complained of in this method of measurement critics would have
to provide a method of measurement of their own. But this they refuse to do, as
the method would be applied to the gold standard, which could not stand the
test. They prefer therefore to speak of "unprovable" errors and to
arouse the suspicion in lay minds that a which is "unprovable" is,
for that reason, particularly dangerous.)
But even such malevolent pedantry
can be silenced, provided that we are prepared to take a certain amount of
trouble. For what is the problem at bottom ? It is merely to discover whether
the interests of creditors and debtors have been affected by changes of prices;
whether and to what extent the budget of the business classes has been
influenced by a rise or fall of prices; whether wage-earners, officials,
stock-holders and pensioners can buy more or less commodities with their money
income.
To ascertain this beyond the
possibility of error it would only be necessary to pass the following law: That
all producers (farmers. manufacturers) be required to furnish the amount of the
commodities produced by them, and the prices obtained, to authorities designated
for this purpose, perhaps the Chambers of Commerce. The separate figures would
be collected by these authorities and the result communicated to the central
bureau of statistics. The communication would be somewhat as follows: -
5,000 tons wheat, per ton $140
$700,000
1,000 tons potatoes, per ton 30
30,000
5,000 gallons milk, per gallon 0.60
3,000
600
cubic yards boards, per cubic yard
9 5,400
5
million bricks, per thousand
8 40,000
200
sheep 20 4,000
500
doz. straw hats, per doz. 10 5,000
____
Annual production of the District
X. $787,400
At the central bureau of statistics
the amounts returned by all the districts would be added together.
The total would give the point of
comparison for the determination, from time to time, of later
variations. For these new
measurements new prices, ascertained by the local collecting agencies, would be
incorporated in a calculation similar to the one sketched above. The new total
would give the average change of prices for the whole production of the
country. The prices would therefore have to be collected as often as
measurements were desired, but the amounts produced would only be taken
annually. For foreign commodities statistics of imports would be used.
Since the volume of production
varies as much as prices, the new statistics of production would not be
immediately available for the new measurement. To obtain comparable quantities
the new amounts of production must be used first with the old prices, and then
with the new prices. The comparison of these two figures gives the index
numbers of the movement of the price of money.
Merchants' stocks are left out of
this calculation. They are included in production, and we may assume that
changes revealed by statistics of the prices of production would apply in the
same proportion to the wares held by merchants. It would therefore be a useless
complication to include the merchants' stocks in the statistics of prices. The
same is true of wages, which are already included in the price of wares. It may
also be assumed that if factory prices in general are constant, the cost of
living must also be constant; that workmen, officials, stockholders and
pensioners will be able to buy the same quantity of goods for their money. (The
workmen's house-rent, which consists chiefly of interest, cannot be taken into
consideration in this connection).
Means of production (land, houses,
machinery, etc.) must not be included in these statistics. The means of
production are no longer wares for exchange, but goods useful to their owners
through the employment to which they put them. And the price of things which
are not for sale is a matter of indifference.
That part of the instruments of
production which is consumed by "wear and tear", and written off, is
transformed into wares and reappears regularly in the market. It is thus
sufficiently represented in the prices of wares.
The State, by this plan, neither
ascertains the prices nor estimates importance of the separate commodities. The
whole work is carried out by the people themselves. The price of money is thus
ascertained impartially, outside the sphere of politics. The nation is directly
responsible for its monetary standard.
The duty of supplying the figures to
be placed at the disposal of the State would hardly be a noticeable burden upon
the business world, and the records required would be extremely useful to the
producer, showing him to what extent his balance was affected by the management
of the monetary standard. He would learn how much depended upon his activity
and how much upon the activity of the Bank of Issue.
The most important objection to this
method is that individuals interested in the rise or fall of prices (debtors or
creditors) would falsify their reports; that farmers with debts, for example,
would endeavour to prove that prices had fallen, in order to cause the State to
raise prices by the issue of money - a rise of prices being equivalent to a
general relief of debtors. But this danger is not great, since everyone would
know how infinitely little his declaration would affect the total result. If an
indebted farmer wrongly declared a loss of 1000 marks on a turnover of 10,000
marks, this would be a negligible quantity in comparison with fifty billion
marks, the turnover of Germany as a whole. False declarations could be made
punishable, and individuals would ask themselves whether the risk was not out
of all proportion to the expected gain.
Each declaration would also be
checked by the others. If the majority of farmers reported a rise of prices, an
exception would be noticeable, and the falsifier would have to be prepared to
face an inquiry.
Obviously this procedure takes no
account of the illusion of "value".
Wares are paid for with wares, and
money can be measured only by wares, by the material characteristics of wares.
There is no other measure of money. I have given wares for money and I shall
receive wares for it. Not work, not sweat. Someone in exchange for my money
gives me an article. How he came into possession of it, how long he worked upon
it, is his concern, not mine. I am interested solely in the product. Labour
must be sharply distinguished from the product of labour, and wages must
therefore be rejected as a measure of the price of money. Wages do indeed
depend upon the product of labour and not, as Marx asserts, upon the factory
clock. But wages are not identical with the product of labour, inasmuch as a
deduction must be made from the latter in the shape of rent and interest. But
wages, plus rent, plus interest, are equivalent to the product of labour which,
in the form of wares, is, as we have seen, the measure of the price of money.
(* I use the word
"measure" reluctantly. A measure is always a part or multiple of the
object to be measured; the length of a bale of cloth is measured by the length
of the yardstick. But what part of a horse can be found in the dollars for
which it is sold ? For
100 years economists have called
money "a measure of value" and none of them has as yet felt the
necessity of finding a substitute for this manifestly erroneous
expression.
That money and commodities are
exchanged does not prove that they have something in common; on the contrary,
it is because money and commodities have little or nothing in common, it is
because they are incommensurable, that they are exchanged to the advantage of
both parties. but how can we "measure" two things that lack a common
property ?
This criticism also applies to the
expression "purchasing power of money which causes the same illusions and
must be rejected. For price is the result of bargaining and in influenced by
thousands of factors.
A real measure, again, the standard
platinum metre at Paris, is kept in a special compartment constructed deep in
the earth in order to remove it from the influence of variations of
temperature. Apply such a measure to the action (bargaining) on which price is
based and you will at once recognise the illusory character of the expressions
"value", "purchasing power", "measure of value",
as applied to money.
And perhaps, if you are a bad
mathematician but a good philosopher, you will then discover the term that
economists can henceforward without reluctance employ.)
8. WHAT DETERMINES THE PRICE OF PAPER-MONEY?
The theory that the ratio in which
commodities are exchanged is Undetermined by the amount of work necessary for
their production cannot be applied to paper-money. Paper-money has indeed a
price but it has no "value", since it has cost no work. Paper-money
has no "intrinsic" or "extrinsic" value, no "value as
a substance"; it cannot serve as a "store of value", a
"conserver of value" or a "means of transport of value"; it
is never "undervalued" or "fully-valued". The price of
paper-money cannot "oscillate about its value as centre of gravity".
(Terminology of the theory of value).
(* We might here ask why price must
"oscillate" about "value", why the forces that are strong
enough to separate price from value are not also strong enough to make the
separation lasting.)
Paper-money must therefore go its
own way; it is completely subject to the forces which determine price, and
serves but one master.
The forces that determine price are
summed up by the words demand and supply. To answer the question at the head of
the chapter we must therefore understand clearly what these words mean.
If we ask today: What is demand for
money ? Who creates a demand for money ? Where do we find a demand for money ?
We receive contradictory answers. Probably the answer most frequently given
would be: "In the banks, where employers and merchants discount bills. If
the demand for money increases, the rate of interest rises, so the rate of
interest can be used as a measure of the demand for money. States that, unable
to balance their budgets, float loans create a demand for money; so do
beggars".
But this is not a demand compatible
with the conception of a medium of exchange; and money is above all things a
medium of exchange. We must learn to regard money simply as a medium of
exchange. That the above answers are nonsense becomes apparent if we substitute
for the word "money" the expression "medium of
exchange".
The merchant who asks the bank for
money exchanges nothing; he gives nothing but his promise to repay the money;
he borrows, he does not exchange. He gives money for money; there is no
question of commerce and prices, but one of interest. Nor does the State create
with its loans a demand for the medium of exchange; it offers nothing in
exchange either. A sum of money in the present is changed for a sum of money in
the future.
This is not demand for the medium of
exchange; it is not a demand for money compatible with the purpose of money. To
demand money as a medium of exchange, something different from money must be
offered for it.
Where, then, is the demand for money
?
Evidently wherever there is need of
a medium of exchange; wherever the division of labour throws upon the market
wares which, for their exchange, require a medium of exchange, that is,
money.
And who demands money ? Evidently
the farmer bringing his produce to market, the merchant selling his wares
across the counter, the workman offering his services and asking money for the
product of his labour. Where the supply of wares is largest, the demand for the
medium of exchange is largest; where the supply of wares increases, the demand
for money, for the medium of exchange, increases. If there are no wares to be
exchanged, the demand for money disappears. Primitive production and barter
mean absence of demand for money.
We must therefore distinguish
sharply between the merchant offering a farmer calico in his shop and the same
merchant an hour later visiting the bank to discount a bill. With his calico in
his shop the merchant creates demand for the medium of exchange; with the bill
of exchange at his bank he creates no demand for money, since a bill of
exchange is not a ware. We speak here of rate of interest. This is simply
desire for money, not demand.
Demand for money has nothing in
common with desire for money. The beggar, the farmer in the grasp of the
usurer, the State, the employer, or merchant discounting a bill desire money;
but demand for money is only created by those who have wares for sale. Desire
for money is complicated, demand for money is simple. Desire for money comes
from a person, demand for money comes from a thing, from a commodity awaiting
sale. The beggar desires alms; the merchant desires to enlarge his business;
the speculator desires to keep loan-money out of reach of his competitors, so
as to monopolise the market; the farmer has fallen into the trap laid by the
usurer. All of them have an intense desire for money and none of them is able
to create a demand for money, since demand depends, not upon the cares of men,
but upon the stock of wares awaiting exchange. In this sense it would be false
to say that desire for a thing and the supply of it determine price. There is
the greatest possible difference between the desire for money, measured by the
rate of interest, and the demand for money, measured by prices. The two things
have nothing in common.
Persons who hear the word
"demand for money" and do not at once think of wares, or the words
"a great demand for money" and do not at once think of a pile of
wares, a market, a goods train, an overladen ship or perhaps of
"over-production" and unemployment, have not grasped the meaning of
the expressions: "Demand for the medium of exchange", "Demand
for money." They have failed to understand that the division of labour produces
wares for the exchange of which money is as necessary as railway wagons for the
sale of coal.
If we hear someone speaking of an
increasing demand for money because the rate of interest has risen, we may be
sure that this person is unable to give clear expression to his ideas. And if
we find a professional economist confusing demand and desire, it is our duty to
remark that scientific questions should not be handled in loose language.
We thus separate the demand for money from human
desires. from the state of the market, from business projects, dealings,
speculations and so forth; we rescue it from the enveloping fog of
"value" and enthrone it upon the mountain of wares which the division
of labour throws upon the market - visible to all, palpable, measurable.
We distinguish this demand for money
from desire for money. Upon another mountain, not of wares but of bills of
exchange, deeds of mortgage, bonds, government securities, insurance-policies
and so forth we place the inscription: "Desire for money". Upon the
first mountain we write "Prices" and upon the second "Rates of
interest". Anyone who, in the course of the following inquiry, thinks of
desire for money when I write demand for money had better lay aside this book.
It was not written for him.
Demand and supply determine price,
the ratio in which money and wares are exchanged. What demand for money is, we
now know. It is material; it is the stream of wares continuously flowing from
the division of labour.
But what is the supply of money ? We
must give this conception a form and content; we must remove it also from its
enveloping fog.
The farmer who harvests potatoes,
the tailor who sews a coat, must offer the product of his labour for money-but
what does he do with the money ? What have the 100,000 farmers and artisans
done with the thaler which for 100 years has passed from hand to hand ? Each of
them offered the thaler for wares which, once in their possession, became goods
for use and disappeared from the market. But the thaler returned again and
again to the market, it remained on the market for one year, 10 years, 100
years; and perhaps, supposing it to be re-coined, for 1000, 2000, 3000 years.
To all through whose hands it passed the thaler was useful only as a ware; of all
those 100,000 persons there was not one who could use it otherwise. The
uselessness of the thaler for consumption compelled everyone to get rid of it
again, to sell it, that is, to offer it in exchange for commodities.
Those who had much money were forced
to offer much money in exchange, those who had little money were forced to
offer the little they had. The offer of money was, and is, quite correctly
called the demand for commodities. Where the stock of commodities is large, the
demand for money is large. Similarly it can be said that where the quantity of
money is large there is necessarily more demand for commodities than where the
quantity of money is small. (The limitations of this statement will soon
appear).
Is there any demand for commodities
other than that which the supply of money represents ?
Here again, as with money, we must
distinguish between the desire for, the need of, commodities, and the demand
for commodities. The "needy" need or desire commodities, but only
those persons demand commodities who offer money for them. The need or desire
for wares is expressed by requests or begging letters, the demand for wares by
the ring of hard cash upon the counter. Merchants shun desire for their wares,
but demand for their wares attracts them like a magnet. In short, the demand
for wares consists of the offer of money, those who have money must create a
demand (We shall see later when they must do so.)
