PART IV. FREE-MONEY, OR MONEY AS IT SHOULD BE
INTRODUCTION
The human mind is baffled by the
abstract, and money hitherto has been wholly abstract. There was nothing with
which to compare it. There were, indeed, various kinds of money, metal and
paper; but as regards the most important aspect of money, namely the forces
regulating its circulation, these different varieties were identical, and this
brought the mind of the monetary theorist to a standstill. Equal things are not
comparable, and, offering no hold for the intellect, inhibit the act of
conception. The theory of money stood before a blank wall, utterly unable to
move on. In no country was there, or is there, a legally sanctioned theory of
money upon which the administration of money could be based. Everywhere the
monetary administration is guided by purely empirical rules for which
nevertheless, it claims absolute authority. Yet money is the foundation of
economic life and public finance; it is a tangible object, the practical
importance of which fires the imagination as does scarcely any other; an
object, moreover, that has been known to, and indeed artificially produced by
mankind for 3000 years. Consider what this means: In one of the most momentous
of public and private interests we have for 3000 years acted blindly,
unconsciously, ignorantly. If further proof were needed of the hopelessness of
so-called abstract thinking, it is here.
With Free-Money, as described in
this book, the situation is radically altered. Money has ceased to be abstract.
Free-Money for the first time supplies the point of comparison for an
examination of money. Money has found a background; it has become an object
with colour tones and limiting surfaces. Give me a fulcrum, said Archimedes,
and I can move the world from its axis. Given a point of comparison, man can
solve any problem.
Free-Money supplies the plumb-line
for the construction of the theory of money, a plumb-line by which all
departures from the vertical immediately become apparent.
1. FREE-MONEY
Money is an instrument of exchange
and nothing else. Its function is to facilitate the exchange of goods, to
eliminate the difficulties of barter. Barter was unsafe, troublesome,
expensive, and very often broke down entirely. Money, which is to replace
barter, should secure, accelerate and cheapen the exchange of goods.
That is what we demand of money. The
degree of security, rapidity and cheapness with which goods are exchanged is
the test of the usefulness of money.
If, in addition to this, we ask that
money shall cause a minimum of trouble by its physical properties, we make a
claim that is valid only if the purpose for which money exists is not thereby
defeated.
If security, acceleration and
cheapening of the exchange of goods can be achieved by means of a form of money
which cannot be harmed by moth and rust and which besides, can be conveniently
hoarded, then let us, by all means, have such money. But if this form of money
diminishes the security, rapidity and cheapness of the exchange of goods, we
say: Away with it!
Knowing that the division of labour,
the very foundation of our civilisation, is here at stake, we shall select
whatever form of money is suited to its necessities, quite regardless of the
wishes or prejudices of individuals.
In order to test the qualities of
money we shall use no scales, crucibles or acids; neither shall we scrutinise
some coin or consult some theorist. We shall consider, instead, the work done
by the money. If we observe that a certain form of money seeks out goods and
conveys them by the shortest route from the workshop to the consumer; if we
notice that goods cease to congest the markets and warehouses, that the number
of merchants diminishes, that commercial profits shrink, that no trade
depressions occur, that producers are assured of a ready disposal of all they
can produce while working at full capacity, we shall exclaim: This is an
excellent form of money! - and we shall hold to this opinion even if, on closer
examination, we find that the money in question is physically unattractive. We
shall consider money as we consider, say, a machine, and form our judgement
exclusively on its efficiency, not on its shape or colour.
The criterion of good money, of an
efficient instrument of exchange, is: -
That it shall secure the exchange of
goods - which we shall judge by the absence of trade depressions, crises and
unemployment.
That it shall accelerate exchange -
which we shall judge by the lessening stocks of wares, the decreasing number of
merchants and shops, and the correspondingly fuller storerooms of the
consumers.
That it shall cheapen exchange -
which we shall judge by the small difference between the price obtained by the
producer and the price paid by the consumer. (Among producers we here include
all those engaged in the transport of goods).
How inefficiently the traditional
form of money functions as an instrument of exchange has been demonstrated in
the previous part of this book. A form of money that necessarily withdraws when
there is lack of it, and floods the market when it is already in excess, can
only be an instrument of fraud and usury, and must be considered unserviceable,
no matter how many agreeable physical qualities it may possess.
Judged by this criterion, what a
disaster was the introduction of the gold standard in Germany! At first a boom,
fed by the millions taken from France, and afterwards the inevitable
crash!
We introduced the gold standard
because we expected an advantage from it, and what other advantage could we
expect from a change of our monetary system than greater security, cheapening
and acceleration of the exchange of goods ?
But if such was the purpose, what
was the justification for the introduction of the gold standard to achieve it ?
Gold coins, neat round shining toys, were expected to facilitate, accelerate
and cheapen the exchange of straw, iron, limestone, hides, petroleum, wheat,
coal, etc., but how that was to be done nobody was able to explain; it was
simply a matter of faith. Everybody - even Bismarck - relied on the judgement
of the so-called experts.
After the establishment of the gold
standard, just as before it, the exchange of goods consumes 30, 40, and
sometimes perhaps 50% of the entire output. Trade depressions are just as frequent
and just as devastating as in the days of the thaler and the florin; and by the
increased number of dealers we observe how slight is the mercantile power of
the new money.
The reason why the mercantile power,
the power of exchanging goods, of this money is so slight, lies in the fact
that it has been over-improved - improved, that is, exclusively from the
view-point of the holder. In fixing upon the material for mousy, only the
buyer, only demand was considered. The goods, supply, the seller, the producer
of the goods, were entirely overlooked. The very finest of materials, a
precious metal, was chosen for the manufacture of money - just because it
offered certain conveniences to the holders of money. Our experts did not pause
to consider that the holders of goods in selling their products had to pay for
these conveniences. By the selection of gold as moneymaterial, the buyer has
been allowed time to choose the most favourable moment for the purchase of
goods, and in granting this freedom the devisers of the gold standard forgot
that the seller would be forced to wait patiently in the market till the buyer
chose to appear. Through the choice of the moneymaterial, demand for goods was
placed at the discretion of the owners of money and delivered up to be the
sport of caprice, greed, speculation and chance. Nobody saw that the supply of
goods, owing to its material nature, is at the mercy of this arbitrary will.
Thus arose the power of money which, transformed into financial power,
exercises a crushing pressure on all producers.
In short, our worthy experts when
considering the currency question forgot the goods - for the exchange of which
the currency exists. They improved money exclusively from the point of view of
the holder, with the result that it became worthless as a medium of exchange.
The purpose of money evidently did not concern them, and thus as Proudhon put
it, they forged "a bolt instead of a key for the gates of the
market". The present form of money repels goods, instead of attracting them.
People do, of course, buy goods, but only when they are hungry or when it is
profitable. As a consumer everyone buys the minimum. No one desires to have
stores, in planning a dwelling house the architect never includes a storeroom.
If every householder were today presented with a filled storeroom, by tomorrow
these stores would be back on the market. Money is the thing people want to
own, although everybody knows that this wish cannot be fulfilled, since the
money of all mutually neutralises itself. The possession of a gold coin is
incontestably more agreeable than the possession of goods. Let the
"others" have the goods. But who, economically speaking, are these
others ? We ourselves are these others; all of us who produce goods. So if, as buyers,
we reject the products of the others, we really all reject our own products. If
we did not prefer money to the products of our fellows, if instead of the
desired yet unattainable reserve of money, we built a storeroom and filled it
with the products of our fellows, we should not be obliged to have our own
products offered for sale in expensive shops where they are, to a great extent,
consumed by the cost of commerce. We should have a rapid and cheap turnover of
goods.
Gold does not harmonise with the
character of our goods. Gold and straw, gold and petrol, gold and guano, gold
and bricks, gold and iron, gold and hides ! Only a wild fancy, a monstrous
hallucination, only the doctrine of "value" can bridge the gulf.
Commodities in general, straw, petrol, guano and the rest can be safely
exchanged only when everyone is indifferent as to whether he possesses money or
goods, and that is possible only if money is afflicted with all the defects
inherent in our products. That is obvious. Our goods rot, decay, break, rust,
so only if money has equally disagreeable, loss-involving properties can it
effect exchange rapidly, securely and cheaply. For such money can never, on any
account, be preferred by anyone to goods.
Only money that goes out of date
like a newspaper, rots like potatoes, rusts like iron, evaporates like ether,
is capable of standing the test as an instrument for the exchange of potatoes,
newspapers, iron and ether. For such money is not preferred to goods either by
the purchaser or the seller. We then part with our goods for money only because
we need the money as a means of exchange, not because we expect an advantage
from possession of the money.
So we must make money worse as a
commodity if we wish to make it better as a medium of exchange.
Figure 4. Free-Money, American
Currency.
(Or any other decimal currency)
This $100 note (bill) is shown as it
will appear during the week August 4th - 11th, thirty-one ten-cent stamps
($3.10) having been attached to it by its various holders on the dated spaces
provided for the purpose, one stamp for each week since the beginning of the
year. In the course of the year 52 tencent stamps ($5.20) must be attached to
the $100 note, or in other words it depreciates 5.2% annually at the expense of
its holders.
Figure 5. Free-Money, British
Currency.
Free-Money, British Currency, is
issued in 1-shilling, 5-shilling, 10-shilling, £1, £4, £10, and £20 currency
notes and in perforated sheets of stamps resembling small postage stamps, value
0.5 d., 1d., 2.5d., and 5d., which are used for attaching weekly to the notes,
to keep them at their face value. A penny stamp must, for example, be attached
weekly by the holder to the above £4 currency note which is divided into 52
dated sections for this purpose. The note is shown as it will appear during the
week August 4th - 11th., 31 penny stamps having been attached to it by its
various holders, one stamp for each week from the beginning of the year. In the
course of the year 52 penny stamps (value 4s. 4d.) must be attached to this £4
note, or in other words it depreciates 5.4% annually at the expense of its
holders.
As the owners of goods are always in
a hurry for exchange, it is only just and fair that the owners of money, which
is the medium of exchange, should also be in a hurry. Supply is under an
immediate, inherent constraint; therefore demand must be placed under the same
constraint.
Supply is something detached from
the will of owners of goods, so demand must become something detached from the
will of owners of money.
If we decide to abolish the
privileges enjoyed by the owners of money and to subject demand to the
compulsion to which supply is by nature subject, we remove all the anomalies of
the traditional form of money and compel demand to appear regularly in the
market, independently of political, economic or natural conditions. Above all,
the calculations of speculators, the opinions or caprices of capitalists and
bankers will no longer influence demand. What we term the "tone of the
Stock-Exchange" will be a thing of the past. As the law of gravity knows
no moods, so the law of demand will know of none. Neither the fear of loss nor
the expectation of profit will be able to retard or accelerate demand.
In all conceivable conditions demand
will then consist of the volume of money issued by the State, multiplied by
whatever velocity of circulation is permitted by existing commercial
organisation.
All private money reserves are
automatically dissolved by such compulsory circulation. The whole volume of
money issued is in uninterrupted, regular and rapid circulation. No one can any
longer interfere with the public monetary administration by putting into
circulation or withdrawing private reserves of money. And the State itself is
under obligation at all times rigorously to adapt demand to supply - an obligation
which it can fulfil by issue or withdrawal of trifling sums of money.
More than that is not needed to
protect the exchange of goods against any conceivable disturbance, to render
crises and unemployment impossible, to reduce commercial profits to the rank of
a wage, and in a short space of time to drown capital-interest in a sea of
capital.
And what do the priceless advantages
of compulsory monetary circulation cost us, the producers, who create the money
through the division of labour ? Nothing but renunciation of the privilege of
infecting demand with our arbitrary will, and, through it, with greed, hope,
fear, care, anxiety and panic. We need only abandon the illusion that we can
sell our produce without someone else's buying it. We need only pledge
ourselves mutually to buy, at once and in all possible circumstances, exactly
as much as we have sold. And in order to secure reciprocity for this pledge, we
must endow money with properties that will compel the seller of goods to comply
with the obligations incidental to the possession of money; we must compel him
to convert his money into goods again - personally, if he has any need of
goods, or through others, to whom he lends his money, if he has not.
Are we then willing to break the
fetters that enslave us as sellers of our produce, by renouncing our despotic
privileges as buyers over the produce of our fellows ? If so, let us examine
more closely the unprecedented and revolutionary proposal of compulsory demand.
Let us examine a form of money subjected to an impersonal compulsion to be
offered in exchange for goods.
Description of Free-Money
Free-Money is a stabilised
paper-money currency, the currency notes being issued or withdrawn in
accordance with index numbers of prices, with the aim of stabilising the
general level of prices.
Free-Money, decimal currency (*
For Free-Money, British currency, see Figure 5.), is
issued in 1 - 5 - 10 - 20 - 50 - and 100 dollar (franc, mark) notes (bills).
The monetary authority also sells, through the postoffice, currency stamps
value 1 - 2 - 5 - 10 - 20 and 50 cents.
Free-Money loses one-thousandth of its
face value weekly, or about 5% annually, at the expense of the holder. The
holder must keep the notes at their face value by attaching to them the
currency stamps mentioned above. A ten-cent stamp, for example, must be
attached every Wednesday to the $100 note illustrated (Figure 4), which is
shown as it will appear during the week August 4th - 11th, 31 ten-cent stamps
($3.10) having been attached to it, on the dated spaces provided for the
purpose, by its various holders, one stamp for each week since the beginning of
the year. In the course of the year 52 ten-cent stamps must be attached to the
$100 note, or, in other words, it depreciates 5.2% annually at the expense of
its holders.
For small change up to one dollar (1
- 2 - 5 - 10 - 20 - 50 cents) the currency stamps themselves could be used, in
which case they would not be reissued when paid in at public offices, but
replaced by fresh stamps. The currency stamps would be sold in small perforated
sheets resembling a page from a postage-stamp booklet, the total value of each
sheet being one dollar.
At the end of the year the
fully-stamped currency notes are exchanged for fresh notes, for circulation
during the following year.
Everyone of course tries to avoid
the expense of stamping the notes by passing them on - by purchasing something,
by paying debts, by engaging labour, or by depositing the notes in the bank,
which must at once find borrowers for the money, if necessary by reducing the
rate of interest on its loans. In this way the circulation of money is
subjected to pressure.
The purpose of Free-Money is to
break the unfair privilege enjoyed by money. This unfair privilege is solely
due to the fact that the traditional form of money has one immense advantage
over all other goods, namely that it is indestructible. The products of our
labour cause considerable expense for storage and caretaking, and even this
expense can only retard, but cannot prevent their gradual decay. The possessor
of money, by the very nature of the money-material (precious metal or paper) is
exempt from such loss. in commerce, therefore, the capitalist (possessor of
money) can always afford to wait, whereas the possessors of merchandise are
always hurried. So if the negotiations about the price break down, the
resulting loss invariably falls on the possessor of goods, that is, ultimately,
on the worker (in the widest sense). This circumstance is made use of by the
capitalist to exert pressure on the possessor of goods (worker), and to force
him to sell his product below the true price.
Free-Money is not redeemed by the Currency Office. Money will always be
needed and used, so why should it ever be redeemed? The Currency Office is,
however, bound to adapt the issue of money to the needs of the market in such a
manner that the general level of prices remains stable. The Currency Office
will therefore issue more money when the prices of goods tend to fall, and
withdraw money when prices tend to rise; for general prices are exclusively
determined by the amount of money offered for the existing stock of goods. And
the nature of Free-Money ensures that all the money issued by the Currency
Office is immediately offered in exchange for goods. The Currency Office will
not be dormant like our present monetary administration which with indolent
fatalism expects the stability of the national currency from the mysterious
so-called "intrinsic value" of gold, to the great advantage of
swindlers, speculators and usurers; it will intervene decisively to establish a
fixed general level of prices, thereby protecting honest trade and
industry.
The great importance of external
trade makes it desirable that there should be an international agreement to
stabilise the international exchanges. In the meantime we shall have to decide
whether the monetary administration, when regulating, the issue of money, is to
stabilise home prices, or to stabilise the foreign exchanges. It cannot of
course do both, for stabilising the exchanges means conforming to the price
levels of other countries. And these price levels, in countries with metallic
standards, constantly fluctuate.
The exchange of metal money for
Free-Money will be entirely optional. Those who cannot bear to part with their
gold may keep it. Gold, however, like silver formerly, will lose the "right
of free coinage", and the coins will be deprived of their quality as legal
tender. After the expiration of the legal period for exchange, the coins will
no longer be accepted by the courts of justice or other public institutions. For payments abroad use can be made as
heretofore of bills of exchange offered for sale by merchants who have shipped
goods abroad. For small amounts Post Office Money Orders may be employed, as is
the custom at present.
Anyone wishing to purchase national
products for export and having only gold at his disposal, that is, if he has
not been able to buy any import bills, can sell his gold to the Currency
Office. Anyone needing gold for the import of foreign goods, because there are
no export bills on offer, can buy the gold at the Currency Office. The price of
this gold will depend on how the question left open in (9) is answered.
The sale of the currency stamps creates a
regular annual revenue for the Currency Office, amounting to 5% of the value of
the currency notes in circulation, or 200 - 300 million marks in Germany before
1914.
This revenue of the currency administration is an
accidental by-product of the reform, and is comparatively insignificant. The
disposal of this revenue will be specially provided for by law. (*For
other methods of applying the principle of Free-Money see page 245.)
2. HOW THE STATE PUTS FREE-MONEY IN CIRCULATION
The money reform deprives the Banks
of Issue of the privilege of issuing banknotes. Their place is taken by the
National Currency Office which is entrusted with the task of satisfying the
daily demand for money.
The National Currency Office does
not carry on banking business of any kind. It does not buy or sell bills of
exchange, it does not classify business firms as first, second and third rate.
It entertains no connections with private persons. The National Currency Office
issues money when the country needs it, and withdraws money when money is in
excess. That is all.
To put Free-Money in circulation all
public treasuries are instructed to exchange, when requested to do so, the old
national metal money or paper money for Free-Money; one dollar (franc, or
shilling) of Free-Money being given for one dollar (franc, or shilling) of the
old money.
Anyone not consenting to this
exchange may keep his gold. No one will compel him to exchange it; there will
be no legal pressure; no force will be employed. The public is merely warned
that after the lapse of a certain term (1, 2 or 3 months) the metal money will
be only metal, and no longer money. If by that time anyone still possesses
metal money he is free to sell it for Free Money to a dealer in precious
metals, but he must bargain about the price. The only form of money recognised
by the State will be Free-Money. Gold, for the State, will be a mere commodity
like wood, copper, silver, straw, paper or fish-oil. And just as today taxes
cannot be paid in wood, silver or straw, so gold will not be available for the
purpose of paying taxes after expiration of the term for exchange.
The State knows that there is no
room for any but State money, and that consequently no special efforts are
needed to give this money currency. For the indispensability of money and the
necessity for State control of money automatically lead to that result. So if
anyone decides to set up a private mint and to strike coins of any particular
weight and fineness, the State can tranquilly look on. Coins, for the State,
have ceased to exist and so, therefore, have forgers of coins. The State simply
deprives all coins, including those formerly struck by itself, of its guarantee
of weight and fineness, the minting machinery being sold to the highest bidder.
That is all the State does to prevent gold from circulating - but it suffices.
So if anyone opposes Free-Money to
the point of rejecting it as payment for his goods, nobody will interfere. Let
him continue to demand gold for his products. But he will have to weigh this
gold and test its purity, coin by coin, with touchstone and acids. He will,
moreover, have to ascertain whether anybody will buy the gold from him, and at
what price, and he must be prepared for certain surprises. If on second
thoughts he finds this procedure troublesome and expensive, he is still free to
seek salvation within the pale of Free-Money. He will then only be following
the example of the former enemies of the gold standard, the German landowners
who at first fiercely opposed the new gold money but very soon accepted
it.
What is the State to do with the gold
received in exchange for Free-Money ? The State will melt it down and have it
manufactured into chains, bracelets and watch-cases to present to all the
brides of the nation on their wedding day. What more reasonable use could be
found for such a mass of treasure ?
For the State does not need gold,
and by selling the gold received for Free-Money to the highest bidders it would
depress its price and embarrass other nations, as happened when Germany so
thoughtlessly sold its demonetised silver. If on that occasion Germany had used
the silver thalers to manufacture wedding presents, or to erect in front of
every pawn-shop and loan-bank life-sized statues to the champions of the gold
standard - it would have been better for economic life at home and abroad, and
even for the State finances. For the few millions which the State realised from
the sale of silver, a mere drop in the ocean considered from the point of view
of German economic life as a whole, were largely instrumental in depressing the
price of silver, and the difficulties of the German landowners, caused by the
low price of grain, were partly due to these silver sales. (*Laveleye:
La Monnaie et le Bimétallisme.) If Germany had adopted
the above proposal and manufactured the thalers into silver wedding presents,
it would have recovered the loss tenfold out of the increased taxpaying
capacity of its subjects.
3. HOW FREE-MONEY IS MANAGED
After Free-Money has been put in
circulation and metal money withdrawn, the sole function of the National Currency
Office is to observe the ratio at which money and goods are exchanged and by
increasing or decreasing the monetary circulation, to stabilise the general
level of prices. In doing so the National Currency Office is guided by
statistics for the calculation of the average price of all goods, as discussed
in Part III of this book. According to the results of this calculation, which
show whether the price-level tends to rise or fall, the monetary circulation is
reduced or enlarged. (Instead of altering the volume of money the Currency
Office might alter its rapidity of circulation by reducing or raising the rate
of depreciation of 5.2%. But the first method proposed is preferable).
To increase the monetary
circulation, the Currency Office pays new money into the public treasury which
will expend it by means of a proportional reduction of taxation. If the taxes
due to be collected amount to 1000 millions, and 100 millions of new money is
to be issued, the taxes are reduced 10%.
That is a simple matter, but the
decrease of the monetary circulation is still simpler. For since the amount of
Free-Money in circulation decreases 5% annually through depreciation, all that
the
Currency Office has to do, to
decrease the volume of money, is - to do nothing. Any surplus consumes
itself automatically. (*This
refers to Gesell's original plan, published in 1891, for applying the principle
of Free-Money, in which he proposes to let the face-value of the currency notes
decrease from 100 at the beginning of the year to 95 at the end - instead of
keeping the face-value at 100 by stamping the notes at the holder's expense.
See page 245.) Should this not suffice the volume of
the currency could be reduced by increasing taxation and using the resulting
surplus to destroy Free-Money notes. The volume of currency could also be
regulated by purchase or sale of Government securities by the Currency
Office.
By means of Free-Money, therefore, the
Currency Office has perfect control over supply of the instrument of exchange.
It controls absolutely both the manufacture of money and the supply of
money.
The Currency Office does not require
a palatial building with hundreds of officials, like the German National Bank.
The Currency Office carries on no banking business of any kind. It has no
counters, nor even a safe. The money is printed in the national printing press;
the issue and the exchange of the money is effected by the public treasuries; the
general level of prices is calculated by the bureau of statistics. All that is
needed is one man who takes the money from the printing house to the public
treasuries, or destroys the money collected by taxation for the purpose of
regulating the currency. The whole establishment consists of a printing press
and a stove. Simple, cheap, efficient!
With this simple apparatus we can
replace the arduous labour of gold-digging, the ingenious machinery of the
mint, the working capital of the banks, the strenuous activity of the Bank of
Issue, and yet make sure that today, tomorrow, for ever, in good days and in
bad, there will never be a penny too much or too little in circulation. And we
can do more than merely replace the present organisation. We can establish
permanently a model currency system for all the world to imitate.
4. THE LAWS OF CIRCULATION OF FREE-MONEY
Let us now consider Free-Money more
closely. What can its possessor or holder do with it ? On January 1st its value
in the markets, shops, pay-offices, public treasuries and courts of justice is
$100 and on December her 31st it is only $95. That is to say, if the holder of
the note intends to employ it at the end of the year to pay $100, on a bill of
exchange, invoice or demand note, he has to add $5 to the note.
What has occurred? Nothing but what
occurs with every other commodity. Just as a certain egg steadily and rapidly
departs from the economic conception "egg" and is not comparable to
it at an on completion of the rotting process, similarly the individual dollar
note drifts away from what the dollar stands for in the currency. The dollar as
the currency unit is permanent and unchanging; it is the basis for all
calculations; but the dollar as a money-token has only the starting point in
common with it. Nothing has occurred, then, but what occurs with everything
about us. The species, the conception is unalterable; but the individual, the
representative of the species is mortal and moves steadily onwards towards
dissolution. All that has occurred is the separation of the object of exchange
from the unit of currency, the individual from the species, and the subjection
of money to the law of birth and decay.
The holder of this perishable money
will beware of keeping the money, just as the egg-dealer will beware of keeping
the egg any longer than he must. The holder of the new money will invariably
endeavour to pass on the money, and the loss involved by its possession, to
others.
But how can he do so? By selling his
products he has come into possession of this money. He was forced to accept it,
though well aware of the loss its possession would cause him. His products were
from the first intended for the market; he was forced to exchange them, and
exchange, under the given conditions, could be effected only through the medium
of money; and this is the only money now produced by the State. Hence he was
compelled to accept this odious Free-Money in exchange for his products if he
was to dispose of them at all and so attain the object of his labour. Perhaps
he might have deferred the sale, say until he was in immediate need of other
goods, but meanwhile his own products would have deteriorated and become
cheaper; he would have incurred a loss, perhaps greater than that involved in
the possession of the money, through the diminution in quantity and the
deterioration in quality of his products, and through the cost of storage and
care-taking. He was under constraint when he accepted the new money, and this
constraint was caused by the nature of his own products. He is now in
possession of the money which steadily depreciates. Will he, in his turn, find
a purchaser, will he find anybody willing to let the loss arising out of the
possession of such money be passed on to him ? The only person who will accept
this "bad" new money from him, is someone like himself under
constraint, someone who has produced commodities and is now anxious to dispose
of them in order to avoid the loss incident to their possession.
We thus at the very outset, note a
remarkable fact, namely that the buyer has a personal desire, arising
immediately out of the possession of his money, to pass it on to the possessor
of commodities, and that this desire equals in strength the seller's eagerness
to pass on his commodities to the buyer. The gain from the immediate completion
of the bargain is the same for both parties, and the effect, of course, is that
during the negotiations about price the buyer can no longer refer to his
invulnerability (gold), and threaten to withdraw should the seller not submit
to his terms. Buyer and seller are both poorly armed; each has the same urgent
desire to strike the bargain. Under such conditions, obviously, the terms of
the bargain will be fair and the transaction will be accelerated.
But let us now suppose that the
Free-Money note which we have just been considering has come into the
possession of a saver, merchant or banker. What will they do with it ? In their
hands also, the money-token steadily shrinks away. They came into possession of
Free-Money by exchanging their former gold coins. No law constrained them to
make the exchange; they might have kept the gold, but the State proclaimed that
after a certain date it would refuse to give Free-Money for gold, and what
could they then have done with their gold ? They could have had it manufactured
into gold ornaments, but who would have bought these ornaments, and at what
price ? And with what would the gold ornaments have been paid for? With
Free-Money !
So they found it advisable not to
let the term for exchange slip by. And now they are considering the new money,
their property. The uselessness of the demonetised gold forced them to consent
to exchange it for Free-Money, and the loss inseparable from possession of the
new money now forces them to get rid of it in order to transfer the loss as
quickly as possible to others.
But since as savers and capitalists
they have no personal demand for goods, they now seek a market for their money
with people who wish to buy goods, but at present have no money. That is, they
offer the money as a loan - just as they used to do in the case of gold. There
is, however, a difference. Formerly they were free to lend the money or not,
and they only lent it as long as they were satisfied with the conditions of the
loan. Now they are forced to lend the money, whatever the conditions of the
loan. They now act under compulsion. By the nature of their property
(commodities), they were compelled to accept Free-Money, and now they are
compelled by the nature of Free-Money to lend it. If they are not satisfied
with the interest offered, let them buy back their gold, let them buy goods,
let them buy wine which is said to become better and dearer in the course of
time, let them buy bonds or Government securities, let them become employers of
labour and build houses, let them enter commerce, let them do anything they
please that may be done with money-one thing only they cannot do: they cannot
now lay down the conditions upon which they are willing to pass on their
money.
Whether they are satisfied with the
interest offered by the debtor or the yield promised by the projected house;
whether the securities selected are favourably quoted; whether the price of the
wine and precious stones which they intend to hoard has been forced up too high
by the great number of buyers with the same ingenious idea; whether the selling
price of the matured wine will cover the cost of storage, caretaking, etc.,
makes no difference, for they are compelled to dispose of the money. And that
too immediately, today and not tomorrow. The longer they stop to think, the
greater the loss. Supposing, however, that they find somebody willing to take
the money, the loan-taker can have only one intention, namely to invest the
money at once in goods, in enterprises or in some other manner. For no one will
borrow money simply to put it in a box, where it depreciates. He will endeavour
to pass on the loss connected with the possession of money by passing on the
money.
In whatever way the money is
invested, it will immediately create demand. Directly, through purchasing, or
indirectly through lending, the possessor of money win be obliged to create a
demand for commodities exactly proportionate to the quantity of money in his
possession.
It follows that demand no longer
depends on the win of the possessors of money; that price-formation through
demand and supply is no longer affected by the desire to realise a profit; that
demand is now independent of business prospects and expectations of a rise or
fall of prices; independent too, of political events, of harvest estimates; of
the ability of rulers or the fear of economic disturbance.
The supply of money, just like the
supply of potatoes, hay, lime, coal and so forth, will be weighable,
measurable, and without life and volition. Money, by an inherent natural force,
will steadily tend towards the limit of the velocity of circulation possible
for the time being, or rather it will in all conceivable circumstances tend to
overleap this limit. Just as the moon, calm and unaffected by what may be going
on here below, moves in its orbit, so Free-Money, detached from the wishes of
its holders, will move through the market.
In all conceivable circumstances, in
fair weather and in foul, demand will then exactly equal: -
The quantity of money circulated and
controlled by the State. Multiplied by:
The maximum velocity of circulation
possible with the existing commercial organisation. What is the effect upon economic life ? The
effect is that we now dominate the fluctuations of the market; that the
Currency Office, by issuing and withdrawing money, is able to tune demand to
the needs of the market; that demand is no longer controlled by the holders of
money, by the fears of the middle classes, the gambling of speculators or the
tone of the Stock Exchange, but that its amount is determined absolutely by the
Currency Office. The Currency Office now creates demand, just as the State
manufactures postage stamps, or as the workers create supply.
When prices fall, the Currency
Office creates money and puts it in circulation. And this money is demand,
materialised demand. When prices rise the Currency Office destroys money, and
what it destroys is demand.
Thus the Currency Office controls
the tone of the market, and this means that we have at last overcome economic
crises and unemployment. Without our consent the price-level can neither rise or
fall. Every movement up or down is a manifestation of the will of the Currency
Office, for which it can be made responsible.
Demand as an arbitrary act of the holders of money was
bound to cause fluctuations of prices, periodic stagnation, unemployment,
fraud. Free-Money makes the price-level dependent on the will of the Currency
Office which uses its power, in accordance with the purpose of money, to
prevent fluctuations.
Confronted with the new money
everyone will be forced to conclude that the traditional custom of storing up
reserves of money must be abandoned, since reserve money steadily depreciates.
The new money, therefore, automatically dissolves all money hoards, those of
the careful householder, of the merchant and of the usurer in ambush for his
prey.
And what does this change further
signify for economic life ? It signifies that henceforward the population will
never be in possession of more than the exact amount of the medium of exchange
necessary for the immediate requirements of the market -an amount regulated so
as to eliminate fluctuations of prices caused by too much or too little money.
It signifies that henceforward no one can frustrate the policy of the Currency
Office by flooding the market with money drawn from private reserves at a time
when the Currency Office considers a drainage of the market opportune, or by
draining off money into private reserves when the Currency Office wishes to
replenish the stock of money. It signifies consequently that, to enforce its
policy, the Currency Office need issue or withdraw only insignificant
quantities of money.
But with the new form of money no
one needs to provide for a money reserve, since the regularity of the
circulation makes reserves superfluous. The reserves were a cistern, that is,
merely a receptacle, whereas the regularity of circulation of the new money
will make it a perennially-welling spring.
With Free-Money demand is
inseparable from money, it is no longer a manifestation of the will of the
possessors of money. Free-Money is not the instrument of demand, but demand
itself, demand materialised and meeting, on an equal footing, supply, which always
was, and remains, something material. The tone of the Stock-Exchange,
speculation, panic and collapse cease from now on to influence demand. The
quantity of money issued, multiplied by the maximum velocity of circulation
possible with the existing commercial organisation, is in all conceivable
circumstances the limit, the maximum and also the minimum, of demand.
Money, anathema throughout the ages,
will not be abolished by Free-Money, but it will be brought into harmony with
the real needs of economic life. Free-Money leaves untouched the fundamental
economic law which we showed to be usury, but it will cause usury to act like
the force that seeks evil but achieves good. By eliminating interest Free-Money
will clear away the present ignoble motley of princes, rentiers and
proletarians, leaving space for the growth of a proud, free, self-reliant race
of men.
5. HOW FREE-MONEY WILL BE JUDGED
A. The Shopkeeper
The coming of Free-Money has made
notable changes in my business. In the first place my customers have taken to
paying cash, because it is to their immediate advantage to pay promptly, and
because they are paid cash themselves. In the second place the sale of goods in
small quantities has ceased, I no longer sell goods by pennyworths. Customers
were formerly loath to part with their money, because the money did not compel
them to pass it on; because they received interest; because they had money in
the savings bank; because it was more convenient to have money in the house
than goods; and finally because nobody was ever sure when he would receive the
money owing to him. The circulation of money was irregular and payments were so
uncertain that everyone except those in receipt of a fixed income was forced to
keep some money in reserve. And this reserve was formed by purchasing whenever
possible on credit and by purchasing only necessities for immediate
consumption. Instead of a pound customers bought an ounce, instead of a sack, a
pound. It never occurred to anyone to lay in provisions or to provide a
store-room when planning a new house. The only possible kind of store was a
store of money. A modern house had many rooms for special purposes such as a
darkroom, a carpet-room, a box-room, etc., but never a room for provisions.
All this has now changed. The new
money constantly reminds men of their duties as debtors, and they are eager to
pay, as they are paid, promptly. Money is now compelled to circulate, so its
circulation is steady and uninterrupted. It can no longer be arrested by rumours.
Regular circulation produces a regular turnover of goods, and as everyone, to
avoid loss, is anxious to pay at once for what he has bought, the influx of
money into my till has also become regular. We shopkeepers are able to rely on
this regular influx of money and are therefore no longer forced to keep a
reserve of money; quite apart from the fact that reserves of money are now
impossible, since they depreciate. Instead of hoarding money, people now lay in
stores; they prefer possession of goods to possession of cash, just as, for the
same reason, they prefer paying cash to buying on credit. Instead of minute
quantities, the public now buys large amounts of goods in their original
packing; instead of a gallon, a barrel; instead of a yard, a roll; instead of a
pound, a sack.
From this it might be imagined that
we retailers are revelling in the new situation but that, unfortunately, is not
so. Luckily for myself I watched developments closely and was able to adapt my
business to the changed conditions. For my former retail prices I have
substituted wholesale prices, and have in this way managed not only to retain,
but greatly to increase the number of my customers. But other shopkeepers who
had not the same foresight have been forced to close their shops. Where there
were ten shops formerly there is now only one which, in spite of its tenfold
increase of turnover, requires less labour to run. The rent of my shop has
already been reduced by 90%, because so many shops have been vacated and are
being converted into flats. But in spite of a minimum rent and a tenfold
increase of turnover my profits are far from having increased proportionately,
since other shopkeepers, owing to the general simplification of commerce, have
also been forced to reduce their profits. Thus instead of an average profit of
25% I now charge about 1% commission. As I deliver orders in the original
packages and am paid cash, a small margin of profit gin suffices. No
bookkeeping, no bills, no losses! And in spite of the tenfold increase of turnover,
my warehouse has not been enlarged. My customers have agreed to take regular
supplies which are delivered direct from the railway station. Shopkeeping has
developed into a mere consignment business.
My fellow retailers who have been
forced to close their shops are, I admit, to be pitied, especially the older
ones who are past learning another trade. As their impoverishment has been
caused by the introduction of Free-Money, that is, by State-interference, they
ought in justice to be compensated by a State pension. And the State is well
able to pay this compensation since the disappearance of these middlemen and
the consequent cheapening of all commodities has greatly increased the
tax-paying capacity of the population. On a former occasion the State felt
itself bound to protect landlords against a fall of rent by introducing a duty
on wheat, so compensation would seem fully justified in the present case.
I must admit that shopkeeping is
enormously simplified by Free-Money. Something of the kind was bound to happen.
Neither small retail selling, with the tremendous cost it involved, nor the
misuse of credit sales could have continued indefinitely. It was an intolerable
abuse that the retail sale of daily necessities should add 25% to their price
at a time when labour was forced to struggle hard for a 5 % increase of
wages.
Switzerland, with 3,000,000
inhabitants, in 1900 employed 26,837 commercial travellers who paid an
aggregate of 320,000 francs for licences. Even if we put their daily expenses
at only 5 francs per head, commercial travellers cost Switzerland 48,977,525
francs annually.
In Germany there are 45,000
commercial travellers permanently on the road. (In Switzerland this business is
largely carried on as a subsidiary occupation; hence the comparatively large
number of travellers and my low estimate of 5 francs a day for expenses). It
has been calculated that each of these 45,000 commercial travellers costs 14
marks a day (salary, travelling expenses, hotel bills) and this is certainly
not an over-estimate. That amounts to 600,000 marks a day or 218 million marks
a year. To this other travelling expenses must be added. We can say that
two-thirds of all travelling is travelling on business, and that two-thirds of
the hotels in existence exist solely for the service of business
travellers.
It was predicted that the
introduction of Free-Money would render buyers more amenable, and I observe
that their behaviour has already been sensibly modified. Last Saturday a
customer who wanted a sewing-machine kept me talking for an hour, but the man
seemed unable to make up his mind and kept discovering imaginary defects in my
good machine - until I reminded him of the imminent close of the week and the
necessity of stamping his currency notes. That worked like a charm, the
fortress of his indecision came tumbling down. He looked at his watch, counted
his money and calculated that if he delayed any longer he would lose a penny.
Forthwith his doubts were resolved, he paid and went off happy. I lost the
penny, but the time gained was worth a thousand times as much.
Next a wealthy customer bought some
goods but said he had forgotten his purse and asked me to charge the amount to
his account. Upon my remarking that as it was Saturday it would pay him to
fetch the money and thus avoid the depreciation, he thanked me for my
attention, went home, and within a few minutes I had received the money. This
enabled me to pay a craftsman who happened to deliver some goods at the same
time. Omission to pay ready money would in this case have been simply a piece
of indolence on the part of my customer, and this indolence would have
prevented me from paying the craftsman. How much labour, risk and worry are
saved by Free-Money ! I now employ only one book-keeper instead of ten. It is
remarkable that the great problem of cash payment has
been solved, as it were
accidentally, by the money reform. It was not poverty that kept buyers from
paying cash, but self-interest, and immediately any advantage was to be gained
by paying cash, cash payment became general. It is well known that under the
old system the merchant was not paid more promptly by the rich than by the
poor, the reason for the delay being that during the term of respite the debtor
was the recipient of interest.
About the depreciation itself I have
no reason to complain. Personally, as a merchant, I should welcome an increase
of the rate of depreciation from 5% to 10% a year, for that would make buyers
still more amenable and book entries would cease entirely, so I could dismiss
my last book-keeper. I now see that the more despised money is, the more highly
esteemed are goods and their makers, and the simpler is commerce. Workers can
be respected only in a country where money is not superior to them and their
products. This desirable result, though not quite attained by the present rate
would certainly be realised by a rate of depreciation of 10%, so possibly the
rate may be raised in favour of the workers.
And what is even 10% on my average
cash balance of $1000 ? A hundred dollars a year! A mere trifle, compared to my
other expenses. I can moreover contrive to reduce this amount considerably by
getting rid of my money still more speedily, that is, by paying not only cash
but in advance.
To pay in advance may seem at first
sight a ridiculous proposal, but it is really only an inversion of the former
custom, when tie goods had to make advances, money following. Money now makes
the advances and the goods follow. Pre-payment binds the debtor to supply goods
and work, things at his immediate disposal; post-payment obliged him to supply
money, a thing he can only obtain indirectly. It is therefore more advantageous
and safer for both parties when the money precedes and the goods follow, than vice
versa, as formerly.
Payment in advance is all that is
needed to satisfy craftsmen and to provide them with the money necessary for
carrying on their business. If craftsmen were not forced to deliver their
product on credit, they could successfully compete with the trusts.
B. The Cashier
Upon the introduction of Free-Money
we cashiers were pitied. Prophecies were made that we should be overwhelmed
with work and worry, that we should always be short in our accounts, and so
forth. But what has actually happened ? To begin with, office hours were
reduced, as there was not enough work. Instead of ten hours I now work six.
Next, the number of employees was gradually reduced, the older clerks being
pensioned and the younger ones dismissed. But not even that was enough; most
banking establishments have now been closed.
This development might indeed have
been foreseen, but the banks were too firmly convinced of their
indispensability! Bills of exchange and cheques, which used to be the cashier's
daily bread, have almost disappeared. According to the returns of the National
Currency Office, the currency now in circulation does not amount to one-third
of our previous issue. That is because our present money circulates three times
as rapidly as the old money. Scarcely a hundredth part of the former sums now
passes through the hands of the banker. Money remains on the move, in the
market, in the hands of buyers, merchants, manufacturers. It passes
uninterruptedly from hand to hand, it has no time to accumulate in the banks.
Money is no longer a bench on which the producer may repose after the fatigue
of selling his goods and wait indolently until personal needs admonish him to
turn over his money. The resting point in exchange is now the commodity itself
- not of course the commodity one produces, but that produced by others. The
holder of money is hunted and worried by his possession, just as formerly the
producer was hunted and worried by his goods until he had passed them on to
someone else. From what is the word "bank" or "banker"
derived ? It comes from the benches on which the holders of money sat at ease,
while the holders of goods ran about and fretted. With FreeMoney, it is the
holders of money who run about and fret, and the sellers of goods who sit on
the benches.
Again, the circulation of money
having become so rapid, and everyone being in a hurry to pay, bills of exchange
are no longer required and have been replaced by ready money. Neither does
anyone need reserves of money, the regularity of the monetary circulation
making these reserves unnecessary. The living, perpetually-welling spring has
taken the place of the stagnant reservoir.
These money reserves had seduced men
into the greatest folly of the century, namely the cheque. Yes, it is I, the
cashier, who proclaim that the cheque was rank folly! The use of money is to
make a payment, and gold was supposed to be the most convenient means of
payment conceivable, so why, then, was it not used as such ? Why let the cheque
take the place of ready money, if ready money meets all requirements, as gold
was vaunted for doing ? Compared with ready money the cheque is an exceedingly
unwieldy instrument of payment. It is bound up with the observance of various
formalities; it must be cashed at a certain place, and the security of payment
depends on the solvency of the drawer and of the bank. Yet cheques were
supposed to denote progress It was even hoped to carry matters as far as the
English have done, and to pay cab fares with a cheque. As if that were an
honour and an advantage for the cabman ! The model cheque, for the recipient at
least, is hard cash, for this cheque can be cashed in any shop or public house,
it is bound by no formalities, and its security is never in question. We were
so proud of our golden money and so convinced that we had reached the acme of
perfection with it, that we were blind to the contradiction that lay in the use
of cheques. Gold was too good for common use; therefore we looked for a
substitute, the cheque. We resembled the man who went for a walk with an old
coat and a new umbrella and could not bear to open the new umbrella lest it
should become wet. So he hid it under his coat. No one scrupled to thrust whole
parcels of cheques upon us cashiers, and we were able to find the total amount
only by noting down the separate sums in long columns and adding them up.
Disgusting work, compared to which the counting of money is child's play. Only
the pieces of money have to be counted, since they are all equal in
amount.
Moreover the cheques had to be
cleared among the various banks, every single cheque charged to its drawer. And
then the calculation of interest! At the end of every quarter an account had to
be handed in with every cheque specifically entered. Thus every cheque was
entered ten times over. And that was called progress ! What an absurdity ! The
unwieldiness of the gold currency and the irregularity of the circulation made
bank accounts necessary, and these in their turn gave rise to the cheque, but
this circumstance, instead of being considered a serious drawback of the gold
currency, was regarded as something to be proud of !
And besides the cheques those heavy
bags of gold, silver, copper and nickel, and paper money into the bargain!
Eleven different kinds of coins: 1, 2, 5, 10, 20 marks, 1, 2, 5, 10, 20, 50
pfennigs ! For small change under one mark alone six different coins of three
different metals ! Hundreds of cheques, eleven different coins and ten
different kinds of paper money !
With Free-Money I have only a few
denominations and no cheques. And everything is light and clean, and always
new. My cash account which formerly took me an hour is now finished in a few
minutes!
I am asked how I deal with the
depreciation on my cash balance. The matter is simple enough. At the close of
the, week, on Saturday at four o'clock, I count my cash, calculate the
depreciation for the week, and enter it among expenses. With private banks this
sum is charged to general expenses, which are covered by a reduction of the
rate of interest on deposits. With public treasuries the loss is only nominal,
since the State profits by the depreciation of the total circulation.
Considered from the standpoint of
cash-keeping technique there is nothing disadvantageous in FreeMoney. The best
proof of this is the fact that nine out of every ten cashiers have become
superfluous. A machine that saves labour must be doing good work.
C. The Exporter
The gold standard was introduced on
the plea that it would facilitate international trade. No sooner, however, had
the introduction of the gold standard, in conformity with the quantity theory
of money, resulted in a sharp general fall of prices than a great clamour was
raised for protection. Barriers in the shape of protective tariffs were then
erected in order to hamper trade with foreign countries. Is not that
sacrificing the end to the means ?
But granted that the gold standard
could have been introduced without a depression of prices, without an economic
disturbance, it would still have been little help to foreign trade. It is
indeed sometimes asserted that the increase of our foreign trade since the
establishment of the gold standard has been caused by it. But foreign trade
increased because the population increased, and it did not even increase
proportionately to the increase of the population. Besides this, the increase
occurred especially in the trade with countries which had a paper currency
(Russia, Austria, Asia, SouthAmerica), whereas the trade with the countries on
the gold standard (France, North America) developed slowly. (England being a
transit country cannot here be used as an illustration).
The gold standard would have some
justification if it could be universally adopted without protective tariffs,
without economic disturbances and without sudden fluctuations of prices. To
lead the way in this would be a reasonable policy for a State which had the
power to force the gold standard upon all the other States. But as no State has
this power, and as we can only hope that other States will follow our lead, why
not lead the way towards an international paper standard ? The German who buys
his goods with gold while he is forced to sell them for paper roubles, paper
gulden, paper pesetas, paper liras, paper pesos, paper reis and so on, is
surely no better off than if he also bought his goods for paper marks. If the
selling price has to be calculated in a currency different from that of the
purchase price, it does not matter whether the purchase is made in a paper, or
a silver, or a gold currency.
But even if the gold standard were
universally adopted for international trade, its advantages are small. It was
thought that the gold standard would facilitate commercial calculations, that
it would suffice to name a sum of money for anyone to know its full
significance for every country. But this is an illusion! In the first place the
gold standard does not obviate fluctuations in the rates of exchange. Gold
imports and gold exports alternate in every country. The quantities may be
trifling enough, but they suffice to bring about considerable fluctuations in
the rates of exchange. The rate of exchange fluctuates between the cost of
import and export of gold, which may amount to as much as 3% in freight,
insurance, loss of interest and minor expenses. And in addition to this there
is the cost of recoinage. For, as Bamberger rightly remarks, a journey abroad means
for gold a journey to the meltingpot. Such expenses must be considered even in
small transactions. But if a merchant is forced to take into account the
fluctuating rates of exchange, what is the advantage of the gold standard for
his calculations ?
The other supposed advantage of a
universal gold standard is even more deceptive. The significance of a sum of
money in a country can be understood only when commodity-prices, wage-rates,
and so forth in that country are known. If, for instance, I inherit debts, I
shall not remain in Germany but go where money is easiest to earn. If I
emigrate, the amount of the debt is not decreased, but my power of paying it
increases. A man with a debt of $1000 is a poor devil in Germany, whereas in
America this debt is a trifle. The reverse is true when instead of a debt I
inherit a fortune. In this case what use is the gold standard ? Or take another
instance, an emigrant is promised a large amount of gold but at once inquires
about the prices of the commodities produced and consumed by him. Not until he
knows these prices can he form a conception of the sum of money named. From
gold his thoughts immediately fly to the prices of commodities; these, not the
gold, are the foundation he can build upon. But if, in order to estimate the
meaning of a sum of money, it is first necessary to know the prices of
commodities, it surely makes no difference whether the sum of money is stated
in gold or in paper. And as a matter of fact nobody knows even approximately
the meaning of a given sum of money, no matter whether the money is a gold
dollar or a paper rouble.
But in practice all this is of very
little importance to the merchant. What are all these small arithmetical
problems compared to the thousand imponderable factors on which the merchant's
theory of probabilities is based ? The estimate of the demand for a commodity,
the determination of its quality, its chances in competition with a hundred
other commodities, changes of fashion, the likelihood of new import-duties, the
rate of profit that this or that kind of commodity may be expected to yield -
these are the things that the merchant must take into account. The conversion
of prices from one currency into another is a job for the office boy.
Far more important than the
currencies of the different countries with which a merchant is doing business
are the protective tariffs and their alterations. To protect the gold standard,
many countries have broken away from free-trade. But an exporter would prefer
any kind of currency, even the cowryshell currency of Central Africa, and
free-trade, to a gold currency coupled with protective-duties. And there is no
denying the fact that wherever the gold standard has appeared, protection has
followed.
In international commerce, goods are
paid for with goods, and if a deficit occurs it can only to a very limited
extent be paid in currency. Prolongation of credit, bills of exchange, loans
and transfers of securities are here employed. For the balance of payments the
policy of the Banks of Issue is far more important than the existence of a form
of money suitable for export. Here, as elsewhere, prevention is better than
cure. The Bank of Issue must learn to consider a fall in the rate of exchange
as a sign that it is issuing too much money and thus raising prices, hindering
export, and encouraging import. In this case it must promptly work for a
reduction of prices by limiting the supply of money. And in the opposite case
it must increase the supply of money. If it proceeds in this manner payments
must always tend to cancel each other, leaving no balance to be paid by the
export of money. It is therefore, to say the least, unnecessary to provide a
national currency that can be exported. Indeed the export and import of the
national currency can become a grave danger to a country. If the currency can
be exported, the Bank of Issue loses the monopoly of the money supply and the
home market becomes exposed to the control of foreign, often hostile,
influences. French money invested in German banks was, for example, withdrawn
during the Moroccan crisis with the purpose of injuring Germany, a purpose
which was attained. Every blunder in currency control abroad reacts on the
currency at home and cannot be counteracted - except by tariffs. When foreign
countries introduce a paper currency and thus drive out gold, this gold seeks
employment elsewhere and comes pouring into our country, forcing up prices,
perhaps at a time when they are already too high. And when foreign countries
substitute the gold standard for a silver or paper currency, gold flows away
from our country, not infrequently at a time when there is already a shortage
of it. Such blunders in the management of the currency have again and again
brought our debt-ridden German farmers into difficulties.
All this was proved
theoretically long ago (* Gesell: Anpassung des Geldes an
die Bedürfnisse des modemen
Verkehrs, Buenos-Aires, 1897. Frankfurth and Gesell:
Aktive Währungspolitik, Berlin, 1909.) but has been
demonstrated in practice only since the introduction of Free-Money. For we have
now a form of paper-money completely detached from gold. With Free-Money there
is not even the promise of redemption in gold, but nevertheless the rate of
exchange with foreign countries is more stable than before. At first the
National Currency Office concentrated all its efforts on the stabilisation of
the general level of prices. The effect was, that while prices remained stable,
the foreign exchanges fluctuated. The reason of this was that prices in other
countries, where the gold standard remained in force, fluctuated in the usual
fashion. The other countries refused however to admit this explanation,
maintaining that our paper money was to blame. Our Currency Office then decided
to prove that the fluctuations were due to gold, and gave up the policy of
stabilising home prices, in order to stabilise the rate of exchange. When the
rate of exchange of the mark rose, it increased the stock of money, and when
the rate fell, it withdrew money. And since with Free-Money the stock of money
is the demand for goods, the effect on the prices of goods, as well as on the
foreign exchanges, was exactly as foreseen by the Currency Office: the
exchanges were stabilised and prices fluctuated. Thus we demonstrated to the
world that a stable rate of exchange together with a stable level of prices
cannot possibly be expected from the gold standard, and that the two aims can
be combined only when the stability of prices is universal. The aim in every
country must therefore be the stabilisation of home prices in order to obtain a
stable rate of exchange. Only through national currencies managed on the same
principle in all countries can stable rates of exchange for international
commerce be combined with a sound national standard. The other countries seem
now at last to have grasped this fact, for an international conference has been
summoned for the purpose of establishing an international paper currency and an
International Currency Office.
Something must be done. We want
free-trade, stable foreign exchanges and stable prices in the home market. With
national institutions alone we cannot fully realise these three aims, so we
must come to an agreement with the rest of the world. And Free-Money seems
destined to furnish the basis for such an agreement. For Free-Money is
submissive, adaptable, plastic. It lends itself readily to the realisation of
any aim.
D. The Manufacturer
Sales, sales, that is what we
manufacturers want; steady, assured sales, with long-term orders in advance.
For industry is dependent on regular disposal of the product; we cannot dismiss
our skilled hands the moment sales begin to slacken, only to engage new,
unskilled labour shortly afterwards. Nor can we go on producing at random for
stock, when regular orders are not forthcoming. Give us then sales, steady
sales and efficient public institutions to facilitate the exchange of our
products
(medium of exchange, post, telegraph
etc.); the difficulties of technical execution can be left to us.
Regular sales. cash payment, and a
stabilised price-level - the rest we can contrive for ourselves.
Such were our wishes when the
introduction of Free-Money was being discussed, and our wishes have been
fulfilled.
For what is a sale ? It is the
exchange of goods for money. And whence the money? From the sale of goods, the
movement is circular.
Free-Money forces its holder to buy:
it constantly reminds him of his duty as a buyer through the losses it causes
him if he neglects to buy. Purchase therefore at all times and under all
possible circumstances follows on the heels of sale. And when everyone is
obliged to buy as much as he has sold, how can sales slacken ? Free-Money,
then, closes the monetary circuit.
Just as the wares represent supply,
so money now represents demand. Demand is no longer a straw to be blown about
by any breeze of rumour or politics. Demand no longer depends on the will of
buyers, bankers, speculators; for money has now become the very embodiment of
demand. The possessors of money are now kept under discipline; money holds the
possessor of money like a dog on a lead.
And this is only fair. For we
producers or possessors of wares are no better off. We do not control the
supply of our products, we are forced by their nature to offer them for sale.
The nature of our products - the stench they emit, the room they take up, the
risk of their catching fire, the decay they are subject to, their fragility,
the change of fashions and a thousand other circumstances - imposes upon us the
necessity of selling them immediately after their production. The supply of
wares is under an inherent material constraint, so is it not just that the
demand for wares, the supply of money, should be under a similar constraint
?
It was a courageous act to answer
this question in the affirmative by the introduction of Free-Money. Up to then
the buyer alone had been considered, now at last it has come to be understood
that sellers, also, have certain wishes and that buyers' wishes can be
fulfilled only at the expense of sellers. What a time it took to arrive at this
simple truth !
Under Free-Money, when sales slacken
and prices decline, the explanation is no longer given that too much work has
been done, that there has been overproduction. We now say that there is a
shortage of money, of demand. Whereupon the National Currency Office puts more
money in circulation: and since money is now simply embodied demand, this
forces prices up to their proper level. We work and bring our wares to market -
that is supply. The National Currency Office then considers this supply and
puts a corresponding quantity of money on the market - that is demand. Demand
and supply are now products of labour. There is now no trace of arbitrary
action, of desires, hopes, changing prospects, speculation, left in demand. We
order just the amount of demand that we require, and just this amount is
created. Our production, the supply of goods, is the order for demand, and the
National Currency Office executes the order.
And Heaven help the controller of
the Currency office if he neglects to do his duty! He cannot now, like the
administration of the old Banks of Issue, entrench himself behind platitudes
about having to satisfy "the needs of commerce". The duties imposed
on the National Currency Office are sharply defined and the weapons with which
we have equipped it are powerful. The German mark, formerly a vague, indefinite
thing, has now become a fixed quantity, and for this quantity the officials of
the Currency Office are held responsible.
We are no longer the sport of
financiers, bankers, and adventurers; we are no longer reduced to wait in
helpless resignation, until, as the phrase used to be, "the state of the
market" has the creation and improved. We now control demand; for money,
supply of which is in our power, is demand - a fact which cannot be too often
repeated or too strongly emphasised. We can now see, grasp and measure demand -
just as we can see, grasp and measure supply. Much produce - much money; less
produce - less money. That is the rule of the National Currency Office, an
astonishingly simple one!
With the money reform, fixed orders
have become so plentiful that full employment is assured for months in advance.
Merchants tell me that buyers now prefer possession of goods to possession of
money; they do not now postpone a purchase up to the moment the thing is
needed, but give their orders whenever they happen to possess money. In every
house there is a special store-room, and the purchase of Christmas presents,
for example, is not deferred till Christmas Eve, but made whenever an
opportunity occurs. That is why Christmas goods are now bought throughout the
year, and why my toy factory receives orders all the year round. The former
rush and scramble at Christmas has been replaced by a steady sale of Christmas
articles from January to December. And it is the same with every industry. A
man needing a winter coat does not wait for the first snowfall, but orders it
whenever he has the money, even though the temperature may be a hundred in the
shade. For the money in the purchaser's pocket, just like the cloth on the
tailor's shelves, is something that must be got rid of. The new money gives its
possessor no peace: it makes him smart and itch and tingle, reminding him
incessantly that the tailor has nothing to do and would be pleased to receive
orders for the coming winter even though the suit should be paid for in money still
worse than Free-Money. For there is no money so bad that it is not better than
unsaleable cloth.
This remarkable change in the
behaviour of buyers has made commercial establishments to a large extent
superfluous; for when buyers provide themselves with goods for some time ahead
and no longer insist on immediate delivery, the merchant does not need to stock
the goods. He keeps a sample collection and his customers give him their
orders. The merchant collects orders and delivers the goods direct from the
railway station when they arrive. In this way he can of course sell them
cheaper.
The disappearance of shops, where
formerly everything could be obtained for immediate use, forces even the most
dilatory buyers to consider in advance what goods they may need, so as to
secure them at the right time by an early order. Thus Free-Money has brought us
at length to the point where the estimate of the need for goods is not made by
merchants but by the buyers themselves - to the very great advantage of all
concerned. Curiously enough, it was the merchant who formerly estimated the
consumers' needs in advance, so as to be able to give his orders; and it is
clear that he often miscalculated. The consumer now estimates his own needs,
and as he obviously knows his own needs and means better than the merchant
knows them, errors are less frequent.
Thus the merchant has become a mere
exhibitor of samples, and the manufacturer is sure that the orders which the
dealer hands him reflect not merely the latter's personal opinion about the
demand for goods, but the immediate demand of the consumers, their real need of
commodities. The orders now provide him with an unmistakable expression of the
changes taking place in the taste and needs of the people, so he is able to
adapt his factory to these changes. Formerly, when orders reflected merely the
dealer's personal opinions, sudden new departures, so-called changes Of
fashion, were an ordinary occurrence.
In this respect, again, free-money
has solved many of my difficulties.
But if the manufacturer's work is so
greatly facilitated, if he need only be a technical expert and not at the same
time a merchant, surely his profits must be unfavourably affected. There is no
lack of able technicians and if the commercial management of an industrial
enterprise presents so few difficulties, every able technician will become an
able manufacturer. By the laws of free competition the manufacturer's profit
must be reduced to the level of a technician's salary - an unpleasant result
for many manufacturers whose success was mainly due to their commercial
ability. With Free-Money, creative power has become unnecessary in commerce,
for the difficulties which called for the comparatively rare and therefore
richly rewarded commercial talent have disappeared. And someone must benefit by
the reduction of the manufacturer's profit. Either goods must become cheaper,
or, to put it the other way about, wages must rise. There is no other
possibility.
E. The Usurer
It was never considered
dishonourable to borrow an umbrella or a book. Even if you forgot to give these
objects back the offence was condoned, the loser himself being anxious to find
some excuse for the defaulter. Nobody kept a record of objects lent.
But how very different it used to be
when someone wanted to borrow money, even if the amount was only a dollar! Both
parties were embarrassed, and the loan-giver looked as if he were having a
tooth extracted, or as if he were confronted with a grave moral offence.
Need of money was considered a
disgrace, a moral stain, and you had to be very sure of a man's friendship
before appealing to him when in need of money. Money! Why is the fellow in
straits for money ? An umbrella, a shot-gun or even a horse I will lend you -
but money ? You evidently lead a loose life!
And yet it was very easy to be in
straits for money. Business stagnation, unemployment, suspensions of payment
and a thousand other causes brought everyone except those with a brilliant
financial position at some time or other into straits for money. And those who
were not blessed with a thick skin, those who shrank from exposing themselves
on such occasions to a possible rebuff, came to me, the usurer; so I made my
haul.
Those good times are now a thing of
the past. With the introduction of Free-Money, money has been reduced to the
rank of umbrellas; friends and acquaintances assist each other mutually as a
matter of course with loans of money. No one keeps, or can keep, reserves of
money, since money is under compulsion to circulate. But just because no one
can form reserves of money, no reserves are needed. For the circulation of
money is regular and uninterrupted.
When, however, an unexpected call
for money does occur, you apply to an acquaintance, just as you apply to him
for an umbrella when you are surprised by a thunderstorm. Thunderstorms and
money embarrassment are, morally speaking, on the same level. And the person
applied to will forthwith comply with the request without making a wry face.
Indeed, he welcomes the opportunity, first because in a similar emergency he
can apply to you, and secondly because it is to his immediate advantage. For
the money in his possession loses value, whereas he will receive back the full
amount of the loan from his friend. Hence his altered behaviour.
Still it cannot be said that people
have become careless with their money, though money is not nearly so shy and
retiring as it used to be. Money is, of course, highly esteemed, for it has
cost work to earn. But it is not more highly esteemed than work, or than the
worker. As a commodity it is no better than any other commodity, since the
possession of money brings the same losses as the possession of a stock of
goods. Commodities and labour are equivalent to ready money, and that means an
end of my business.
The pawnbroker is in the same plight
as myself. Anyone possessing some money for which he has no immediate use is
now willing to lend it, without interest, against a pledge. For money has
become inferior to the usual pledges. If you want ten dollars in a hurry, you
need not slink through back streets to the pawnbroker's. You go to your
neighbour to have the money advanced to you on a pledge. And any commodity that
you happened to buy when you had a supply of money is as good as, or better
than, ready money. Goods are money and money is goods, for the very simple
reason that both are equally bad. Both are ordinary, perishable things in this
valley of tears ! All the bad qualities of goods have their counterpart in the
loss to which money is subjected, so nobody prefers money to goods.
But for this reason labour is always
in demand; and because it is in good demand, every man able and willing to work
has, through his power to work, ready money in his pocket.
I tell you, the death-knell of usury
has sounded !
But I am not yet going to admit
defeat. I am going to sue the State for compensation. Money used to be, as it
is now, a State institution, and I battened on it. I was therefore a kind of
State official. By reforming money, that is, by forcible interference, the
State has now ruined my trade and deprived me of my income, so I am entitled to
compensation.
When the German landowners got into
difficulties the State came to their rescue with the duty on wheat, which was
introduced to relieve so-called agricultural distress. Why should not I also
appeal to the State in my hour of need ? Is bread-usury any better than
money-usury ? Both of us, I the Jew, and you, the Prussian Junker are usurers -
the one as base as the other. Nay, it seems to me that you are even somewhat
baser and more avaricious than I. For it is bread-usury that very frequently
creates the distress that drives people to the money-usurer. So if the
distressed bread-usurers were relieved by a State subsidy, usury being thus
placed under State protection, it is only fair to protect the moneyusurer as
well. For usury is usury, whether it is for land or for money. What difference
does it make to the farmer whether he is fleeced in renting land or in
borrowing money ? Both the money-usurer and the land-usurer will take exactly
as much as they can get-neither will rebate one jot. If the landowners have a
legal claim to rent, the moneylenders have a legal claim to interest. There is
no escaping this logic by the assertion that there is a difference between
money and land, between interest and rent, for there was nothing to prevent me
from exchanging my money for land and so converting a usurer's grievance into
that of a landowner.
So I shall base my appeal on the
wheat-duties, and the usurer's cry of distress will not Pass unheeded by a
justice-loving land.
F. The Speculator
By the Free-Land reform we were
prevented from speculating in building sites, mines and farming land, and now
by the Free-Money reform our business in securities and produce has also been
snatched away. Wherever I plant my foot, I am on quicksand. And that is called
progress and justice ! To deprive honest citizens of their livelihood by
invoking the assistance of the State - the State that I have served so faithfully,
witness my decorations and titles I call it simply spoliation.