Demand for commodities, usually
known simply as demand, is therefore always represented by money. A mountain of
money means a great demand for commodities, though not indeed always, as is
proved clearly by the 180 millions in the war-chest at Spandau. During 40 years
this mountain of money has not bought a pfennig's worth of commodities. Such
exceptions will be treated later. The discovery of a new gold mine means an
increasing demand for commodities, and if a country with a paper-money standard
sets in motion additional printing-presses for paper-money, everyone knows that
demand, and consequently prices, will increase. If everyone were given the
right to cut banknotes, treasury notes and coins in two, and to use each half
as a whole, demand, and prices would be doubled.
But can we now go further; can we do
with the supply of money what we did with the supply of wares, can we say:
"To measure the stock of money is to measure the demand for wares" ?
In other words, is the supply of money to such a degree identical with the
stock of money that it is completely independent of the wishes of the possessor
of money ? Or is the offer of money, partly at least, subject to the whims of
the market, to the greed of speculators ? In short, is the supply of money
something material, namely money itself, or does it include an action ?
The answer to this question is
obviously of extreme importance for the solution of our problem.
The division of labour causes a
never-ending stream of wares called "supply". The stock of money
causes the offer of money called "demand". The stock of money is a
definite quantity. If, therefore, the offer of money were continuous, price,
the ratio of exchange between money and wares, would be independent of human
action. Money would be the embodiment, sharply defined, of demand, just as the
wares are the calculable, measurable embodiment of supply. We should then only
need to ascertain the ratio of the stock of money to the stock of wares in
order to know whether prices were about to rise or fall. This would actually be
true of Free-Money as described in the next section of this book. Free-Money
embodies demand, it eliminates from demand the wishes of the possessor of money
in respect to the time, place and amount of demand. Free-Money dictates to its
possessor orders for commodities and makes these orders an imperative
necessity. With Free-Money the amount of demand can be measured directly by the
amount of Free-Money issued by the State, just as the supply of potatoes or of
a morning newspaper can be measured by the size of the harvest or of the
edition printed.
But this is not true of the present
form of money, as we shall see later, and we cannot therefore at once answer
the question at the head of this chapter. We must undertake further
investigation before we can say what determines the price of the present form
of paper-money.
9. INFLUENCES TO WHICH DEMAND AND SUPPLY ARE SUBJECT
Wares are produced for the market
and are useful to their producers only as objects of exchange. For this reason
supply is equal to the stock of wares; it is something material, or at least an
involuntary action carried out by means of wares. Without wares the action
which lies in supply cannot be carried out, and with wares it must be carried
out. To offer wares for exchange is the only thing which can be usefully done
with them. In general therefore, the action which lies in supply is so closely
identified with the substance necessary for the action that substance and
action are bound into one.
Supply, that is, demand for money,
is therefore identical with the stock of wares.
The stock of wares, again, depends
upon:
The stream of wares flowing into the
market, due to the division of labour.
The stream of consumers' goods
leaving the market after completion of exchange.
If the stream of commodities into
and out of the market never varied, supply, that is demand for money, would be
constant. But this, we know, is far from the truth. The stream of wares into
the market is continually increasing because of the continual increase of
population. One hundred workers throw more wares upon the market than ninety.
The stream of wares into the market also increases because of the steady
expansion of the division of labour. If a farmer organises his farm for
cattlebreeding, instead of wasting his energy in producing articles for his own
consumption, he must make more frequent journeys to market. Formerly he bought
and sold little, now he sells his whole produce; he has therefore increased the
supply of wares, that is, the demand for money, by almost the whole amount of
his production.
In the country and in small towns
many artisans used to follow their trades intermittently; they had subsidiary
occupations such as farming or gardening; they made their own tools, clothes,
furniture, they taught their children. No artisan can now spare time for such
occupations. His trade occupies him completely and pays him better. The whole
product of his labour takes the form of wares and comes to market, where it
creates demand for money. In this way demand for the medium of exchange has
been greatly increased during the last decades.
Still more is the offer of wares,
the demand for money, increased by improvements in the means of production. If
a weaver with a hand-loom wove 10 ells of cloth he marketed only 10 ells of
cloth; his demand for money was only 10 ells of cloth. With modern machinery
the same weaver weaves 500 ells. He therefore sends 50 times more wares to
market; his demand for money has increased fifty-
fold. (*Value
theorists, who have succeeded in enveloping economic phenomena in an
impenetrable fog, will here object that the improved means of production have
reduced the "value" of 500 ells to the value of the former 10 ells,
with the result that 500 ells now only cause the same demand as 10 ells
formerly. In reply we may ask why improvements in the means of production should
halt before money. We should be justified in replying as follows: "The
improved processes of production have reduced the 'value' of 500 ells of
paper-money to the 'value' of 10 ells. With the fall in the value of wares, the
'value' of money has also fallen, and has thereby remained on the same level as
that of the wares.") It is the same with all other
arts and crafts.
To copy the books produced annually
by a single modern printing press, the whole population of the Chinese Empire
would have to spend its time from morning till night, year in, year out, in
copying. The same is true of colour printing.
Thirty men in Argentina with
steam-ploughs and threshing machines produce as much wheat as 3,000 German
smallholders with the same effort. These Argentine farmers consequently produce
one hundred times the supply of wares and cause one hundred times the demand
for the medium of exchange.
The amount of supply should not,
however, be measured solely by the amount produced, but also by its quality. A
ton of first-class wheat represents a greater demand for money than a ton of
wheat of the second quality.
Modern products are constantly
advancing in quality. Breeding stock and seeds are being steadily improved; the
finish given by machinery is becoming finer and finer; purer and more useful
chemicals reach the market. With electric chisels and the splendid models
furnished by our exploited proletariat, sculptors produce miracles, and the
demand for money increases by the full advance of the art of the present beyond
the art of the past.
The stream of products into the
market is also increased by the discovery of uses for formerly useless
products. The German blast furnaces supply over a million trucks of basic slag
for use as a fertiliser. Slag, at one time a troublesome waste product, now
creates a demand for many hundred million marks of the medium of exchange.
(This does not, however, mean that the circulation need be increased by so many
millions). The same is true of potash salts and of many other substances. Less
money, less of the medium of exchange would be required in Germany if the
usefulness of basic slag and potash salts had not been discovered.
But the demand for money is also
influenced by factors independent of production. The division of property makes
many things wares which were formerly goods for use. Land, for instance, can
now be bought and sold; formerly it was the property of the community and
inalienable. Year after year large sums of money are required for the transfer
of real estate. The demand for money had increased since the land of the
country has been degraded to the level of a ware. Interest upon mortgages and
rent require much currency. Less currency would suffice if farmers had not to
put by part of the money received for their produce to pay the rent and
interest due at Martinmas; less money would be required if the land had
remained common property.
The same is true of house-rent.
Formerly most men lived in their own huts or houses, and rent was something
exceptional. At present the houses in which men dwell are seldom their
property, and part of the weekly or monthly wage must be set apart to pay the
rent on quarter-day. Many millions are thus locked up for days, weeks or
months.
(* Whether rent on land and houses
or other regular payments are made every quarter, every month, or every week
also affects the demand for money. If a workman puts by the part of his wages
destined for rent in the first weeks of the quarter the money lies fallow for
three months. If, as in England, he pays his rent weekly, the money at once
comes into circulation again, through his landlord. This is one of the reasons
why England manages with a much smaller quantity of currency than any other
country.)
The provision of water, light,
power, etc., by the community, converts a number of important things into wares
which were formerly produced for direct consumption. This also increases the
demand for money.
Again, nothing can become a ware
unless it can be brought to the purchaser. How many things are today lying
useless because, for want of railways, roads, canals, they cannot be
transported ! Mountains of ore and timber, herds of cattle are brought into the
market by a new railway line, a tunnel, a bridge, a voyage of discovery, and
the demand for money is increased by the whole amount of these products.
In general, therefore, the supply of
wares, the demand for money, is constantly increasing. But sometimes the demand
for money decreases, for example through a general reduction of the hours of
work. War, failure of the crops, and epidemics can cause important reductions
in demand for the medium of exchange, as does the whole present wage-policy of
the workers.
These examples suffice to illustrate
some of the many factors which determine the flow of wares into the market. But
the offer of wares depends also, as we have already stated, upon the stream of
wares out of the market. Until a commodity has reached the consumer it is
offered for sale and creates demand for money. Every commodity carried away
from the market means a reduction in the demand for money.
Thus the supply of wares, the demand
for money, depends also upon how quickly wares find purchasers and cease to be
wares. A comparison with the means of transport will again serve to make this
clear. Suppose a certain quantity of bricks, say a thousand tons, must be
brought daily from the brick fields to the city. The road is bad, bridges are
wanting, and the bricks have to be unloaded to pass a morass. The carts
therefore proceed slowly, their load is small, and many carters must be engaged
to cope with the work. Suppose now that the road is improved, the morass filled
in, and bridges built. The carters can now take larger loads and can make two
journeys instead of one. Only half the carters are required; the thousand tons
of bricks now represent only half the former demand for carters. Or a
narrow-gauge railway is built, and the thousand tons of bricks represent but a
hundredth part, or less, of the former demand for carters. This is how we must
think of the demand for the medium of exchange caused by the stock of
wares.
To bring the wares from producer to consumer
by way of exchange, a series of commercial organisations is necessary. Upon the
existence and efficiency of these organisations depends the speed with which
wares leave the market.
Suppose a bag of Brazilian coffee
had to be exchanged by way of barter for prints from Aix-laChapelle. It would
have to be exchanged countless times; it would drift about the market endlessly
as a ware. Today, with the help of money, a bag of Brazilian coffee often
reaches the German consumer after three or four changes of possession.
The technique of commerce has
reached a comparatively high degree of perfection (* Only the
power of money to exchange wares is steadily decreasing - as we shall prove
later.), and each improvement accelerates the
conversion of wares into goods for use. We need mention only the improvements
in modem banking and in the laws relating to bills and cheques; co-operative
societies and department stores; the postal, telegraphic and consular services;
advertising and printing; commercial schools for the training of young business
men; uniform weights and measures; telephones, typewriters and copying
presses.
A modern commercial undertaking can
do 10, 20, 100 times the amount of business that was formerly
possible; the "salesmanship" (*
Salesmanship: Capability of bringing wares from the place of production to the
consumer.) of a modern merchant is, from the merely
technical standpoint, 100 times greater than that of his grandfather.
The division of labour continuously
throws masses of wares into the market, and merchants, with the help of
commercial organisation, continuously direct these masses of wares out of the
market, into the hands of the consumers.
If merchants had not this commercial
organisation at their disposal, the stores, shops and markets to receive the
slowly flowing stream of wares would have to be many times larger. A mountain
stream broadens as it enters the plain, as the fall decreases; and it would be
the same with wares. Without modern commercial organisation the stock of wares
would be larger, the demand for money incomparably greater. Even at the present
day we often experience the breakdown of some form of commercial organisation,
for instance the organisation of credit, and we can then observe how the flow
of wares from the market is retarded, how the stock of wares increases until it
threatens to flood the market (so-called over-production). Under the pressure
of this growing demand for the medium of exchange prices then weaken and there
is a crisis.
Suppose that a road is incapable of
dealing with the traffic because of its many turnings and bad surface. The road
is straightened and its surface adapted to rapid traffic when, in spite of the
increased volume of traffic, it will appear half deserted. If, now, the old
conditions are suddenly restored, the traffic will perhaps be completely
blocked by the congestion of vehicles. It is the same with commercial
organisation which straightens and mends the roads for the rapid exchange of
wares. If part of the organisation breaks down, the stock of wares immediately
becomes greater, that is to say, the demand for the medium of exchange
increases.
As credit transactions have in this
way a powerful influence upon the demand for money, we must consider them
somewhat more closely.
We said that wares represent a
demand for the medium of exchange exactly corresponding to their amount and
quality. So, if there were any method of exchanging wares without employing
money, the demand for money would be reduced by the amount of the wares so
exchanged. This is self-evident when examined with the aid of our conception of
the demand for money. Here again we may use a railway-line as an illustration.
The demand for rolling stock is exactly equal to the amount of goods awaiting
transport. But if a canal is built along the railway, the demand for rolling
stock decreases by the amount of the goods transported by canal.
Credit transactions substituted for
money in the exchange of goods have the same effect as such a canal. If A. in
Königsberg sends B. in Aix-la-Chapelle a consignment of butter, and B. pays the
bill with a consignment of wine, the transaction is completed without a pfennig
of money. If B. had no credit with A. or A. had no credit with B. the butter
would have been handed over only for money, and the wine could only have been
exchanged in the same way. The demand which the wine and butter would have
created for money is here eliminated by credit.
The demand for money is therefore
reduced by the exact amount of the wares exchanged by way of credit. If the sum
of credit transactions increases, the demand for money decreases; if credit
decreases, the demand for money increases proportionately. The influence of the
credit transactions upon the demand for money is unchanged if the price of the
butter and wine is calculated in money and this money is represented by
cheques, bills of exchange, or other credit instruments. Credit is always an
evasion of the demand for money. Credit instruments, although drawn in money,
render money superfluous for the transactions they negotiate. But they are only
credit instruments, they rise and fall with credit. They are substitutes for
money only as long as credit is flourishing.
We may again use as illustration the
railway from which the traffic was diverted by a canal. If the water in the
canal freezes over in winter, or evaporates in the summer drought, the goods
which would have been transported by canal return to the railway. If the ice
melted, the demand for rolling-stock would again decrease. An unreliable canal,
sometimes silted up and sometimes frozen over, would disturb rather than
relieve the traffic on the railway. Credit transactions have a similar effect
upon the demand for money.
Let us now recapitulate what has
been said of the demand for money in this section.