I recently launched at my own
expense news of serious trouble between two South-American republics (their
names I have forgotten) and of possible complications with foreign powers. Do
you imagine that the news made any impression on the Stock-Exchange? Not the
slightest! The StockExchange has grown incredibly thick-skinned. Why, not even
the news of the occupation of Carthage by the Japanese has been able to rouse
it; the general indifference is simply appalling. It may be explicable but it
is so altogether out of keeping with the former ways of the Stock-Exchange that
it comes as a shock.
Since the introduction of
Free-Money, money has ceased to be the stronghold of the investing classes into
which they retreated at the slightest alarm. When danger threatened, they used
to "realise"
(*Nothing demonstrates more strikingly the monstrous
illusion under which humanity is living than this universally current
expression. For everyone the only real thing is money.)
their securities, that is, they sold them for money and then considered
themselves completely protected against every kind of loss.
These sales were of course
accompanied by a fall in the price of securities. which was proportionate to
the extent of the sales.
After a while, when I believed that
nothing more could be gained, I used to circulate reassuring news. The
frightened public thereupon ventured out of their stronghold and were soon
busily forcing up, with their own money, the price of the securities which they
had sold cheap to my agents. That was something like business !
And now this wretched Free-Money !
Before parting with his securities the investor must ask himself what he is
going to do with the money he obtains for them. For this money no longer allows
him to pause and consider; he cannot take it home with him and tranquilly wait.
Money has become a mere halt by the wayside. So people ask: "What will
become of the yield of these securities ? You say the outlook for them is bad,
and we believe you, but is the outlook any better for the money you give us in
exchange ? What are we to buy with the money? We do not care to purchase
Government securities, since others have forestalled us and forced up their
price. Are we to sell our securities at a loss, simply to buy others at an
exorbitant price, that is, again as a loss ? If we lose in buying Government
securities, we may as well lose on our own securities. We prefer to wait a
while before we sell".
That is the new attitude of the
public, and it ruins our business. This confounded waiting ! Through it the
first impression of our news wears off, the bewilderment passes away and
another party has time to spread reassuring news, exposing our exaggerations
and lies; and so the game is up. For it is the first impression that tells and
must be exploited. Duping the public has become a difficult business.
My working capital, moreover, is
invested in this carrion money and rots away in my safe. To carry out my stroke
at the right moment I am forced to keep a reserve of money. If I count this
reserve after a lapse of time, I find that it has already suffered a
considerable depreciation. A regular and certain loss in return for a very
uncertain chance of profit!
At the beginning of the year I had a
cash account of ten millions. Thinking that I should need it, as formerly, at a
moment's notice, I let it lie idle in the form of ready money. We are now at
the end of June but I have not yet been able to move the Stock-Exchange to
sales on any appreciable scale, so the money is lying there untouched. What did
I say ? Untouched ? A quarter of a million of it has already melted away! I
have lost, irrecoverably, this large sum, and the outlook for the future has
not improved. On the contrary, the Stock-Exchange is becoming more and more
thick-skinned. In the long run experience teaches even the most timorous
investor that when nobody sells, prices, in spite of gloomy prospects, cannot
decline, and that not alone rumours and prospects, but also facts are required
to justify a fall of quotations.
How different it was in former times
? Before me lies a cutting from the financial column of a newspaper, a model of
the reports which I myself used to circulate:
"A Black Tuesday. A panic broke
out on the Stock-Exchange today upon receipt of the news that the
Sultan was suffering from
stomach-ache. Considerable selling orders from provincial customers coincided
with great eagerness to sell on the part of local speculators, and under this
pressure the market opened in a demoralised and panicky mood. 'Sauve qui peut'
was the watchword."
And now ? Eternally the same stupid
question: "What am I to do with my money ? What am I to buy if I sell my
securities ?" This abominable money! How different it was with the gold standard!
Then nobody asked: What am I to do with the money I receive ? Those beautiful
securities were sold at the bidding of speculators, for gold. since gold was
still more beautiful; investors were happy to see the money again, to count it
and let it run through their fingers. When you had gold you were safe; gold
could not possibly involve you in a loss, either in buying or in selling, for
it had, as the economists put it, its "fixed intrinsic value". This
wonderful gold money with its fixed intrinsic value in terms of which all other
goods and stocks rose and fell like the mercury of the barometer, how easy it
made speculation.
Investors now sit on their stocks as
if they were glued to them, and before they sell they always put the same
query: "Please tell me first what I am to do with the abominable money I
should receive for my securities ?" The merry old Stock-Exchange days are
no more, when gold vanished the sun set in the heavens of speculation.
There is however one comfort: I am
not the only sufferer. My colleagues of the produce exchanges have fared
equally badly. Their business also has been ruined by Free-Money. Formerly, the
whole production of a country remained on sale up to the moment of its
consumption; it was in the hands of the dealers. No consumer ever thought of
laying in stores. Gold with its "fixed intrinsic value" was a
substitute for all provisions and could never involve us in loss, so anyone who
had a reserve of gold had everything that he might need, at his disposal. Why, then,
lay in stores for the moth to eat ?
But the fact that everything was
always on sale made speculation profitable. Here were the consumers with not
enough provisions for 24 hours, and there was the whole of supply lying ready
for sale in the hands of the merchants, so speculation was simplicity itself:
you just bought the existing stock and then waited for demand to come forward.
Generally you were sure of your profit.
And now ? The goods which were
formerly held for sale in the warehouses are now held for use in millions of
store rooms, so how can they be brought back to the market ? And with what can
these stores be bought ? Not with Free-Money, for it was to get rid of
Free-Money that the consumers bought the stores. These stores are no longer
wares for sale: they have became unsaleable property. And even if the
speculator could succeed in cornering the new output, prices, because of these
private stores, would not rise immediately. For people no longer live from hand
to mouth. Before these stores are used up, the news spreads that the
speculators have got hold of certain stocks of merchandise, so producers are on
the alert and have made up the deficiency before the speculators have been able
to dispose of their goods. It must be further kept in mind that the working
capital of the speculators in produce is, like mine, ready money subject to the
monetary depreciation. Loss of interest, loss by depreciation, storage costs,
and no profit - in short we speculators are faced with ruin !
How was it possible to introduce an
innovation so injurious to the State ? For I, Rockefeller, am the State, and my
friend Morgan and I together are the United States. Whoever injures me, injures
the State.
According to our experts and
professors, gold had a "fixed intrinsic value". In exchanging gold
for goods the public could never lose anything. For according to the
professors, exchanging is equivalent
to measuring (*Measure
of value. Medium for transporting value, store of value - and illusion of
value.), and as the result of measuring a piece of
linen is the same whether you begin at one end or the other, so in buying and
selling goods for gold the quantity of gold must always be the same. For gold
has, it cannot be too strongly emphasised, a "fixed intrinsic value"
! As long as we had gold, therefore, the public was protected by the fixed
intrinsic value of gold from any possible cheating. We speculators who enriched
ourselves, cannot have done so at the expense of the public. Where our fortunes
came from I cannot explain, but perhaps they were a gift from Heaven.
Alas, that such heavenly gifts
should have been abolished by Free-Money !
G. The Saver
Free-Money disproves all
predictions; none of the dismal prophecies of its opponents have been
fulfilled. It was said that nobody would be able to save, and that interest
would rise to unprecedented heights; but the contrary has happened.
When I have saved a sum of money I
now do exactly what I did formerly - I take it to the savings bank which enters
the amount in my savings book. In this respect nothing has changed. It was said
that the sum of money entered in the savings book would be subject to the same
rate of depreciation as FreeMoney, but that is nonsense. The savings bank owes
me so many dollars, American Standard, but not the notes that I handed in. And
the standard dollar stands above the notes. If I lend somebody a sack of
potatoes for a year, he will not give me back the same potatoes, which have
meanwhile rotted, but a sack of new potatoes. It is the same with the savings
bank. I lend it $100 and it agrees to give me back $100. The savings bank is in
a position to do so, since it lends the money on the same terms, while the
businessmen and farmers who obtain money at the savings bank for their
enterprises do not keep the money at home. They buy goods for use with it, and
in this way the depreciation loss is distributed among all the persons through
whose hands the money has passed in the course of the year.
Nothing has changed, then, with
regard to the sum to be repaid by the bank. But I now find that I can save a
great deal more than formerly.
A socialist attributed my increased
power of saving to a general reduction of "surplus value" which,
keeping pace with the decline of the rate of interest, has affected all capital
(tenements, railways, factories, etc.). The manager of a consumers'
co-operative society explained that with Free-Money commercial costs have
fallen from an average of 40% to barely 10%, so that for this reason alone I
economise 30% on my purchases. And a social reformer attributed my increased
saving capacity to the removal of economic disturbances. They may all three be
right. The fact is that instead of $100 I now save over $1000 and live more
comfortably than before. And for many people Free-Money has made saving for the
first time possible.
How was it formerly with my savings
book? At every political rumour there was a slump in trade, accompanied by
unemployment which forced me to withdraw some of my money from the savings
bank. That was a setback, and it was sometimes years before I had filled the
gaps in my savings book caused by an industrial crisis. Saving resembled the
labour of Sisyphus. I have now regular employment and am no longer periodically
obliged to have recourse to the money saved with so many privations.
I now carry my monthly surplus to
the bank with astonishing regularity. And what is happening to me seems to be
happening to everybody, for there is always a throng at the counters. The
savings bank has already repeatedly reduced the rate of interest, and a new cut
is announced for next month. It justifies its action by stating that the sums
coming in are in excess of those going out. From 4% the rate of interest has in
this short period fallen to 3%, and it is said that with the universal
introduction of Free-Money it will fall to zero ! And so it will, in my
opinion, if present conditions continue.
For while the influx of money into the
savings banks is continually increasing, requests for loans are decreasing,
since businessmen, farmers and manufacturers, for the same reasons that make
saving easier for me, are now able to enlarge their businesses with their own
surplus.
The demand for loan-money is
shrinking, and the supply is growing, so the rate of interest is bound to fall.
For interest expresses the ratio of demand and supply of money loans.
For the filled pages of my savings
book the fall of the rate of interest is, no doubt, regrettable, but it is all
to the good for the unfilled pages which are far more numerous. For what is
interest ? Who pays it ? What I save today is what remains of my wages after I
have paid, in my personal outlay, my share of the interest-tribute exacted by
the creditors of the State and municipalities, and my share of the
interest-tribute demanded by capitalists for the use of houses, plant,
provisions, raw material, railways, canals, gas and water-works and so forth.
If the rate of interest falls, everything becomes cheaper and my power of
saving increases proportionately. My loss on the sums already saved will be
compensated ten-fold by my increased savings. My house-rent, for example,
amounts to 25% of my wages, and two-thirds of it is interest on the building
capital. If, now, the rate of interest is reduced from 4 to 3, 2, 1, or finally
0%, I save and so on of my house-rent, that is 4 - 16% of my wages on house-rent
alone! But house capital is barely one fourth of all capital, the interest on
which I pay out of my wages. (*Industrial, commercial and
agricultural capital, National Debt, capital sunk in means of transport.) If the rate of interest fell to zero I could therefore save a much
larger proportion of my wages.
Out of my income of $1000 I was able
to save $100 a year. At 4% compound interest that would produce $1236 in ten
years. Since the elimination of interest my wages have doubled, so instead of
$100 I can now save $1100 a year, or $11,000 in ten years. (*This
is on the assumption that the prices of
commodities are kept at the same level by the Currency
Office. Elimination of the interest that now goes into price, will, in this
case be expressed, not by lower prices, but by higher wages. On the opposite
assumption, that the prices of goods fell with the rate of interest, wages
would remain at the same level. Savings would then increase because of the fall
in the cost of living. But the sum thus saved is not immediately comparable
with the savings formerly, since commodity prices were then higher.) Should I not therefore rejoice at the abolition of interest ?
So far from injuring me, therefore,
the complete elimination Of interest would enormously facilitate my saving. For
example, if I work and economise for twenty years and then retire I shall
possess:
With compound interest at 4%
$3,024 With interest at 0% $22,000
My income from the former sum with
interest at 4% would be $120 a year. If I exceed this sum and touch the
capital, an annual expenditure of $360 would in ten years exhaust my savings,
whereas with $22,000 I can for ten years spend $2,200 a year.
The old notion that gold and
interest facilitate saving was a fallacy. Interest renders saving impossible
for the majority of mankind; with interest at zero everyone will be able to
save, whereas formerly only exceptionally efficient workers or those possessing
exceptional courage to face privations were able to practice this bourgeois virtue.
For rentiers the conditions are
reversed, if the rate of interest falls to zero. Since their property no longer
yields interest, and since, as non-workers, they gain no advantage from the
rise of wages resulting from the elimination of interest, they are forced to
live on their capital until it is exhausted. The contrast between a saver and a
rentier is great. When the workers save, the interest must be found out of
their work. Savers and rentiers are not colleagues, but adversaries.
In return for the privilege of
drawing interest on my $3,024 savings I must pay $18,976 ($22,000 less $3,024)
interest to the rentiers !
Rentiers may deplore the decline of
interest, but we savers or saving workers, on the contrary, have every reason
to rejoice. We shall never be able to live on interest, but we can live
comfortably to the end of our days on our savings. We shall leave our heirs no
perpetually-welling source of income, but is it not provision enough to
bequeath economic conditions that will secure them the full proceeds of their
labour ? Free-Land and Free-Money double the income of the worker, so by the
mere act of voting for the introduction of these two reforms I have bequeathed
my offspring the equivalent of a capital bearing interest equal to my former
wages.
And again, let us not forget that if
saving is a virtue that should be preached, unreservedly, to all men, it ought
to be possible for all men to practice this virtue without injury to anyone and
without destroying the harmony of economic life as a whole.
Now, in the economic life of the
individual, to save means to do much work, to produce and sell much, and to buy
little. The money taken to the savings bank is the difference between the money
received from the sale of our own produce and the money we paid in purchasing
the produce of others.
But what must happen if everyone
brings produce worth $100 to market, and buys produce for only $90 - that is,
if everyone wishes to save $10. How can this contradiction be resolved, how can
all men be enabled to save ? The answer is given, the contradiction is
resolved, by Free-Money. Free-Money applies the Christian maxim: whatsoever ye
would that men should do to you, do ye even so to them. It says: If you wish to
sell your produce, buy the produce your neighbour wishes to sell. If you sold
for 100, buy for 100 in return. When everyone acts in this manner, everyone
will be able to sell his whole produce and to save. Otherwise savers mutually
deprive one another of the possibility of carrying out their purpose.
H. The Co-operator
Since the introduction of Free-Money
the popularity of our movement has strikingly diminished, and I hear almost
daily of the dissolution of consumers' co-operative societies. This is another
of those unforeseen and surprising consequences of Free-Money. But in reality
there is nothing to be surprised about. The consumer buys for ready money, lays
in stores and buys goods in large quantities in the original packing. The
merchant is not called upon to give credit. He keeps no books, nor does he need
a large warehouse, for goods are mostly delivered direct from the railway
station.
The combined effect of all these
circumstances is of course an extraordinary simplification of commerce.
Formerly only the cleverest businessmen managed to escape the perils of buying
and selling on credit; formerly only the most capable, industrious, thrifty,
orderly and active persons were fit for commerce; now anyone of average
intelligence can succeed in commerce. No warehouse, no scales, no errors, no
book-keeping, no estimates of future demand. At the same time cash payment,
ready money on the delivery of the goods, no bills of exchange, no cheques, no
humbug! Not even an invoice is asked for. Here is the case or sack, and here is
the money. The matter is settled and forgotten, and the merchant is free to
look out for new transactions.
Work of this kind can be done by any
subordinate; and by the laws of competition the remuneration for it must fall
to the level of a subordinate's wage.
So what is the use of the
co-operative society ? Its purpose, the reduction of the cost of commerce, is
realised by the money reform. Whom is our society to associate henceforward ?
It was composed of the élite of the consumers, those, namely, who were able to
pay cash and to purchase in quantities considerable enough to make it worth
their while coming to our shop. But owing to the changed conditions of commerce
such selection is no longer possible, because today every consumer possesses
these qualities; they all pay cash and they all buy in large quantities. It
would be impossible to form an association of negroes in Africa, or an
association of beer-drinkers in Munich. For the same reason the money reform
has made consumers' co-operative societies impossible.
Nor is the disappearance of the
societies any great loss. As a nursery for public spirit they failed, because
they were necessarily in opposition to the rest of the people. Sooner or later
they would have come into conflict with their natural counterpart, namely
societies of producers, and that would have created problems which, in theory
and practice, could have been solved only by universal communism, by the
abolition of every kind of property in every country. What price, for instance,
would the Union of German Co-operative Societies have consented to pay to the
Union of German slipper manufacturers ? Only the police could answer the
question.
And had we any real cause for pride
in our achievements ? It is a humiliating reflection that although we succeeded
in ruining many small independent shopkeepers, we never ousted a single
speculator in stocks or produce. But it was just there, on the Stock-Exchange,
that we ought to have shown our strength!
Who can respect a
"public-spirited society" which displays its power by striking only
at the weak ? I much prefer Free-Money which also, indeed, ousts the small
shopkeepers, but at the same time opposes as decisively the money magnates of
the Stock-Exchange.
Nor can it be affirmed that the
co-operative movement was exempt from the grave evils of bribery and
corruption. When the administration of public funds or the funds of a society
cannot be efficiently controlled, the thief is sure to appear in the course of
time. And the members of the society cannot be expected to examine every
invoice and to compare all the goods delivered with the samples. Nor is it
possible to prevent private agreements, through which co-operative officials
may be bribed to the detriment of the society. If the society dealt only in
goods of uniform quality such as, for instance, money, an effective control of
the officials would be possible; but is there any commodity, except money, in
which quality as well as quantity must not be taken into consideration ?
What we have to expect from a
general application of the co-operative system is therefore communism, the
abolition of private property, and widespread corruption. That is why I welcome
the attainment of the object of the co-operative movement, namely the reduction
of commercial costs, simply by a change in commercial practice resulting from
Free-Money. Goods now pass once more from owner to owner; goods and property
are inseparable. The interference of middlemen, the fixing of prices and
qualities by agents on behalf of third parties not only leads to corruption, it
is in itself a corruption of the idea of a commodity, a corruption of
price-fixing by demand and supply.
And is it not strange that the
natural aim of the co-operative movement, the association of all the societies,
should have been realised by the dissolution of all the societies ? For the
most efficient cooperative society is always the open market, where owner deals
with owner, where the quality of the goods is estimated by those concerned
personally, where the buyer is not bound to certain branch shops, villages,
towns; where the tokens of the society (money) are available throughout the
realm, where distrust disappears and corruption is excluded, and where public
control is superfluous, because no private persons with special interests act
as agents to conclude the bargain on behalf of the absent principals. Provided
of course, that the open market does not add to the cost of the goods more than
does the administration of the co-operative society! But this condition has
been fulfilled by the creation of Free-Money. Commerce has been accelerated,
secured and cheapened through FreeMoney to such an extent that commercial
profit can no longer be distinguished from a common wage. Which means that
co-operative societies have become superfluous.
I. The Creditor
Nobody, I am sure, will blame me for
not being enthusiastic about Free-Money. For has not this innovation reduced
the rate of interest, and does it not threaten, if universally adopted, to
abolish interest altogether ? But I must confess that in some ways the
introduction of Free-Money has been, even to me, a relief.
For what was, formerly, the
"Mark, German Standard" which the State, the municipalities and
private individuals owed me in the shape of Government securities, bills of
exchange, mortgages or promissory notes ? I never knew and nobody could tell
me!
The State made money out of gold as
long as the majority in Parliament so desired. But any day the State could
decide to abolish the right of free coinage of gold and demonetise gold, just
as it demonetised silver. This has actually happened with the introduction of
Free-Money. In adopting these changes the State recognised that the thaler is
not a little pile of silver, nor the mark a few grains of gold, but money, and
that in abolishing the right of free coinage it was bound to compensate or
protect from loss the holders and creditors of money.
The State might have acted
differently. It does not want gold; it withdrew gold merely to melt down the
coins and sell the metal to the highest bidder for industrial purposes. And
this sale, even though cautiously managed, brought the State far less
paper-money than it gave for the gold. If the State had not exchanged our gold
for Free-Money this loss would have fallen on us. But the safeguarding of our
cash is a matter of comparatively small importance in comparison with the
recognition that our claims for money (Government loans, mortgages, bills of
exchange, and so forth), which are a hundred times greater than the whole
amount of the gold money in circulation, and in many cases only fall due fifty
years hence, are also to be paid in paper-money with fixed purchasing power,
one mark of FreeMoney for one mark in gold.
So in this respect I am perfectly
safe. I know, now, what a "Mark, German Standard" is: I know that
what I gave in goods for a mark I shall receive back in goods, today, tomorrow,
always. I receive indeed less interest than I did before, and perhaps later I
shall receive no interest at all; but my property, at least, is safe. What is
the use of interest when the principal is constantly in danger ? The prices of
industrial shares rose and fell with the prices of commodities and it was a
commonplace that a fortune was more easily made than kept. The great fortunes
of the speculators were built from the ruins of other fortunes. There was also
the danger of great discoveries of gold and the possibility that science might
some day hit upon the philosopher's stone. Scientists speak of the unity of
matter, and say that gold is merely a special form of matter; so that it may
become possible to convert any kind of matter into gold. A ticklish business
indeed! "Ninety days after sight pay to my order the sum of one thousand
marks German Standard", was the tenor of the bills of exchange in my
portfolio.
"Let me see" the debtor
would have said, "there are some ashes in my stove; I am going to make
1000 gold marks for you. I need only press this button. Here are your 1000
marks in gold; or rather a little more, but that does not matter".
Our laws made no provision against
such accidents: the definition of the meaning of the "Mark,
German Standard" was left to the
decision of Parliament-Parliament in which our debtors might easily obtain the
majority. (*This aspect of the matter is fully dealt with in the
author's pamphlet: Das Monopol der schweizerischen Nationalbank, Bern, 1901.)
My situation as a creditor was also
rendered precarious by the possibility that the gold standard might be
abolished by other countries but retained by ours. Suppose, for example, the
United States decided the problem of whether silver or gold should be admitted
as legal tender, by demonetising both metals, so as to hold an even balance
between the conflicting interests of debtors and creditors. This would have
been the most rational solution of the contradictions of American currency
policy, and the only way of proving the impartiality of the State. But what
would have been the result? The masses of gold which had become useless in
America would have flooded Germany, forcing up our prices perhaps 50% or even
100 or 200%, so that I should have lost more from the general rise of prices
than at present from the decline of the rate of interest.
Securities payable in marks, German
standard, were obviously a risky investment. But now all danger has
disappeared. It makes no difference to us whether the United States pass over
to a paper currency or to bimetallism, whether the Bank of England puts its
gold in circulation, or whether Japan and Russia retain the gold standard.
Whether much or little gold is discovered, not a penny is added to or withdrawn
from the monetary circulation; whether the existing stock of gold is, or is
not, offered for exchange, the German monetary standard is unaffected. Whatever
happens I shall get for one mark, German standard, as much merchandise as I
gave for it; for such is the conception of the "Mark, German
Standard", as legally and scientifically defined. And even should the
majority of Parliament consist of debtors who would personally benefit by a
reduction in the value of the mark, they could not indulge their desires
without an open breach of faith. "The average price of commodities is the
fixed and unalterable standard of money. And you have changed this standard, as
everybody sees and can test by measurement. You did so for your personal
advantage, in order to return less than you borrowed. Therefore you are
thieves".
But nobody steals in broad daylight
before the public gaze. It is profitable, however, to fish in troubled waters;
and with the old currency the waters were troubled, to the great advantage of
swindlers. But now the waters have become transparent; the standard of money is
something which all men clearly understand.
J. The Debtor
Unless we agrarians (*Agrarian:
a debt-ridden German landowner who endeavours to get rid of his debts through
legislation.) belonged to the genus of pachyderms we
could not be insensible to the abuse showered upon us in Parliament, in the
Press and in daily intercourse; we are called bread-usurers, beggars and
scoundrels.
That the working class should have
attacked us for making their bread dearer was pardonable. Towards them we
played the part of the aggressor. They had done us no injury that could justify
our inroads upon their lean purses. But that the other parties which had so
often injured us by legislation in order to enrich themselves should have
joined in the chorus of abuse, I find simply ridiculous. It shows that these
parties have not yet learned the meaning of politics. Politics mean power, and
those who have the power exploit politics to their own advantage. Formerly the
liberal parties held the power, which they exploited, now it is our turn. So
why abuse us ? The abuse rebounds on those who have been in power and those who
will be in power in the future.
In this quarrel our political
opponents were decidedly the aggressors. They attacked us by introducing the
gold standard, and to protect ourselves we tried to restore bimetallism. As we
did not succeed, we had recourse to protective-duties. Why did our opponents
deprive us of the double standard on which our mortgages were based ? Why did
they force us to repay more than we had received ? Why did they alter the terms
of our mortgages by depriving us of the choice between gold and silver ? Why
did they deprive us of the possibility of paying our debts with the cheaper of
the two metals ? It obviously makes a great difference whether I am free to pay
my debts with 1000 kilograms of potatoes or 100 kilograms of cotton, or whether
I am bound to pay in potatoes a one. We were of the advantages of this clause
in our contracts without receiving compensation of any kind. If I had been
allowed to choose I could have paid either with 160 pounds of silver or with 10
pounds of gold, and I should have paid, of course, with the cheaper of these
two metals, just as, when I borrowed the money, I was paid in the cheaper
metal. The chances of profit from this advantage became apparent later when we
compared the price of silver with that of gold. The price of gold increased 50%
compared with silver, so instead of 100,000 marks ray debts now amount to
200,000 marks - not nominally, but what is worse, in actual fact. I have to
sacrifice double the quantity of produce annually to pay the interest on my
debt. Instead of 50 tons of wheat, the bank now claims 100 tons annually. Had
the silver currency not been abolished I could have employed the fifty
additional tons to pay off my debts, and I should by now be clear.
Is not this treatment of debtors,
approved of by our political opponents, simply swindling?
If debtors did not protest in a
body, if the protest was confined to landowners and other mortgage debtors, the
explanation is that most of the remaining debtors, who had borrowed money
without giving real estate as security, went bankrupt and so got rid of their
debts in the general collapse that followed the introduction of the gold
standard. The matter therefore no longer concerned them.
When we supported our demand for a
return to the silver standard by pointing out that after the introduction of
the gold standard the price of wheat had fallen from 265 marks to 140 marks,
and that we had received silver, not gold, for our mortgages, we were laughed
at and told that we did not know anything about the currency or the needs of
commerce. The gold standard had proved a great success (proof: a great
commercial crisis and fall of prices) and could not be tampered with without
unsettling the notion of property and risking a collapse of the whole economic
structure. If, in spite of the blessings of the gold standard, we fared badly,
our antiquated methods were to blame; why did we not adopt modern machinery,
why did we not use chemical fertilisers, why did we not grow the crops needed
for industrial purposes, why did we not produce more at a reduced cost, and so
carry on in spite of lower prices ? Our argument was all wrong; the "value
of gold was fixed, and the value of commodities had declined in consequence of
the reduced cost of production ! As gold has a fixed intrinsic value",
price fluctuations are always due to the commodities.
We tried to put this good advice
into practice and to reduce our costs of production. The State came to our aid
with reduced freights and reduced fares for the Polish labourers. And we did
obtain better crops with the same amount of labour. But we did not obtain the
expected advantage, for although our crops increased, prices fell from 265
marks to 140 marks, so that we actually obtained less money for the larger
crops. Money was the thing we needed for it was money that our creditors
claimed, not potatoes or sugar beet ! They held us to our bond which had been
falsified by legislation in their favour; they demanded gold.
The silver standard would have given
us money - more money and cheaper money, that being denied us, we tried by
other expedients to obtain more money from our produce, and in this way we hit
on protective-duties. If we had not been cheated out of the silver standard,
protective-duties would have been unnecessary. The whole responsibility for the
wheat-duties therefore rests on those who have been calling us bread-usurers,
beggars and scoundrels, with those who robbed us through the introduction of
the gold standard. An odious episode in our economic and political history,
which has caused endless strife and bitterness, could have been avoided by the
elementary precaution of including a legal definition of the terms
"thaler" and "mark" in the proposed currency reform, and by
a clear statement of the circumstances under which the State was entitled to
demonetise either silver or gold.
Considering the enormous importance
of the matter, it was criminal of both sides to use the thaler, and afterwards
the mark, as a basis of their bid for power, and to make the answer to the
question: "What is a mark, German Standard ?" a matter of party
politics. But now I feel safe. The National Currency Office is on the watch and
Free-Money enables it to maintain an equitable balance between the conflicting
interests of debtors and creditors.
K. The Unemployment Insurance Office
Since the introduction of
Free-Money, applications for unemployment benefit have suddenly ceased; my
assistants and I have nothing to do. Money now goes in search of goods, and
goods are work, employment. Anyone possessing Free-Money invariably endeavours to
get rid of it, either by purchasing goods, or by investing it in a new
enterprise, or by lending it to others who are in the position to make use of
it. The change is this, that no conceivable circumstances, no personal or
political considerations, neither a fall in the rate of interest nor even the
complete disappearance of interest and profit, can interfere with the supply of
Free-Money. Even supposing that the commercial purchase of goods involved a
loss instead of a profit, Free-Money is in exactly the same predicament as all
other commodities; these also are offered for exchange, even should their sale
involve a loss.
Anyone in possession of Free-Money
is forced to pass it on, no matter whether that means a loss or a profit.
Free-Money commands; it brooks no delay, it breaks all fetters. The speculator
or financier who in attack or defence attempts to hinder the circulation of
money is struck down by it. With the force of an explosive it bursts open all
stores of money, from the cellars of the great banks to the humble money-box of
some stable-boy, liberating itself and rushing to the market. Hence the name
"FreeMoney". Whoever sells goods for Free-Money must immediately
purchase goods again. And purchase of goods means sale of goods, and sales of goods
mean employment.
Free-Money is embodied demand,
demand is sale, and sale is work. The money reform is an automatic insurance
against unemployment; not an official insurance spoon-fed by the State and the
employers, but the natural insurance inherent in the division of labour. For
labour produces goods, and goods tend always to be exchanged for goods. Through
the interference of gold, exchange was forced to pay tribute to two extraneous
powers, interest and desire of profit, by which it was hampered. The exchange
of goods became conditional upon interest and profit. If exchange did not
result in interest or profit, it came to a standstill, because money, the
medium of exchange, was held back.
With Free-Money such conditions are
utterly impossible. Free-Money is a hungry lion seeking whom it may devour; it
pounces on the goods, and goods are employment, for it makes no difference
whether I buy goods or employ a labourer direct. The merchant from whom I buy
the goods will seek to replenish his stock and get rid of the money by ordering
new goods from the manufacturer.
An absurdly simple insurance against
unemployment, an absurdly simple labour bureau ! Every FreeMoney note put in
circulation by the State is a substitute for an application for employment:
every thousand of these notes is a substitute for a labour exchange. Anyone who
sells goods and receives money in return will immediately buy goods again,
either for himself or through someone to whom he lends the money; so everyone
buys the same quantity of goods that he sells, and everyone sells the same
quantity of goods that he buys. There is no room for any surplus; the exact
quantity of goods produced is sold. Under such conditions how can slumps,
overproduction and unemployment occur ? Such phenomena are possible only when
people at times, or usually, buy less goods than they themselves produce.
(* Free-Money does not of course
guarantee the individual producer the disposal of his output; it only protects
the community as a whole. If someone produces poor goods or asks too high
prices, or produces blindly without consulting the needs of the market,
Free-Money will not enable him to dispose of his produce. The term
"unlimited sales", which is repeatedly used here, applies only to the
community; after the introduction of Free-Money neither the claims of interest
nor the "tone of the market" can obstruct the disposal of goods.
Everyone will be compelled to buy immediately exactly as much as he has sold;
and when everyone is under such compulsion there can be no surplus. If anyone
has no further need of goods he will either cease working or he will lend his
money-surplus to others who require more goods than they themselves have sold
at the moment. If competition in some commodity is too great (sugar-beet,
pig-iron, dancing lessons) its price will fall; and if production at the
reduced price does not pay, everyone will know what steps to take.)
What happened formerly? The merchant
had to pay interest on his capital, so he made the purchase of goods dependent
on the exaction of interest. If the situation made it impossible for him to add
the interest to the selling price of the goods, he left the products of the
workers untouched, and the latter were thrown out of work through the cessation
of sales. No interest, no money; no money, no exchange of goods; no exchange,
no employment.
Interest was the necessary condition
of the circulation of money, upon which employment depends. The Reichsbank
itself never issued money without interest, even at times when by universal
admission the market was short of money - and this in spite of the fact that
according to its charter the main task of the Reichsbank was to adapt the
monetary circulation to the needs of the market. (I do not reproach the Reichsbank;
even a god would have been powerless if bound by the clumsily framed
regulations of its charter).
Today the circulation of money has
ceased to be conditional. Money means the sale of goods, no matter what the
result. Money - sales of goods - employment - money. Under all possible
circumstances the circuit is closed.
The merchant was, of course, bound
to keep his profit in mind; the selling price had to exceed the purchase price.
That was the natural, inevitable and, moreover, fully justified condition of
all commercial activity. And the price paid by the merchant or debited to his
account was in every case a known and unalterable quantity (except with sales
by commission), whereas the selling price was a lottery, and commerce as a
whole resembled a gambling table at Monte Carlo. For between the purchase and
the sale there was an interval of time during which the market might
change.
Before making a purchase the
merchant considered the state of the market, trade prospects and home and
foreign politics. If he thought that others shared his belief that a general
rise of prices was imminent, he hastened to buy, so as to participate in the
looked-for rise with as large a stock of goods as possible. If he was not
mistaken, if he had many fellow believers, so that many did buy, that alone was
reason enough for the expected to happen, namely a rise of prices - no matter
what the reasons upon which the expectation had been founded. For it is clear
that if everybody believes in the advent of higher prices, everybody possessing
a money reserve will buy, and when all money reserves are employed for
purchases, prices must rise.
This case supplies proof of the
doctrine that he who believeth shall be saved.
The reverse was of course true when
there was a general belief in a fall of prices. When a merchant believed that
his fellow merchants believed that prices would fall, he tried to dispose of
his stock of goods; on the one hand by forcing their sale, if need be through a
reduction of prices. and on the other hand by delaying his orders until a more
propitious moment. But as his fellow believers acted in the same manner this
again was the sole reason for bringing about the thing they feared. Their
belief had made fools of them. For under the gold standard everything happened
that people believed. Belief reigned supreme. The belief in the coming of
higher or lower prices was quite sufficient to make this belief a reality.
Beliefs, moods, weather reports determined
whether money was or was not offered in exchange for goods, whether the workers
played football or worked night-shifts and overtime. The offer of the whole
monetary reserves in exchange for goods depended on belief!
Free-Money has changed all this.
Money does not now wait to inquire about the beliefs or moods of its possessor.
It commands, it places orders of its own accord. But just because belief has
been eliminated from commerce because faith, hope and love of profit no longer
influence the circulation of money, demand is regularised. Mercantile hopes and
fears are now simply personal matters without any effect on the market. Labour
and the demand for goods are no longer dragged at the heels of an arbitrary
power, money; they are no longer subject to the will of the possessors of
money, for money is now demand itself.
It used to be considered a matter of
course that the worker should go out to look for money, that is, work. Only
exceptionally did money go out to look for work. Money compelled goods, work,
to come to it. No protest was raised against this breach of the principle of
equal rights; everyone tolerated the privilege of money - probably because the
privilege was supposed to be indissolubly bound up with the monetary system.
The worker and the possessor of goods incurred a heavy, daily increasing loss
through postponement of the sale, whereas money produced interest for the
potential buyer. So it was natural and inevitable that if buyers stayed at home
sellers set out to find them and to urge them personally to buy.
This view is now no longer a matter
of course. For the possessor of money feels the money burning in his pocket and
is compelled to exchange it, just as the worker is compelled by the perishable
nature of his power of work (which cannot be stored) to find a purchaser for it
as speedily as may be. So the possessor of money no longer waits patiently for
the possessor of goods (worker) to come and find him. He rises earlier, looks
about him, and goes to meet the goods half-way.
But when two are searching for one
another, they will meet sooner and more surely than when only one is on the
look-out. The animal kingdom would be in a sorry plight if the females tried to
hide from the males. How would the toad in the pond find his mate if she did
not crawl out of the mud at his call ?
Formerly the possessor of money
gained by hiding from the possessor of goods; for the length of the quest made
the latter more amenable. In his dressing-gown and bedroom slippers, so as to
make it appear that the worker or seller of goods had disturbed him in his
slumber. That is how the buyer met the seller!
So money now under all circumstances
goes out to seek the commodities. Money has suddenly become hungry. Its
hunger-cure has made it nimble and sharpened its hunting instinct. It does not,
indeed, run after the goods, for the goods do not slink out of sight; they
cannot do so. The two meet half-way. But if money finds no goods to buy, it
does not wait until chance throws what it wants at its feet; instead of that it
tracks the article to its source, which is labour.
Thus Free-Money has replaced the
official insurance by an automatic insurance against unemployment. Free-Money
has become an automatic labour bureau, and I and my 100,000 officials have been
turned out on the street. By the irony of fate, the only unemployed in the
realm are now the officials of the unemployment insurance office !
L. The Disciple of Proudhon
With the introduction of Free-Money
our whole programme has been fulfilled. The goal towards which we had been
groping has been reached. What we had hoped to attain by means of complicated,
vaguely-conceived institutions such as exchange-banks and co-operative
societies, namely a perfect exchange of goods, has been realised in the very
simplest and easiest way through Free-Money. What did Proudhon say: -
"In the social order
reciprocity is the formula of justice. Reciprocity is defined in the maxim: Do
as you would be done by. Or translated into the language of political economy:
Exchange products for products, buy your products mutually from one another.
Social science means simply the organisation of mutual relations. Give the
social body a perfect circulation, that is, an exact and regular exchange of
products for products, and human solidarity is assured, labour is
organised".
And Proudhon is right, at least as
regards the products of labour, though not as regards the products of the land.
But how can this regular exchange of products be realised ? What Proudhon
himself proposed for the achievement of this perfect circulation was
impracticable. Even on a small scale, a goods-bank as conceived by Proudhon was
unworkable, so how could the whole economic body have been organised on these
lines ?
Again, he ought to have investigated
why we failed to buy each other's produce, as complete and regular exchange
demands. That was the question to be answered first of all, before he set about
Proposing remedies.
Proudhon did indeed suspect that
there was something wrong about metal money; for did he not call gold "a
bar to the market, a sentinel guarding the gates of the market with orders to
let no one pass". But he never tried to find out exactly what was wrong
with money, although this was the point at which his investigations should have
started. It was his failure to do so that led him astray. In raising labour, or
the result of labour, the commodity, to the level of ready money (that is,
gold) Proudhon thought he had discovered the solution of the social problem.
But why was it necessary to "raise" goods to a higher level, what was
there in gold (then money) that placed it above the level of labour ?
Here, in this idea of raising goods
to the level of gold, lay Proudhon's error. He should have inverted the
proposition and said: "We wish money and goods to circulate on the same
level, so that money shall never be preferred to goods; goods thus becoming
money, and money goods. Let us therefore debase money to the level of goods. We
cannot alter the qualities of goods and endow them with the advantages inherent
in gold as a commodity. We cannot make dynamite harmless, or prevent glass from
breaking, or iron from rusting, or furs from being eaten by moths. Goods
invariably have natural defects; they decay, they are subject to the
destructive agencies of nature - gold alone is exempt. In addition to this,
gold has the privilege of being money and, as money, of being universally
saleable; and it can be conveyed from one place to another without appreciable
expense. How, therefore, can we possibly raise goods to the level of gold ?
But the opposite procedure is easy:
Money is adaptable; we can do with it as we please, since it is indispensable.
Let us degrade it to the level of goods, let us give it qualities that win
counterbalance the evil qualities of goods".
By the introduction of Free-Money
this logical idea has now been put in practice, and the result proves how much
truth and just observation is contained in Proudhon's pithy phrases, and how
narrowly he missed the solution of the problem.
With the money reform, money has
been debased to the level of goods, and the result is that goods are at all
times and in every situation equal to money. "Buy your products from one
another", said Proudhon, "if you wish to find markets and
employment". That is now done. Demand and supply have been welded into one
by the new money, just as they were when exchange was effected by barter; for
everyone who in those times brought goods to the market took other goods home
with him. So there was always as much produce going out as coming in. Since the
introduction of Free-Money the money realised by the sale of goods is
immediately converted into goods again by the purchaser, so a supply of produce
now causes a demand for the same amount. The seller, who is pleased to be rid
of what he had to dispose of, finds himself compelled by the nature of his
money to put into circulation again the money yielded by his sale, either by
purchasing commodities for his own consumption, or by building a house, or by
giving his children a better education, or by improving his live-stock and so
forth. If he is not attracted by any of these possibilities he lends the money
to others who need goods but, for the moment, have no money. Other expedients,
such as hoarding the money; or making the loan of it dependent on interest; or
purchase of goods only on condition that they yield a profit; or calculated
waiting for better prospects, are no longer possible. You were compelled by the
nature of your products to sell; and now you are compelled by the nature of
your money to buy, there is no alternative. In rapid succession, compulsorily,
purchase now follows sale, and money passes from hand to hand. In good times
and in bad, in victory and in defeat, money pursues its orbit through the
market as steadily as the earth revolves around the sun. Demand now appears as
regularly in the market as labour in search of employment or goods in search of
a purchaser.
Buyers at first, indeed, complained
about being compelled to get rid of their money. They called this compulsion a
restriction of their liberty, an attack upon property. But everything depends
on what you mean by money. The State proclaims that money is a public means of
intercourse and that it is managed solely in the interests of the exchange of
goods. And these interests demand that the sale of goods shall immediately be
succeeded by an equivalent purchase of goods. But experience proved that the
mere wish that everyone should of his own accord, and for the benefit of all,
at once put into circulation the money he receives was not in practice
sufficient to ensure a regular monetary circulation, so it was necessary to
introduce into money a force compelling it to circulate. This was done and the
aim was realised.
Anyone unwilling to be deprived of
the liberty of dealing with his property at his own pleasure and discretion,
may, if he prefers, keep his produce, his undoubted property, at his own house
and sell it only when he needs to buy other products. If he prefers to keep
hay, Iime, trousers, tobacco-pipes, or whatever his produce may be to selling
them in advance for Free-Money, he is at liberty to do so; no one will prevent
him, and nobody will complain. But if through the agency of money, he has been
relieved of the burden of his own goods, he must remember the duties which he
has assumed as a seller and as a possessor of money; he must allow others to
benefit by the circulation of money. For the exchange of goods is based on
reciprocity.
Money must not be a resting place in
the interchange of goods; its role is transitory. The State manufactures money
at the public expense and cannot tolerate the abuse of this means of
intercourse by others for purposes foreign to the exchange of goods. Nor is it
just that money should be circulated gratis by the State, for the cost has to
be paid out of public funds, and many citizens make little use of money. That
is why the State levies an annual duty of 5% on the use of money. In this
manner the State ensures that money is not misused for speculation,
exploitation, or as a medium of saving. Only those who really need money, the
medium of exchange, those, namely who produce goods and wish to exchange them
for other goods, now make use of money. For all other purposes it has become
too expensive. Above all the instrument of exchange is now strictly separated
from the instrument of saving.
What the money reform demands of the
man who has sold his goods is mere justice: "Now buy goods in order that
others may get rid of theirs." But this demand is not only just; it is
also wise, for to be able to buy other goods a man must sell his own. Buy,
therefore, that you may be able to sell all your own products. Otherwise to be
a lord as buyer, you must be a slave as seller. Without purchase, no sale; and
without sale, no purchase.
Purchase and sale combined make up
the exchange of goods; they are, therefore, parts of a whole. With metal money
Purchase and sale were often separated by a lapse of time; with Free-Money they
are made to coincide. Metal money separated goods by inserting between sale and
purchase an interval of time, interested delay, greed of gain and a thousand
other forces extraneous to exchange; Free-Money, on the contrary, brings goods
together by making purchase follow close upon sale and by not allowing time or space
for extraneous forces to intervene. Metal money, according to Proudhon's
dictum, repeatedly quoted in this book, was a bar to the market; Free-Money is
the key.
M. The Theorist on Interest
Free-Money has robbed me of my whole
intellectual capital. My finest theories have been refuted by this hateful
innovation. For behold, interest which since the dawn of history had always
remained at the same level, has now, in utter disregard of all my theories,
started on its course towards zero. And those interest-free loans which had
always appeared to me as mere Utopian dreams are now considered not only
possible but probable. Interest-free loans ! Money, machinery, houses,
factories, goods, raw materials no longer capital! My head is whirling!
The convincing "theory of
utility", the attractive "theory of fructification", the
inflammatory "exploitation theory", the somewhat bourgeois, but all
the more popular "abstinence theory", (*This
terminology is taken from Boehm-Bawerk's treatise on interest. Irving Fisher's
"Impatience Theory" belongs to the abstinence theories of interest.) and whatever else I called them, have all collapsed with the advent
of Free-Money.
It seemed natural, obvious. indeed inevitable
that the lender of an instrument of production should be able to secure
interest for this "service". Yet interest is falling to zero, and
capitalists (if they may still be called so) are delighted when anybody
consents to take their money with no other condition than simple restitution of
the sum borrowed. They say that competition has increased to such an extent
that it is more advantageous for them to lend the money in this way than to
keep it at home as a reserve for future use. For at home part of the money
would annually be lost through depreciation. so it is better to lend it, even
without interest, on a mortgage or a bill of exchange which can be converted
into ready money again, by selling or discounting, whenever ready money is
required. There is then indeed no interest, but neither is there any loss from
depreciation.
Interest-free loans are now an
advantage not only to the loan-taker, but to the loan-giver as well. Who ever
imagined such a possibility! Yet now it has been realised, for what is the
saver to do ? A man saves for the future, for old age, for a pilgrimage to
Jerusalem, for hard times, for marriage, for illness, for his children and so
forth. But what is be to do with his savings in the meantime, until he needs
them ?
If he buys cloth, foodstuffs, wood,
etc., and stores them, he is no better off than if he keeps FreeMoney, for all
such stores are subjected to rust, rot and decay. It may here be objected that
gold and precious stones may be kept indefinitely without deterioration, but
what would happen if this form of saving became general ? How high would the
price of these things soar in good years, when everybody saves; how low would
it drop when, after bad harvests or in war-time, the savings (that is, the gold
and precious stones) were brought to the market in large quantities ? Precious
stones are the things that people buy last and sell first. The experiment would
not be repeated; this form of saving would be a deplorable failure. (The same
is true of wine which is said to become better and more valuable the longer it
is kept).
It is surely more advantageous to
invest one's savings in bonds. Government securities, bills of exchange and so
forth, which, although they yield no interest, are always convertible into ready
money without loss.
It may be asked, why not, instead,
build houses, or buy industrial shares ? And people do buy and build houses
although houses have also ceased to yield interest. They are satisfied with the
sums written off annually for depreciation, which the tenants pay in the rent.
This form of investment is sometimes even more advantageous than the purchase
of Government securities, as it gives a regular return which keeps pace with
the depreciation of the house (factory, machinery, ship, etc.), yet leaves a
pledge, namely the piece of property, in the lender's hands. That is why so
much building is going on in spite of the fact that rents are only just
sufficient to pay for repairs, depreciation, taxes and fireinsurance; that is
why houses are considered a good medium of saving.
Nevertheless all this is most
disturbing. It is difficult to grasp the fact that men still build houses to
let, though expecting to obtain as rent merely the repayment of the capital,
without interest. For it used to be considered a scientifically established
fact that money bore interest only because the instruments of production bore
interest, that the interest-bearing power of money was fundamentally a
transferred or borrowed power. And it now seems that the reverse is true, for
how else could a monetary reform have influenced interest ?
As a matter of fact it was illogical
to say that money yields interest because it can be used to buy instruments of
production which yield interest. For this fails to explain why instruments of
production yielding interest are sold for money which is declared to be barren.
Does an ox give milk when you barter it for a cow ?
Catch-words were here evidently
substituted for clear thinking. It is nonsense to talk of transferred and
borrowed qualities; such transfer of qualities and forces is just as impossible
in economics as it is in chemistry. If money had not the intrinsic power of
levying interest, where did the revenue derived from the issue of paper-money
come from ?
If money was unable by its own power to levy interest,
interest-bearing instruments of production and barren money were
incommensurable quantities, things not admitting of any comparison and
therefore not exchangeable. There are many things which cannot be bought with
money.
And what price was paid for a piece
of land yielding a rent of $1000 ? The calculation was based on the fact that
$100 bore $5 interest, and the price of the land was as many times 100 as 5 is
contained in 1000. But how did this rate of 5% originate ? That is the crux of
the matter.
So there can be no question of a
transferred power; the interest-bearing power must have been an inherent
quality of money. But where was this quality of money hidden? Formerly it would
have been difficult to discover, but with Free-Money as an object of comparison
the difficulty disappears. For since with Free-Money money has manifestly lost
its interest-bearing quality, we need only investigate wherein the two forms of
money differ, in order to lay bare the source of interest. Now Free-Money
differs from the traditional form of money in being subject to an inherent
compulsion to be offered in exchange for goods, whereas the traditional form of
money was exempt from such compulsion. Here then, in the absolute liberty of
the possessor of metal money to offer his property for exchange whenever he
pleased, in the arbitrary power of capitalists and savers who controlled the
supply of money, we have to look for the source from which interest sprang.
And we have not far to look. Money
is admittedly indispensable for commerce, for the exchange of the products of
the division of labour. For how do the makers of goods act when they cannot
sell their products for money ? Does the cabinet-maker sleep in his coffins,
does the farmer eat all his potatoes ? Nothing of the kind; they try to effect
the sale by reducing their prices, they all try to attract money by lowering
their claims. If capitalists and savers have withdrawn money from circulation
and will return it only if promised interest, they obviously find the ground
well prepared for the levy of interest in the readiness of the possessors of
goods to surrender part of their produce for the use of money. "You want
money for the mutual exchange of your products, and this money is locked up in
our safes. If you are willing to pay us something for its use, if you are
willing to pay us interest, 4% annually, you may have it, otherwise we shall
turn the key and you must make shift without it. Interest is the condition we
lay down. Consider the matter; we can wait, we are not compelled by the nature
of our money to yield it up".
Clearly it depends on the owners of
money whether commerce is to carry on with money or without. At the same time
the State makes the use of money inevitable by levying taxes in it. Hence the
owners of money can always extort interest. A parallel would be a bridge over a
river cutting the market in two, and guarded by a toll-gate keeper. Because the
bridge is indispensable for traffic between the two halves of the market, and
because the toll-gate keeper can close or open it, he is in a position to levy
a toll on all the goods in the market.
Interest was a toll which the makers
of goods were forced to pay to the owners of money for the use of the means of
exchange. No interest means no money; no money means no exchange of goods; no
exchange means unemployment and hunger. Rather than starve, the producers of
goods paid interest.
The interest-bearing power of money
was not a "borrowed" or "transferred" power. It was a
quality of metal money due. ultimately, to the fact that in the manufacture of
money a material had been chosen which holds a privileged place among the other
products of the earth, since it may be kept indefinitely without injury and
without expense, whereas all other products of human industry deteriorate,
become antiquated, and are expensive to store.
This explains why people exchanged a
field for a sum of money; for both the field and the money, each by virtue of
its own power, yielded a rent. In order to establish the exchange ratio of the
two things it was only necessary to calculate the sum of money which would
produce interest equal to the rent of the field. The field and the money were
then perfectly commensurable objects. In the case of the field there was no
question of a "borrowed" or transferred power of exacting interest,
and the same was true in the case of money.
That hackneyed and meaningless
phrase about the transferred power of money deceived me completely, for money,
the medium of exchange, was intrinsically capital.
Let us consider for a moment what
must happen if we elevate a species of capital to be the means of exchange of
all commodities.
Money can be capital only at the
expense of commodities, for it is on the commodities that money levies the toll
that stamps it as a form of capital.
If commodities have to pay interest
they cannot possibly be capital themselves, for if both commodities and money
were capital, neither of the two could assume the role of capital in connection
with the other, and in their mutual relation, at least, they would cease to be
capital.
If commodities seem to us capital in
commerce, because their selling price, besides the cost price and commercial
profit, includes capital-interest. the explanation is that the merchant has
already deducted this interest from the producer's or the worker's remuneration
in the purchase price. The commodities here merely play the part of bank
messengers for money capital. If the selling price is $10 commercial profit 3,
and interest 1, the producer receives $6.
From this it follows that if the
medium of exchange, money, were not itself a form of capital, the whole
exchange of goods would be effected without any charge for interest. That is
what Proudhon always maintained, and it seems that he was right.
Let us now consider the effect of a
medium of exchange which is itself capital upon the creation of instruments of
production.
How did the instruments of
production (machinery, ships, raw materials and so forth) come into existence ?
Does a man still make his own instruments of production out of raw materials
found on his own land ? Possibly that may happen exceptionally now and then,
but the general rule is that the instruments of production have to be bought
and paid for with a sum of money. The foundation capital of all enterprises of
any magnitude is a sum of money which is entered on the first page of the
ledger. Now if this money paid for instruments of production is intrinsically
capital, if the owners of the money, by merely locking it up can prevent the
creation of an enterprise, it is clear that they will not advance any money for
enterprises which yield no interest. If I can obtain 5% on my money from the
purchase and sale of commodities. I am obviously not going to be satisfied with
less in the manufacture of them. If I can collect ore at the surface I shall
not dig a pitshaft.
Hence it follows that the number of
houses built is limited by the fact that rents must remain high enough to
include the interest-tribute that money can exact. If by chance more houses
have been built, if the supply is greater than the demand, rent of course falls
and the houses do not yield the interest required. Whereupon workers in the
building trade are dismissed, and house-building is suspended until, through
the increase of population, the demand for houses has increased to the point
where rents again yield the full interest exacted by money. Only then can the
building trade make a fresh start.
It is exactly the same with
industrial enterprises. When these have become so numerous that the demand for
labour which they incorporate has forced up wages to a point at which the
employer is no longer able to squeeze capital-interest out of the sale of the
product, the founding of new enterprises is interrupted - until the increase in
the number of workers and the resulting increased supply of labour again
reduces wages and allows scope for the levy of interest.
The instruments of production appear
to us as capital simply because they are created by money capital, and because
money capital artificially limits their creation so as to place them in a
privileged position in relation to the workers. There are always less
instruments of production than workers, and the surplus of workers resulting
from the shortage of factories depresses wages below the full proceeds of
labour.
The picture becomes still clearer if
we consider the employer merely as a pawnbroker who advances the necessary
money to the worker for machinery and raw materials and is repaid by the
worker's produce.
Money, then, controlled absolutely
the exchange of goods and the creation of instruments of production. Everything
was tributary to it. It intervened between consumer and producer, between
workman and workgiver, separating those who were naturally destined to unite
and exploiting the embarrassments so arising. Its booty was called
interest.
Even I now begin to understand
clearly why with Free-Money the rate of interest is falling and already
approaching zero.
Money can no longer be withheld from
the market; regardless of interest it must be put into circulation, either
directly in exchange for goods, or indirectly as a loan. It cannot intervene
between the producers to separate them, in spite of itself, in spite of its
predatory nature, it is forced to carry out its function and act as the medium
for the exchange of goods. Money is no longer a tyrant or bandit obstructing
the exchange of commodities; it has now become the unpaid servant of
exchange.
Commodities are now no longer
excluded from the market and workers dismissed as soon as the rate of interest
falls; the exchange of goods proceeds, regardless of interest.
But where work proceeds regularly
people save. Immense sums are saved and carried to the banks to be offered as
loans. And if this continues year after year, if the workers are not again and
again forced by recurring economic crises to eat up their savings, the time
must come when the money offered for loan by the savings banks is no longer
sought for, the time when the loan-takers say: We have built so many houses
that we cannot find tenants for them; we have built so many factories that we
cannot find workmen for them. Why continue to build when even now we find it
hard to pay interest ?
But then the savings bank will
answer: We cannot leave our money idle, we cannot store it. FreeMoney forces us
to lend it. We do not insist on 5, 4, or 3 %, we are willing to negotiate. If
we let you have the money at 2, 1 or 0%, you can reduce your rents accordingly,
whereupon those who were satisfied with one room will rent two, and those who
had five will want ten. You will then be able to build more houses. There is
real need of houses, it is only a matter of price. So take the money at 2% if
3% is now more than you can pay. Build away, reduce your rents; you cannot
suffer any loss, for we shall provide you with correspondingly cheaper
loan-money. There is no fear that either you or we shall ever be short of money,
for the more we reduce the rate of interest and you reduce the rents, the
larger will be the sums that the savers will put by and pass on to us. Nor is
there any fear that this great quantity of money will force up prices, for
every penny of it has Previously been withdrawn from circulation; the volume of
money has remained unchanged. Those who saved the money produced and sold more
goods than they consumed, so there is a surplus of goods corresponding to the
amount of money which we supply to you.
Take the money, therefore, without
anxiety. If the interest yielded by your houses falls, we shall follow suit
with our money interest, even if interest should be thereby depressed to zero.
For even with interest at 0% we are compelled to lend the money.
But it is not only we who are under
compulsion; you are in the same plight. For if you attempt to keep up the rent
of the houses already in existence ceasing to a to their number, and so reject
our offer, we shall point out that there are other builders who possess no
houses and are not bound by such considerations. We shall give them the money
for building, and the new houses will be built, whether you like it or
not.
It is the same with industrial
undertakings. If money is available at 0%, no employer can extract interest
from his enterprise, either in the form of a reduction of wages or in the form
of an increase of prices. For such is the law of competition.
(*The reader will find the theory
of interest more fully presented in the last part of this book.)
N. The Theorist on Economic Crises
Free-Money has injured me quite as
much as my colleague, the writer on the theory of interest; it has reduced my
whole collection of theories to waste paper.
It seemed so plausible that a period
of growth should be succeeded by a period of decay. It is so in nature, and it
must be so in economic life, since man and everything he creates is part of
nature. The ant-hill and the economic system of the bees are products of
nature, so the economic system of men and nations must be the same. Man grows
and passes away; why, then, should not economic fife, after a period of growth,
end in dissolution ? Ruin overtook the Roman Empire, therefore ruin must
overtake the economic life of all other nations periodically every few years in
the shape of a great crisis. Just as summer is succeeded by winter, so a boom
must be succeeded by a slump.
Was not that a theory worthy of a
poet's pen? How simple it was, with its aid, to explain the intricate problem
of unemployment! I had also ready to hand a soothing theory guaranteed not to
disturb middle-class complacency. A lullaby, not a theory, was what was asked
for, and in this respect the current explanation of economic crises was most
suitable. In consequence of "speculative purchases" prices had risen
and there was "feverish activity" in every field. Overtime and
night-shifts were required to meet the increasing demand; wages soared. Of
course this "hot-house growth" was an unhealthy manifestation which
was bound to end in a sudden collapse. And the collapse occurred. Naturally
demand fell short of such an enormous output of every kind; and demand failing,
prices fell. Everything without exception, the products of industry,
agriculture, mining, forestry, declined in price and the whole structure of
speculation came down with a crash. The avaricious workers had absorbed with
their overtime the whole "Wage-Fund" and the "Wage-Fund"
being exhausted, there was not enough employment to go round. There were
mountains of bread and clothes, yet the workers went cold and hungry.
Or take the classical Malthusian
theory - how convincing it sounded and how widely it was accepted ! It sternly
rebuked the dissolute masses: "The only use you could make of prosperity
was to get married; you increased your miserable race beyond the limit of
decency. At every turn our eyes are offended by swaddling clothes and cradles.
The streets swarm; the schools are like rabbit-warrens. So now your own
children have grown up to crowd you out of your occupations and to reduce your
wages. Lowered wages mean falling prices; falling prices make business a losing
venture and nip the spirit of enterprise in the bud. Propagation is the
forbidden fruit, it is tainted with original sin, but is doubly sinful for the
proletariat. Abstain then, leave breeding to the heathen, send your daughters
to the nunneries, and we shall no longer have more workers than are necessary
to deal with the available work. With wages rising, prices will also rise and
stimulate enterprise. Moderation in all things, my friends, in the production
of goods as well as in the production of children, otherwise we shall have
overproduction both of goods and of consumers."
Or again there was a new theory, one
of the best in my collection. Owing to accumulation of riches in comparatively
few hands and disproportion between the purchasing power and the producing
power of the masses, consumption falls short of production. Hence a glut of
unsaleable goods in the market, a fall of prices, unemployment, depression and
crisis. The rich are unable to consume up to their incomes, and the workers
have no incomes to consume. Were incomes properly distributed, consumption
would keep pace with production and crises would be averted.
How plausible this sounded ! And it
is the sound that matters, for this theory was meant for the proletariat, and
it is useless to appeal to the intelligence of a crowd of people nurtured on
adulterated food and beer, crushed with cares and incapable of standing a
hearty shock.
For I had a theory for every grade
of society and every taste. If, occasionally, I met with serious objections I
had recourse to my reserve theory which connected crises with the currency
system. Usually the word currency sufficed to silence the objectors. "That
is enough", they cried, "We know what Disraeli says, that next to
love, the currency problem is the chief cause of lunacy, and we have no wish to
risk a dangerous overburdening of our brains for the sake of a theory of
economic crises !" Yet this was comparatively the simplest and soundest of
all my theories. Commodities, I argued, are almost exclusively disposed of by
way of commerce. that is, their exchange is effected through the agency of
merchants. The merchant, however, does not buy commodities unless he expects to
sell them at a profit. The prospective selling price must be higher than the
purchase price, the price asked by the worker or manufacturer. So if prices
tend to fall, the merchant is unable to estimate what price he ought to pay,
while the manufacturer cannot, short of incurring an actual loss, reduce his
offer below his own cost price. With the consumer the case is different. He
buys, paying the price asked. He rejoices when prices fall and is chagrined
when they rise, his only limit for the price paid being his own income. The
merchant, on the contrary, must realise a price that will exceed a certain
figure, namely the purchase price. He does not know whether he can obtain such
a price. His selling price is uncertain, whereas the purchase price, once the
bargain is struck, is a definite quantity.
When prices in general are stable
or, still more, if they are rising, all is well, the sale will, in all
probability, cover and exceed the outlay, so the merchant is safe in signing
his order. But when prices fall, and keep on falling, 1, 2, 5, 10, 20, or 30%,
as has often happened, the merchant has no foothold, so the only reasonable
thin he can do, if he is a prudent man, is to wait. For the merchant cannot
calculate his selling price on the basis of his outlay; he has to make an
estimate of the price he hopes to realise. And if, within the period between
purchase and re-sale, prices fall, he is forced to reduce his selling price and
incur a loss. So the safest thing to do in times of falling prices is to
postpone orders. For the motive power in the commercial turnover of goods is
not the need of commodities but the hope of profit.
This postponement of the merchant's
usual orders meant a stoppage of the manufacturer's sales. But the manufacturer
is, as a rule, dependent on the regular disposal of his output, since he cannot
store bulky or perishable goods. The stoppage of sales compelled him, therefore,
to dismiss his workers.
Employment and wages failing, the
workers, in their turn, were unable to buy, which brought prices still lower.
Thus the initial decline of prices had created a vicious circle.
The moral of all this was that we
must prevent prices from falling, that we must manufacture more money. In this
way there will always be sufficient money to buy commodities, and merchants,
being aware of the large cash reserves of banks and private individuals, will
never be alarmed by the prospect of a shortage of money and slump of
prices.
That meant a bimetallic standard or
paper-money.
At bottom none of these theories
satisfied me. The first, which looks upon the crisis as a kind of natural phenomenon,
is too crude to need refutation. The second theory, which makes speculation
responsible for the crisis, does not examine whether the surplus of money in
the hands of Private individuals and professional speculators, without which
speculation would be impossible, was not the real cause of speculation and
consequently of the crisis itself. What is the use of setting up a central Bank
of Issue and granting it a monopoly of the issue of banknotes for the purpose
of "adapting the monetary circulation to the needs of the market", if
notwithstanding the bank and its monopoly "speculation" can decide to
force up prices whenever it pleases ? And because this theory overlooks that
aspect of the question, it falls into the error of expressing pious wishes instead
of indicating the necessary reforms. "Do, pray, abstain from
speculation", is all it has to recommend as a protection against
crises.
This theory does not, moreover,
consider the real motive of the feverish activity, overtime and
nightshifts". For without this speeding up of labour, all speculation
would be doomed to failure. What is the use of a manufacturer proposing
overtime to his workers if they reply that their present working hours suffice
to meet their wants ? So if, at present, the workers are willing to join in
"the feverish activity", it is simply because they have urgent wants
which they expect to satisfy with the wages earned by overtime. But if demand
is as urgent as supply, how can a crisis occur ? The speculation that induces
money reserves to seek a market accounts only for the general rise of prices,
but does not explain the failure of consumption to keep pace with production,
or the fact that sales usually fall off with dramatic suddenness.