Demand for money is represented by
the wares which the division of labour continuously throws upon the market.
Demand for money therefore increases, and also decreases, with the quantity of
wares produced by the division of labour. Demand for money is not merely
proportional to the stock of wares, it is the stock of wares. There is no
demand for money except the stock of wares. And when we speak here of wares we
include all their material properties. When we use the word "wares"
we have casks of beer, hams, ships laden with tobacco, before our eyes. We mean
a palpable, not an abstract ham, a ham which we have visualised so clearly that
we could swear it was the product of Westphalia. When we speak of demand for
money, when we speak of wares, we do not mean crystallised or mummified labour,
or a quintessence of labour, or a social substance, or sweat and blood and
working hours. We do not think of a ham from which have been abstracted all
material properties, the lean, the fat and the bone. Demand for money, demand
for a medium of exchange, emanates from the visible, palpable things that we
purchase in the market by the pound or yard, to feed and clothe ourselves. And
in the demand for money is included not only the quantity, but also the quality
of the wares.
Demand for money depends upon the
stream of wares produced by the division of labour and the division of
property. The size of this stream depends again upon the number, industry,
skill and wisdom of the workers, and upon the quality of their instruments of
production. An English weaver throws five times as much calico upon the market
as an Indian weaver. He creates, therefore, five times the demand for
money.
Demand for money depends upon the
speed with which commerce brings the wares to the consumer, and this speed
increases with every improvement in the technique of commerce. If the
salesmanship of a young man trained in a school of commerce is greater than that
of an ordinary retailer, the demand for money has decreased with the foundation
of the school of commerce. (If the salesmanship of the student is not greater,
these schools have no right to existence).
Demand for money is in inverse ratio
to the speed with which the products of the division of labour and property
lose the quality of a ware.
Demand for money also depends upon
the growth or limitation of credit, that is, upon the constantly varying
quantity of wares withdrawn from the market, and from the demand for money, by
the constant expansion and contraction of credit.
The daily demand for money therefore
equals the quantity of wares daily brought to market, less the wares exchanged
by way of credit (or barter).
In short: The supply of wares,
supply simply, supply as we mean it in the statement, "demand and supply
determine prices" - this supply is the demand for money. The demand for
money is comprised in the supply of wares and vice-versa. And supply is equal
to the stock of wares.
10. THE SUPPLY OF MONEY
(The Demand for Wares or, simply,
Demand)
The characteristic of the products
of the division of labour and property is that they must be sold. Wares are
produced to sell, and no product is more characteristically a ware than money.
This we have already shown.
All other wares sooner or later
leave the market as goods for consumption, but money is bought only to be sold
again.
Wares can be sold only for money,
and in the same way money can be sold only for wares. Just as wares represent
the embodied demand for money, so money represents the demand for wares. An
increase in the stock of money means an increase in the demand for wares. He
who has no money can create no demand for wares. The money in the cellars of a
bank could at any moment be poured upon the market and would create a powerful
demand for wares, whereas a thousand starving unemployed casting longing
glances at the riches of the market can create no demand for them.
The demand for wares depends
therefore chiefly upon the stock of money. The demand for wares will not always
coincide with the stock of money (we shall very soon come to this crucial
point), but money is a ware and therefore sooner or later compels its possessor
to offer it in exchange.
A person can offer less money than
he possesses, but he cannot offer more than he possesses. Our stock of money is
the upper limit of our offer of money. Again, since money is a ware, more money
will be offered in exchange, on the average, over a period of years, where the
stock of money is larger than where it is smaller.
The 180 millions stored for 40 years
in the German war chest at Spandau prove, no doubt, that money and the sup o
money are not, like potatoes and the supply of potatoes, almost identical.
Nevertheless the function of money is, to be offered, under certain
circumstances, in exchange.
As a vehicle becomes useful to its
owner only through a change of place, so money becomes useful only when it changes
possession, when it serves as a medium of exchange and circulates. Inherent in
money is the characteristic which sets it in circulation. To a certain degree
the present form of money is under a material compulsion to circulate. (With
Free-Money this compulsion becomes absolute).
We said that the stock of wares is
in inverse proportion to the speed with which commerce dispatches wares from
the market to the consumer. But since money is used and not consumed, since it
preserves its characteristic of being a ware, since it is bought only to be
sold (the use of gold in the arts can here be disregarded) an acceleration, by
improved commercial organisation, of the rate at which money changes possession
has the opposite effect to an acceleration of the sale of wares. The more
rapidly money passes from hand to hand, the sooner it appears at its point of
departure, the market, to begin its circuit again. With each change of
possession of money, a ware is brought a stage further in its progress towards
the cellar of the consumer. Just as the number of ton-miles completed by a
railway wagon in a given time is proportionate to the rapidity at which the
wheels rotate, so the quantity of wares that a piece of money clears from its
path is proportionate to the rapidity with which it completes its circuit. A
brand-new, obviously genuine thaler perhaps changes possession only ten times
in the week, since some persons into whose possession it comes will think twice
before parting with it. With a worn thaler this obstacle to circulation is
smaller, and with a doubtful one it is nonexistent. So to complete the same
circuit a new thaler may require a month, a worn thaler a fortnight, and a
doubtful thaler a week. Four new thalers, two worn thalers or one doubtful
thaler perform the same amount of work. The power of money to effect exchanges,
its technical quality from the mercantile standpoint, is in inverse proportion
to its technical quality from the banking standpoint. From the mercantile
standpoint a doubtful thaler may be four times as efficient as one fresh from
the mint. This little detail should be carefully noted.
Supply is a stream which rises in
the division of labour and flows into the houses of the consumers.
Demand is not a stream but an object
which moves in a circle and when rotating quickly resembles a solid ring.
Supply is always composed of fresh wares which make one journey and disappear
for ever. Demand is composed of a mass of coins which have completed the same
journey a thousand times and are destined to complete it as many times
again.
This comparison is used to show that
demand is subject to laws other than those of supply. The mere fact that a ware
on its journey to the consumer becomes larger, heavier, that is, dearer,
whereas the price of money may remain the same, after it has changed hands a
thousand times, shows clearly that we cannot always compare money with wares.
(But nothing in this sentence should be taken to mean that at present money
performs the exchange of wares free of cost).
None of the conditions determining
the amount of the supply of wares, noted in the last chapter, apply in fact to
demand (supply of money). Indeed one condition, the improvement of commercial
technique, has an effect upon money opposite to that upon wares. Improved
commercial technique accelerates the progress of wares to the consumer, and
this reduces the stock and supply of wares. A technical improvement in money,
on the contrary, a reduction of its period of circulation, causes the same coin
to reappear sooner at its starting point to begin its work again. Every
improvement in money therefore increases the supply of money. For this reason,
after the introduction of Free-Money about one-third of the stock of money will
probably suffice to create the same amount of demand.
The amount of the supply of wares is
in the first place determined by the conditions of production - the
fruitfulness of nature, the skill of the workers and the efficiency of their
tools. For demand all this is immaterial. Gold is not produced but found; and
the stock of gold which affects the present generation has been inherited from
its forbears. Similarly the stock of paper-money has been arbitrarily
"issued". The wares produced a year ago have almost ceased to
influence supply, but the gold which Solomon brought from Ophir doubtless forms
part of the currency of today and influences demand. Supply is each year
created afresh; demand is an inheritance which includes the treasures of
Solomon, the Spanish plunder from Mexico and Peru and, in recent times, the
abundant gold discoveries from Klondyke and the Transvaal. The magnitude of
demand is determined by men whose bones are long since dust. A thousand million
human beings are engaged in feeding supply; demand, on the other hand, is kept
up by a handful of adventurers in the gold-mines of Alaska and South
Africa.
But demand is also affected by the
velocity of the monetary circulation, and many may find it difficult to set any
limit to this velocity. They will therefore be inclined to think that demand is
something quite indeterminate. Yet demand, in conjunction with supply, has the
supremely important function of determining price.
It is a fact that we can hardly
imagine a velocity of circulation which could not be increased by some
improvement in commercial organisation.
Suppose, for instance, that we have
worked out carefully the highest imaginable Emit for the velocity of
paper-money. Someone then proposes to impregnate the notes with some nauseous
chemical such as sulphuretted hydrogen. Everyone would try to get rid of such
money still more quickly, so the limit set to the velocity was obviously too
low.
But in practice it is immaterial to
the demand of today whether the velocity of circulation of money can be increased
tomorrow. "Today" is what matters in the market; "tomorrow"
is important only if it can be clearly foreseen. We cannot imagine a limit to
the speed of a railway train which could not be exceeded by some technical
improvement; but for the present the limit is prescribed by the existing
locomotives, bridges, curves and embankments. It is a matter of course for all
of us that we cannot travel at any speed we please. After a little
consideration we should be able to familiarise ourselves with the thought that
the existing commercial organisation prescribes a maximum velocity for money
which, for the present, cannot be exceeded.
But this does not mean that
commercial organisation cannot be improved. As a matter of fact it is being
improved almost daily. The reform of the German currency, for example, which
replaced the former medley of coins by a unified coinage passing from hand to
hand without examination, certainly made a faster circulation possible.
(*Arguments could be found for the opposite
conclusion. The greater security against a fall in the rate of exchange and the
greater security from false coinage must make the coins more attractive to
savers than the worn groschen, thalers and gulden. But to save the actual
currency means to interrupt the circulation of money. We have here without
doubt, to some extent, a restraining influence.)
Exchanges, clearing-houses, cheques
and bills of exchange increase the velocity of circulation of money.
(*Merchants formerly, like
cattle-dealers today, carried, when travelling, ready money for their
purchases. The ocean bed on the sea route to India is said to be covered with a
layer of silver lost through shipwreck.)
Above all, the change in the form of
saving has influenced the velocity of circulation. Savings were formerly hidden
in a mattress, a buried jar, etc.; in modem times they are brought into
circulation again through the medium of the savings banks. In this manner large
sums go to increase demand.
The circulation of money is even
accelerated by modem department stores, since a purchaser can spend in such a
store in one day a sum which would have required two days to spend in separate
shops scattered through the town. In short, the possibility of a continual
acceleration of the velocity of circulation of money cannot be denied, but this
possibility does not obscure in any way the picture of demand which we have drawn
in the preceding pages.
Demand, then, is determined by the
amount of the stock of money and the velocity of circulation of money. Demand
increases in exact proportion to the increase of the stock of money and of the
velocity of its circulation.
That is what we must first know of
demand, to form a general picture of the determination of price through demand
and supply. It must be admitted that what we have learnt is as yet very little.
But at least a content has been given to these words. We can weigh and handle
demand and supply; they are no longer abstractions. When we speak of supply we
no longer think of business transactions, speculation and so forth. We see
passing before us a goods train loaded with timber, straw, lime, vegetables,
wool, minerals. With our eyes and other senses we have become aware of the
nature of supply.
And if we speak of demand we do not
see beggars, deficits, interest on loans. We see money, papermoney or metallic
money, which we can handle and count. We know that money is brought into motion
in a circuit by a force inherent in it, and that this motion can be accelerated
by improvements in commercial organisation. We observe that each time money
completes its circuit it seizes a certain quantity of wares and throws them
from the market into the consumers' houses. We can follow with our own eyes how
demand depends in part upon the rate at which money, after each ejection,
returns to the market to seize another ware. We speak no longer as parrots, but
with the consciousness that we are uttering the fundamental truth of economic
science when we say: Prices are determined by demand and supply.
A numerical representation of the
elements of price discussed so far would be somewhat as follows:
Supply Tons Demand Tons
When commercial organisation is
working smoothly, the division of l a b o u r and property throws on the market
daily a quantity of wares equal to 1000
The metal or paper-money of the State creates, with its present velocity of
circulation and yesterday's prices, a d e m a n d which also equals 1000 This supply increases: Demand increases:
1. Because production increases through a 10% increase of population
150
2. Because division of labour replaces primitive production, expanding
5 % 50
3. Because the means of production i m p r o v e 20% 200
4. Because workmen, becoming more efficient, produce wares of superior
quality. 30 % 300
____
1650
On the other hand supply
decreases:
1.
Because better commercial
organisation and the elimination of middlemen cause wares to flow more rapidly
from the market to the places of consumption 100
2.
Because simplification of the
law relating to bills of exchange and o t h e r circumstances cause wares to be
exchanged by way of credit instead of for money 300 400
____ ____
1250
1. Because the stock of money increases through the discovery of new
gold mines or the issue of paper-money 10%
100
2. Because the velocity of circulation of money increases through
improvements in commercial organisation, 20%
200
3. Because the savings banks bring the money of small savers more
rapidly into circulation. 10% 100
____
1400
But this demand is not constant, it
does not appear regularly in the market, as we shall see in the following
chapters.
Explanation: A ton can of course be
a ton of any kind of ware, for example peat. We then calculate the quantity of
potatoes, milk, cranberries, buckwheat, etc. that can be exchanged, at present
prices, for a ton of peat. 100 Ibs. of potatoes, first quality, or 20 gallons
of unskimmed milk, or two bushels of buckwheat are then equal to one ton of
supply.
In the case of demand we calculate
from the actual stock of money and its actual velocity of circulation how much
money can to-day be offered for wares, and how many tons of wares can be bought
at present prices by this amount. The answer is 1000 tons. Since demand and
supply determine the prices upon which these 1000 tons are based, demand
expressed in tons by means of the money offered, must necessarily correspond to
supply expressed in tons. If this is not the case, as for instance in the above
example, where a supply of 1250 tons is confronted with a demand of 1400 tons,
the discrepancy is sooner or later removed by a change of prices. In our
example equilibrium would be established by a rise of prices of 12 per
cent.
11. THE LAWS OF CIRCULATION OF THE PRESENT FORM OF
MONEY
If we recognise demand and supply as
the sovereign regulators of prices, if we are convinced that the subject-matter
of the theory of value is an illusion, and further, that production oscillates
about price as centre of gravity and not vice-versa, it is clear that price and
the factors influencing price will absorb our interest, and that certain facts
which until now seemed trivial will assume an immense new importance.
One of these apparently trivial
facts, which has, up to the present, been totally overlooked, is that the
nature of our traditional money allows demand (the offer of money) to be
delayed from one day, one week, one month, one year to another. whereas supply
(the offer of wares) cannot be postponed a day without causing its possessor
losses of every kind. The French war-indemnity of 180 million marks of gold
stored in the fortress of Spandau has not entered the market once in 40 years,
yet any expense caused the German government by this so-called war-chest has come
from without, not from within the Julius tower. The amount and quality of the
gold has remained the same. Not a pfennig has been lost through loss of
material. The soldier on guard protects the gold, not from moth and rust, but
from thieves. He knows that as long as the locks remain intact no harm can come
to the treasure piled within.
In contrast to this, a real
war-chest, the so-called "wheat of the Swiss Confederation" stored at
Berne, suffers annually a loss of 10% of its material, apart from the cost of
guarding and storage. (Without counting interest, which the owners of the
Spandau treasure also lose).
The wares which compose supply
decay, lose weight and quality, decrease continually in price in comparison
with fresh wares.
Rust, damp, decay, heat, cold,
breakage, mice, moths, flies, spiders, dust, wind, lightning, hail and
earthquakes, epidemics, accidents, floods and thieves wage war continuously and
successfully upon the quantity and quality of wares. Few wares fail to exhibit
the results of this warfare a few days or months after their production. And it
is precisely the most essential wares, food and clothing, that are least able
to withstand these enemies.
Like all things earthly, wares are
in constant state of flux. Rust is converted into pure iron by fire, and iron
is converted back into rust by the slow fire of the atmosphere. Costly furs fly
out of the window in the form of a thousand moths. Dry-rot converts the
woodwork of a house into dust. Even glass, which might seem better able than
other products to withstand the assault of time, sooner or later undergoes
something of the game transformation - it breaks.
Each product is threatened by a
particular enemy-iron by rust, furs by moths, glass by breakage, livestock by
disease; and with these particular enemies are allied common enemies, water,
fire, thieves and the oxygen of the air, which slowly but surely burns
everything away.
Who could pay the premium for
insurance against all these risks? How much does the shopkeeper pay for the
place of storage, only, of his wares ?
Wares, again, not alone deteriorate,
they also become antiquated. Who would today buy a muzzleloader or a
spinning-wheel ? Who would even pay the cost of the raw material of such wares
? Production is constantly bringing newer and better models into the market;
the Zeppelin had no sooner proved its dirigibility than it was outflown by the
aeroplane.
The only way in which an owner of
wares can protect himself against such losses is to sell them. He is compelled
by the nature of his property to offer it for sale. If he resists this
compulsion he is punished, and the punishment is carried out by his property,
by the wares in his possession.
It must also be remembered that new
wares are continually flowing into the market. A cow must be milked daily, a
man without possessions is daily compelled by hunger to work. The offer of
wares must therefore become larger and more urgent if sale is delayed. As a
rule the most favourable time for the sale of a product is the moment it leaves
the factory. The longer sale is delayed, the less favourable the market
conditions.
Newsboys shout and run because their
wares are unsaleable a few hours after production. The milkman's cart is
provided with bells because he must make his sales to the hour and minute. The
vegetable woman is the earliest riser of God's creatures; she awakens the
sleeping cocks. The butcher cannot afford to oversleep himself or to close his
shop during the Whitsun holidays, for in twenty-four hours his wares would be
on the verge of putrefaction. Bakers can sell their wares at the regular price
only as long as the loaves are warm. They are throughout their lives as hurried
as the good Zürchers who once a year appear with their millet broth in
Strasbourg. The farmer who has ploughed out his potatoes and fears an early
frost hurriedly collects them and as hurriedly brings them to market to take
advantage of the fine weather and to save, as far as possible, the laborious
loading and unloading of his cheap and heavy product.
Or take wage-earners, the ten
thousand battalions of workmen. Are they not as hurried as the newsboy, the
vegetable-seller, the farmer ? If they do not work, Part of their assets, their
capability to work, is lost with every beat of the pendulum.
Thus the nature of wares, their
transitoriness, arouses the majority of us every morning from sleep, spurs us
to haste and forces us to appear at a given hour in the market. The possessor
of wares is commanded by them, under threat of punishment, to seek the market,
and the punishment is carried out by the wares themselves. The offer of a ware
for sale depends, therefore, not upon the will of its possessor, but upon the ware
itself. Wares seldom leave their possessors free-will, and then only within
narrow limits. A farmer, for instance, can, after threshing his wheat, store it
in his barn to await a better opportunity of sale. The nature of wheat allows
its possessor more time for reflexion than the nature of salad, eggs, milk,
meat or labour. But the time for reflexion is not unlimited; for the wheat
loses weight and quality, is eaten by mice and mites, and must be protected
from fire and other dangers. If the farmer brings his wheat to a granary,
storage, even if interest is neglected, costs him in six months a considerable
part of the wheat. In any case the wheat must be sold before the next harvest,
and the harvest, owing to import from the southern hemisphere, now occurs once
every six months.
Mlle. Zélie, of the Théatre Lyrique,
Paris (1860), receives for a concert on the island of Makea in the
Pacific, as entrance money for the
860 tickets sold: 3 pigs, 23 turkeys, 44 chickens, 500 coconuts, 1200
pineapples, 120 measures of bananas, 120 gourds, 1500 oranges. She estimates
the receipts, at Paris market prices, at 4000 francs and asks; "How can I
convert all this into money? I hear that a speculator from the neighbouring
island of Manyca is prepared to make an offer in hard coin. Meanwhile, to keep
my pigs alive, I give them the gourds, and I feed the chickens and turkeys with
bananas and oranges, so that, to preserve the animal part of my capital, the
vegetable part must be
sacrificed." (*Wirth,
Das Geld, p. 7.)
It can therefore be said without
fear of contradiction that supply is subject to a mighty compelling force
inherent in the objects of which it is composed, and that this force increases
from day to day and breaks down the barriers separating supply from the market.
Supply cannot be postponed. Quite independently of the will of the possessors
of wares, a supply of them must daily appear in the market. Whether the sun
shines or the rain falls, whether political rumours alarm the exchanges, supply
is always equal to the stock of wares. Supply remains equal to the stock of
wares even if the price of wares is unsatisfactory. Whether the price brings
the producer gain or loss, the wares must be offered for sale-usually at
once.
We may therefore regard the supply
of wares, that is, the demand for money, as identical with the wares
themselves. Supply is independent of deals on the market. Supply is a thing, a
material, not a business transaction. Supply always equals the stock of wares.
Demand, on the contrary, as we have
already shown, is not subject to this compulsion. It is composed of gold, a
precious metal which, as the expression implies, occupies an exceptional
position among the products of the earth. Gold may be regarded almost as
foreign matter intruded upon the earth and successfully withstanding all the
destructive forces of nature.
Gold neither rusts nor decays,
neither breaks nor dies. Neither frost, heat, sun, rain nor fire can harm it.
The holder of money made of gold need fear no loss arising from the material of
his possession. Nor does its quality change. Gold which has lain buried for a
thousand years remains unconsumed.
Again the production of gold is trivial in comparison
with the masses of gold accumulated since the earliest times. The production of
gold in three, six, twelve months hardly equals the thousandth part of the
stock of gold.
Nor is gold money affected by
changes of fashion. The only change of fashion in money in 4000 years was the
change from bimetallism to a simple gold standard.
Gold has only one possible danger to
fear-the invention of an efficient form of paper-money. But even here the
holder of gold is safe enough, for such paper-money would have to be introduced
by the will of the whole people - a slow-moving force which gives him time to
save himself.
The possessor of gold is protected
from loss of his material by the unique characteristics of this foreign body.
Time passes gold unnoticed by, for gold is charmed against his ravages.
The possessor of gold is not forced
to sell by the nature of his property. It is true that while he is waiting he
loses interest. But does he not also, perhaps, gain interest simply because he
can wait ? The owner of wares also loses interest if he delays his sale. But he
must be prepared as well for the loss of part of his product and for the
expense of storage and care-taking, whereas the possessor of money suffers only
the loss of a profit.
The possessor of money can therefore
postpone his demand for wares; he can use his will. He must indeed sooner or
later offer his gold for sale, for in itself it is useless to him. But he is
free to choose the time at which he does so.
Supply can always be measured by the
stock of wares in existence; it is exactly equivalent to those wares. Wares
command and brook no contradiction; the will of the possessor of wares is so
powerless that it may be disregarded. With demand, on the other hand, the will
of the possessor of money comes into play, for gold is a patient servant. The
possessor of money holds demand like a hound on the leash and lets it slip at
the quarry of his choice. Wares are the quarry of demand. Or, to imitate Karl
Marx's pictorial language: Demand enters the market proudly confident of an
easy victory; supply appears dejected like a beggar who expects more kicks than
ha'pence. On the one hand compulsion, on the other hand freedom; and the two
together, compulsion and freedom, determine price.
Why this difference ? Because in one
case there is indestructible gold to sell, in the other perishable commodities.
Because one can wait and the other cannot. Because one possesses the medium of
exchange, and, thanks to the physical characteristics of this medium, can,
without personal loss, postpone exchange, whereas the other suffers personal
loss from the postponement - a loss proportional to its duration. Because this
relation makes the possessor of wares dependent upon the possessor of money;
because, to quote Proudhon, money is not the key that opens the gates of the
market but the bolt that bars them.
Suppose now that demand makes use of
the freedom it enjoys and withdraws from the market. Supply must then, because
of the compulsion to which it is subject, seek out demand, hasten to meet it
and entice it back to the market by the offer of some special advantage.
Demand, instant demand, is a
necessity to supply, and demand knows of this necessity. Consequently demand
can usually ask for, and obtain some special advantage from its privilege of
being able to withdraw from the market. Is there any reason why the possessor
of money should not ask for this reward ? Have we not shown that our whole
economic system, the determination of prices through demand and supply, is
founded upon exploitation of our neighbour's embarrassment ?
A and B, separated by space and
time, wish to exchange their wares, flour and pig-iron, and for this purpose
need the money in C's possession. C can at once effect the exchange with his
money, or he can delay, hinder or forbid the exchange; for his money gives him
the freedom of choosing the time at which it shall take place. Is it not
obvious that C will demand payment for this power, and that A and B must grant
it in the form of a tribute on their flour and pig-iron. If they refuse this
tribute to money, money withdraws from the market. A and B must then retire
without completing the sale and undertake the heavy cost of returning home with
their unsold products. They will then suffer equally as producers and
consumers; as producers because their wares deteriorate, and as consumers
because they must do without the goods to obtain which they brought their
products to market. If instead of gold, C owned any other product, tea, powder,
salt, cattle or Free-Money, the characteristics of these media of exchange
would deprive him of the power of postponing his demand; he would no longer be
able to levy a tribute on other products.
Usually, therefore, that is,
commercially, the present form of money acts as intermediary for the exchange
of wares only on condition that it receives a tribute. If the market is a road
for the exchange of wares, money is a toll-gate built across the road and
opened only upon payment of the toll. The toll, profit, tribute. interest or
whatever we choose to call it, is the condition upon which wares are exchanged.
No tribute, no exchange.
I wish here to avoid all possibility
of misunderstanding. I am not now speaking of commercial profit, of the payment
which the merchant can and does demand for his work. What I speak of here is
the profit which the possessor of money can demand from producers, because he
can paralyse the exchange of wares by withholding his money. This profit has
nothing in common with the merchant's profit; it is a separate effect produced
by money itself, a tribute which money is able to exact because, unlike an
other wares, it is free from the material compulsion of being offered for Sale.
For supply: the material compulsion inherent in wares; for demand: freedom,
will, independence of time - the result must be a tribute. Wares must pay money
a tribute because money is free; there is no other possibility. Without this
tribute money will not be offered in exchange, and without money to effect
exchanges no wares will reach their destination. If, for any reason, money
cannot exact its accustomed tribute, there is a crisis; wares he where they
are, and rot.
But if tribute is the obvious
condition for the appearance of demand, it is still more obvious that it will
not appear in the market if loss awaits it there. Supply is forced into the
market regardless of gain or loss. Demand, if conditions are unfavourable,
retires into its fortress (its fortress being its indestructibility), and
quietly waits there until conditions are again suitable for a sally.
Demand, therefore, the regular offer
of money for wares exists, only when the condition of the market ensures:
-
Sufficient security against
loss.
A tribute for money.
The tribute can be levied only on
the sale of wares, and requires the fulfilment of one essential condition:
During the interval between buying and selling a product, its price must not
fall. The selling price must exceed the price of purchase, for the tribute is
contained in the difference between them. In times of trade expansion, when the
average price of wares is rising, the merchant's profit rises also. The
difference between the two prices is then sufficient to cover the merchant's
profit and the tribute paid to money. When prices are falling, the collection
of the tribute becomes doubtful or impossible. The doubt alone is sufficient to
keep the merchant from purchasing wares. No merchant, speculator or employer
will discount a bill at the bank and undertake the obligation of paying
interest if he suspects that the product he thinks of buying may fall in price.