This failure to explain why
consumption and production do not, as a rule, balance, is the weak point common
to all these theories; but this question clamours most loudly for an answer in
the case of the third theory, the theory of over-population. Overproduction
resulting from over-population is here advanced as the cause of the crisis,
which amounts to saying that the excessively large loaves are due to the
excessive hunger ! The absurdity of such an argument becomes apparent if we
keep in mind that commodities are produced for exchange, and that the hungry
workers are both willing and able to give other products in exchange for those
they need. If it were merely a question of overproduction of some special kind
of goods, say coffins, no explanation would be necessary; but there is too much
of everything, for example both of agricultural and industrial products.
The theory that attributes the
crisis to deficient consumption resulting from an unequal distribution of
income is quite as unsatisfactory, for it fails to explain why sales go sky-high
at one moment and then drop to earth the next; why a constant and latent cause
(in our case the unequal distribution of incomes) should have an acute and
sudden effect (boom and slump). Had faulty distribution of incomes been the
cause, the crisis must necessarily have manifested itself as an uninterrupted,
latent condition, a constant, unchanging surplus of labour; that is, the direct
opposite of what was observed to happen.
But even the assumption that the
incomes of the wealthy classes generally exceeded their personal wants was
erroneous, as was proved by the debts of the land-owners great and small, and
their clamour for protection by the State. Wants have no limit; they are
infinite. The wants of the weavers in the Eulengebirge were, surely, not
satisfied with the potato parings that fell to their lot, and the ducal
coronets which the American millionaires bought for their daughters were not
sufficient to appease their craving for dignity.
They reached out for an imperial
crown, piling million on million, toiling day and night, reducing perhaps their
own, and certainly their workers' standard of living to obtain it. And had they
obtained it, a priest would have appeared and told them that earthly crowns are
perishable that they must still toil and save, to bequeath billions to the
Church and assure themselves a throne in the Kingdom of Heaven. Between potato
parings and the church treasury there extends an ocean of wants large enough to
engulf the maximum that men can produce. Neither is any man so rich that he is
not bent on growing still richer; on the contrary, the greed of gain develops
with successful gaining. The mighty fortunes of our epoch could never have been
formed if after reaching the first Million their possessors had said: "We
have acquired enough, let others now have an innings." No rich man ever
allowed his surplus to lie idle as long as there was a prospect of a profitable
investment. Interest, no doubt, was the essential condition for the lending of
the capitalist's money, but in this respect the richest in the land acted no
differently from the meanest saver of pence. No interest - no money, was the
watchword all down the line. All of them made the lending of money dependent on
interest, and even had we levelled all incomes it would not have altered the
fact that the money-saver, the man who produced and sold more goods than he
consumed, would not have put his money surplus into circulation until he was
assured his interest. Thus the activity of the savers necessarily brought about
an excess of commodities, stagnation of the markets and unemployment as soon as
commerce and industry ceased to yield interest. The cause of the crisis lay in
the fact that capitalists refused to invest their money unless they obtained
interest, and that when the supply of houses, industrial plant and other
instruments of production passed a certain limit, the rate of interest fell
below the minimum yield necessary to pay the interest on the money invested in
them. (Competition among house-owners in respect of tenants has the same effect
as competition among the owners of industrial enterprises in respect of
workers: it reduces the rate of interest. In the one case it diminishes rent,
in the other it raises wages). As soon as this point was reached employers were
no longer able to pay the interest demanded of them, and capitalists had no
motive to lend their money gratis.
They preferred to wait for the
crisis which could be counted on to "ease" the situation and to
restore the normal rate of interest. They found it advantageous to renounce all
interest for a short time in order to make sure of a higher rate, rather than
immobilise their money in a long-term investment at a low rate. A certain
minimum rate could always be extorted merely by waiting.
So the disproportion between the
income and the consumption of the wealthy classes and between the purchasing
power and the producing power of the workers cannot be regarded as the true
cause of industrial crises.
The last theory, which connected the
crisis with the currency, came nearest the truth.
That as long as prices tended
downwards and goods could be sold only at a loss, no one thought of creating
new enterprises or enlarging existing ones; that no merchant bought goods which
he would have been forced to sell below the purchasing price; and that in these
circumstances a crisis became inevitable, is obviously true. But this theory
answered the question with new questions. It was right in stating that a crisis
is equivalent to a general fall of prices, but it failed to provide a
satisfactory answer to the question how the fall of prices occurred. It did
indeed trace the fall of prices to a shortage of money, and hence proposed as
remedy an increased manufacture of money (bimetallic standard, paper-money);
but the proof was lacking that with or after the increase of the stock of money
the supply of this money would adapt itself to the supply of goods, and more
especially that money would be supplied to the market when the rate of interest
began to decline. And that, after all, is the issue.
This point was not altogether
overlooked; it was proposed to dissociate the currency from any kind of metal
by abolition of the right of free coinage of silver and gold, so that the
manufacture of money (not the supply of money) might be regulated; more money
being manufactured when prices fell and less when prices rose. It was supposed
that by this simple method the supply of money could always be adapted to the
demand.
This proposal was never put into
practice, which was lucky, for it would have proved a failure. Its authors
mistook a stock of money for a supply of money, believing as they did, that
because a large stock of potatoes means an equally large supply of potatoes, it
must be the same in the case of money. But that is by no means true. The supply
of potatoes or any other commodity corresponds exactly to the stock, since
storage involves heavy expense. Had the traditional form of money resembled the
general run of commodities, had it not been possible to hoard metal money
without expense, the supply of money might reasonably have been estimated by
the stock. But that, as we know, was not the case. The supply of money depended
absolutely on the will of its owners. And not one penny was put in circulation
commercially or financially as long as no interest could be obtained. No
interest - no money; even though the stock of money were increased a
hundred-fold.
Now suppose that such a reform in
the system of issuing paper-money had achieved its purpose, namely the
prevention of trade depression and acute crises. The country adopting the
reform would then have speedily become so well stocked with houses, industrial
plant and so forth that such things would have failed to yield the customary
interest. Whereupon the old round would have started again; the money savers
and capitalists would have opposed a reduction of the rate of interest, and
employers of labour would have been unable to pay the old rate. Thousands of
years of experience have taught the owners of money that their money will fetch
3 - 4 or 5%, according to the investment, and that to obtain this rate of
interest they need only wait. So they would have waited.
But while the owners of money were
waiting, demand for goods would have failed, and prices fallen. This in its
turn would have alarmed commerce which, uncertain of the future, would have
held back orders.
And thus we should have been once
more face to face with slump, unemployment and crisis.
It was indeed proposed that in such
cases the State should enable the employers of labour to carry on by supplying
them with money at a lower rate or, if need be, free of interest. In this
manner the State would have replaced the money withdrawn from circulation by
the savers and capitalists. But what would this have led to ? on the one hand,
the capitalists' useless masses of paper-money, on the other hand, in the
national treasuries, corresponding masses of bonds and bills of
exchange-long-term bills, moreover, and bonds such as employers require, not
subject to withdrawal at short notice.
The masses of paper-money hoarded by
private individuals (all private fortunes would finally have assumed that form)
might any day have been set in motion by some trivial event, and this money,
being only redeemable in the market in exchange for goods, would suddenly have
become an enormous mass of demand which the State would have been powerless to
control by means of the bonds and long-term bills. in this manner prices would
have soared sky-high.
It was fortunate that we escaped
this peril by introducing Free-Money, for the disastrous failure of the partial
reform would of course have been used as an argument against the theory of
paper-money, and we should have relapsed, perhaps for centuries, into the
barbarism of metal money.
Free-Money makes the supply of money
independent of all conditions; the exact quantity of money that has been put in
circulation by the State is supplied to the market. What had hitherto been
taken for granted, namely, that the supply of money, like the supply of potatoes,
must always be equal to the stock, has for the first time become a reality. The
supply of money no longer runs an independent course; it has ceased to be an
arbitrary act; it is not influenced by human volition. The quantity theory now
holds good, even in the simple form sometimes termed "crude".
Under such circumstances, how can a
crisis occur ? Even if the rate of interest decreases, even if it falls below
zero, money will nevertheless be supplied; and should prices tend to fall, the
State will raise them again, simply by increasing the stock of money. The
supply of money will then in all conceivable circumstances balance the supply
of goods.
Now if it is Free-Money which
prevents crises, we have to look for the cause of the crisis at the point where
the traditional form of money differed from Free-Money. And the difference lies
in the motives controlling the supply of money now and formerly.
Interest was formerly the essential
and obvious condition of the circulation of money; whereas money is now
supplied without interest.
Formerly, when a general fall of
prices set in (already an indication that the supply of money was insufficient)
money was withdrawn from the market (because with prices falling nobody buys or
can buy goods commercially, without incurring the risk of losing on the
outlay), and in this way a general fall of prices frequently developed into a
frantic universal scramble for ready money, which inevitably precipitated
prices to the lowest depths. Whereas at present money is supplied in all
conceivable circumstances.
And with a general rise of prices,
the index of an excessive supply of money, all private reserves of money sought
a market, because everyone was anxious to participate in the generally expected
further rise with as large as possible a stock of goods or of industrial
shares. This made the expected rise inevitable, forcing up prices to the very
highest level attainable by the supply of all private reserves of money.
Whereas at present prices cannot rise at all, because there are no longer any
private reserves of money.
The amount of money supplied to the
market, the answer to the question whether a capitalist should or should not
buy commodities. used to be determined by guess-work, public opinion, rumour,
very often merely by the frown or smile of a sovereign. If the digestion of the
"leading" stock jobbers was sound, and fine weather coincided with
some favourable piece of intelligence, the "tone" of the market
changed, and the sellers of yesterday became the buyers of today. The supply of
money was a straw blown by the wind. And consider the haphazard fashion in
which money was produced! If the diggers found gold-good; if they did not-we
had to manage without. All through the Middle Ages down to the discovery of
America commerce had to be conducted with the stock of gold and silver
inherited from the Romans, because all the mines then known were exhausted.
Trade and traffic were restricted to a minimum, because the scarcity of the
medium of exchange did not permit the division of labour. Since that time much
gold and silver has been discovered; but how irregular were these discoveries!
There were "finds" in the fullest sense of the term.
Added to these fluctuations in the
discovery of gold were the fluctuations in the currency policies of the various
countries which sometimes introduced the gold standard by means of loans of
foreign gold (Italy, Russia, Japan), thus withdrawing immense quantities of
gold from the markets, and sometimes reverted to a paper standard and so thrust
their gold back on the foreign markets.
The supply of money was thus the
shuttlecock of the most varied and conflicting circumstances. That was the
difference between the former monetary system and Free-Money; that was the
cause of economic crises.
O. The Theorist on Wages
Now that railways, steam navigation
and the right of free movement have placed vast tracts of fertile soil in
America, Asia, Africa and Australia at the disposal of the workers; now that
the growth of personal credit (the result of higher moral and educational
standards and enlightened commercial legislation) has made capital accessible
to the workers, the "iron law" of wages no longer holds good.
The labourer is no longer delivered
over to the tender mercy of the landowner; he can break away from his serfdom
and shake the dust of his native land from his feet. The land monopoly has been
broken. Millions of workers have sought freedom by emigration, and the
landowners are compelled to treat those who remain as free men. For the
possibility of emigration has set them all free.
I was forced to abandon the iron law
of wages; the facts disproved me. According to Moleschott and Liebig the
quantities of nitrates and carbohydrates necessary for a man working twelve
hours a day are contained in a pint of fish-oil and a few pounds of broad
beans. These substances cost twopence, to which may be added one halfpenny for
potato parings, clothing, housing and religious needs, total twopence
halfpenny. This, then, was the iron limit above which wages could not rise. But
wages were higher, so the law of the iron wage was a fallacy.
I tried to evade this difficulty by
saying that the iron wage is the minimum required for the worker to maintain
and propagate life on the level of his cultural standard (minimum cultural
standard of existence). But this did not carry me far. For how had the worker
fed on broad beans attained to a cultural standard at all ?
How could the rascal escape from his
well-guarded compound ? And apart from that, what is culture, what is a minimum
standard of existence? Fish-oil and broad beans are a Christmas feast for the
weavers in the Eulengebirge. Such elastic terminology is useless for science.
According to many people (nature faddists, cynics and so forth) a life without
material needs is a sign of the highest culture, so the iron wage based on the
standard of living would have to diminish with the increase of culture, which
weans men from material needs. Are the weavers in the Eulengebirge less
civilised than the obese persons who begin their day with a beer breakfast and
look more like pigs than human beings ? Nor is it true that wages rise with the
number of tankards or the quality of the tobacco.
The Minister of Commerce in the
Prussian Diet stated that the average wages of the miners in the Ruhr district
were as follows:
Marks Marks 1900: 4.80 1903: 3.88
1901: 4.07 1904: 3.91 1902: 3.82
Thus wages fell 25% within a space
of three years! Did the cultural standard of the miners also fall by
25% in this short period (*
We assume that the real wage fluctuated with the money wage. Otherwise the
so-called "German Currency Standard" is simply a fraud.)? Or did they lapse into the barbarism of total abstinence?
Abstainers manage with less money, which would be an excellent reason for
further reducing the minimum wage to the level of the cultural standard of
total abstinence. But here the question arises why our rulers are not more
enthusiastic supporters of the abstinence movement. Were it possible by means
of total abstinence to reduce wages in favour of unearned income, the
manufacture and sale of alcoholic drinks would be quickly prohibited ! But our
rulers know better: Beware of your abstainers ! Without intoxicants a people
cannot be "governed".
In a word, the minimum cultural
standard of existence is humbug, and so is the iron law of wages. Wage
movements take no heed of the standard of civilisation. The increase of wages
which the workers imagine they have "wrested" for good from their
employer is lost again tomorrow if business takes an unfavourable turn. If, on
the other hand, the market improves, the increase of wages will automatically
fall to their lot without a struggle and even without their demanding it, just
as the higher price of wheat falls to the farmer without a struggle, when the
prospects of the American harvest are reported to be poor.
For what are wages ? Wages are the
prices paid by the buyer (employer, merchant, manufacturer) for the goods
supplied him by the producer (worker). This price, like the price of any
commodity, is determined by the prospective selling price. The selling price.
less rent on land and capital-interest, is the so-called wage. It follows that
the law of wages is contained in the law of rent on land and the law of capital
interest. The commodity, less rent and interest, is the wage. There is, then,
no special law of wages. The word wage is a superfluous term in economic
science, for wage and price are one. If I know what determines the price of commodities.
I also know what the worker obtains for his produce.
(* In the last part of this book I
shall show that the owner of the meant of production (manufacturers) are simply
pawnbrokers - a fact now. Indeed, generally admitted.)
Free-Money has opened my eyes to all
that; it has liberated me from my illusions about so-called "value",
the very existence of Free-Money being a tangible refutation of all theories of
value and of the very belief in value. And the belief in value being disposed
of, the conception of "labour" went overboard, being wholly
superfluous for an examination of economic laws. What is labour ? Labour cannot
be measured by the movements of the arms, or by the degree of fatigue, but
solely by the produce of labour. James Watt in his grave does more work today
than all the horses alive. it is not the labour, but the result of labour, the
product, that matters. The product is the thing bought and paid for, as is
clearly demonstrated in the case of piece-work. And at bottom all labour is
piece-work.
But to buy commodities is to
exchange commodities. Economic life therefore resolves itself into a series of
exchange-transactions, and all terms such as "wages",
"value", "labour" are simply superfluous circumlocutions
for the two basic conceptions "commodities" and
"exchange".
6. The International Exchanges
6. INTERNATIONAL TRADE
1. The Mechanism of the Exchanges
It is often asserted that foreign
trade cannot be carried on with paper-money, that gold is needed for this
purpose. But in reality foreign payments can be made with paper-money, and the
mechanism of such payments is simple enough, though it is still not generally
understood.
Do you see the lemons in the
greengrocer's over there ? They come from Malaga. And the packing cases yonder
being trundled from the Hamburg Parasol Company to the station are going to
Seville. The question is, can these two transactions be carried on with German
and Spanish paper-money, without the intervention of gold ?
If the same dealer imported the
lemons from Spain and exported the parasols to Spain, everybody would see that
paper-money offers no obstacles to the execution of the two transactions. The
dealer would sell the parasols in Seville for Spanish paper-money, and with
this paper-money buy lemons in Malaga. He would then send the lemons to
Hamburg, sell them for German paper-money, and with it pay for the parasols. He
would repeat this transaction indefinitely without being troubled by the
circumstance that Spanish paper-money is not legal tender in Germany. The
Spanish paper-money received for the parasols is spent in Spain for lemons, and
the German paper-money paid him for the lemons is used for the purchase of
parasols. His capital changes continually: to-day it consists of lemons,
tomorrow of German marks, next of parasols and then again of Spanish pesetas.
The dealer is concerned only about the profit, about the surplus yielded by the
continual transmutation of his capital. And his guarantee that there will be a
surplus depends, not on the currency, but on the laws of competition.
Import and export are seldom,
however, united in one hand, as a rule we have here also division of labour
which requires a special action to effect the payment. But here again
paper-money is no obstacle. The transaction is as follows: The importers and the
exporters living in the same town meet on the Exchange where the exporter of
parasols sells to the importer of lemons, for German money, his claim on
Seville in the form of a bill of exchange. At what price (rate of exchange)
that is done we shall see presently. This bill of exchange, which is made out
in Spanish pesetas, is sent by the importing firm to Malaga in payment for the
lemons received. The wording of the bill is as follows:
Thirty days after sight pay to the
order of Hamburg Lemon Importers Ltd. the sum of One Thousand Pesetas, value
received (our invoice of August 1st. for parasols).
To Mr. Manuel Sanchez, Seville. The Hamburg
Parasol, Company.
The sale of the bill by the parasol
exporting firm to Lemon Importers Ltd. is already certified by its being made
out to the order of Lemon importers Ltd. The further sale of the bill to the
lemon exporting firm at Malaga will be inscribed on the back of the bill, as
follows: For us to the order of Messrs. Cervantes y Saavedra, Malaga, Hamburg Lemon
Importers Ltd.
From Malaga the bill is sent through
a banking-house to Seville and is there met by the dealer in parasols, Mr.
Manuel Sanchez.
The transaction in parasols and
lemons is then effected in all four directions, the parasol exporting firm in
Hamburg and the lemon exporting firm in Seville having received their money,
the lemon importing firm in Hamburg and the parasol importing firm in Seville
having paid their bills. Yet the only money that entered into the transaction
was German and Spanish paper-money. Although there were four parties concerned
in the export and import, goods were paid for with goods, German goods with
Spanish goods.
The transaction is similar if
instead of being negotiated between the importing and the exporting firms
direct, the bills are handed in at banks, which is the general rule if the
importer and the exporter live in different towns- it would lead us too far to
describe the whole course of such a transaction, but there is no essential
difference.
One important question has yet
however to be answered: What determines the rate of exchange of the peseta bill
of exchange in Hamburg, what is the price, in German money, paid by the lemon
importing firm in Hamburg for the bill of exchange made out in a foreign
currency ?
This question, also, we shall
answer. The price of bills of exchange, like the price of lemons and potatoes,
is determined exclusively by demand and supply. Many potatoes, many bills, mean
low prices for potatoes and bills. Now many Spanish peseta bills are offered
for sale in Germany when many goods are exported to Spain, and there is little
demand for peseta bills in Hamburg when few goods are imported from Spain.
Hence the price (rate of exchange) of peseta bills falls, to rise again when
the tide turns.
As long as imports and exports
remain unchanged, the supply of and the demand for bills will balance. But a
change immediately occurs if, for any reason, prices in Spain or Germany (to
come back to our example) depart from their general level. If commodity prices
rise in Spain, say because comparatively more paper-money has been issued there
than in Germany, these higher prices will attract more foreign commodities and
at the same time make the export of Spanish goods less profitable or altogether
unprofitable. Imports into Spain therefore increase, while exports decrease.
The supply of peseta bills in Hamburg is then large, whereas the demand for
them becomes small. But demand and supply determine the market price of the
peseta, so the peseta, instead of standing at 80 pfennigs will cost 75 or 70
pfennigs or even less. The parasol exporters do not realise in German currency
as much as formerly for their bill of exchange on Seville, so that what they
gained by the high prices obtained for their parasols in Seville, the expected
additional profit, they lose again by the falling rate of exchange when selling
their bill of exchange in Hamburg. The lemon importers on the contrary, will
recover in the lower price of the peseta bill of exchange in Hamburg the excess
paid for the lemons in Malaga.
This play of forces continues until
the high prices of Spanish goods caused by the inflation of the Spanish
currency, have been compensated by the fall in the rate of exchange of the
peseta, when the stimulus to increased imports and decreased exports
disappears. The equilibrium between import and export is thus automatically
restored, which means that a special fund for the payment of balances between
two countries with paper currencies is superfluous, because such balances
cannot occur.
Figure 6A. German-Spanish Balance of
Trade
Surplus of German Export
The supply of peseta bills
increases, and the demand for peseta bills decreases, so the German rate of
exchange falls (in the figure to 72 marks for 100 pesetas).
The German exporter then loses, and
the Spanish exporter gains, on the rate of exchange.
We need hardly add that if prices
rise in Germany and remain stable in Spain, things will be reversed: the export
of parasols becomes unprofitable, while import into Germany from the countries
with which Germany normally competes in the world market becomes increasingly
profitable. Fewer foreign bills of exchange are then offered for sale in
Germany, whereas there is a brisk demand for them; this means higher prices (in
German paper-money) for foreign bills, and the rising price (rate of exchange)
of these bills automatically restores the equilibrium between imports and
exports.
Figure 6B. German-Spanish Balance of
Trade Deficit of German Export
The supply of peseta bills
decreases, and the demand for peseta bills increases, so the German rate of
exchange rises, (in the figure to 89 marks for 100 pesetas).
The German exporter then gains, and
the Spanish exporter loses, on the rate of exchange.
Both figures (6A and 6B) show how a
surplus balance of trade depresses the rate for foreign bills of exchange and
restricts export Fluctuations in the rate of exchange tend, therefore, to
counteract their causes.
Fluctuations in the rate of exchange
at one moment favour and at the next injure exporters or importers and so add
greatly to the risk of commerce. Between two countries with different paper
currencies there is evidently no limit to such fluctuations in the rate of
exchange, for they depend simply on the internal currency policies of the two
countries. But does not the fact that it is possible through currency policy to
cause arbitrary and unlimited fluctuations of the rates of exchange prove that
it is also possible through suitable currency policy to stabilise, to fix
arbitrarily, the rates of exchange ? If the equilibrium of exports and imports
can be disturbed by currency policy, it must be possible, by currency policy to
forestall the fluctuations of imports and exports, even those due to natural
causes, such as failure or unusual abundance of the harvest. All that is
necessary is the adoption of a uniform currency policy by the countries
concerned. If we in Germany and the Spaniards in Spain by suitable regulation
of the currency maintain a stable level of prices, the ratio of exports and
imports will also remain stable. The ratio of demand and supply of bills of
exchange and, finally, the rate of exchange will then also be stabilised. For a
solution of this problem we only need an agreement between the two countries
and action based thereon.
What we here demand of the currency
administration was realised, to a certain extent automatically, by the
international gold standard. When the currency (gold and banknotes) in any
country became over-abundant and prices consequently rose above their natural
level in the world market, what happened was exactly what now happens in a
country with a paper standard when the circulation is increased. The bills
drawn on the country with rising prices had a falling rate of exchange. If, for
example, the country was Spain, the rate of exchange of the peseta in Hamburg
fell from 80 to 79 or 78 pfennigs and continued to fall until the seller of
such gold peseta bills (in our example the exporter of parasols) wrote to his
correspondent in Seville: "I find it difficult to sell the bills drawn on
you for the parasols supplied. I am offered only 78 pfennigs instead of 80 for
a peseta. I therefore cancel the bill and request you to remit the amount of my
invoice in gold coins of your country". Our parasol exporter has now of
course to pay the expense of this shipment of gold, so he will not have
recourse to this expedient unless the loss on the rate of exchange exceeds the
expense of shipping the gold. The Spanish gold coins are delivered to the
Reichsbank, which converts them for the parasol exporter free of charge, into
German currency, or else exchanges them for banknotes at the fixed rate of 2790
marks for a kilogram of fine gold.
Now what happens here and in Spain
in consequence of this business custom ? In Spain the currency is diminished by
the amount of the gold shipment from Seville. If the gold is withdrawn from the
Spanish central Bank of Issue, this bank is obliged to withdraw from
circulation three times the amount in banknotes, in accordance with the law
that the notes issued must be covered up to one-third of their value by gold.
In Germany, on the contrary, the circulation of money is increased by three
times the amount of the shipment of gold from Spain. The effect is that prices
in Spain fall, and prices in Germany increase, and this increase continues
until equilibrium is restored.
Had the general rise of prices which
caused the fluctuation in the rate of exchange occurred in Germany instead of
in Spain, the lemon importer in Hamburg would have acted like the parasol
exporter. He would have written to his Malaga correspondent that on account of
the high rate of the peseta in Hamburg he was sending German gold coins, instead
of making the customary remittance by bill of exchange in payment for the
lemons he had received.
As gold shipments of this kind were
frequent, it was generally believed that reserves of gold were necessary for
this purpose, but that was a misconception. For equilibrium would have been
restored automatically without these gold shipments, through the obstacles or
facilities to import or export resulting from fluctuations in the rate of
exchange. The effect of the shipments of gold, and of the gold reserves which
rendered them possible, was not due to the shipping of the gold itself, but to
the influence of the gold shipments on commodity prices. It was the change of
prices and not the gold shipments that restored equilibrium. If the currency
administration in countries with rising rates of foreign exchange (for example
in Germany when peseta bills fetched a high price in marks) had reduced the
circulation of currency by withdrawing banknotes from circulation, the
consequent fall of prices would immediately have restored equilibrium of
exports and imports, and the rate of exchange would have returned to par. A
very simple action, namely an increase of the rate of discount for bills of
exchange by the Bank of Issue, would have rendered gold shipments and the
gold-reserves destined for them superfluous.
A conscious action must be
substituted for a dead mass of gold, since the monetary standard cannot be
conceived as a substance, but only as an action, as an administrative measure. (*See
also: Frankurth
und Gesell: Aktive
Währungspolitik.)
With the gold standard fluctuations
in the rate of exchange could never exceed the cost of shipping gold. At a low
level of civilisation, in which no intelligent State control is possible, such
automatic compensation of currencies has certain advantages. But at the present
day, the retention of the gold standard for this reason is an insult to the
national administrations.
For a machine automatic regulation
may be preferable to the human hand, but the currency cannot be compared with a
machine. The regulation of the currency under the gold standard is moreover,
automatic only in a restricted sense. The shipments of gold are not automatic,
for the gold has to be counted, packed, shipped, insured, recoined. The
withdrawal of an equal sum of money from circulation as an administrative
measure of the Bank of Issue would have the same effect, with less effort and
no expense whatever.
We must further keep in mind that
with the gold standard fluctuations in the rate of exchange between distant
countries, allowing for interest, may amount to 4% or more.
(* The expense of a shipment of
gold from Europe to Australia is fully 2%. It is composed of the interest lost
during the voyage, freight, insurance, packing and brokerage. The rate of
exchange between Europe and Australia may therefore fluctuate above or below
par by 2 %, so in this case the margin may exceed 4%. That is what was called a
standard!)
The automatic mechanism of the gold
standard does not prevent fluctuations; it begins to act only when the
fluctuations have reached the maximum, at the so-called gold point (the cost of
gold shipments mentioned above), or in other words, with the setting in of the
import and export of gold. When the fluctuations in the rate of exchange have
done all the damage they can, and not till then, does the remedy begin to operate.
With a paper standard, on the other hand. if the statistical service of the
currency administration is reasonably efficient, the remedial measures make
themselves felt simultaneously with the first signs of a disturbance of the
equilibrium, and the fluctuations of the exchanges are confined to these signs.
With the gold standard it might indeed also be possible to prevent and
forestall fluctuations, and the central Banks do assert that they are not mere
automata. But if the gold standard has to be assisted by a conscious act, what
remains of the automatic functioning claimed by its advocates ?
What has here been said applies to
ordinary paper-money. With Free-Money, owing to its compulsory circulation, the
measures of the monetary administration are immediately effective, and the
claim that no reserves of any kind are necessary to maintain stable rates of
exchange becomes doubly true.
2. Stabilisation of the International Exchanges:
Theory. Some Facts
Silver five-franc pieces circulated
freely before the war in the countries of the Latin Currency Union. (France,
Italy, Switzerland, Belgium and Greece). These five-franc pieces were free to
pass from one to another of these countries; they were legal tender at par with
the national currencies, and usually circulated at par with them.
Yet these five-franc pieces were
"fiduciary" money; they were for some time "covered" only
to the extent of 50% by the silver they contained; they could buy double their
weight of silver. Hence, of two such coins, one could be regarded as purely
"fiduciary" money. Five-franc pieces lost half their value in the
melting-pot.
Because of their freedom of
circulation, these coins had a regulating effect upon the international exchanges,
and acted as an automatic arbitrage mechanism, bringing prices to a level in
the different countries.
The balance of trade and payments
was regulated by this automatic arbitrage mechanism. If one country of the Latin Currency Union
increased the quantity or the rate of circulation of its currency out of
proportion to the other countries, its general level of prices rose above
theirs. Hence the imports of this country increased, its exports decreased, and
its balance of trade and payments closed with a deficit which had to be made
good by the export of five-franc pieces.
The export of five-franc pieces
lowered prices in this country and raised them in the other countries,
especially as five-franc Pieces were counted as "cover" for notes
and, if removed from a Bank of Issue usually caused the withdrawal of double
the quantity of notes from circulation. The effect of exporting five-franc
pieces was usually, therefore, doubled. The export of five-franc pieces lasted
until equilibrium was established in the balance of trade and payments.
If the increased issue of notes
continued until the country was completely drained of five-franc pieces, it
could no longer make up the deficit by exporting them. The automatic arbitrage
mechanism then ceased working and an agio (premium on foreign money)
appeared.
If the country wished to eliminate
the agio, it withdrew notes from circulation. Prices then fell, imports
decreased, exports increased, the deficit in the balance of trade and payments
gradually decreased and was replaced by a surplus. The five-franc pieces which
had been driven away by the increased issue of notes then began to flow back
and conditions were reversed-until a general equilibrium was reached. Prices in
the different countries were levelled by the five-franc pieces, as water, after
a disturbance, is levelled by a system of communicating pipes.
If all the countries of the Latin
Currency Union were guided, when issuing notes, by the danger-signals described
in paragraphs 7 and 8, the fluctuations of their exchanges remained within the
cost of transporting five-franc pieces from one country to another.
The countries of the Latin Currency
Union therefore stabilised their exchanges by declaring one class of coins an
international medium of payment, not by internationalising their whole
currencies.
This was not, of course, the
original purpose of the Union, whose founders could not have foreseen that
silver would become "fiduciary" money.
The regulating effect of the
five-franc pieces upon the exchanges can be explained only by the theory of
paper-money.
Inferences from these Facts.
The play of forces described above
is in accordance with the quantity theory of money and is a proof of its
correctness.
The results would have been the same
if five-franc notes had been substituted for the five-franc pieces - which
acted as an international medium of payment because of an international
agreement, and not because of the silver they contained.
International paper-money issued in
one denomination under the supervision of the countries concerned, and for this
purpose only, would circulate freely like the five-franc pieces and regulate
import and export, thus keeping the exchanges in equilibrium.
An unusual influx of these international five-franc
notes would prove that insufficient national currency was in circulation. An
unusual efflux of the international notes would prove that the national
currency was over-abundant.
The complete disappearance of the
international notes and the resulting agio (premium upon the international
notes) would be a warning signal that the country in question should proceed to
drain the market of national notes until the agio disappeared and international
notes began to flow back. Too large an
influx of international notes would mean that insufficient national currency
was in circulation - unless all the other countries were expelling
international notes by issuing too much national currency. The latter
supposition leads to the question of currency standard, which must not be
confused with the question of the exchanges.
We shall now give a summary of our
proposals for an international union for regulating both the currency standard
and the exchanges: The International Valuta Association.
3. Stabilisation of the International Exchanges: Practice.
The International Valuta
Association. (Iva).
Countries desiring to join the
International Valuta Association adopt the "Iva" unit of currency
standard. This new unit is not static
(substance); it is dynamic (action). As the result of a continuous active
currency policy it can remain a fixed quantity only as long as that currency
policy keeps it so. The currency policy
of the Iva countries is based upon stabilisation of the currency. (*By
currency
stabilisation is meant the
equilibrium between the supply of money and the supply of goods - the fixed general
level of prices - resulting from an active currency policy with this aim.)
The statistics of prices required
for a policy of stabilisation are recorded on a unified system by all the
countries of the Association.
An active currency policy with stabilisation
as aim depends upon the quantity theory of money, upon the fact that if the
general level of prices fluctuates, it can under all circumstances, even in
time of war, be brought back to a starting point by an increase or decrease of
the monetary circulation.
The currency systems of the Iva
countries remain national, but are based on unified principles, valid in all
circumstances and for all stages of development.
This unified national currency
policy removes the chief cause of disturbances in the balance of trade and of
the resulting fluctuations in the exchanges.
Small disturbances in the balance of
trade caused, for example, by the course of the seasons, are still
possible.
To eliminate completely the effect
of these disturbances upon the exchanges, a special form of international
paper-money is issued which is imported and exported without hindrance by all
the countries of the Association and is recognised by them as legal tender at
par with the national currency.
This international paper-money is
issued by the Iva Office, say at Beme, to the countries of the Association and
under their supervision. The Iva notes are issued free of charge, except for
the expense of printing and administration.
The quantity of Iva notes is
determined solely by their regulating effect upon the exchanges, about 20% of
the national issues being required for this purpose.
For the amount of the Iva notes
issued to each country the Iva office at Beme receives a bill of exchange
payable only in case the country, by mismanagement of the national currency
resulting in a permanent deficit in its balance of trade, has forced the export
of its Iva notes, Iva notes being obtainable only on payment of an agio. From
the date of this occurrence the bill of exchange bears interest.
The Iva notes are issued in a
denomination especially suitable for retail trade. Scarcity of superfluity of
the notes is therefore felt immediately.
It is in the interest of the
countries of the Association to take the measures necessary for keeping the Iva
notes at par with the national currency.
For this purpose national notes are
issued when Iva notes are flowing into the country, and national notes are
withdrawn when Iva notes are leaving the country.
If this international currency
policy, undertaken in the interest of the Iva note, leads to an appreciable and
lasting discrepancy with currency stabilisation, an international investigation
is instituted by the Iva office to discover the cause of the disturbance and to
issue to all the countries of the Association the instructions necessary for
its elimination.
Figure 7.
Stabilisation of the international
Exchanges by means of international (Iva) notes.
The upper, lightly shaded part of
the reservoirs represents national notes; the darker shading international
notes.
Explanation of Figure 7.
Just as Water in a System of
communicating pipes tends, when disturbed, to return automatically to the same
level, so in countries which link their currencies by means of Iva notes,
prices will remain at the same level, or tend, if disturbed, to return to that
level - provided, of course, that the national currencies are based on the
principle of stabilisation.
If one of these countries abandons
the principle of stabilisation and pays no heed to the danger signals (export
and import of Iva notes), it will become flooded with Iva notes (U.S.A. in the
figure), or completely drained of them (England in the figure). But it is
detrimental to a country to become flooded with international notes, since it
loses the interest on the national paper-money that it might have issued. And
it is still more detrimental to a country to become drained of iva notes, on
account of the resulting premium on these notes which disturbs its foreign
trade. The normal situation is shown in the reservoirs marked France and Italy.
In the reservoir marked U.S.A. the plethora of international notes is being
relieved by a strong dose of national notes. In the reservoir marked England,
on the contrary, the premium on iva notes is being removed by withdrawal of
national notes. (The Open tap in the figure).
The drawing represents a closed
system, but the communicating pipe is shown with a coupling (on the right) to
facilitate the entry, later, of other countries into the Iva system.
Any form of international currency,
not only gold, will stabilise the international exchanges. Countries adopting
the gold standard had stabilised exchanges but a fluctuating price level.
Countries adopting the Iva system have stabilised exchanges but, as well, a
stabilised price level.
To exclude the influence of the cost
of transport (import and export) of Iva notes upon the exchanges, this expense
is borne by the Iva Office.
The expense of administration is
divided among the countries of the Association in proportion to the amount of
Iva notes issued to them.
Any non-European country observing
paragraphs 1 and 9, and adopting the principle of currency stabilisation can
join the Association and will then receive the usual amount of Iva notes (20%
of the national issue).
A country can leave the Association
at any time on redemption of the bill of exchange mentioned in paragraph
12.
To dissolve the Association, these
bills of exchange could be paid to the Iva Office which could then destroy the
Iva notes so recalled.
PART V. THE FREE-MONEY THEORY
OF INTEREST
1. A STORY OF ROBINSON CRUSOE
To introduce the theory of interest
here expounded, and to facilitate the removal of old prejudices, which are
nowhere stronger than in connection with the subject of interest, I shall begin
with a story of Robinson Crusoe. *
Robinson Crusoe, as is well known,
built his house, from motives of health, on the south side of the mountain,
whereas his crops grew on the damp but fruitful northern slopes. He was
therefore obliged to carry his harvests over the mountain. To eliminate this
labour he decided to construct a canal around the mountain. The time required
for this enterprise which, to avoid silting, would have to be continued without
interruption, he estimated at three years. He had therefore to lay in
provisions for three years.
He slaughtered some pigs and cured
their flesh with salt; he filled a deep trench with wheat, covering it
carefully with earth. He tanned a dozen buckskins for suits and nailed them up
in a chest, enclosing also the stink-glands of a skunk as a precaution against
moths. In short, he provided amply and, as he thought, wisely, for the coming
three years.
As he sat calculating for the last
time whether his "capital" was sufficient for the projected
undertaking, he was startled by the approach of a stranger, obviously the
survivor of a shipwreck.
"Hallo, Crusoe!" shouted
the stranger as he approached, "my ship has gone down, but I like your
island and intend to settle here. Will you help me with some provisions until I
have brought a field into cultivation and harvested my first crops?"
At these words Crusoe's thoughts
flew from his provisions to the possibility of interest and the attractions of
life as a gentleman of independent means. He hastened to answer
"yes."
"That's splendid ! " replied
the stranger, "but I must say at once that I shall pay no interest. I
would prefer to keep myself alive by hunting and fishing, for my religion
forbids me to pay, or to receive, interest."
--------------------------------------------------------------------------------
note:
* To save space I have not subjected
the loan-contract here described to the regulating effect of competition. If
the conditions of the loan were determined by competition in the form of
several loangivers (Crusoes) to one loan-taker (the Stranger) the contract
would be still more favourable to the loan-taker. It is also assumed that both
parties are guided by the principles of Free-Land, for otherwise the outcome
would be, not a loan contract, but a fight.
--------------------------------------------------------------------------------
Robinson Crusoe:
An admirable religion! But from what
motive do you expect me to advance you provisions from my stores if you pay me
no interest?
Stranger:
From pure egoism, my dear fellow,
from your self-interest rightly understood. Because you gain, and gain
enormously. R.C.
That, stranger, you have yet to
prove. I confess that I can see no advantage in lending you my provisions free
of interest.
S.
I shall prove it in black and white,
and if you can follow my proof, you will agree to a loan without interest, and
thank me into the bargain. I need, first of all, clothes, for, as you see, I am
naked. Have you a supply of clothes? R.C.
That chest is packed with buckskin
suits. S.
My dear Crusoe! I had more respect
for your intelligence. Just fancy nailing up clothes for three years in a chest
- buckskins, the favourite diet of moths! And buckskins must be kept aired and
rubbed with grease, otherwise they become hard and brittle.
R C.
That is true, but I have no choice
in the matter. They would be no safer in my clothes-cupboard - less safe,
indeed, for it is infested by rats and mice as well as by moths. S.
The rats and mice will get them in
any case. Look how they have already started to gnaw their way in! R.C.
Confound the brutes! I am helpless
against them. S.
What! A human being helpless against mice!
I will show you how to protect yourself against rats and mice and moths,
against thieves and brittleness, dust and mildew. Lend me these clothes for
one, two or three years and I agree to make you new clothes as soon as you
require them. You will receive as many suits as you have lent me, and the new
suits will be far superior to those you would have taken from the chest. Nor
will you regret the absence of the particular perfume you have employed! Do you
agree? R.C.
Yes, stranger, I agree to lend you
the chest of clothes; I see that in this case, the loan, even without interest,
is to my advantage. * S.
Now show me your wheat; I need some
for bread and seed. R.C.
It is buried in this mound! S.
Wheat buried for three years! What
about mildew and beetles? R.C.
I have thought of them and
considered every other possibility but this is the best I can do. S.
Just bend down a moment. Observe
this beetle crawling on the surface of the mound. Note the garbage and the
spreading patch of mildew. It is high time to take out the wheat and air it.
R.C.
This capital will be my ruin! If only I
could find some method of protecting myself against the thousand destructive
forces of nature! S.
Let me tell you, Crusoe, how we
manage at home. We build a dry and airy shed and shake out the wheat on the
boarded floor. Every three weeks the whole mass is turned over with wooden
shovels. We also keep a number of cats; we set mouse-traps and insure against
fire. In this way we keep the annual depreciation down to 10%. R.C.
But the labour and expense! S.
Exactly! You shrink from the labour
and expense. In that case you have another course. Lend me your wheat and I
shall replace it, pound for pound, sack for sack, with fresh wheat from my
harvest. You thus save the labour of building a shed and turning over the
wheat; you need feed no cats, you avoid the loss of weight, and instead of
mouldy rubbish you will have fresh, nutritious bread. R.C.
With all my heart I accept your
proposal. S.
That is, you will lend me your wheat
free of interest? R.C.
Certainly: without interest and with
my best thanks. S.
But I can use only part of the
wheat, I do not need it all. R.C.
Suppose I give you the whole store
with the understanding that for every ten sacks lent you give me back nine
sacks?
--------------------------------------------------------------------------------
Note
* This obvious fact has been
overlooked by every writer upon interest up to the present day, even by
Proudhon.
--------------------------------------------------------------------------------
S.
I must decline your offer, for it would
mean interest - not indeed positive, but negative interest. The receiver, not
the giver of the loan, would be a capitalist, and my religion does not permit
usury; even negative interest is forbidden. I propose therefore the following
agreement. Entrust me with the supervision of your wheat, the construction of
the shed, and whatever else is necessary. In return you can pay me, annually,
from every ten sacks two sacks as wages.
R.C.
It makes no difference to me whether
your service comes under the heading of usury or labour. The agreement is,
then, that I give you ten sacks and that you give me back eight sacks? S.
But I need other articles, a plough,
a cart and tools. Do you consent to lend them, also, without interest? I
promise to return everything in perfect order, a new spade for a new spade, a
new, unrusted, chain for a new chain, and so forth. R.C.
Of course I consent. All I have at
present from my stores is work. Lately the river overflowed and flooded the
shed, covering everything with mud. Then a storm blew off the roof and
everything was damaged by rain. Now we have drought, and the wind is blowing in
sand and dust. Rust, decay, breakage, drought, light, darkness, dry-rot, ants,
keep up a never-ending attack. We can congratulate ourselves here upon having,
at least, no thieves and incendiaries. I am delighted that, by means of a loan,
I can now store my belongings without expense, labour, loss or vexation, until
I need them later. S.
That is, you now see the advantage
you gain by lending me your provisions free of interest? *
--------------------------------------------------------------------------------
notes:
* Knut Wicksell, Wert, Kapital und
Rente, p.83, "Böhm-Bawerk asserts that present goods are at least equal to
future goods, since, if need be, they can simply be 'stored for use in the
future.' This is certainly a great exaggeration. Böhm-Bawerk does, indeed,
mention that perishable goods, such as ice, fruit, etc., are an exception. But
this exception applies more or less to all foodstuffs. Perhaps, indeed, all goods
except precious stones and precious metals, if kept for future consumption,
require special labour and attention to which must be added the danger of loss
through accidents such as fire."
(Banks now provide, for private use
special store-rooms for gold, precious stones and securities. For the use of
these rooms, rent must be paid. The "present goods" are here inferior
to the "future goods", by at least the amount of this rent.)
--------------------------------------------------------------------------------
R.C.
Of course I do. But the question now
occurs to me, why do similar stores of provisions at home bring their
possessors interest? S.
The explanation lies in money which
is there the medium of such transactions.
R.C.
What? The cause of interest lies in
money? That is impossible, for listen to what Marx says of money and interest:
"The change of value of money
that converts it into capital cannot be derived from the money itself, since
money in its function of medium of payment does no more than pay the price of
the commodity it purchases, and, as hard cash it is value petrified, never
varying. Just as little can the change occur in the second act of circulation,
the re-sale of the commodity. [For in both cases] equivalents are exchanged,
and the commodity is paid for at its full value. We are therefore forced to the
conclusion that the change originates in the use-value of the commodity, after
its purchase and before its sale." (Capital I. VI). S.
How long have you been on this
island? R.C.
Thirty years. S.
I thought so! You still appeal to the
theory of value. My dear sir, that theory is dead and buried. At the present
day it has no defenders. R.C.
What ?, Marx's theory of interest
dead and buried. Even if no one else defends it - I defend it. S.
Well then, defend it not only with
words but also in practice if you wish, in relation to me! I hereby break off
the bargain we have just made. From their nature and destination your goods are
the purest form of what is usually called capital. But I challenge you to take
up the position of a capitalist towards me. I need your stuff. No worker ever
appeared before a capitalist as naked as I stand before you.
Never has there been so clear an
illustration of the relation between the owner of capital and the individual in
need of capital. And now make the attempt to exact interest ! Shall we begin
our bargaining again from the beginning?
R.C.
I surrender ! Rats, moths and rust have
broken my power as a capitalist. But tell me, what is your explanation of
interest? S.
The explanation is simple enough. If
there were a monetary system on this island and I, as a shipwrecked travelled
needed a loan, I should have to apply to a money-lender for money to buy the
things which you have just lent me without interest. But a money-lender has not
to worry about rats moths, rust and roof-repairing, so I could not have taken
up the position towards him that I have taken up towards you. The loss
inseparable from the ownership of goods (there the dog running off with one of
your - or rather my -buckskins!) is born, not by money-lenders, but by those
who have to store the goods. The money-lender is free from such cares and is
unmoved by the ingenious arguments that found the joints in your armour. You
did not nail up your chest of buckskins when I refused to pay interest; the
nature of your capital made you willing to continue the negotiations. Not so
the moneycapitalist; he would bang the door of his strong room before my face
if I announced that I would pay no interest. Yet I do not need the money
itself, I need it only to buy buckskins. The buckskins you lend me without
interest but on the money to buy buckskins I must pay interest! R.C.
Then the cause of interest is to be
sought in money? And Marx was mistaken?
S.
Of course Marx was mistaken, and as
he was mistaken about money, the nervous system of economic life, he was
mistaken about everything. He and his disciples excluded money from the scope
of their enquiry; he was fascinated by the shining 'metal disks', otherwise he
could never have written: "Gold and silver are not by nature money, but
money is by nature gold and silver, witness the coincidence of their natural
properties and its functions."
R.C.
Practice certainly doesn't confirm Marx's
theory, that has been clearly shown by our negotiations. For Marx money is
simply a medium of exchange, but money does more, it seems, than "merely
pay the price of the commodities it purchases," as Marx asserted. When the
borrower refuses to pay interest, the banker can close the door of his safe
without experiencing any of the cares wich beset the owner of goods - that is
the root of the matter. S.
Rats, moths and rust are powerful
logicians! A single hour of economic practice has taught you more than years of
study of the text books.
2. BASIC INTEREST
Orthodox and Marxian economists are
agreed that interest is an inseparable concomitant of private ownership of the
means of production. "Those who reject communism, community of property,
and desire liberty in economic life, must accept an economic system founded
upon interest, that is, capitalism." So say all who have hitherto
investigated the problem of interest. The investigators differ, indeed, widely
in their moral judgement of interest, but that is a matter of secondary
importance which does not help to clarify the problem. Whether interest, as the
socialists aver, is the result of forcible appropriation, of an immoral abuse of
economic power, or whether, on the contrary, the orthodox economists are right
in ascribing it to the economic virtues of order, industry and thrift, is of
little importance to the dispossessed workers, to the proletariat which has to
bear the burden of interest.
In conformity with the above
doctrine Marx and his followers are compelled to seek the origin of interest
(surplus-value) in the factory or, at least, in the separation of the workers
from the means of production; and there, in fact, they claim to have found
it.
Nevertheless I shall now proceed to
prove that interest has no connection with private ownership of the means of
production; that interest is found where no mass of dispossessed workers
(proletariat) exists or has existed; that interest has never been determined by
thrift, order, industry and efficiency. I shall reject the above theories of
capital and show that interest springs from the ancient form of money handed
down to us from the times of the Babylonians, Hebrews, Greeks and Romans, and
that is it protected by the physical, or legally acquired advantages of that
form of money.
Curiously enough Marx also began his
inquiry into the nature of interest by investigating money. (*The
reason why, in the following pages, I frequently probe weak
places in Marx's theory of interest, is simply that, of all the socialistic
theories, his is the only one which has any influence upon the political
struggles of our time. Marx's theory is for the proletariat a dangerous apple
of discord witness the two sections of the German Socialistic party, both
holding Marx's theory of interest as a dogma, and at present settling their
differences with rifles and hand-grenades.) But
unfortunately at the critical moment, in spite of Proudhon's warning, he made a
false assumption. Like the orthodox apologists of interest he assumed that
money and commodities are equivalents.
(*Two commodities are
"equivalents" if neither is in a privileged position in relation to
the other, and if they can be exchanged without profit. If, for example,
usurers, savers or misers, when considering whether it is more advantageous to
hoard commodities or money, are always forced to the conclusion that it is
immaterial for their purpose which they choose, then a dollar's worth of gold
and a dollar's worth of commodities are equivalents. But if savers and
speculators conclude that a dollar's worth of money is for their purpose
preferable to a dollar's worth of commodities, then the equivalence assumed by
Marx does not exist.)
Through this fatal mistake Marx went
astray at the outset.
Marx finds nothing to criticise in
money. Money, as adopted by us from the Babylonians, Israelites, Greeks and
Romans, is a complete and perfect medium of exchange which has from the
beginning brilliantly fulfilled its function. The fact that during the Middle
Ages an economic system founded on money, and consequently the division of
labour, could not develop, because of scarcity of the moneymaterial; that the
prohibition of interest by the Popes paralysed an economic system founded on
money - although this prohibition was simply the forcible establishment of the
equivalence of money and commodities assumed by Marx - is not sufficient to
shake Marx's belief that money is a perfect medium of exchange, that it is a
true, universal "equivalent". Needless to say, therefore, that Marx
recognises no special form of power founded on money; he is forced to deny that
mankind is exploited by a golden "International", composed of
speculators and usurers. A speculative scheme on the StockExchange is to him
mere cheating, not robbery with violence. The speculator operates by fraud, not
force; he is only a thief. Robbery requires the use of force, and force is the
attribute, not of the moneymagnates, but of the owners of the means of
production. Money and commodities are, in short, at all times and in all places
equivalents, and it makes no difference whether the money is held by a
purchaser buying for his own consumption, or by a purchaser buying as a
merchant. In Marx's own words "Gold and silver are not by nature money,
but money is by nature gold and silver, witness the coincidence of their
natural properties and its functions." (* Marx,
Kapital I.II)
Dies Kind, kein Engel ist so rein,
Lasst's eurer Huld empfohlen sein!
This Marxian hymn in praise of gold
and of the gold standard has completely diverted the attention of the
proletariat from money, and has placed speculators, usurers and rogues under
the direct protection of the dispossessed classes. Hence the present tragic
farce wherein, throughout the world, "the watchmen at the gates of
Mammon's temple have been replaced by the Red Guard".
It is a remarkable fact that in the
social-democratic press and propaganda literature the words
"interest" and "money" never occur !
It is still more remarkable that
although Marx's own formula for the normal process of exchange M-WM' (Money,
Wares, Surplus-Money, buying in order to sell at a profit) is a contradiction
of the equivalence he had affirmed between wares and money, he seeks the
explanation of the contradiction elsewhere, namely in the long chain of
intermediate stages.
This "long chain" is
simply the process of production; the chain begins and ends in the factory. The
employer is not, says Marx, one of many exploiters, he is the exploiter.
Exploitation takes place nowhere but in the pay-office.
(* "True commercial capital is
the purest expression of the circuit M-W-M' (Money, Wares, Surplus-Money;
buying in order to sell at a profit). And the movement takes place wholly
within the sphere of circulation. But since it is impossible to deduce from the
circulation alone the conversion of money into capital (the formation of
surplus value), it would appear that merchants' capital is an impossibility as
long as equivalents are exchanged, that it can therefore originate only through
the two-fold advantage gained over both the selling and the buying producers by
the merchant who pushes himself parasitically in between them. If the
transformation of merchants' money is to be explained otherwise than by the
producers being simply cheated, a long chain of intermediate stages is
necessary." Capital I.V.)
To explain the contradiction felt by
Marx between the formula M-W-M' and the alleged equivalence of money and
commodities I shall not require this chain of intermediate stages; I shall
dangle my hook before the mouth of interest and draw it directly, visible to
all men, from its element. I shall reveal that the force expressed by the
formula M-W-M' lies directly in the act of exchange; shall show that money in
the form we have blindly adopted from antiquity is not an
"equivalent"; that it can circulate only according to the formula
M-W-M'; that every nation which, to stimulate the division of labour and to
facilitate the exchange of commodities, adopted this form of money, was
inevitably forced into capitalism, into an economic system based on interest.
The force that makes money circulate
according to the formula M-W-M', that is, the capitalistic quality of money,
originates as follows:
Money is the essential condition of
a highly developed division of labour.
The physical properties of the
traditional form of money (metal money and paper-money) allow it to be
withdrawn indefinitely from the market without material cost of storage;
whereas producers (workers), to whom money is essential for effecting
exchanges, are compelled, by the constantly increasing losses connected with
the storage of wares, to create a demand for money.
(* Wares decay, at different rates
indeed, but with some unimportant exceptions (precious stones, pearls, precious
metals), they all decay. Care bestowed upon the wares can retard, but cannot
prevent their decay. Rust, rot, breakage, damp, drought, heat, frost, worms,
flies, ants, moths, beetles, fire, etc. join in the work of destroying wares.
If a merchant closes his store for a year, he must write off 10-20 % of his
capital because of this decay, in addition to the outlay for rent and taxes.
But if the possessor of money closes his safe for a year he suffers no loss.
Gold treasure found among the ruins of Troy has not lost demonstrably in weight
and is worth 2790 marks per kilogram at the counters of the Reichsbank
today.
It is often stated in this
connection that as wine becomes more valuable during storage, it is therefore,
apparently, an exception to the general rule that the storage of wares always
means a loss. Wine, however, (like a few other products) is not a manufactured
product but a natural product which, at the beginning of the storage period,
has not reached the stage of development at which it becomes fit for human
consumption. The juice that flows from the wine-press into the casks is must
which only gradually becomes wine. It is this process of converting wine into a
finished product that increases its value, not the storage itself. If this were
not so, the increase in value would continue, which is not the case. The
storage itself causes, as always, expense: rent for storage space, casks,
bottles, years of care, breakage, etc.)
The merchant can therefore force the
possessors of wares to make him a special payment in return for the fact that
he refrains from arbitrarily postponing, delaying, or, if necessary, preventing
the exchange of wares by holding back his money.
Interest on commercial capital is
composed of this regular payment which, distributed over the total annual
transactions, amounts, as we know from thousands of years of experience, to
about 4 or 5% per annum of the capital sum involved.
This special payment, sharply to be
distinguished from commercial profit (*Commercial profit is what
remains over for the merchant after he has paid the interest on his capital.
The profit of a merchant dealing exclusively in merchandise bought on credit is
pure commercial profit, for he must hand over the interest spoken of above (No.
3) to his capitalist. He is thus a sort of bank-messenger for his capitalist.), cannot of course be exacted by the ordinary purchaser impelled by
his bodily wants (also called consumer), for here the possessor of money can as
little postpone or renounce the purchase of wares as the producer can postpone
or renounce their sale. Only the merchant approaching the market as owner of
money can exact this tribute - the man who buys as a merchant, that is, with
the purpose of selling again; the man who is free to buy, but can, if he thinks
fit, abstain from buying, without incurring the pangs of hunger; the man, in
short, who buys a cargo of wheat although one sack of wheat may suffice for his
personal consumption. The merchant is of course in need of commercial profit,
and he can obtain it only through the purchase of commodities. The impulse
stimulating the merchant's purchases of commodities is not, however, physical
necessity, but the wish to obtain the commodities as cheap as possible and,
with this object, to use as a weapon every turn of the market and every
weakness discoverable in the seller. If the seller's position is weakened by
waiting, the merchant lets him wait. In general the merchant does all he can to
increase the embarrassment of the seller (producer, worker) and the facts set
forth under the above three headings are a constant source of embarrassment.
The consumer, under the pressure of personal wants, cannot wait, although his
money would allow him to do so; neither can the producer wait, although his
personal wants would in many cases allow him to do so. But the possessor of
money coming forward as a merchant, the holder of the universal, essential
medium of exchange, can wait and thereby embarrass both producer and consumer
by holding back the medium of exchange. And in commerce one man's embarrassment
is another man's capital. If producers and consumers were not separated by time
and place they would be able to manage, as still happens in barter, without the
merchant's money; but as things stand at present, the intervention of the
merchant, and consequently interest, is, for by far the largest part of
production, a necessity.
Because of the latter fact we can
leave the consumer's money quite out of our calculation. All commodities and
all money pass through the hands of the merchant. For this reason we need here
consider only the laws of circulation of the merchant's money.
(*Readers with any difficulty in
recognising that merchant's money and consumer's money obey different laws of
circulation should reflect a moment upon the mechanism by which savers' money
is drawn back into circulation as a medium of exchange.)
Having established these facts I
shall next answer the question: What circumstances limit the amount of interest
that money can exact for performing the function of exchange ? The reason for
considering this question at once is that the answer best reveals the true
nature of interest on money.
If money is capital because it can
arbitrarily interrupt the exchange of commodities, it will be asked why
interest does not rise by the full amount of the advantage we derive from the
use of money in our economic system; an advantage measurable by the difference
in efficiency between division of labour and primitive production. Similarly
the question is justified, why landowners, when fixing their rents, do not in
every case apply the law of the "iron wage"; or why the shareholders
in the Suez Canal, when fixing the canal dues, are not exclusively influenced
by competition of the sea-route around the Cape of Good Hope.
But the tribute which money claims
for its use follows other laws than those governing the use of land; it more
resembles the tribute exacted by the robber barons of the Middle Ages.
Merchants who were forced to use a road which passed the baron's castle were
thoroughly plundered; dues of 30, 40, 50% were exacted. But if the merchant had
a choice of other roads, the baron became more modest, he guarded his road,
improved its surface, built bridges, protected it from other robbers and, if
need were, even reduced the toll, to prevent the merchant from avoiding the
road altogether.
It is the same with money; money
also knows that competitors will appear if it sets its tribute too high.
(I shall prove later than in
money-lending there can never be competition. The competitors just mentioned
make their appearance, not when money is being lent, but when it is being
exchanged for wares).
It is clear that the division of
labour could be much further developed than at present. The gold standard is a
world standard, so when considering it we must consider the economic system of
the whole world. But three-quarters of the inhabitants of the world still cling
to primitive production. Why ? Partly because the exchange of commodities by
money is too heavily burdened by interest. This expense must cause producers to
forego the production of commodities for exchange (wares) in certain branches
of their activity, or even in general, and to continue the primitive system of
production. The choice between production of goods for home use and wares for
market depends on an arithmetical calculation, and the interest with which the
production of wares is burdened may often enough lead to preference being given
to primitive production. Many German small farmers for example, may prefer to
feed pigs with their potatoes and to kill the pigs for their own use, if meat
is slightly increased in price because of the interest exacted by the agent of
exchange. The small farmer will then produce fewer wares (potatoes for the
market) and more goods for his own consumption. For this reason he will require
less money.
This part of production must not,
even in Germany, be underestimated, and here money must moderate its demand for
interest, to avoid forcing modern production back into primitive production. In
Asia and Africa the bulk of the population acts like the German small farmer
described above.
If, now, the possessors of money
demand too large a tribute from the wares, that part of present-day production
which oscillates about the marginal utility of the division of labour is
abandoned, and primitive production takes its place.
The demand of too large a tribute by money
reduces the production of wares (commodities for exchange) and correspondingly
increases primitive production. This means that the supply of wares decreases.
Prices therefore rise.
For the present we simply register
this fact.
Barter has the same effect upon the
demand for money, for the medium of exchange, if money claims too high a rate
of interest. Money indeed owes its existence to the difficulties of barter. It
was invented to overcome these difficulties. But if money claims too high a
tribute for performing the work of exchange, barter can often successfully
resume competition with it, especially when, as in many parts of Asia and
Africa, producers and consumers are not separated by time and place. The more
the exchange of products is burdened with money-interest, the easier it is for
barter to challenge the supremacy of money. Products sold by barter reach the
consumer without the payment of interest. For
which of the parties should pay
interest ? (* If potatoes are bartered for fish, and each party
burdens his product with 10 % interest, the two demands for interest cancel
each other. But this by no means excludes the possibility of interest derived
from loans, as distinct from interest derived from barter.) It is clear, therefore, that if money is to replace barter, it
cannot demand any tribute it chooses, especially as the owners of products can
overcome the obstacle to barter, their separation in time and place, by arranging
to meet on certain days in certain places (market-days).
(* Barter is not quite so difficult
as is usually represented. The difficulty that those who hold the products I
need, do not always need my products, or do not need them in just the quantity
corresponding to the quantity (often indivisible) of products they have to
offer, has been much exaggerated. In reality this difficulty is resolved by the
appearance of the merchant. For a merchant who buys everything can sell
everything. He can always pay me with what I need. If I bring him an
elephant-tusk I can obtain any of the commodities in his shop, and in just the
quantity I require. At the present day commerce is carried on in this manner
among the German colonists of Southern Brazil. These German colonists seldom
receive money for their produce.)
In this way they demolish the
foundation upon which money is built, namely the demand for the medium of
exchange embodied in the wares. Commodities reaching the consumer by barter are
lost to money, just as a gypsy in his cart is a customer lost to the railway.
For our present purpose we need not
calculate what fraction of the world's production oscillates between
barter-sales and money-sales, what quantity of commodities is excluded by too
high a demand for interest from using the medium of exchange. It is sufficient
if we have demonstrated that barter is a competitor of money whose chances of
success increase in proportion to the amount of interest demanded by money. If
interest rises, many commodities are diverted from money-sales to barter-sales,
and the demand for money decreases. Prices therefore rise, exactly as with an
increase of primitive production. This fact also, we are content for the
present simply to record.
Bills of exchange have the same
effect as primitive production and barter, if the claims of money are raised
too high. Commodities sold by means of bills of exchange also escape the
interest-tribute to money - and a high rate of interest stimulates a more
extended use of bills of exchange.
Bills of exchange are not, indeed,
as safe and convenient as money; in many cases they cannot replace money at
all, as is apparent from the fact that they are frequently exchanged
(discounted) at the bank for money, although they suffer thereby a deduction.
This would not happen if the bill of exchange could always replace ready money.
Nevertheless, bills of exchange, particularly in wholesale commerce and as a
reserve, have often only small disadvantages in comparison with money. A slight
rise in the rate of interest can in such cases cause a preference for bills of
exchange.
Money-interest affects the use of
bills of exchange as an increase of railway fares affects the use of canals.
The higher the rate of interest, the greater is the stimulus to avoid this
tribute to money by the use, in commerce, of bills of exchange. For the same
reason everything that artificially increases the natural disadvantages of
bills of exchange (in comparison with money) must strengthen the position of
money and increase the tribute it demands. If the rate of interest is lowered
to 5% by the competition of bills of exchange, it will rise to 5.25 - 5.5 - 6%,
if the use of bills of exchange is made difficult by alarming news or by a
stamp-duty. The greater the insecurity of bills of exchange, the higher is the
rate of interest demanded by money; the more heavily bills of exchange are
burdened by stampduties, the higher are the claims of its competitor, that is,
the higher the rate of interest. If we burden bills of exchange with a tax of
1%, the deduction made by the bank when changing a bill of exchange (discount)
will rise 1%. If bills of exchange are taxed 5%, the deduction will rise from
5% to 10%. (Unless the other competitors of money, barter and primitive
production, intervene).
(For this reason the State is
illogical in proposing to increase its revenue by a stamp-duty upon bills of
exchange when at the same time it complains of being able to place its loans
only at a high rate of interest. The State, as a debtor, should, on the
contrary, abolish the tax upon bills of exchange in order to reduce the
interest upon its loans. What the State lost in stamp-duties it would gain a
hundred-fold by the decrease of interest upon its loans. At the same time the
burden of interest upon the whole nation would be lightened).
If, now, instead of a tax, we
imagine a premium (of any kind) upon bills of exchange, it is clear that, with
such a premium, the circulation of bills of exchange could also be stimulated
or retarded; stimulated by raising the premium, retarded by lowering it.