A fall of price may mean that he does not get back even the amount of his
outlay.
If we now consider the two
conditions upon which money offers its services as medium of exchange, we see
that commerce is mathematically impossible with falling prices. But it should
be noted that the only person who speaks of this mathematical impossibility is
the possessor of money. For the possessor of wares, extreme, demonstrable
losses are no obstacle to supply; for him there is no question of mathematical
impossibility. Whether profit is or is not probable, wares are in all
circumstances ready for exchange. But money goes on strike if its usual tribute
is not assured, and that happens when, for any reason, the ratio of demand to
supply is disturbed and prices fall.
But stop! What is it that we have
just affirmed ? That demand withdraws the circulation of money becomes
mathematically impossible when prices fall! But prices fall just because the
supply of money is sufficient. Does the supply of money, when it is
insufficient to prevent a fall of prices, withdraw, that is, become still
smaller?
It is indeed so, there in no
misprint or mistake in what we have just written. Money actually withdraws from
the market, the circulation of money is mathematically impossible, when the
supply of money becomes insufficient and a fall of prices begins or is
expected.
When, after the introduction of the
gold standard, the production of money was reduced by the whole amount of the
production silver, and prices fell, the circulation of money became impossible
and money piled up in the banks. The rate of interest steadily sank. The
bimetallists then opened their campaign against the gold standard and argued
that the chronic trade depression of that time was due to an insufficient stock
of money. In reply, the defenders of the goId standard, Bamberger and others,
pointed to the enormous bank-reserves, to the low rate of interest, and
asserted, that these phenomena were a conclusive proof that the stock of money
was not too small, but too large. The fall of prices, they explained, was due
to a general fall in the cost of production (including that of gold ?) with an
overproduction of wares.
The bimetallists, above all
Laveleye, brilliantly disposed of this argument by proving that the commercial
circulation of money is impossible if money is not offered in a quantity
sufficient to prevent a fall of prices. The large bank deposits, the low rate
of interest, proof that the supply of money was insufficient.
But our monetary philosophers,
wandering in the fog of "value", have never understood this. Even
today they do not see their way clearly, although monetary history has
meanwhile furnished many proofs of the correctness of this part of the bimetallistic
theory. For since chance has decreed great discoveries of gold and the prices
of commodities have moved strongly upwards all along the line, the great bank
reserves have disappeared and the rate of interest is higher than ever. It is
therefore a fact that money collects in the banks, that the rate of interest
falls, because there is a lack of money; and it is also a fact that the banks
are emptied, that the rate of interest rises, because the supply of money is
too great.
And prices fall precisely because
the supply of money is insufficient.
An actual fall of prices is not
necessary to cause the flight of money from the market. If there is a general
opinion that prices will fall (no matter whether the opinion is true or false),
demand hesitates, less money is offered, and for this reason what was expected
or feared becomes an actual fact.
Is not this sentence a revelation ?
Does it not give us a clearer explanation of the nature of commercial crises
than is contained in any of the many-volumed explanations of the matter ? From
this sentence we learn why a Black Friday, a crisis scattering death and
destruction, often comes like a bolt from the blue.
Demand withdraws, conceals itself,
because it is insufficient to effect the exchange of wares at the present
price-level ! Supply exceeds demand, therefore demand must disappear entirely.
A merchant writes an order for cotton. He hears that the production of cotton
has increased and consigns the order to his waste-paper basket! Is that not
comic?
But production continues to throw
new masses of wares upon the market, so the stock of wares increases if sales
are interrupted - just as the water-level of a river rises when the sluices are
closed.
Supply therefore becomes larger and
more urgent because demand hesitates, and demand hesitates simply because
supply is too large in proportion to demand.
Here again there is no mistake, no
misprint. The phenomenon of a commercial crisis, so ridiculous to the onlooker,
must have a ridiculous cause. Demand becomes smaller because it is already too
small, and supply becomes larger because it is already too large.
But the comedy develops into a
tragedy. Demand and supply determine price; that is, the ratio in which money
and wares are exchanged. The more wares are offered for exchange, the greater
is the demand for money. Wares reaching the consumer by way of credit or barter
are lost to the demand for money. Prices, therefore, rise when credit sales
increase, since the quantity of wares offered in exchange for money decreases
by the amount of these credit sales, and since demand and supply - the ratio in
which money and wares are exchanged - determine price.
Conversely, prices must fall when
credit sales decrease, since reaching the buyer through these side channels
again create and for money.
The offer of wares for money
therefore increases in proportion to the decrease of credit sales.
Credit sales decrease when prices
fall, when selling prices fall below cost prices, when a merchant usually loses
upon his stock of wares, when on stocktaking day he can buy for 900 those
articles in his warehouse which cost him 1000, and must therefore write them
down to 900 in his inventory. The solvency of the merchant increases or
decreases with the prices of his wares, so credit sales also increase or
decrease with the increase or decrease of prices. Everyone knows this fact and
everyone regards it as something quite natural. Yet the fact is strange
enough.
If prices rise, that is, if demand
exceeds supply, credit comes into play, deprives money of part of the wares to
be exchanged and drive prices still higher. If prices fall, credit retires,
wares must be exchanged for cash, and prices are still further depressed. Need
we search further for the explanation of commercial crises?
(*The amount of the circulation of
bills of exchange in Germany in 1907 was given in the Reichstag as 35 billion
marks. This sum should possibly be reduced 9 billion marks if it represents the
total bills stamped during the year, as these would be three months bills. But
even in this case we can imagine how greatly the steadiness of demand and
prices is imperilled by such an amount of credit-credit which depends on men's
moods and the turn of the market.)
Because we have improved our means
of production, because we have been industrious and inventive, because we have
enjoyed good weather and abundant harvests, because our wives have been
fruitful, because we have extended the division of labour, the mother of all
culture, the supply of wares (the demand for money), has increased; and because
we have not balanced this greater demand for money with a greater supply of
money, the prices of wares have fallen.
But because prices have fallen,
demand withdraws, money is hoarded. And because demand is withdrawn and sales
hindered, the wares pile up like ice blocks in rivers when the flow of ice is
obstructed. Supply breaks down the obstruction and floods the market, and the
wares must be got rid of at any price. But because prices are falling all along
the line, no merchant can buy wares for fear that what he is tempted to buy so
cheap today could be bought still cheaper to-morrow by his rival with whom, in
this case, he could no longer compete. Wares are unsaleable because they are
too cheap and threaten to become still cheaper. This is the crisis.
The crisis breaks out, merchants'
assets dwindle and their liabilities (in proportion to their assets) increase.
Anyone who has signed a contract to deliver money (*Bills of
exchange, promissory notes, bonds, rents and leases, insurance policies, and so
forth.) finds the engagement difficult to keep because
of the falling prices of commodities (his assets); suspensions of payment
begin, and the exchange of wares becomes a game of chance. For these reasons
credit sales are restricted and the demand for money is increased by the whole
mass of wares hitherto exchanged by way of credit - at a time when money is
scarce and therefore disappears.
Just as the draught created by a
fire makes it blaze, so obstacles to the circulation of our present form of
money stimulate the demand for money. The equilibrating forces, of which so
much is written, never come into play. The evil is intensified, not mitigated,
there is no sign of any compensatory tendency.
Many still seek this compensation in
an increased velocity of circulation of money when the demand for money
increases. They imagine that the wish to buy cheap t must bring increasing
quantities of "money from the reserves" into the market. The contrary
is the truth. A rise of prices, not a fall. stimulates the merchant to
purchase; a fall of prices can only injure him. The fear that what is offered
cheap (* From the merchant's point of view no ware is in itself
cheap; a ware is cheap only in comparison with its selling price. When prices
are falling, all wares are dear. Wares become cheap when a general rise of
prices raises the price at which the merchant sells above the price at which he
buys.) today will be offered still cheaper tomorrow
closes all purses. Purses remain open only as long as a rise of prices is
expected. Again, where are these supposed "reserves" to be found ?
Are they to be found in the banks ? The banks withdraw their money from circulation
when, because of the general fall of prices, it cannot circulate with safety.
The millions thus withdrawn from the market at the time when they are most
needed cannot be regarded as reserves. If the harvest fails and the sheriff
seizes a farmer's cow, the result is not an addition to the stock of cows. The
banks are always overflowing when prices are falling, that is, when the supply
of money is insufficient; when prices are rising they are empty. If the
contrary were true, we could only speak of reserves. If there are actually
reserves in existence, they should, in the interest of the exchange of wares,
be used up as quickly as possible, since their existence would be a further
cause of price fluctuations. Reserves, that is, collections of money, can be
formed only by withdrawing money from circulation, from the market, from the
exchange of wares. But if such reserves are formed only when money is already
scarce in the market, they are not reserves but poison.
This, therefore, is the law of demand,
that it disappears when it becomes insufficient.
But what happens when demand is too
large in proportion to supply, when the prices of commodities rise ? This state
of the market must also be examined; for it is theoretically possible (p. 122),
and has actually occurred, as is shown by the history of the market during the
last decades. No one denies that since about 1895 prices, in spite of greatly
increased production, have risen sharply.
How does the possessor of money act
when prices rise? He expects or knows that what he has bought today can be sold
tomorrow at a higher price. He knows that rising prices make everything, from
the merchants viewpoint, cheap (see footnote p. 234) and that by turning over
his money he can gain increasing profits. He buys therefore as much as he can,
that is, as much as his money and credit allow. And merchants obtain credit as
long as prices are rising and the selling price exceeds the cost price of
merchandise. The optimistic feeling among merchants caused by rising makes them
more inclined to purchase; they do not turn a piece of money over ten times
before deciding to spend it. Money circulates more rapidly when prices are
rising; during a trade-boom the circulation of money attains the maximum
velocity which the existing commercial organisation allows.
But demand is the product of the
quantity and velocity of circulation of money; and demand and supply determine
prices.
Because, therefore, prices rise, the
demand for wares increases through the accelerated velocity of money, and at
the same time the quantity of wares offered for ready money decreases, because
of the increase of credit sales. Prices therefore rise because they have risen.
Demand is stimulated and enlarged because it is too large. Merchants buy wares
far beyond their immediate needs; they seek to secure stocks for future sale -
because supply is too small in comparison with demand. When supply increased
and became too large in proportion to demand, the merchant reduced his orders
to the minimum, to what he could at once dispose of. He could not allow any
time to elapse between buying and selling, for during this time the selling
price would have fallen below the price he had paid for the ware. But if wares
are scarce he is eager to buy; all the purchases he can make seem nothing to
him, he is anxious by every means to increase his stocks. The debts, based on
bills of exchange, that he contracts in doing so, sink daily in significance in
comparison with his assets, which are daily increased by the rise of prices.
These debts cause him no anxiety - as long as prices are rising.
Is not this a fantastic phenomenon,
worthy of the other fantastic phenomena of a trade boom ?
The demand for wares must always
increase far above its usual volume as often and as long as supply is
insufficient.
Yes, our gold standard, offspring of
the theory of value, stands the test. That our investigation has clearly
proved. It causes an increasing demand when demand is already too large, and
restricts demand to the personal bodily wants of the few holders of money the
moment demand becomes too small! A starving man is deprived of nourishment
because he is starving, and a glutton is filled to bursting because he is a
glutton.
We know in what the true utility of
money consists (Chap. 4). But the true utility of money has unfortunately been
hitherto overlooked, with the result that no one was able to imagine demand for
a kind of money made of worthless paper. Something must stimulate people to
purchase money, and if this something were not its utility as the medium of
exchange it would have to be the utility of the material.
Now gold is in fact a material of
industrial utility, and its utility would be much greater if it were cheaper.
The high price of gold alone prevents its being often used instead of iron,
lead or copper.
But gold is not too dear to be used
at least for ornaments, where expense need not be considered. Gold is in fact
the special raw material of the jeweller's trade. Bracelets, chains,
watch-cases and such ornaments are made of gold, as are chalices for the
Catholic form of worship. The fittings of motor cars, church clocks, lightning
conductors, picture frames, etc. are plated with gold, and dentists and
photographers use considerable quantities. All this gold is withheld from the
currency. Coins are usually the goldsmith's cheapest raw material.
The use of gold for industrial
purposes increases with the love of splendour, with the growth of prosperity
and wealth; and wealth increases through production, through work. During years
of prosperity goldsmiths work overtime; during periods of economic depression
people in difficulties bring them back gold ornaments for the melting pot.
That is, when more wares are
produced, when the demand for money, the medium of exchange, increases, large
numbers of gold coins are thrown into the goldsmith's melting pots.
But halt ! Surely this statement is
mere nonsense ! The more work performed, the more wares produced, the greater
is the increase of wealth. And the greater the increase of wealth, the more
money (the medium for the exchange of wares) is melted down for jewellery. We
cannot have heard aright!
But such indeed was the statement.
There is here no misunderstanding and the words are uttered with the gravity of
a judge passing a death sentence. For in these words there is cause enough to
condemn the gold standard. Let those who have the temerity to deny this truth
produce their arguments !
We repeat: the more wares produced,
the greater is the growth of prosperity, the accumulation of wealth, and the
love of splendour. The population having attained prosperity through the
production of wares, empties the jewellers' shops, and the jewellers throw part
of the money they receive into the melting pot to replace with money-material
(gold) the watches, chains, etc. which they have sold.
Many wares have been produced. A
process has been invented for making good steel of indifferent ore. This steel
has given us good tools which increase ten-fold the product of our labour. In
addition, the waste products of the process prove to be an excellent fertiliser
which trebles the produce of our fields. Our workmen have learned in technical
schools to use their hands intelligently. In short, the supply of wares has
increased. And because the supply of wares has increased, we destroy the demand
for wares by melting down the medium of exchange, the bearer of demand !
What would be said of a railway company which decided
that the best way to celebrate a good harvest, or a time of industrial
prosperity when factories were working overtime, was to burn its rollingstock
?
If my potatoes are a success this
year, I shall buy my wife a gold necklace, says the landowner.
If my cow has two calves this year,
I shall buy my sweetheart a wedding ring, says the young farmer.
If I can finish twice as many pairs
of trousers with my sewing machine, I shall buy a gold watch, says the
tailor.
If I can produce ten times as much
nitrogen with my new process, I shall regild the chapel of Our Lady of Succour,
says the chemist.
If the production of my steel works
again increases this year, I shall buy a service of gold plate, says the
capitalist.
In short, the purchase of the
wedding ring, necklace, and so-forth, is always caused by increased production
of wares, increased supply, and the gold for these necklaces and wedding rings
is always deducted from demand, from the coinage. (Uncoined gold, also is by
law money).
The money melted by the jeweller is
lost from the demand for wares, and lost, unfortunately, at a time when the
supply of wares is increasing (see below). But demand and supply determine
price. Prices therefore fall. And this fall of prices interrupts the exchange
and production of wares. The result is unemployment and pauperism.
The gold standard, the usefulness of
the money-material for industrial purposes, is thus the saw that saws away the
branch upon which prosperity grows. Money is the condition of the division of
labour, the division of labour leads to prosperity, and prosperity destroys
money.
Prosperity always, therefore, ends
by cotton parricide.
The gold standard and beggary are
inseparable. Frederick the Great was ashamed of ruling over a nation of beggars
and thereby proved that he had an over-delicate sense of honour. He had no
special cause for shame, for wherever the previous metals have become the
standard of money, kings have always ruled over nations of beggars. If men
continue to love display and to spend part of their increase of income in
buying the products of the goldsmith's art; and if gold continues to be the raw
material for the medium of exchange - the prosperity of mankind as a whole is
impossible.
But a farmer does not always use a
good harvest to buy his wife a gold necklace, nor do all chemists implore a
blessing upon their inventions by vowing to regild a statue of the Blessed
Virgin.
If the harvest turns out well, I
shall buy a reaping machine, says the farmer.
If I become a successful breeder I
shall drain the swamp, says the landowner.
If my invention fulfils my
expectations I shall build a factory, says the chemist.
If my mill pays a good dividend and
the strike is settled, I shall build a tenement house, says the
capitalist.
That is, the greater the production
of wares, the greater is the increase of the means of producing wares.
(So-called real capital).
But from these investments, from
real capital, interest is expected and the rate of interest falls if the
proportion of real capital to population increases. If there are many houses
and few tenants, houserent is low. If there are many factories and few workmen,
the dividends of factories are low.
Figure 2. Trade Boom
Demand: Gold-discovery or over-issue
of paper-money increases credit and the velocity of circulation of money.
Demand increases, prices rise.
Supply: The rising prices cause
maximum activity of economic life (full employment, overtime, night shifts), but
in spite of greatly increased supply, prices are still forced upwards.
The rate of discount rises, but
abundant investment depresses the rate of interest on real capital.
If, therefore, real capital is multiplied and the
interest upon it in consequence falls below the traditional rate, no money will
be given for new undertakings. (*The reader is referred to the
theory of interest developed at the end of this volume.)
Halt a moment! Once more, can I
trust my ears ? If the interest on factories, houses, ships, falls, no more
houses are built, since no one will give money for new real capital ? Is this
true ? How then can cheap houses ever be built ?
Figure 3. Trade Boom and Crisis
Explanation: The components of
Demand are Quantity of Money (M), Velocity of Circulation (V), and Credit (C).
Supply consists of the wares awaiting sale. The rise of prices caused by
increase in the quantity of money stimulates production of wares. If the
production of wares increases out of proportion to the increase of money,
prices begin to fall. The result is that V and C withdraw from Demand and that
the fall of prices becomes at * a slump of prices, especially as the fall of
prices causes sales to stagnate, so that the quantity of wares awaiting sale
increases rapidly. Prices remain stable only if M. V. C, and W run parallel, or
if the deviations compensate one another.
These were indeed my words, this is the truth, and will
anyone dare to deny it ? If the interest on houses and other real capital
falls, the money employed in such enterprises withdraws. What is then to become
of the wares hitherto consumed in renewing and extending real capital ? (*At
the German Congress for Housing Reform, the banker Reusch, Wiesbaden, estimated
the amount of money required for house-building in Germany at 1500-2000 million
marks annually.)
When men are industrious and
inventive, when harvests are favoured by sun and rain, when many products are
available to multiply houses and factories - this is the time that money (which
should facilitate exchange), chooses to withdraw and wait.
And because money withdraws, because
demand is lacking, prices fall, and a crisis occurs.
A crisis must therefore always break
out when, on account of increased production of real capital, the rate of
interest on factories and houses sinks.
In the theory of interest at the end
of this book, proof will be given that interest on money is independent of
interest on real capital (but not vice versa). The objection that interest on
money decreases simultaneously with the decrease of interest on real capital,
that there is consequently no lack of money for new real capital, even if the
rate of interest on real capital falls, does not. therefore, hold good.
This reason, even taken alone, is
sufficient to account for the fact that economic life proceeds from crisis to
crisis. Under the rule of metal money men must periodically eke out existence as
homeless beggars. Gold, our hereditary king, is the true "roi des
gueux", the king of beggars.
12. ECONOMIC CRISES AND THE CONDITIONS NECESSARY TO
PREVENT THEM
Economic crises, that is, stagnation
of the market, unemployment and the accompanying phenomena, are conceivable
only with falling prices.
Prices can fall for three
reasons:
Because the conditions under which
gold is produced do not allow the supply of money (demand) to be adapted to the
supply of wares.
Because when the production of
wares, and therefore of real capital, is increasing, the rate of interest upon
the latter falls. No more money is then offered for the formation of new real
capital, and the markets of wares destined for this use (an important part of
production, especially when population is increasing) stagnate.
Because with increased production
and prosperity money is melted by the goldsmiths in direct proportion to the
increase in the supply of wares.
(*The Chinese are said to make
silver figures which are much valued as the patron gods of the household. But
silver is the general medium of exchange among the Chinese. The following
course of events is therefore probable: For some reason silver flows into China
in greater abundance than usual and stimulates trade and industry (trade-boom).
Merchants prosper, and out of gratitude increase the size and weight of their
silver household gods. The silver they obtain in exchange for their products -
the cause of the trade activity - melted and disappears for ever in the
household shrine. If, however, conditions are reversed and from lack of silver
prices fall and business is bad (crisis), the Chinese merchant comes to the
conclusion that his household god is powerless because it is too small. So he
scrapes together the little silver he has, to increase its size. Even if there
were no other causes, this cause alone would be sufficient to explain the
striking arrest, extending backwards over a thousand years, of the development
of China.
Has a European any right to laugh
at the Chinese ? If trade is good he buys a gold watch-chain for ostentation,
and if trade is bad he buys a still larger one to persuade others to give him
credit. Both, for different motives, saw off the branch upon which they are
sitting.)
Any one of these three causes of
falling prices is sufficient alone to produce a crisis; and it is
characteristic of them that when one cause (say the first, owing to sufficient
discoveries of gold) fails to function, the others leap into the breach. One or
other of these three causes of crisis regularly and inevitably occasions the
periodic breakdown of economic life.
Only if gold continues to be
discovered in such unusual quantities that, in spite of increased consumption
of gold for industrial purposes, there is a large and steady rise of prices (at
least 5 % annually), can economic life develop without crises. Even the
resistance to the circulation of money caused by the fall of interest on real
capital would give way to such a general rise of prices; the rise of prices
would compel the circulation of money. But such a general rise of prices would
in itself constitute a breakdown of the monetary standard.
The explanation of the causes of
commercial crises indicates the condition which must be fulfilled to prevent
their occurrence. The condition is that prices must never, under any
circumstances, fall.
The next question is how this
condition can be fulfilled. It can be fulfilled by:
Separation of money from gold and
the production of money in accordance with the needs of the market.
A form of paper-money so contrived
that it will be offered in all possible circumstances in exchange for wares,
even if interest on capital (interest on money as well as interest on real
capital) falls or disappears.
A form of money fulfilling these
conditions will be described in Part IV of this book (Free-Money).
13. REFORM OF THE NOTE-ISSUE
Demand and supply determine prices:
and economic life needs a fixed level of prices to prosper and to enable the
splendid possibilities of progress inherent in money to unfold themselves. If
during three thousand years or more, civilisation had not been again and again
forced by economic crises down the slope it had so laboriously climbed, if the
widespread pauperism left behind by each crisis had not made a pauper
philosophy part of our flesh and blood, capitalism (*
Capitalism - An economic condition in which the demand for loan-money and real
capital exceeds the supply and therefore gives rise to interest.) would long ago have been a thing of the past. The German workers
would have ceased to tolerate the treatment they receive from their employers
and from the State if the demand for their wares appeared as regularly on the
market as supply. And our German landowners would not have exposed their sores
to excite public sympathy, and begged for wheat-duties from emaciated workmen's
wives, if they themselves had not been ruined by the fall of prices caused by
the gold standard.
The pangs of hunger and pressure of
debt are pernicious educational influences.
Mankind would have scaled heights as
yet unknown in science, art and religion if the promising culture called into
life by gold (even though bloodstained and plundered) at Rome, had not been
petrified and annihilated in the economic glacial period, fifteen hundred years
in length, which was created by lack of money.
Solomon wrought miracles because the
money-material he received from Ophir made possible the regular exchange of
wares and the division of labour. But everything he wrought was lost with the
passing of the supplies of gold.
The growth of culture has always
been blasted by a fall of prices. For culture means the division of labour, and
the division of labour means supply. But supply cannot result in exchange if
prices are sinking from want of demand, from want of money.
Money and civilisation rise and fall
together. For this reason the mercantilists, who regarded gold as synonymous
with wealth and culture, and planned a constant increase of the stock of gold
by means of import-duties, were not so very far wrong. A sound principle was
foolishly applied. It is a fact that science, trade and art flourish when the
stock of money is increasing. But the mercantilists confused money with gold;
they thought that gold performed the miracle by means of its "intrinsic
value". They overlooked money; they had eyes for nothing but gold. Money
and gold meant the same thing to them. They did not know that money, not gold,
carries out the exchange of wares, and that wealth is created by the division
of labour which money, not gold, makes possible. They ascribed the progress resulting
from the division of labour to the characteristics of gold, instead of to the
characteristics of money.
Many of those who have learnt to
separate money from gold, who have renounced the heresy of "intrinsic
value" and convinced themselves of the importance of stable prices will
now be inclined to argue as follows: Why not simply manufacture paper-money and
bring it into circulation as soon as supply has overtaken demand or, in other
words, when prices begin to fall ? And conversely: Why not withdraw paper-money
from circulation and burn it when demand begins to exceed supply, that is, when
prices begin to rise ? This is merely a question of quantity: a lithographic
press and a fireplace put it in your power to adapt demand (money) so exactly
to supply (the wares) that prices remain constant.
So says among others Michael
Flürscheim (*Michael Flürscheim, The Economic and Social
Problem.), a zealous propagandist of this idea, who
counts me among the first who have formulated and popularised it. This honour I
must, however, decline, since at the outset (*Silvio
Gesell, Nervus Rerum, p. 36-37, Buenos-Aires, 1891.)
and ever since I have denied that paper-money as we know it (without direct,
material compulsion to circulate) could ever be as closely adapted to supply as
a regular exchange of wares, national and international, requires.
I deny this possibility and intend
to prove in black and white that if the State controls the amount of money
issued, but neglects to control its circulation, all the anomalies we have
revealed in the functioning of the present form of money will continue to
exist.
As long as money, regarded as a
ware, is superior to wares in general, as long as savers prefer money to wares
(their own products), as long as speculators can with impunity misuse money for
manipulating the market, money will not mediate the exchange of wares without
exacting a special tribute over and above the legitimate profit of commerce.
But money should be "the key to open the gates of the market, not the bolt
to close them"; it should be a road and not a toll-gate; it should assist
and cheapen exchange, not impede and burden it. And it is clear that money
cannot be simultaneously the medium of exchange and the medium of saving -
simultaneously spur and brake.
In addition to State control of the
quantity of money in circulation (only possible by means of a papermoney
standard) I therefore propose a complete separation of the medium of exchange
from the medium of saving. All the commodities of the world are at the disposal
of those who wish to save, so why should they make their savings in the form of
money ? Money was not made to be saved!
Supply is under a direct compulsion inherent in the
nature of wares, and for this reason I propose a similar compulsion for demand.
In the process of settling the price, supply would then no longer be at a
disadvantage in comparison with demand. (* Those who
are not yet free from the "value" superstition will not understand
the justice of this claim.)
Because of this compulsion, supply
is a simple measurable object not dependent upon the will of the possessor of
wares. Demand must therefore also be separated from the will of the possessor
of money, demand must become an object capable at all times of measurement. If
we know the amount of wares produced at any time we know the amount of supply.
Similarly if we know the quantity of money in circulation at any time we should
be able to foretell the quantity of demand.
This reform can be attained by the
introduction of a medium of exchange subject to a material, inherent compulsion
to circulate, and it can be attained only in this way. (See Part IV,
Free-Money).
The material compulsion liberates
money from all the hindrances to circulation caused by greed of gain,
speculation and panic, and sets the whole mass of money issued by the State in
constant, uninterrupted circulation which creates a constant, uninterrupted
demand.