But is not the saving of interest
afforded to commerce by the circulation of bills of exchange such a premium,
rising and falling with the interest upon money ? The circulation of bills of
exchange increases, therefore, in direct proportion to the increase of interest
upon money.
But wherever bills of exchange
circulate, corresponding quantities of commodities circulate in the opposite
direction. These commodities also, are lost to the demand for money. Money has
been deprived of them by bills of exchange. There is thus a corresponding
decrease in the demand for ready-money. Prices therefore rise in proportion to
the increase in the circulation of bills of exchange, and the circulation of
bills of exchange increases with the increase of interest upon money. This
fact, also, we at present simply record.
Money is not, therefore, an absolute
monarch of the market. It has competitors, and for that reason it cannot set
the rate of interest as high as it chooses.
The objection may here be made that
money is often, particularly in modern cities, indispensable, that in most
cases it could even claim the larger share of commodities as payment for
performing the function of exchange without causing a return to barter or
primitive production. Even if the deduction (discount) were 50%, money could
not, in many cases, be replaced by bills of exchange.
And bills of exchange pass only from
one trusted hand to another. They are not sufficiently divisible for the needs
of retail commerce. They are subject to certain laws and bound to certain times
and places. All this greatly restricts their radius of action.
These facts could be used in support
of the objection that in all such cases payment for the function of exchange
would be much higher than at present, if money really exacts interest because
it can arbitrarily postpone the exchange of wares.
But this objection leaves out of
account a fact which we learned in the third part of this book, namely that a
general rise of prices forces money into the market. A general rise of prices
of commodities means for the possessor of money a loss exactly proportionate to
the rise of prices, and the only way of avoiding this loss is to offer the
money in exchange for commodities. A general rise of prices means, for our
traditional form of money, a compulsory circulation similar in many of its
effects to the compulsory circulation of Free-Money. During a rise of prices
everyone endeavours, by purchasing commodities, to avoid the loss which
threatens his money-by passing on the loss to others.
We can therefore say that to raise
the tribute claimed by money above a certain level automatically liberates the
forces which again reduce the tribute.
The reverse is true when
money-interest falls below this limit. Owing to the lessened cost of commerce,
the division of labour is introduced where primitive production was hitherto
profitable, and money-sales take the place of barter. At the same time bills of
exchange lose their attraction (with money at 0% they would disappear). These
circumstances, namely an increase in the production of wares (at the cost of
primitive production) and a simultaneous increase in the offer of wares for
ready money (at the cost of the circulation of bills of exchange) would depress
prices and impede the exchange of wares. And the resulting embarrassment of
producers would again bring money into use with increased interest.
The forces liberated by
money-interest (through its effect upon the interest-free competitors of money,
and consequently upon prices) have thus an automatic regulating effect upon
interest itself. so that the upper limit of money-interest is also its lower
limit. (The fact that the rate of interest on bills of exchange [discount] is
subject to great variations, is not, as we shall show later, a proof to the
contrary).
Interest upon money must therefore
always fall back to the point at which it stimulates or restricts primitive
production, barter, or the circulation of bills of exchange.
There is even at the present day a
general opinion that the rise or fall of interest is determined by competition
among those who lend money.
This opinion is wrong. There is no such thing as
competition between money-lenders; competition is here an impossibility. If the
money offered for loan by capitalists is drawn from the existing circulation,
the capitalists, by lending this money, merely fill the holes they have dug by
withdrawing it. Ten, a hundred or a thousand money-lenders mean ten, a hundred
or a thousand holes dug by these moneylenders in the path that money has to
pursue. The greater the amount of loan-money offered, the larger are these
holes. (* In the celebrated crisis which swept over the United States
in 1907, it was Morgan who "hastened to the rescue" of the Government
with a loan of 300 million dollars. Where did these dollars come from ? They
were urgently needed dollars. Morgan had previously withdrawn them from
circulation and thereby brought his country into trouble. When the slump in
stocks had taken place and the differential gains been pocketed, the rogue
generously, out of pure patriotism, offered them to the Government.) Thus, other things being equal, a demand for loan-money must always
arise exactly equal to the amount of money that the capitalists have to lend.
Under these circumstances we can no longer speak of competition capable of
influencing the rate of interest. If this were competition, the fact that
changes of residence take place at Martinmas should influence rents. But rents
are not influenced, since the increase in the number of those seeking houses is
balanced by the increase in the number of vacant houses. These changes of
residence in themselves have no influence whatever upon rents, and it is the
same with the competition of money-lenders. Money is here merely taking part in
a general Martinmas flitting.
But if the money offered for loan is
new money, say from Alaska, this new money will drive up prices, and the increased
prices will force all who are obliged to borrow money for an enterprise to
increase the amount of the loan demanded, by the amount of the rise of prices.
Instead of 10,000 dollars, a builder will need 11-12-15,000 dollars to build
the same house, so the increased supply of loans due to the new money will
automatically cause a corresponding increase in the demand for loans. In this
way the influence of the new money upon the rate of interest is soon cancelled.
The fact that an increase of the quantity of money in circulation (due to
discovery of gold or issue of paper-money) not only does not cause a fall but
actually causes a rise in the rate of interest will be explained later.
Competition between money-lenders
which could affect the rate of interest does not, therefore, exist; such
competition is an impossibility.
The only competition which can
restrict the power of money is competition in the three forms already
enumerated; primitive production, barter and bills of exchange. An increase in
the tribute claimed by interest automatically causes an increase of primitive
production, an increase of barter and an increased circulation of bills of
exchange. The result is a general rise in the price of commodities which makes
the possessors of money more accommodating. (For the better understanding of
this sentence we refer the reader to a later chapter "Components of Gross
Interest").
Only one straight line can be drawn
between two points; the straight line is the shortest, and the shortest -
translated into economic terms - is the cheapest.
The shortest and therefore the
cheapest road between producer and consumer is money. (With primitive
production, goods do, indeed, make a still shorter journey, namely from hand to
mouth. But this form of production is less fruitful than the production of
wares which results from the division of labour).
The other roads (barter, bills of
exchange) which commodities can use to reach the consumer are longer and more
expensive. If it were otherwise, if ready money had no advantages, as a medium
of exchange, over bills of exchange, why would anyone give $105 in bills of
exchange for $100 in money?
But the shortest and cheapest road
can be closed by the possessor of money, and he never leaves it open unless he
is paid for the advantages of the straight road, money, over the devious roads.
If he demands more than this difference, commodities choose the longer road; if
he demands less, money is overburdened, that is, commodities which would
otherwise have been sold by means of bills of exchange and so forth, now claim
ready-money. The demand for money increases, prices fall, and when prices are
falling, the whole circulation of money is arrested.
Money claims interest for each time
it is used, somewhat as a cab claims a fare. Interest is counted among the
general expenses of commerce and collected with these - it is immaterial
whether as a deduction from the price paid the producer or as an addition to
the price demanded from the consumer. As a rule the merchant can estimate by
experience the price which he can obtain from the consumer. From this price he
deducts the costs of commerce, wages for his own work (net profit of commerce),
and interest. Interest is calculated by the average time, known to the merchant
by experience, which elapses between the purchase and the sale of his
merchandise. What remains is for the producer. If, for example, the retail
price of a box of cigars in Berlin is ten marks, the cigarmanufacturer in
Munich of course knows that he cannot claim the full ten marks for himself. He
must reduce the price to the cigar-merchant in Berlin sufficiently to enable
the latter to pay for carriage, shop-rent and his own services, from the
difference between the factory price and the retail price. And something more
must remain, since the cigar-merchant is obliged to "put money into his
business". This money usually comes directly or indirectly from the banks
or savings-banks which of course give it only for interest. The cigar-merchant
must obtain this interest from the above mentioned difference in price. If that
is not possible with present prices, he waits; and while he waits, the
manufacturer and consumer must also wait. Not a single cigar can pass from the
factory to the lips of the smoker without paying a tribute to money. Either the
manufacturer must moderate the price asked for, or the consumer must increase
the price offered. The capitalist regards the outcome with indifference, for in
either case he receives his tribute.
Interest is therefore simply added
to the other costs of commerce. These are, in general, the reward for work
done. The carter feeds his horse, greases the axles, sweats and curses; it is
only just that he should be paid. The merchant keeps his shop, pays his rent,
broods and calculates; he, also, should receive something. But the banker, the
savings-bank, the money-lender-what is their service ?
A king stands beside the barrier; he
obstructs the stream of commerce across the frontier and says "The tithe
is mine!" A moneylender stands beside his safe, he obstructs the exchange
of commodities which requires its contents, and says "Interest is mine
King and money-lender render no service, they exact a tribute simply by
obstruction, interest is thus, like import-duties, a tribute, with the
difference that the king uses import-duties to pay State-expenses, whereas the
capitalist keeps the moneyinterest for himself. Money-interest is our payment
for the activity of the capitalist - and this activity consists of putting
obstacles in the way of commerce.
Of the three competitors of money
that set the limits to money-interest, which is the most important ? In
commercially developed countries and in ordinary times, the bill of exchange,
in less developed countries, the other two competitors. Suppose, for example,
Germany were a self-contained economic State with its own paper-money standard.
Without bills of exchange money would then be able to exact a very high tribute
before primitive production and barter could intervene with sufficient force to
cause the rise of prices necessary for the liberation of money. (*
For the better understanding of this statement I again refer to the chapter at
the end of this book on "The Components of Gross Interest.") One is even justified in assuming that without bills of exchange,
(including, of course, credit sales, deferred payments and so forth), money
would, under such conditions, raise the interest-tribute until it very nearly
equalled the advantage derived from the division of labour - as is strikingly
proved by the abandonment of work in times of crisis. Primitive production and
barter are only quite exceptionally, and to a small extent, of use to the
unemployed. An unemployed worker can mend his trousers, shave himself and cook
his own meals. He can bake his own bread, perhaps teach his own children and,
instead of going to the theatre he can write a comedy for his family-if hunger
leaves him so disposed.
But if bills of exchange are with us
the most important regulator of interest, primitive production and barter are
the chief regulators of interest in undeveloped countries such as Asia and
Africa, where bills of exchange are little used. That primitive production and
barter must be effective regulators in such countries is plain from the fact
that in earlier times, when the division of labour had been adopted only by a
fraction of the population, for example under the Romans, or in England under
Queen Elizabeth, the rate of interest was about what it is at the present day.
(The facts are set out at the end of this book).
The constancy of the rate of pure
money-interest is most remarkable and justifies the assumption that the three
totally different regulators of interest, adapted to such totally different
stages of culture, are interdependent and supplementary. For example, a highly
developed division of labour, not capable of great further extension, makes
barter and primitive production impossible, but produces the degree of culture,
the social, legal and commercial organisation, under which the circulation of
bills of exchange expands and prospers. The 36 billion marks of bills of
exchange which circulated in Germany in 1907 are a better measure of the
development of German commerce than the network of railways and other external
signs of progress.
On the other hand where the stage of
culture excludes the substitution of bills of exchange for money, primitive
production and barter are the faithful guardians that prevent money from
raising its claim for interest above a certain level.
Let us summarise what has been said
in this section:
Money-interest is the product of an
independent capital, namely money, and is comparable with the tolls exacted in
the Middle Ages by robber barons, and until lately by the State, for the use of
the roads. Interest on money is not influenced by interest on so-called real
capital (houses, factories) though the converse, as we shall see later, is
true. The competition of money-lenders has no influence upon money-interest.
Money-interest is limited only by the competition of the other forms of
exchange, namely barter and bills of exchange, and of primitive
production.
When money is lent, the ownership of
the money is changed, but nothing is changed in the money itself; just as
nothing is changed if the toll-gate is closed and the toll collected, not by
the toll-keeper himself, but by his wife. The substitution of bills of exchange
and barter, on the contrary, is not an ineffective personal change of this
kind, for it means effective competition to money through the provision of
other roads for the exchange of commodities.
Through the rise of prices caused by
bills of exchange, primitive, production and barter, the circulation of money
is subjected to an economic compulsion which prohibits the abuse, beyond
certain limits, of the power of money, even in relation to commodities which
cannot be exchanged by way of barter or bills of exchange. It is here the same
as with wage-earners whose wages are determined by the proceeds of labour of
emigrants even although they themselves do not all threaten to emigrate. (See
Part 1, Distribution).
Money-interest is exacted from the
wares, that is, directly from the circulation of wares and money. (We have
already noted that Marx denied this possibility). Interest upon money is quite
independent of the existence of a proletariat deprived of the means of
production; it would be no whit less if all the workers were provided with
their own instruments of production. Interest on money would in that case be
levied by the merchant (possessor of money) from the workers when they were
handing him over their produce. It would be levied because the merchant, by
withholding his money, could prohibit the exchange of the wares produced by the
workers - without direct loss to himself, and with direct, inevitable loss to
them, since all wares, with a few unimportant exceptions, lose daily in
quantity and quality and, in addition, cause considerable expense for storage
and caretaking.
Interest upon money we shall call from now
on "basic interest". (* The use of the term basic
interest for moneyinterest, in contrast to the interest on "real"
capital (houses, factories, and so forth) will serve to emphasise the
distinction between the two forms of interest.)
3. TRANSFER OF BASIC INTEREST TO THE WARES
If a commodity is to be burdened
with basic interest it must of course be capable of bearing this burden, that
is, it must meet with market conditions permitting the payment of its cost
price, plus basic interest, out of its selling price. The market conditions
must allow the circulation of money in accordance with the formula Money -
Wares - Surplus Money.
This is obvious. For if it were not
so, money would refuse to act as the intermediary of exchange, and the
consequent embarrassment of producers would cause them to increase the
difference between the cost price and the selling price of wares until the
selling price, besides the other costs of commerce, could bear the cost of
basic interest.
This whole process is automatic. For
our traditional form of money, our medium of exchange, being by nature capital,
allows no wares to enter commerce without its brand, so wares must necessarily
always find the market conditions which permit them to appear as
interest-exacting capital - at least to the consumer, since he pays the price
which the producer receives, plus interest. To the producer, on the contrary,
wares (his produce) must appear the reverse of capital (negative capital) since
he receives the price paid by the consumer, less interest. Money has wrested
this part of his produce
from him. But a thing that must pay
interest cannot properly be called capital. If commodities were capital, they
would also be capital in barter, and can anyone imagine how interest could be
exacted in
barter? (* Marx does indeed deduce capital
in some mysterious way from barter !) Two forms of true
capital, when confronted, neutralise each other. Rented land and money, for
example, exchange for one another without interest. Each taken separately is
capital, but they cannot meet each other as capital. Money, however, is always
capital in relation to wares.
It should be noted that even to the
consumer wares have only the appearance of capital; if he examines the matter
more carefully he soon finds that wares are simply the quarry of
money-capital.
Every producer is also a consumer,
and just as in barter each party receives the other party's whole product, so
every producer must at present regard the full price paid by the consumer as
the return service for his own product. If he does this, wares must seem to him
negative capital. Wares then appear in their true character namely as
bank-messengers for money-capital. Wares collect basic interest from the
consumer, not for the producer but for the possessor of money (medium of
exchange), somewhat as a postman collects the price of a cash-on-delivery
parcel. The weapon with which money arms its messenger is the power of breaking
the connection between producer and consumer by withdrawal of the medium of
exchange.
If the mediator of exchange, the
capitalist, is deprived of the power of interrupting the exchange of wares for
the purpose of exacting basic interest - as is achieved by Free-Money - money
must give its services free of cost and the wares can be exchanged as in
barter, without the payment of interest.
To facilitate the free exchange of
commodities, the State at present charges the owners of bullion nothing for the
conversion of their metal into coin. If the State substituted for this free
coinage an annual payment for coinage of 5%, money would really act free of
charge as the instrument of exchange.
4. TRANSFER OF BASIC INTEREST TO SO-CALLED REAL
CAPITAL
A commodity is bought with money and sold
again to the consumer loaded with interest. When the commodity has been sold.
money is again free for a new foray. (* According to this, the
consumer must always spend more money than as producer he receives. The
difference, consisting of basic interest, the producer obtains by producing and
selling more commodities than he buys. The surplus so delivered by the
producers is bought by the money-capitalists for their personal use with the
money which they receive as interest. It is the same with the cost of commerce
paid by the consumer.) This is the true meaning of
Marx's formula Money - Wares - Surplus Money.
Basic interest thus exacted by money
from the wares is not booty snatched on one occasion only, it is a perpetually
flowing fountain and the experience of thousands of years permits us to
estimate it on the average at 4% to 5% annually of the money sum involved. The
interest that the merchant exacts directly from the wares as they pass through
his hands is the true and full basic interest. What the merchant delivers to
his capitalist is basic interest less the cost of collections (*
We shall see later that the cost of collection is not inconsiderable. The chief
item is the devastation caused in economic life by commercial crises.); just as the tolls which the toll-collector delivers to the State
are not the full toll-money.
But if someone with his money-capital
buys bricks, lime, wheelbarrows, not in order to sell them again but to build a
tenement house, he voluntarily puts an end to the periodic return of the money;
he gives up the perpetually-flowing fountain of interest. He has then a house
but no money, no source of interest. Obviously he will give up such a valuable
possession only on condition that the house brings him in the interest which,
experience shows, the money necessary for its construction can always exact in
commerce. If money in the course of a year can exact 5% interest from the
wares, the house must be able to exact the same tribute from its tenants, the
ship from its freight, the factory from
wages; (* I use this expression
unwillingly, as it is ambiguous. It is better to speak of the price which the
employer pays the workmen for their produce, since it is for this, the
completed, tangible achievement, not for the activity of the workman that the
employer pays.) otherwise money simply remains in the
market with the wares, and the house is not built.
Money therefore lays down this
obvious condition for the construction of a house, or factory, or ship, that
the house must be able to exact from its tenants, or the factory from its
workmen, or the ship from its freight, the same interest that money itself can
at any time exact from the wares. No interest means no money for houses,
factories, ships. And without money how could anyone collect and put together
the thousand different articles necessary for the construction of a ship, a factory,
a house ? Without money it is inconceivable that a house or ship or factory
could ever be constructed, so the foundation capital of every capitalistic
undertaking consists of a sum of money. For the millions of factories, ships,
rented houses, it may be said, "In the beginning was the money."
But if no money is given for the
construction of houses unless they can exact the same interest that money
itself exacts from the wares, building is suspended and the consequent scarcity
of houses raises rent; just as the scarcity of factories reduces wages.
Houses, ships and factories, in
short all so-called real capital, must therefore necessarily yield interest
equal to the tribute which money can impose as basic interest upon the exchange
of wares.
Houses, factories, machinery are
capital. They do not, like the wares, collect interest as bankmessengers in
order to hand it over to the possessors of money, they collect it for the owner
of the house or factory. This power does not, however, lie in the
characteristics of such things, but in the fact that money here, precisely as
with the wares, prepares the market conditions necessary for the collection of
interest. The ratio of houses to tenants, of ships to freights, of workmen to
factories is regularly, artificially and inevitably so constituted by the
present form of money that demand (tenants and workers) is always faced with an
insufficient supply.
The traditional form of money
(medium of exchange) provided by the State protects all existing houses from
the interest-reducing competition of new houses. Money takes jealous care that
its creatures shall not degenerate; it is given only for the construction of as
many houses as can be built without causing the yield of interest to fall below
basic interest. This fact is confirmed by thousands of years of
experience.
So-called real capital is therefore
anything rather than "real". Money alone is true real capital, basic
capital. All other capital objects are completely dependent upon the
characteristics of the existing form of money; they are its creatures; they
receive the title of nobility, the title of capital, from money. Deprive money
of the privilege of forbidding the workers to build new houses, tear down the
barrier raised by money between the workers and real capital, and the supply of
such things will increase until they lose the characteristics of capital.
The statement sounds monstrous, and
one must be very sure of one's reasoning to make it, that the houses,
factories, ships, railways, theatres and power-stations, in short, the whole
dark and mighty ocean that one can overlook, say, from the Kreuzberg in Berlin,
is capital, and must necessarily be capital, only because money is capital. Is
it possible that this mighty ocean of capital, at least 100 times as great as
money-capital, yields interest only because money yields interest ? The
statement sounds improbable.
But the apparent improbability at
once decreases if we reflect upon the antiquity of money, upon the fact that
for three or four thousand years money has by artificial means regularly and
automatically restricted the construction of houses, so that demand has always
exceeded supply, and houses, for this reason, have remained capital.
And the improbability disappears if
we recall to mind the economic glacial period (as we have named the Middle
Ages) and the thousand economic crises caused, since then, by money. Real
capital worth billions of dollars would have been constructed but for forced
unemployment; it is the absence of this real capital, due to money, that
permits the existing real capital to exact interest.
The scarcity of houses, ships,
factories, revealed by the fact that these things yield interest, is the result
of a cause which has been uninterruptedly at work for thousands of years.
If during the years of crisis 1873 -
1878, the starving and unemployed masses had been allowed to build houses and
machinery, would not house-rent have been forced down by this addition to
supply ? And those were but five years! Nor must it be forgotten that the other
causes of economic crises, unconnected with interest (as described in the third
part of this book: "Money as it is") act in the same direction, that
is, restrict or prevent exchange.
Clearly, therefore, so-called real
capital produces interest because it can be created only by spending a sum of
money, and because this money is capital. So-called real capital has not, like
money, the power of extorting interest. Real capital, just as the wares merely
makes use of a state of the market forcibly established for its own ends by
money, namely an artificial limitation of the production of real capital with
the aim of keeping the supply of it constantly below the demand.
By forced unemployment our
traditional form of money, stamped and managed by the State, inevitably creates
the homeless and destitute mass of workers, the proletariat, essential for the
continuance of the capitalistic character of houses, ships, and factories.
Money is indispensable for the
formation of this real capital, and without interest there is no money.
But real capital cannot exist
without a proletariat. (* Proletariat: workmen deprived of
their own means of production.) Consequently the
indispensability of money must produce the proletariat necessary for interest
upon real capital and for the circulation of money.
Money creates a proletariat, not
because the burden of interest deprives the masses of their property, but
because it forcibly prevents the masses from constructing property for
themselves.
To account for the existence of the
proletariat we need not have recourse to the facile expedient of the alleged
historical explanation; for the proletariat is a regular concomitant of the
traditional form of money. Without a proletariat; no interest upon real
capital; without interest: no circulation of money; without the circulation of
money: no exchange of commodities - the result of which is impoverishment.
In former times, no doubt, the sword
was a powerful factor in the production of a proletariat. The throne
(legislation) and altar also helped. Even in our time attempts are still made
to put land-rents under the protection of the law; wheat-duties are devised to
deprive the people of the weapons they have forged against rent, namely ships,
railways and agricultural machinery. A right to exact rent is set up against
the right to work and the right to eat. But even without this aid, capital
would not have been the poorer by a single proletarian. A few more economic
crises, a few more thousand superfluous workers, would have been effective
substitutes for legislation and the sword. Even without the sword and
legislation money-capital has sufficient intrinsic power to create the
proletariat necessary for real capital. With the impetus of a natural agent
money creates a proletariat. Metal money and a proletariat are
inseparable.
So-called real capital consists, no
doubt, of very real and indispensable objects, but as capital these objects are
anything rather than real. The interest at present produced by them is the
creature of basic capital, of money.
5. COMPLETION OF THE FREE-MONEY THEORY OF INTEREST
We have called money basic capital
because it prepares the road for so-called real capital, and asserted in this
connection that real capital owes its interest-earning capacity solely to the
fact that money, through forced crises, forced unemployment, that is, through
fire and sword, prepares the market conditions which enable real capital to
exact interest equal to basic interest. But we must also be able to prove that
interest upon real capital is so governed by basic interest that it must
necessarily again conform to basic interest if, for any reason, it temporarily
deviates therefrom.
For we assert that demand and supply
determine interest on real capital - and thereby recognise that interest is
subject to many influences.
What we have to prove, therefore, is
this: That if from other causes interest on real capital rises above basic
interest it must inevitably, from the nature of things, fall again until it
reaches the level of basic interest. And conversely, if interest on real
capital falls below basic interest, it will be automatically raised again to
this level by money. Basic interest is therefore always the maximum and the
minimum return usually to be expected from real capital. Basic interest is the
point of equilibrium about which interest on all forms of real capital
oscillates.
But if this is so, we must also be
able to prove that if the artificial obstacles to the formation of socalled
real capital, caused by the present form of money, are removed, the supply of
such capital, resulting from the now untrammelled work of the people, will sooner
or later, without the intervention of any other agent, cover demand in the
sense that interest throughout the world, wherever there is freetrade and
freedom of movement, will fall to zero.
(Capital interest is an
international quantity, it cannot be eliminated by one country alone. If, for
instance, houses in Germany yielded no interest, and such interest were still
obtainable in France, no houses would be built in Germany. German capitalists
would send their surplus across the frontier by purchasing French bills of
exchange with the proceeds of which they would build houses in France).
We must therefore prove:
That the power and means exist of
drowning interest in a sea of real capital, within a reasonable time. That the impulse or will to produce real
capital, such as tenement-houses, factories and ships, does not decrease when
such things no longer yield interest.
That interest on real capital can at
any time deviate in an upward or downward direction from basic interest is
easily proved as follows:
Let us suppose that three-quarters
of mankind are carried off by the plague. The present ratio between proletariat
and real capital would be fundamentally changed; to every tenant there would be
four houses, to every farm labourer four ploughs, to every gang of workmen four
factories. Under these circumstances real capital would no longer yield
interest; the competition of house-owners would depress rents, and the
competition of employers would reduce profits to such an extent that probably
not even the full costs of upkeep and amortisation could be recovered.
During the years of crisis from 1890
- 1895, for example, it was possible to inhabit, rent-free, the finest houses
in the provincial capital of La Plata in Argentina. The house-owners were
unable to obtain even enough rent to cover repairs.
Under such circumstances only one
form of capital would continue to exist, namely money. For although all other
capital objects would have lost the power of exacting interest, money would
have no need to reduce its claim for interest, even if 99% of the population had
died out. The produce of the interest-free instruments of production, the
wares, would still be compelled to pay the same interest for their exchange,
just as if nothing had happened.
The case we have supposed throws a
vivid light upon the nature of money and upon the relation of money to real
capital.
If we assume that the quantity of
money in circulation was unaffected by the plague, the disproportion between
money and commodities would cause a rise of prices, but the relatively large
stock of money would not reduce interest, since, as we have proved, competition
between money-lenders is impossible. Gross interest would even be increased by
the rise of prices. (See later, Chapter 7, "The Components of Gross
Interest").
Under the circumstances we have
imagined it is obvious that no one would give money for the construction of a
factory. Money would be given for that purpose only when, partly through an
increase of population, partly through fires and other accidents, to which must
be added the passage of time, the supply of real capital had so decreased that
the original ratio of real capital to population, and with it the level of
basic interest had been reached. Why this must happen we have already
explained.
Thus interest on so-called real
capital can at any time, as the result of exceptional circumstances, fall below
basic interest; but the natural agents of destruction to which real capital is
subject (see the annual statistics of shipwrecks and ships broken up, railway
accidents, fires, and the sums annually written off for depreciation in every
factory), in conjunction with the circumstance that money permits no production
of new real capital until the interest upon existing real capital reaches the
level of basic interest, necessarily re-establish the former relation between
the demand and supply of real capital.
But we must also prove that interest
upon real capital cannot permanently rise above basic interest.
That it can rise above basic
interest under special circumstances, and that it has actually done so for
decades at a time in countries with relatively large immigration, we readily
admit. For this is a conclusive proof of the theory of interest whereby demand
and supply alone determine whether real capital produces interest, and the
amount of interest it produces.
The amount of capital in houses,
instruments of production, shops, railways, canals, harbours and so forth that
fans to each workman's family in the United States is unknown to me. It may be
$5.000 or it may be $10,000. Suppose it is only $5,000. To provide shelter and
means of production for the 100,000 immigrant families annually landing in
America, the Americans would then have to provide 500 million dollars annually
in new houses, factories, railways, ships.
If an German workmen were to
emigrate to the United States, everything needed to employ and house these
masses would be wanting. The want of factories, machinery and houses would
depress wages and at the same time enormously increase house-rent. Interest
upon real capital would rise high above basic interest.
Usually this process is completely
concealed from immediate observation, since capital goods rise in price with
the rise in the yield of interest. A house which can be sold for $10,000
because it brings in $500 interest, rises in price to $20,000 if interest on
the house rises to $1.000. Arithmetically the house then yields only 5%. For it
is basic interest that serves as the basis for calculating the price.
We must next be able to explain the
fact that every rise in the rate of interest upon real capital above basic
interest inevitably, naturally and automatically causes a steadily increasing
new production of houses, factories, etc., and that, under pressure of this
supply, the interest on such things soon falls back to the point of equilibrium
or limit, namely basic interest - as automatically as, in the opposite case, it
rises to this Emit. We must prove that there are no economic or psychological
obstacles to interfere with this process. The will to work, the power of
working and natural resources must at all times and in all places suffice to
provide capital in such quantities that the supply of this capital is bound to
reduce interest to the limits of basic interest.
(Flürscheim's (*
"The Economic Problem," Michael Flürscheim, 1910) statement that "Interest is the father of interest" is no
absurdity. Flürscheim means that the burden of interest prevents the people
from producing the amount of real capital necessary for the elimination of
interest; just as rent prevents peasants from buying the rented land they
occupy.
But the statement that
"Interest is the father of interest" also implies that rising
interest must cause an unlimited further rise of interest. If, as Flürscheim
claims, the law of falling bodies is applicable to interest when interest
begins to fall, the law must apply in the reverse direction when interest
begins to rise. This contradiction was insoluble by the methods of
investigation employed by Flürscheim).
That such quantities of real capital
are forthcoming we see from the fact that the United States, in a comparatively
short period of time, have passed from demand to supply in the international
capital market; that they have carried out the great undertaking at Panama with
their own resources; that they have rescued many a princely house in Europe
from ruin with their daughters' dowries; that they are seeking other outlets
abroad for their surplus capital. This proof is all the more convincing, first
because the great influx of destitute immigrants into the United States created
an abnormal increase of demand for real capital, and secondly because the
formation of real capital was frequently interrupted by devastating economic
crises. Such is the fact; we now need the explanation.
The interest produced by so-called
real capital stimulates saving, and the higher the interest, the greater is the
stimulus to saving. It is indeed true that the higher the interest, the greater
also is the burden of interest, and the more difficult it is for those who have
to pay interest to create, by saving, a capital of their own. But in the
present order of things new capital is only to a small extent formed from the
surpluses of the earning, interest-paying classes.
(* Savings-banks deposits, the
capital of the proletariat, were in Prussia:
Year. Number of
savings books. Amount saved. Million Marks. Average amount for each book.
Marks.
1913 14,417,642
13,111 909 1914 14,935,190 13,638
913 )
New capital is chiefly formed from
the surpluses of capitalists, and these surpluses naturally increase with the
increase of the capitalists, income, that is, with the increase of interest
upon capital.
We must here keep the following fact
in mind:
The income of the earning class
increases if interest falls, whereas the income of the capitalistic class
increases if interest rises. Employers' income consists partly of the wages for
their work, and partly of interest upon capital; in their case, therefore, the
effect of changes in the rate of interest depends upon what proportion of their
income is derived from interest, and what proportion from wages for their
work.
The earning class is, therefore,
better able to save when interest is falling, and the capitalistic class when
interest is rising. It would be a fallacy, however, to conclude from this that
the function of saving, as a whole, and the increase of capital, is unaffected
by the fact that interest rises or falls.
For in the first place an increase
of income has an effect upon the spending, and therefore upon the saving of a
capitalist, different to its effect upon the spending and saving of a worker.
With the capitalist the increase of income does not meet so many wants awaiting
satisfaction, often for decades. The capitalist finds it easier to save the
whole increase of his income, but the worker's impulse to save only comes after
the satisfaction of many other needs.
Again the capitalist's only method
of providing for his children is saving. With the birth of the third child he
must increase his capital if he wishes to make the mode of life possible for
his children, for which, by his example, he has educated them. The worker has
no such cares, he need not bequeath anything to his children, for they will
support themselves by work.
The capitalist therefore must save;
he must increase his capital (although this increase depresses interest) to
provide his increasing offspring with the life of ease befitting their station.
And if, as a rule, he must save, we can assume that he will also, as a rule,
employ the surplus derived from an increase of interest to create new
capital.
From this we can conclude that an
increase of interest, though it always takes place at the expense of the
workers and small savers, must nevertheless increase, rather than diminish, the
sums available in a country for the creation of new real capital. An increase
of interest increases the forces that depress interest. And the higher the
interest, the greater is this pressure.