Regularised demand eliminates the
stagnation of sales and the congestion of wares. The immediate result of a
regular demand is a regular supply influenced only by the production of wares,
just as the flow of a river becomes regular when the fall is evenly
distributed.
If money were under compulsion to
circulate, minute changes in the quantity of money would suffice to make demand
fit like a glove the natural variations of production.
Without this forced circulation of
money we are at once back again to the present confusion. Demand eludes the
power of the State, and the only fixed factor in the present chaos, the fact
that money exacts a tribute for its services, causes money to be withdrawn from
the market by private individuals as soon as it is scarce, and to be again
brought into circulation as soon as it is offered in superfluity.
To test the correctness of what has
just been said, I shall examine more closely Flürscheim's proposal. (*See
also Arthur Fonda, Honest Money: Professor Frank Parsons, Rational Money.) This is all more necessary since Argentina (*Silvio
Gesell, La Cuestion monetaria argentina, Buenos-Aires, 1898; La pletora
monetaria, Buenos Aires, 1907.), Brazil, India and
other countries have succeeded in keeping their currencies at par with the gold
standard by regulating the issue of money other than gold. This has called
attention to paper-money and awakened the belief that this medium of exchange
is capable of further perfection. But advocates of a paper-money standard can
do their cause no greater injury than to attempt the introduction of reforms
which do not exclude the possibility of failure, for each failure strengthens
the position of those who defend a metallic monetary system and postpones for
decades the discussion of a paper currency.
The simple reform of the note-issue,
here described as inadequate, proposes to empower the State to issue or
withdraw paper-money in quantities to be determined by the general level of
prices. The State is to estimate the demand for money solely by the average
price of the wares. The quantity of money in circulation is to be increased
when prices fall, and to be decreased when prices rise. Money is not to be
redeemable in gold or any other particular product; for redemption the holder
of money is directed to the market. But in every other respect this paper-money
is to be indistinguishable from ordinary paper-money; it may be used or misused
for saving, or as a reserve for speculation. Demand is left in possession of
all the privileges it possesses over supply. Demand is to remain what it is
today, an action willed by the holder of money, and therefore the plaything of
money-magnates.
Nevertheless the reform professes to
eliminate the recurring periods of over-production and unemployment, to make
economic crises impossible and to suppress interest on capital.
The fate of this reform would be
determined by the behaviour of persons in a position to save. We must here
recall our words about saying. A person who saves produces more wares than he
purchases, and his surplus, bought by employers with money from the savings
banks, is worked up into new real capital. But no one parts with money-savings
unless promised interest, and the employer can pay no interest if what he
constructs does not bring in at least as much interest as is demanded for the
use of savings. And if work upon the building of houses, factories, ships, etc.
continues for a time, the interest on such things of course falls. The employer
cannot then pay the interest demanded for the use of savings. The money remains
in the savings-banks, and as this is the money with which the surplus wares of
the savers are bought, the sale of these wares is interrupted and prices fall.
This means a crisis.
But here the reformers of the
note-issue intervene and say, Why did the crisis break out ? Because prices
fell - and prices fell because money was scarce. Because of the lowered rate of
interest on real capital, part of the stock of money was withdrawn from
circulation. Good ! We leave the savers or the savings-banks in possession of
the money, and let them hoard it; we shall replace it with new money. The State
prints money and advances it to the employers, if the money of capitalists and
moneysavers is held back. If the rate of interest on real capital falls, the
State also reduces the rate of interest on the money it issues. If employers
can extract only 3, 2, 1% from their houses, factories, ships, the State
supplies them with money at 3, 2, 1 %, or, if necessary, at 0 %.
The proposal is simple and sounds
reasonable. But it only sounds reasonable to the layman. The trained ear can
detect a discord.
For money exists to facilitate
exchange, and here capitalists, speculators and money-savers are permitted to
use money for purposes foreign to the exchange of wares. Money was made to help
the producer of wares to exchange his products for the products of other
producers. Money is a medium of exchange and nothing more. Money makes exchange
possible, and exchange is complete only when two producers have exchanged their
products. When a producer has sold his product for money, exchange is not yet
complete; someone is in the market waiting for him. The purpose of money
demands that the sale of a product for money shall immediately be followed by
the purchase of a product with money, to complete the exchange. Anyone hesitating
with his purchase leaves exchange incomplete and interrupts a sale for another
producer. This is a misuse of money. Without purchase there can be no sale,
therefore, if money is to fulfil its purpose, purchase must follow step for
step on the heels of sale.
We are told that the man who has
sold his products for money and does not set free his money by further
purchases of products is ready to lend his money if offered interest. But this
condition cannot in justice be permitted. The man must lend his money
unconditionally, or be compelled to purchase wares, or to re-purchase his own
products. No private individual can be allowed to make conditions of any kind
about the circulation of money. Those who have money have the right of
immediately purchasing wares, and no other right. A right to interest is
incompatible with the conception of money, for this right would resemble a tax
upon the exchange of wares for the benefit of private individuals and
sanctioned by the power of the State. The right to interest is the right to
interrupt the exchange of wares by holding back money, to embarrass the owners
of wares waiting for this money, and to exploit their embarrassment for the
purpose of extorting interest. The conditions upon which money can be lent are
the private affair of the savers, with which the State has no concern. The
State, to which money is purely a medium of exchange, says to the saver: You
have sold more wares than you have bought and you are consequently in
possession of a surplus of money. This surplus must in all circumstances be
brought back to the market and exchanged for wares. Money is not a feather-bed.
it is a moment's halting place by the road-side. If you have no personal need
of wares you can buy bills of exchange, promissory notes, mortgage-deeds and so
forth from persons who are in need of wares and have no money. The conditions
upon which you can buy bills of exchange are your affair; only on one point the
State insists upon absolute obedience; that your money shall immediately be brought
back to the market. If you fail to put your money in circulation voluntarily,
the State, by punishment, will compel you to do so, since your delay is
detrimental to the common interest.
The State builds roads for the
transport of wares and provides a currency for the exchange of wares. The State
insists that no one shall interrupt the traffic of a busy street by slow-moving
ox-carts, and should also insist that no one shall interrupt or delay exchange
by holding back money. Such inconsiderateness invites punishment.
Reformers of the note-issue with
youthful enthusiasm pass over these fairly obvious conditions of an efficient
monetary system, yet hope to realise their aim. It is a vain hope!
Savers produce more commodities than
they consume, and they do not again set free the money they receive for their
surplus unless they are promised interest. The proposal now before us is that
the crisis which is the direct result of the savers' conduct should be resolved
by the State supplying money to the employers at a lower rate of interest, this
money to be new money straight from the printingpress.
The surplus production of the savers
is in this case not bought with their money, but with new money. For the moment
this is unimportant; with the help of the new money the building of houses,
factories and ships proceeds without interruption. It is true that employers
receive less and less interest from these enterprises, since building is now
uninterrupted, and the supply of ships, tenements, etc. is constantly
increasing. But parallel with the decrease of the interest they receive is the
fall in the rate of interest they have to pay the Bank of Issue. As employers
they are therefore indifferent to the amount of interest they receive on the
ships or houses, as it must all be handed over to their creditors. Work
proceeds without interruption, and there is therefore no interruption in
saving. Many still find it advantageous to lend their savings at the lower rate
of interest; but others, especially the small savers who, in any case, obtain
but a trivial amount of interest, will return to tie old custom of keeping
their savings at home and renouncing interest - even if the fall in the rate of
interest is only from 5% to 4% or 3%. The small sums thus hoarded would, added
together, amount to many hundred million dollars. The State replaces this
amount by the issue of new money. Crisis is thus averted and work proceeds upon
houses, ships, factories, the interest upon which would steadily, and probably
quickly, fall. But the fresh fall in the rate of interest will still further
check the flow of savings into the savings-banks. Soon even the larger class of
savers will begin to find it scarcely profitable to bring money to the
savings-banks; they will certainly hesitate about bringing money wanted at
short notice to a savingsbank some distance away. Some persons will also
consider their money safer in their own possession than under the control of
strangers. All the forces preventing the re-entry of saved money into
circulation, which were counterbalanced by the high rate of interest, will now
be set free, and a stream of money, paper-money, will flow from the National
Currency Office or Bank of Issue into millions of savings-boxes. The
lithographic press of the National Currency Office will ceaselessly replace
what is here withdrawn from the market. A mighty stream of paper-money, of
demand due from day to day, will be lost to sight.
The more the rate of interest falls,
the more the stream swells. Finally, before the market is saturated with real
capital, when interest has fallen to about 1%, no one will bring his savings to
the savingsbanks; everyone will prefer to keep the money under his own
supervision. At this stage the savings of the whole nation, huge sums amounting
annually to many billions of dollars, will flow into the savingsboxes. These
sums will be increased by the absence of economic crises and by the fall in the
rate of interest which will make saving easier. The savings of last year will
not be consumed by this year's unemployment. If interest falls to 1%, the
income of the workers will be doubled, and if income is doubled savings can be
increased ten-fold. It is the last addition to the income which is saved, and
this addition will be equivalent to the whole amount of the income
hitherto.
All this money is to be annually replaced by
the State! A whole nation is to convert its savings into money, into what
should be demand falling due from day to day, into scraps of paper which have
some use only because a fraction of them is required for the exchange of wares.
A strange state of affairs !
Billions of dollars are lent on
mortgage. But if mortgages bring in no interest they will be foreclosed and the
money hoarded. The State must replace these billions by new issues. Bills of
exchange to a total of over 30 billions of marks circulate regularly in Germany
and at the same time serve as a medium of exchange. But if interest disappears,
no one will any longer discount a bill. Bills of exchange therefore become
useless for trade purposes, and the State will have to issue an equivalent
amount of money. Many hundreds of billions will be necessary. With a hundred
lithographic presses printing $1000 notes day and night the State will hardly
keep pace with the requirements of currency. Hundreds of billions of demand,
due in the market from day to day, lying buried in the hoards !
But what if, for any reason, this
demand came to life and appeared in the market ? Where would then be the
corresponding supply of products ? If supply is lacking, prices rise, and
rising prices cause differential profits. This prospect of gain entices money
into the market ! The rise of prices, the prospect of differential profits,
bursts open the savings-boxes and the billions of demand pour like an avalanche
upon the market. "Sauve qui peut !" is the cry, and in the shipwreck
the only lifeboats are the wares. Those who can buy wares are safe, so
everybody buys wares. Demand rises to thousands of billions, and as supply is
of course lacking, prices shoot up. The rise of prices annihilates savings. The
peasant again uses paper-money as he used the French assignats - to paper his
cowshed.
Flürscheim indeed denies such a
possibility. He asserts that the thought of a rise of prices could never occur
to the savers, that is, to the holders of the billions of demand, since it is
known that the State would immediately counteract the slightest tendency to
rising prices by withdrawing the surplus money.
But here we meet the second
contradiction in this reform. The first contradiction was the toleration by the
State of the use, or rather misuse, of money as a medium of saving, with the
result that it was forced to manufacture more money than was necessary for the
true purpose of money, namely the exchange of wares.
The second contradiction lies in the
fact that the State, when issuing money to employers, was itself not using the
money as a medium of exchange. The money was not given for wares but for bills
of exchange, mortgages and other securities. But money is a medium of exchange,
and as such should be issued only against wares, that is, given out in
accordance with its purpose. If the State had issued money only for wares (and
if these wares had not in the meantime fallen into dust and decay), it would
have no reason to fear the avalanche of demand caused by the return to
circulation of the hoarded savings. As it is, the State holds only mortgages,
promissory notes and bills of exchange which bear no interest, and with such
instruments no ready money can be recalled.
The State misunderstood the function
of money when it advanced the employers the money refused them by the savers.
The State misused its power; and money wreaks a sharp and sudden vengeance for
every misuse to which the State subjects it. Here appears the third
contradiction inseparable from this reform. Different qualities are demanded of
money according to whether it is used for the purpose of saving or for the
purpose of exchange. As consumer the saver pays $100 for a certain quantity of
wares, but as saver he does not pay this price. He prefers his $100. Thus $100
considered as a medium of saving are more than the wares that can be bought for
$100. Savings can never be brought back to circulation by wares.
The State has here treated money for
exchange and money for saving as equivalents; it has replaced the money
withdrawn from the market in the form of savings, by purchasing bills of
exchange, mortgages, and so forth. When the time comes for the State to exchange
these things for savings, the impossibility of doing so becomes apparent.
This becomes still clearer if we
think of two different kinds of money, say gold and tea, in circulation
together. To those who use money as a medium of exchange it would be a matter
of indifference which kind of money they received, as they would immediately
pay it out again. But to those who wish to save money, it is by no means a
matter of indifference whether they receive gold or tea, since gold is durable
and tea spoils. A person who wishes to save will not give $10 of gold for $10
of tea; indeed, if he reckons with long periods of time, he will not deem gold
and tea equivalent at any ratio of exchange. For him gold and tea are simply
quantities that cannot be compared.
Further, the State must act
promptly. The slightest rise of prices would immediately bring speculators for
a rise of prices upon the scene, and once they had pocketed their first gains
from the differences in price-levels there would be no holding back the flood
of paper-money. Any action by the State would then come too late. Let us
picture the situation of the State. Ten billions are necessary for the regular
exchange of wares, 100 billions have been issued and the difference hoarded as
savings. If a fraction of the surplus 90 billions reaches the market, prices
rise, and the moment prices rise, the rest of the 90 billions are flung upon
the market. The sequence of events would be as follows: The merchants who
believe prices are about to rise buy more than they immediately require. They
obtain the money for these purchases by offering interest to the savers of
money. These savings, coming into circulation, now make the rise of prices a
reality. This stimulates new borrowing and new speculative purchases. So the
process would proceed, step by step, until all the money from the savings-boxes
had been drawn into circulation by the upward movement of prices.
The slightest want of confidence in
the power of the State to prevent a rise of prices would instantly bring the
billions of savings into the market, into the shops, just as the slightest
doubt as to the solvency of a bank of deposit immediately brings all the
depositors to the counters of the bank. They would race to market, at
double-quick speed, in motor-cars, in aeroplanes. That is the inevitable result
of a monetary reform that leaves untouched the misuse of the medium of exchange
as a medium of saving.
As long as paper-money remains what
it was meant to be, a medium of exchange, everything works smoothly.
Paper-money used for any other purpose is not worth the paper upon which it is
printed. It becomes a scrap of paper fit at best for lighting a pipe.
The anomaly of the physical junction
of the medium of exchange and the medium of saving is still more obvious if we
suppose that, as in Joseph's time, a series of fruitful years is followed by a
series of bad ones. During the fruitful years the people would of course be
able to save, that is, to pile up a mountain of paper-money. If during the
following years of scarcity the people wish to utilise this mass of paper it
becomes apparent that there is no supply to balance the piled-up demand.
The reform which we are here
examining can be effective only as long as the interest which the employer
receives, and can therefore afford to pay the savings-banks or capitalists, is
sufficient to induce the majority of savers to put their money into circulation
again. But does not Flürscheim claim that interest, if it once begins to fall,
and if economic crises can be averted, must soon fall to zero ?
A reform of this kind would be short-lived
and would bring the possibility of the greatest fraud ever practised upon
mankind. After such an attempt at reform the people, as in the past, would
believe that their salvation lay in the gold standard and would clamour for its
re-introduction. (* Throughout the foregoing analysis it is assumed
that the reform is adopted universally. If only one country, or a few
countries, adopted the reform, the fall in the rate of interest would be
checked by the export of savings which would be sent abroad to gain the higher
rate of interest. In this case the reform would not result in a catastrophe,
but neither would it eliminate interest.)
To me it seems preferable to make
the work of reform thorough at the outset, and to add to the reform of the
note-issue, just described, a change in the form of money which would dissolve
the material connection between medium of exchange and medium of saying, a
change which would cause the disappearance of all private stores of money,
which would break the lids of all savings-boxes and force the locks of all
money-chests-a change which, in war and peace, in good years and in bad, would
keep exactly as much money in circulation as the market, without fluctuations
in the general level of prices, could absorb.
With Free-Money the traditional
connection between the medium of saving and the medium of exchange is, in
conformity with the results of our inquiry, irrevocably broken. Money becomes a
pure medium of exchange, independent of the will of its possessor. Money
becomes materialised demand.
14. CRITERION OF THE QUALITY OF MONEY
The partisans of the gold standard
ascribe the great absolute and relative economic development of the last
decades to the gold standard. These millions of factory-chimneys belching forth
smoke are the modern equivalents of sacrificial altars, and they express the
nation's thankfulness for the gold standard
There is certainly nothing
surprising in the assertion that the monetary standard can cause, or make
possible, an economic revival. For money makes the exchange of wares possible,
and without exchange of wares there can be no work, no profit, no traffic, no
marriage. When the exchange of wares is interrupted, factories shut down.
The assertion, we repeat, contains
nothing at first sight surprising. On the contrary, manufacturers, shipbuilders
and other employers. when asked whether they could produce more wares with
their present machinery and staffs, are unanimously of opinion that production
is limited only by the sale of their wares. And money makes sales possible - or
makes them impossible.
That this eulogy of the gold
standard should contain a tacit assumption that its predecessor, the bimetallic
standard, hindered economic development also causes no surprise. For money, if
it can bring progress, can also, evidently, hinder progress. More important results
can be ascribed to money than economic prosperity or the reverse during a few
decades. (* Gesell: "Gold and Peace ?" (spoken at Berne, 1916). (See
page 117).)
After the adoption of the gold
standard by Germany, German landowners complained of the fall of prices and of
their difficulties in finding money to meet the interest on their mortgages.
The German import-duties were devised for their protection, and without this
protection many farms would have come under the hammer. But with prices
falling, who would have bought these farms? Large estates would have been
formed, just as under the Roman Empire, and the downfall of Rome has been
ascribed to its latifundia.
The assertion of the advocates of
the gold standard contains, therefore, nothing remarkable, but it requires
proof. For German economic development could have had other causes; the school,
the many technical inventions which made work fruitful, German wives who
provide a numerous and healthy stock of workers, and so forth. There is, in
short, no lack of competitors eager to snatch the laurels from the gold
standard.
Proofs, then, are needed. We must
find some criterion for the quality of money. We must determine whether the
gold standard has so facilitated exchange that the expansion of economic can be
ascribed to this cause alone.
If the gold standard has facilitated
the exchange of products the result must be increased safety, speed or cheapness
of exchange, and this increased safety, speed or cheapness of exchange must
cause a corresponding decrease in the number of those engaged in commerce. This
is too obvious to require further explanation, if we improve the roads that
serve for the transport of merchandise, the efficiency of carters increases,
and if the amount of merchandise to be carted remains the same, the number of
carters must diminish. Since the introduction of steam, sea traffic has
increased a hundredfold, yet the number of sailors has diminished.
The same result should occur in
commerce if the gold standard is to the cowry-shell standard as steam power is
to wind, or as dynamite compared with a wedge.
But with the gold standard an
exactly contrary development can be observed.
"The middleman's activity (that
is, commerce) used to claim about 3 or 5% of the workers; it now claims 13 or
15, sometimes even 31%. This activity (the cost of commerce) forms an
increasing proportion of price", says Schmoller (Commerce in the XIXth
Century, Die Woche).
Commerce, instead of growing less
difficult, grows daily more difficult. With gold as the medium of exchange not
fewer but more persons are required to exchange the wares, and these persons
have a better general education and a better commercial training. This can be
proved from the German statistics of occupations.
1882 1895 1907
Population of Germany 45,719,000
52,001,000 62,013,000
Total number of workers 7,340,789
10,269,269 14,348,016
Persons engaged in commerce 838,392
1,332,993 2,063,634
From these figures we see that the
increase in the number of persons engaged in commerce has far outstripped the
increase in the total number of German workers (industry, commerce,
agriculture). The total number of workers has increased from 7,340,789 to
14,348,016, or 95%, whereas the number of those engaged in commerce has
increased from 838,392 to 2,063,634 that is 146%.
These figures are a clear proof that
since gold has been adopted as the medium of exchange, commerce has become more
difficult.
It may be objected that during the
last decades many producers have gone over from primitive methods of production
to the division of labour, especially in the country, where less and less is
produced for personal consumption and more and more for the market. This of
course increases the number of merchants required. Few spinning wheels, for
instance, are now in use, and the village artisans paid directly in kind
(barter) have had to give way to factories.
Again a worker, thanks to improved
methods of production, now produces more wares, judged by quantity or quality,
than formerly. Thus a much greater mass of wares is brought to market, and this
also increases the number of persons engaged in commerce. If one merchant is
required to sell the calico produced by 10 weavers, then, other things being
equal, two merchants are required if the 10 weavers, with improved looms,
produce twice as much calico.
This objection is valid, but on the
other hand it should be remembered that commercial work also has been greatly
facilitated by organisation and invention. We have the decimal coinage,
introduced with the German gold standard (though it is independent of the gold
standard, as the English currency system proves), the metric system of weights
and measures, commercial staffs trained in better schools, co-ordinated laws of
commerce, consulates, extraordinary postal facilities, (cheap letter postage,
parcel-post, postcards, money orders, collection of cash through the post,
etc.). Add to these telegraph and telephone, stenography, typewriters
multigraphs, cash registers, cheques and current accounts, more efficient
methods of advertising, consumers' co-operative societies; in short, the
countless improvements introduced into the technique of commerce during the
last thirty years. Finally, the better technical training of the business man
must have increased his power of selling merchandise. If technical training has
not done so, it is superfluous, and the merchant is a fool who pays a higher
salary to a trained assistant. For he pays the higher salary because he
believes that the trained assistant does more work, that is, sells more
merchandise than his untrained colleague.
If the increase in production is
compensated by the increased efficiency of commercial organisation, then the
increase in the proportion of those engaged in commerce retains its fun force
as evidence against the alleged advantages of the gold standard.
But the above figures give only the
number of persons engaged in commerce, and we are more interested in the gross
profit of commerce. This, to judge by appearances, has certainly increased. It
cannot be deduced directly from the number of those engaged in commerce, since
the average income of persons engaged in commerce is higher than that of any
other workers.
To judge the effect of a monetary
reform upon commerce, it would be necessary to calculate statistically the
gross profit of commerce, that is, the difference between the factory price and
the retail price of each product. Retail price, less factory price, equals the
gross profit of commerce. It would be possible to calculate in this way the
cost of commerce to a country and the efficiency of its monetary system. There
is reason to believe that such statistics would prove the well-known assertion
that commerce at present consumes one-third or more of the total production! Of
1000 tons of production 333 tons fall to the traders.
15. WHY THE CRUDE QUANTITY THEORY FAILS WHEN APPLIED
TO MONEY
Demand and supply determine the
price of wares, and supply depends upon the existing stock of wares. If the
stock increases, supply increases; if the stock decreases, supply decreases.
Stock and supply are identical; instead of saying "demand and supply"
we could say "demand and the stock of wares" determine price. Indeed
the statement in this form brings the suppositions of the quantity theory into
higher relief.
The quantity theory, which, with
unimportant limitations, holds good of all wares, has been applied to money. It
has been stated that the price of money is determined by the stock of money.
But experience has shown that the supply of money is not so dependent upon the
stock of money as this statement of the quantity theory assumes. The stock of
money often remains unaltered, but the supply of money is subject to great
variations. The war-chest at Spandau has not been offered as supply once in
forty years, whereas other money annually changes hands 10 or 50 times. The
places where money is kept (banks, safes, chests or stockings) are sometimes
empty, sometimes overflowing, and accordingly the supply of money is great
today and small tomorrow. A rumour is often sufficient to direct a torrent of
money and demand from the market to the places where money is preserved. A
telegram, perhaps forged, often makes hands in the act of closing the
purse-strings scatter money broadcast upon the market.
The conditions of the market have
the greatest possible effect upon the supply of money, and if we said above of
wares that demand and supply determine their price, we could say with equal
truth of money that "demand, for money and the mood of its holders"
determine its price. The stock of money is certainly important for the supply
of money, since the stock fixes the upper limit to the supply of money. More
money cannot be offered than the stock allows. But whereas with wares the upper
limit to supply (that is, the stock) is also the lower limit, so that supply
and stock are always equivalent, with money no lower limit can be discovered,
unless we regard it as zero.
When confidence exists, there is
money in the market; when confidence is wanting, money withdraws - such is the
teaching of experience.
But, if as experience teaches, the
supply of money does not exactly and at all times correspond to the stock of
money, then the price of money is independent of the stock, and the crude
quantity theory cannot be applied to money.
But if the crude quantity theory is
not applicable to money, neither is the cost-of-production theory. The cost of
production can determine price only by its influence upon the quantity
produced, that is, the stock; and the stock of money does not, as we have seen,
always correspond to the supply of money.
(* "The increase of the stock
of money alone cannot increase prices; the new money must also cause demand by
being used for purchasing in the market. That is the first limitation to be
made to this theory." Dr. George Wiebe, History of the Price Revolution in
the 16th and 17th Centuries, p. 318.
"Money which is not
offered in exchange for products has as little influence upon prices as if it
were destroyed." Hume.)
Of products in general it is true
that when the cost of production falls, production increases. With increasing
production the stock and supply increase, and with increasing supply the price
falls.
But with the precious metals it is
by no means certain that when the stock increases supply immediately increases;
still less, that supply always corresponds to the stock. Proof: the stores of
silver at Washington; the war-chest at Spandau; the frequently discovered
hoards of coins.
Both theories, the crude quantity
theory and the cost-of-production theory, fail when applied to money, and the
reason why they fail must be sought in the characteristics of the
money-material. The contents of the war-chest at Spandau would long ago have
fallen into dust but for certain characteristics of gold, and the silver policy
of the United States would have been inconceivable but for certain similar
characteristics of silver.
If gold decayed like other products,
the supply of money would always correspond exactly to the stock of money.
Confidence or want of confidence would have no effect upon the supply of money.
In war and peace, in prosperity and adversity, money would always be offered
for exchange, even when the offer meant certain loss, just as potatoes are
offered for exchange quite apart from the question of profit to their owner. In
short, demand and supply would determine the price of money as now they
determine the price of all other products.
The price of a product like the gold
at Spandau, or the silver at Washington, which, without suffering the least
depreciation, can be stored for decades in damp subterranean strongrooms, the
price of a product the supply of which depends not upon intrinsic necessity but
upon human judgement, is as free and incalculable as the wind. The price of such
a product knows no economic laws; the quantity theory and the
cost-of-production theory pass it by. Its supply is determined simply by
profit.
Such money, as Lassalle rightly
remarked, is from the outset capital; it is offered in exchange as long as it
can obtain interest, and no longer. No interest, no money!
We have now completed our
investigation of money as it is, of the metal or paper-money of the present,
and can turn our attention to money as it should be, to the money of the future
which we have named Free-Money, that is to say, money free to circulate, money
free from the anomaly of interest.
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