We cannot indeed give examples of
this; statistical proofs of what we have just stated are not possible, for the
statistics available under the gold standard are unsuitable. If Carnegie had
given his workers 20% or 50% more wages he would probably never have reached
his first million. In that case would the steel-factories (built by Carnegie
from his savings) which increased the supply of real capital, drove up wages and
depressed interest, have been built from the savings of the workers ? Would not
the workers, perhaps, have preferred to spend the 20% or 50% increase of wages
on sufficient food for their children, on healthier houses, on soap and baths ?
In other words, would the workers, collectively, have brought together as great
a surplus for the construction of new steel-works as Carnegie alone, with his
modest personal wants ? (To preserve the existing ratio between the demand and
supply of real capital, the workers would even have to produce a much greater
mass of real capital. For their present scanty wages cause an appalling infant
mortality which the increase of wages would have reduced. The resulting great
increase in the number of workers would have increased the demand for means of
production).
We are at first inclined to answer
the above question with a categoric negative - and thereby to commit a gross
error. For what did Carnegie achieve by the multiplication of real capital, by
his personal thrift? He again and again reduced the interest on real capital
below basic interest and thereby caused crisis after crisis. The good man in
this way destroyed or prevented the formation of as much real capital as, by
wise management, he brought into existence. If Carnegie had distributed the
surplus of his undertakings to the workmen in the form of increased wages, it
is true that only the smaller part of these increased wages would have been
saved for new real capital; the rest would have been dissipated in orgies of
pork and beans, or soap. But on the other hand the intervals between one crisis
and the next would have lengthened. The workers would consequently have lost
less by forced unemployment, and would have made up for the greater sum spent.
The effect upon interest would have been the same; that is, without Carnegie's
thrift, the supply of real capital would have been the same today as with his
thrift.
The difference between what Carnegie
could personally save and what the workers could have saved is regularly and
inevitably destroyed by economic crises.
The capitalist's impulse of
self-preservation and the fact that he must assure the future of his children
force him to provide a surplus and, what is more, an interest-bearing surplus.
He must provide this surplus even if his income decreases; indeed, his impulse
of self-preservation bids him increase the strictness of his saving in direct
proportion to the decline of interest. If, for example, a capitalist wishes, by
increasing his capital, to compensate the loss of income caused by a fall of
interest from 5 to 4%, he must increase his capital one-fifth by economising on
his personal expenses.
If interest rises, capitalists can
save; if interest falls, they must save. In the first case the amount saved
will, indeed, be greater than in the second case, but that does not limit the
importance of the fact for the determination of interest. It remains true that
the greater the fall in interest, the more the capitalist must, by reducing
personal expenses, draw on his income to form new real capital even although it
is precisely the increase of real capital that has caused his difficulty.
We who assert that in the nature of
things real capital must multiply until it destroys itself or, in other words,
until interest disappears completely, can see in the above fact a conclusive
proof of what we have yet to show, namely that when interest falls, the will and
need to create new interest-depressing capital enterprises must continue to
exist - on condition, of course, that we remove the obstacles to the creation
of such enterprises, caused by our traditional form of money.
If the rate of interest falls from 5
to 4%, the capitalist must, by reducing his personal expenses, raise his
capital from 8 to 10. If interest falls from 5 to 4%, the capitalist will
therefore renounce his plan of a summer residence for his family and build,
instead, a tenement-house in the city. And this new tenement-house will still
further depress the interest upon house-capital. For capital in general it
would be better if the capitalist built the summer residence and not the
tenement-house. For the individual capitalist, however, the opposite is
true.
If interest (under the pressure of
the new tenement-house) falls further from 4 to 3%, the capitalist must still
further reduce his expenses. Instead of paying, as he had contemplated, the
debts of a princely son-in-law, he must give his daughter to a
building-contractor. The tenements erected with the dowry would then produce
interest, but at the same time still further depress the rate of interest. And
so on.
The nature of the capitalist, his
impulse of self-preservation - the impulse in which the human will is strongest
- makes it certain that the greater the fall of interest, the greater must be
the percentage of the capitalist's income set aside by him to create new real
capital which, in its turn, still further depresses interest.
Expressing what has been said in
figures we have the following picture:
Billion Marks
The interest paid by the workers in
Germany amounts annually, at 5%, to
20
Of this the capitalists devote 50%
to new capital enterprises 10
spending the remainder on their
personal requirements. The rate of interest then falls from 5% to 4% and the yield
of interest therefore falls from 20 to 16 The capitalists therefore lose 4
This loss of income, equivalent to a
capital loss of 100 billions, forces the capitalists to set aside a larger part
of their income for the creation of new capital enterprises. Instead of 50%
they now set aside 60% of their income (which has meanwhile fallen from 20 to
16 billions) for new capital enterprises. The amount set aside is. therefore,
instead of 10 billions 9.6
But the capitalists' loss of income
means a corresponding gain of income to the workers. If the workers, through
the savings-banks, invested the whole of the surplus in new interest-bearing
enterprises, the decrease of interest of 4 would increase the sum set aside for
the creation of new capital enterprises (given by us above as 10 billions) to
13.6 or 4 billions from the workers and 96110 billions from the
capitalists.
But we have assumed that the workers
will save only part of the remitted burden of interest, perhaps about one half.
Even in this case a decrease of interest from 5 to 4% would increase the sum
annually available for new capital enterprises from 10 to 11.6
and the greater the fall in the rate
of interest, the greater is the sum destined for new capital enterprises which
depress, and finally eliminate interest. Capitalists would save from necessity,
and workers would save because they could now at last satisfy the impulse of
saving. Thus the nature of new real capital forces it, as it were, to commit
suicide.
The greater the fall in interest,
the greater the amount of real capital created which, in its turn, depresses
interest. Possibly the physical law of falling bodies is applicable to interest
- but only, of course, after removal of the obstacles which the traditional
form of money opposes to the creation of such masses of real capital.
The objection has here been raised
that if real capital were free from interest no one would build a
tenement-house, factory, brick-oven, etc. Savings would be spent upon
pleasure-trips instead of upon flats in which others would live in rent-free
dissipation.
But more is here asserted than the
expression "free from interest" implies. House-rent is only partly
composed of interest. Interest on the building capital is a component of
house-rent, but there are other components such as: ground-rent, repairs,
depreciation, taxes, insurance, the expense of cleaning, heating, care-taking,
furnishing, and so forth. Interest is often 70 or 80% of the rent, but often,
in the centre of a city, as little as 20 or 30%. Even when interest disappeared
completely from house-rent there would always remain expenses enough to prevent
everyone from claiming a palace.
It is the same with the other forms
of real capital, which cause their users, besides interest, other expenses such
as upkeep, depreciation, insurance, ground-rent, taxes, etc. - expenses which
generally equal or exceed the amount of interest. House-capital is here,
indeed, in a relatively privileged position. In 1911 2,653 German limited liability
companies with 9,201,313,000 marks capital wrote off 439,900,475 marks as
depreciation, that is, on the average about 5%. But for the annual renewals (in
addition to improvements) nothing would be left of such capital in 20 years.
But quite apart from this, the
objection does not hold good, especially in the case of persons who have up to
the present lived from unearned income.
These persons will, as we saw, be
forced to greater thrift by the decrease of capital-interest, and they will be
still more careful, when interest disappears entirely, to consume as slowly as
possible their remaining investments, which will then no longer be capital. And
this they can achieve by spending for their personal requirements only part of
the sum annually written off their capital as depreciation, and by devoting the
remainder to the construction of new houses, ships, etc. which will, indeed,
yield no interest, but will at least give them security against immediate loss.
If they keep the money (FreeMoney) they will, in addition to receiving no
interest, suffer an actual loss. By building new houses they will avoid this
loss.
A shareholder in the Norddeutscher
Lloyd, for example, who, under the Free-Money reform, will receive no
dividends, will not ask the company to pay out his full share of the sums set
aside for depreciation (with which the company at present builds new ships). He
will content himself with part of his share in order to postpone as long as
possible the day on which the last dollar of his investment will be repaid him.
New ships will always, there fore, be built, even although, instead of
interest, they only produce the sums written off for depreciation. It is true
that even so the last ship of the Norddeutscher Lloyd would in time fall to
pieces if others did not take the place of the ex-capitalist living from the
amounts written off his capital; that is, if the workers, relieved of the
burden of interest, did not assume the function that the ex-capitalist could no
longer fulfil. New savers would replace the part of the depreciation consumed
by the ex-capitalist - though only, indeed, with the same purpose of being able
to live upon and consume in old age the sums written off for depreciation.
Houses, factories, ships, etc. need
not, therefore, produce interest to attract from all sides the means for their
production. After the introduction of Free-Money these things would prove to be
the best means of storing savings. By investing their savings in houses, ships,
factories, which bring in no interest but resolve themselves again into sums
set aside for depreciation, savers would avoid the expense of storage and
caretaking - and that too from the day they made the surplus to the day on
which they consumed it. As decades often lie between these two dates (for
example in the case of a youth saving for old age) the advantages of such
investments to the savers are obvious.
Interest is, no doubt, a special
attraction for the saver. But this special attraction is not necessary, for
even without it the impulse of saving is sufficiently strong. Interest, again,
may be a great incentive to saying, but the obstacles to saving caused by
interest are also great. Because of the burden of interest, saving at present
means, for the majority of mankind, severe privation, renunciation, hunger,
cold, semi-suffocation. Precisely because of the interest which workers must
raise for others, the proceeds of labour are so reduced that for most workers
saving is an impossibility. So if interest is an incentive, it is still more an
obstacle to saying. Interest limits the possibility of saving among workers to
small classes, and the capability of saving to the few individuals in these
classes with courage enough to face continual privation. If interest falls to
zero the proceeds of labour rise by the whole amount of the burden of interest,
and the possibility and capability of saving are correspondingly increased. It
is certainly easier to save $5 from $200 than from $100. If with $100 wages a
man, partly because of the stimulus of interest, deprives his stomach of $10
for his own and his children's benefit, with $200 wages he could probably, from
the natural impulse of saying, set aside, if not $110 at any rate much more
than $10.
Saving is practised throughout nature without the
incentive of interest. Bees and marmots save, although their stores bring them
no interest and many enemies. Primitive peoples save although interest among
them is unknown. (* African negroes, Red Indians, Hottentots, have
never obtained interest from their savings, yet none of them would exchange
these savings (provisions) for the savings of our proletariat (savings-bank
book).) Why should civilised man act otherwise ? Men
save to build a house, they save for marriage, illness, old age; and in Germany
they even save for masses for the repose of their souls and for a burial fund,
although burial brings the corpse no interest. And when did the proletariat
begin to save for the savings-bank ? Did the money formerly hidden in
mattresses yield interest ? Yet such a form of saving was customary until 30
years ago. Winter provisions, too, bring no interest but much annoyance.
(* That the prohibition of interest by the medieval
Popes prevented the growth of an economic system based on money (the scarcity
of the precious metals was a contributing cause), shows that the impulse of
saving was obeyed even without interest. The savers hoarded the money.)
Saving means that the saver produces
more wares than he consumes. But what does the individual saver, or the
population, do with this surplus of wares ? Who keeps the wares and who pays
the cost of keeping them ? If we answer here: "The saver sells his surplus
produce", we merely transfer the problem from the seller to the buyer. To
the population in general this answer does not, obviously, apply.
If a person saves, that is, produces
more wares than he consumes, and finds someone to whom he can lend his surplus
on condition that after a certain period his savings are to be given back
without interest but without loss, the saver has concluded an extraordinarily
advantageous bargain. For he avoids the expense of upkeep of his savings. He
gives 100 tons of fresh wheat as a young man and receives 100 tons of fresh
wheat, of equally good quality, in his old age. (See the Story of Robinson
Crusoe, p. 365).
The simple restitution, without
interest, of the borrowed savings represents, therefore - if we leave money out
of the account - a considerable piece of work done by the debtor or borrower,
namely the payment of the expense of upkeep of the borrowed savings. The saver
himself would have had to bear this expense if he had found nobody to take
charge of his savings. True, the borrowed goods do not cause the borrower any
expense of upkeep since he consumes them in his undertaking (example: borrowed
seed-wheat). But when loans are made without interest, the borrower transfers
this advantage, which is really his, to the lender, without receiving any
return service. If lenders were more numerous than borrowers, borrowers would
claim payment for this advantage in the shape of a deduction from the amount of
the loan (Negative interest).
Thus from whatever view-point the
problem of loans without interest is examined, no obstacles of a natural order
can be discovered. On the contrary, the greater the fall of interest, the
greater the incentive to the multiplication of houses, factories, ships,
canals, railways, theatres, crematoria, tramways, lime-kilns, blast-furnaces,
etc.; and the work upon such enterprises reaches its highest intensity when
they produce no interest at all.
To Boehm-Bawerk it is obvious that a
"present good" must be more highly valued than a "future
good", and upon this assumption his new theory of interest is based. But
why is this assumption supposed to be obvious ? Boehm-Bawerk himself gives the
somewhat strange reply: Because wine can be bought which becomes annually
better and dearer in the cellar. (* Compare footnote p. 374.) But because wine-and among all commodities Boehm-Bawerk discovered
no second with this wonderful property - automatically, it seems, without
labour or costs of any kind and without, therefore, costs for storage, becomes
annually dearer and better in the cellar, do the remaining commodities,
potatoes, flour, powder, lime, hides, wood, iron, silk, wool, sulphur, ladies'
costumes, also become annually better and dearer. If Boehm-Bawerk's explanation
is correct, we have here a complete solution of the social problem. We need
only pile together sufficient products (the inexhaustible fertility of modern
production and the army of unemployed workers provide an excellent
opportunity), and the whole population can, without work of any kind, live from
the proceeds of these commodities which will constantly become better and
dearer (a difference in quality can always, in economic life, be traced to a
difference in quantity). It is indeed not easy to see why one should not make the
opposite deduction: Because all commodities, with the exception of money and
wine, soon fall into decay, therefore wine and money fall into decay! Yet up to
the time of his death (1914) Boehm-Bawerk was the foremost authority on
interest, and his works were translated into many languages.
The anxieties of savers do not in
themselves concern us, as our sole purpose is to establish the fundamental
theory of interest; but it may perhaps contribute to the elucidation of our
theory if we examine these anxieties more closely.
Let us assume, therefore, that after
gold has been removed from the path of circulation of commodities someone
wishes to save in order to live without work or care in his old age. The
question at once arises: What form will he give his savings ? The plan of
piling up his own produce or the produce of others may at once be dismissed;
and a hoard of Free-Money is also impossible. The first practicable solution
would be loans without interest to employers, artisans, farmers and merchants
who wished to enlarge their businesses; and in the case we are considering, the
longer the term of repayment, the better. The saver of course runs the risk of
not being repaid his money. To eliminate this risk, however, he can compel his
debtor to pay a special contribution to cover risk, such as is added to the
interest on every loan at the present day. But if the saver wishes to be quite
secure from such loss he will use his savings to build, say, a house for
letting. With the sums annually written off for depreciation, which are at the
present day also included in house-rent, the tenants will gradually repay the
whole cost of building. And the form of building chosen will be determined by
the amount of depreciation the saver wishes to receive annually. He will build
a stone house if he wishes to receive 2% depreciation annually; he will put his
savings into shipbuilding if 10% depreciation suits him better; or, if he needs
his money soon, he can buy a powder-factory, when the sum set aside for annual
depreciation will be 30%. In short, he will have ample choice.
Just as the toil that the children
of Israel, 4,000 years ago, put into the building of the Pyramids becomes
living again today, without loss, if the stones are rolled from the summit, so
the savings built into an interest-free house will appear again, undiminished,
in the rent, in the form of sums annually set aside for depreciation. The saver
will not, indeed, receive interest, but he will retain the priceless advantage
of carrying his surplus without loss, through the period in which he does not
require it, to the period in which he desires to use it.
A person who builds a tenement-house
with the purpose of letting it free from interest is thus in the same position
as a person who lends money without interest against a pledge and stipulates
for repayment by instalments.
In practice, no doubt, small inexperienced
savers, to avoid trouble and anxiety, will hand over their savings to
life-insurance companies which will build the houses, ships, factories, etc.
With the sums set aside for depreciation on these objects, the insurance
companies will then pay each saver a lifeannuity; healthy men 5,% of the
deposit; old people or invalids 10% or 20%. Under these circumstances there
will be no expectations from wealthy uncles. The coffin-lid will be nailed down
with the last nail of the property. The saver will begin to consume his
property when he ceases working, and at his death it will be consumed
completely. Under such circumstances, however, no one is forced to provide for
his posterity. It is provision enough to liberate their work from the burden of
interest. An individual liberated from the burden of interest no longer needs
an inheritance, just as the widow's son at Nain no longer needed crutches.
Everyone earns his own goods and chattels, and finances, with his surplus, the
aforesaid insurance-companies. Thus the annual depreciation upon houses, ships,
etc. paid to the old will be constantly replaced, through new construction, by
the savings of the young. The expenditure of the old will be met by the savings
of the young.
A worker at present pays interest
upon about $12,500 in houses (* Germany with about 10 million
workers (that is, those who live from the proceeds of their work) pays interest
upon a capital of about 500 billion marks (including the land). A single worker
therefore pays interest upon about 50,000 marks or $12,500.), means of production, national debt, railways, ships, shops,
hospitals, crematoria, etc. That is, he has to pay $500 annually either
directly, as deduction from wages, or indirectly in the prices of commodities,
as interest upon capital and rent upon land. Without interest upon capital, the
proceeds of his labour would be doubled. If such a worker, with $1,000 wages,
at present saves $100 annually, it would be a long time before he could live on
his capital, especially as his saving, in the present order of things, causes
periodic crises which again and again force him to have recourse to his
savings, or possibly even result in their total loss, through the failure of
his bank in the crisis his saving had provoked. But if, through the elimination
of interest, the worker's income is doubled, he can, in the case we have
supposed save annually $1,100 instead of $100. Even though his savings are not
"automatically" increased by interest, the difference, at the end of
the years of saving, between the amount he will have saved, without interest,
and the amount he could have saved, with interest, will be so great that he
will rejoice at the disappearance of interest. For the difference will not be
simply in the ratio 100 (plus interest) to 1,100; it will be much greater,
since the worker will not be compelled, in times of unemployment, to have
recourse to his savings.
One more objection which has been
raised against the possibility of equalising demand and supply in the capital market
we have still to refute. It is objected that, since production can be cheapened
by more or better machinery, every employer will make use of the fall in the
rate of interest to enlarge and improve his factory. From this the deduction is
made that the fall of interest and, still more, the complete absence of
interest, would create in the capital market a demand from employers too great
for supply ever to cover, with the result that interest could never fall to
zero.
Otto Conrad (* Jahrbuch
für Nationalökonomie und Statistik, Jena, 1908.) says
for example: "Interest can never completely disappear. For suppose a piece
of machinery, say a lift, is to replace five workmen with a total annual wage
of 4,000 kronen. With interest at 5,%, the cost of the lift must not exceed
80,000 kronen. Now suppose that the rate of interest falls, say to 0.01 %. The
lift could then be profitably installed even if it costs 40 million kronen. If
interest sinks to zero or near zero, the utilisation of capital would increase
to a degree that cannot even be imagined. The most complicated and expensive
machines could be installed to save the smallest piece of manual labour.
Interest could be kept at zero only by the existence of infinite capital
undertakings. No special proof is needed that this condition is not fulfilled
to-day, and that it can never be fulfilled."
To this argument against the
possibility of loans without interest we reply as follows: Among the expenses
of a capital undertaking must be reckoned, in addition to interest, the cost of
upkeep, which is always, especially in industrial undertakings, extremely high.
A lift which cost 40 millions would certainly cost, for upkeep and depreciation
alone, 4-5 millions. The lift would thus have to replace, not, as Conrad
imagined, five workmen but 4,000 workmen with wages at 800 kronen - even if not
a penny of interest were required. With 5% for upkeep and 5% for depreciation,
the lift to replace five workmen with wages at 800 kronen, must not cost more
than 40,000 (instead of 40 million) kronen in interestfree money. If the cost
of construction exceeds this amount, the cost of upkeep is not covered, the
lift is not built, and there is no extra demand upon the loan-market.
Where little or no depreciation
takes place, as for example with certain forms of permanent landimprovement,
the indefinite increase of demand for interest-free loans will be prevented by
the wages claimed by the workers. The problem here merges into the problem of
rent upon land. Nor will any private individual undertake to blast rocks and
clear forests if this work brings him no advantage. If he builds a factory or
tenement-house, he has the advantage of gradually receiving back his money in
the sums annually set aside for depreciation. The expectation of receiving back
the money was, in fact, the motive for building the tenement. Being mortal he
wishes to reap before his death what he has sowed in the sweat of his brow; he
can therefore undertake only such works as resolve themselves into depreciation.
If he and his works disintegrate at the same rate he has judged correctly from
the individual standpoint. Works of eternal value are not for the individual,
who is mortal, but for the people, which is eternal. The people, which exists
eternally, counts upon eternity and blasts the rocks, although this work yields
no interest and does not resolve itself into depreciation. At death's door the
old State-forester draws up a plan for the reafforestation of a waste. Such
works are for the State. But the State will undertake them only to the extent
to which interest-free money is placed at its disposal. Such undertakings are
not, therefore, an obstacle to freedom from interest, they are the consequence
of it.
Those who raise this objection also
forget that a simple extension of an undertaking (10 lathes instead of 5; 10
brick-moulders where 5 were at work) requires a corresponding increase in the
number of workmen employed. An increased demand for money for extending a
factory therefore always means a simultaneous increase of demand for workers
who, by increasing their claims for wages, cancel the gain expected by the
employer. An employer cannot by simply extending his factory expect any special
advantage from loans free of interest, so the disappearance of interest will
not stimulate him to create an unlimited demand for loans. The limits to such
loans will be set by the wages claimed by the workers, who alone profit by the
decrease of interest. And this is natural; for the relation between employers
and workmen is fundamentally the same as the relation between those who lend
money
(pawnbrokers) and those who borrow
money (their customers) against a pledge. (* Eugen
Düing said long
ago: "Employers let their
factories to the workmen for a certain charge." Dühring calls this charge
for letting, profit. Marx calls it surplus-value. We call it simply interest.) Here also the fall of interest is to the advantage of the
borrowers.
The employer does not buy work, or
working hours, or power of work for he does not sell the power of work. What he
buys and sells is tie product of labour, and the price he pays is determined,
not by the cost of breeding, training and feeding a worker and his offspring
(the physical appearance of the workers is only too conclusive a proof that the
employer cares little for all that), but simply by the price the consumer pays
for the product. From this price the employer deducts interest on his factory,
cost of raw material, including interest, and wages for his own work. The
interest always corresponds to basic interest; the employer's wage, like all
wages, follows the laws of competition; and the employer treats the raw
material he intends his workmen to manufacture as every shopkeeper treats his
merchandise. The employer lends the workmen machinery and raw material and
deducts from the workers' produce the interest with which the raw material and
machinery are burdened. The remainder, so-called wages, is in reality the price
of the product delivered by the workmen.
Factories are simply, therefore,
pawn-shops. Between a pawnbroker and Krupp there is no difference of quality
but simply a difference of size. With wages for piece-work the nature of the
contract is obvious. But all wages are fundamentally wages for piece-work,
since they are determined by the piece of work the employer expects to obtain
from the individual worker.
But as well as simple extension of
enterprises, which increases the demand for workmen, we must consider
improvements of the means of production, which result in the production of more
commodities with the same number of workmen. If a farmer, for example, doubles
the number of his ploughs he must also double the number of his ploughmen. But
if he buys a steam-plough he may be able to plough double the number of acres
with the same number of labourers.
Employers always aim at such improvements in the means
of production (sharply to be distinguished from simple multiplication of the
means of production). For what affects an employer is net profit (*
Net profit - employers protit - proceeds of the employees labour - is what
remains over for the management of the business after payment the cost of
production, including interest, and is to be regarded as the profit of
management It has nothing to do with interest. In corporations and trusts the
patent-rights of the inventors, or the "shameless" salaries and wages
claimed by exceptionally efficient or irreplaceable directors and workmen,
absorb this net profit.), and this is larger when his
means of production are superior to those of his competitors. Hence the
competition among employers to improve the means of production; hence the
demand for loans from employers who have not themselves the means necessary for
scrapping obsolete machinery and building well-equipped factories, as they
desire.
Nevertheless it does not follow that
the demand for interest-free loans for the improvement of the means of
production must at all times be unlimited; it does not follow that supply can
never overtake the demand caused by the absence of interest. And the reason why
this deduction cannot be made is that the money necessary for carrying out such
improvements in the means of production is only of secondary importance.
Show someone how to bind a broom and
he can bind a hundred. But offer him money, free of interest, on condition that
he improves his means of production and produces more or better brooms with the
same amount of labour, and he will have no answer to give you. Improvements of
the means of production are the fruit of intellectual effort which cannot be
bought like potatoes at so much per hundredweight. Improvements of the means of
production cannot be turned out to order-no matter how "cheap" the money
available. Anybody could at any time earn millions by thinking out new patents
- but for the fact that he lacks the necessary intelligence.
It may be that after 10 or 100 years
the means of production will be so improved that every workman will perform
twice, five times or 10 times his present work. Employers will hasten to adopt
such improvements. But contemporary employers are forced to use whatever
machinery is offered them by the contemporary, backward, technical arts.
Apart from this, however, let us
assume that a costly machine is discovered with which everyone can double his
present production. This would cause an unprecedented demand for loan-money to
purchase the new machine. Everyone would install it and scrap the old machines.
Even if interest upon loan-money had disappeared, this enormous new demand
would cause its reappearance. Under these circumstances (the conversion of all
existing machinery into scrap-iron) interest might even reach an unprecedented
height. But this condition of affairs could not last long. Commodities would
become 50% cheaper (not cheap in the sense of a fall of prices, but cheap
because everyone could double the quantity of his produce and use this double
quantity for exchange) and this would allow the population to make extraordinary
savings. And the supply of these savings would soon overtake the extraordinary
demand for loan-money.
One can therefore conclude that the
demand for loan-money for the improvement of the means of production must
itself produce a supply of loan-money much more than sufficient to cover this
demand.
Thus from whatever side we consider
the problem of covering the demand for loan-money so completely that interest
would disappear; whether we approach the problem from the side of demand or the
side of supply, we find that there are no natural obstacles to such covering.
Except for the traditional form of money, the road is free for loan-money
without interest, as well as for houses and means of production without
interest. The elimination of interest is the natural result of the natural
order of things when undisturbed by artificial interference. Everything in the
nature of men as in the nature of economic life urges the continual increase of
so-called real capital - an increase which continues even after the complete
disappearance of interest. The sole disturber of the peace in this natural
order we have shown to be the traditional medium of exchange. The unique and
characteristic advantages of this medium of exchange permit the arbitrary postponement
of demand, without direct loss to its possessor; whereas supply, on account of
the physical characteristics of the wares, punishes delay with losses of all
kinds. In defence of their economic welfare both the individual and the
community have been and are at enmity with interest; and they would long ago
have eliminated interest if their power had not been trammelled by money.
We have now studied this new theory
of interest from so many sides that we can finally put and answer a question
which should logically have been asked at the beginning of our inquiry, but
which we have purposely postponed till now, since knowledge and insight which
can only be assumed to exist at the end of our inquiry are necessary for its
complete understanding.
We said that money is capital
because it can interrupt the exchange of commodities. From this the deduction
can be made that if, by the proposed change of form, we deprive money of the
power of interrupting exchange, money as a pure medium of exchange is no longer
capital, that is, money can no longer exact basic interest.
Against this deduction no objection
can be raised; it is correct.
But if it is further deduced that,
since money can exact no interest from commodities, we may count upon
interest-free loans from the day that Free-Money is introduced - this deduction
is not correct.
As medium of exchange, in direct
relation to commodities, that is in commerce. Free-Money will not be capital,
just as commodities are not capital when exchanged for one another. With
Free-Money, commodities will be exchanged free of interest. But when Free-Money
is introduced it will meet with the market conditions created by its
predecessor, gold, for the purpose of exacting interest upon loans; and as long
as these conditions continue to exist, that is, as long as demand and supply
permit the exaction of interest in the loan-market (in all its branches),
interest will have to be paid also upon loans contracted in Free-Money.
Free-Money will find before it world-wide poverty, the result of which is
interest. This poverty must disappear, and it will not disappear in the course
of a few days. Work is here the remedy. Until this poverty is removed, the
instruments of production and commodities will continue to yield interest in
all forms of loan-transactions (not, however, in exchange-transactions). But
Free-Money does not make interest the condition of its services, it will allow
our economic system, as the result of work uninterrupted by crises, to put on
fat; and it is this fat which is to eliminate, and doubtless will and must
eliminate, interest. Interest feeds upon the sweat and blood of the people, but
it has no liking for fat or, in other words, economic prosperity. For interest,
fat is poison.
It is quite certain that the
disproportion between the demand and supply of real capital, which is the cause
of interest, will continue to exist for some considerable time after the
introduction of the moneyreform, and that it will only gradually disappear. The
effects, accumulated through thousands of years, of the traditional form of
money, namely the scarcity of real capital, cannot disappear as the result of
twenty-four hours' working of the lithographic press. The scarcity of houses,
ships and factories cannot be eliminated by gaily-printed slips of paper, in
spite of the belief to the contrary held by the papermoney lunatics of all
times. Free-Money will permit the building of houses, factories and ships in
unlimited quantities; it will permit the mass of the population to work as much
as it pleases, to sweat and curse the pauperism that gold has left behind. But
Free-Money will not itself provide a single stone for the missing cities. The
lithographic presses upon which Free-Money is printed cannot themselves
contribute a drop to the ocean of real capital necessary to drown interest.
Freedom from interest can be realised only by years of dogged and uninterrupted
toil. Lasting freedom must always be striven for; freedom from interest must
also be striven and fought for. Bathed in sweat the people must cross the
threshold of their first interest-free dwellings, their first interest-free
factories; bathed in sweat they must organise the interest-free State of the
future.
The day on which gold is driven from
its throne. the day on which Free-Money assumes the function of exchanging
commodities, will see no great change in interest. The interest upon existing
real capital will remain for some time unchanged. Even the new real capital
which the people can now produce with untrammelled labour will yield interest.
This new real capital will however, depress interest in direct proportion to
its own increase in quantity. And if beside a city like Berlin, Hamburg,
Munich, a second, larger, city is built, the supply of dwellings will perhaps
cover the demand and bring interest upon houses down to zero.
But if real capital is still
producing interest and it is possible to buy with money commodities which can
be assembled into new, interest-bearing, real capital, it is clear that anyone
seeking a loan of money must pay for it interest equal to the interest yielded
by real capital. That is obvious from the laws of competition.
Loans of Free-Money must therefore
pay interest as long as real capital yields interest. Real capital will long
remain capital because metal money allowed it to exist only in insufficient
quantities, so its component parts, namely, money and raw materials, will also
long remain capital.
Up to the introduction of Free-Money
interest on real capital depends on basic interest; after the introduction of
Free-Money basic interest will disappear, and interest on loans will be exactly
determined by interest on real capital. Borrowers of money will no longer pay
interest because money can exact a tribute from the wares, but because the
demand for loans, for the time being, exceeds the supply.
Basic interest is not interest on a
loan; the exchange of money for wares and the tribute thereby exacted have
nothing in common with a loan. Basic interest is not, therefore, determined by
demand and supply. In exchange for the money the producer gives his produce.
This is an exchangetransaction during which basic interest is exacted because
the possessor of money can prohibit, or allow, the exchange. Basic interest
corresponds to the difference of efficiency between money and the substitutes
for money (bills of exchange, barter and primitive production) as media of
exchange. No offer of loan-money, however large, could eliminate this
difference, and upon it depends basic interest.
With the interest on real capital,
on the contrary, we have, not an exchange, but a loan. The landowner lends his
land to a farmer, the house-owner lends his house to a tenant, the manufacturer
lends his factory to the workmen, the banker lends money to his debtor - but
the merchant who exacts interest from the wares lends, nothing; he makes an
exchange. Farmer, tenant, workman, debtor, give back what they received; but
the merchant receives for his money something totally different from money. For
this reason exchange has nothing in common with lending, and for this reason,
also, basic interest and interest upon real capital are determined by totally
different causes. We ought really to cease designating two so fundamentally
different things by the same word, interest.
Interest on real capital is
determined by demand and supply; it is subject to the laws of competition and
can be eliminated by a simple change in the ratio of demand to supply. With
basic interest this would never be possible. Interest on real capital has up to
the present been protected from such a change - the condition for the
production of real capital being that it should be able to exact interest equal
to basic interest.
Free-Money will deprive real capital
of this protection, but the disproportion between the demand and supply of
loans of every kind, loans in the form of tenement-houses, factories and
machinery, as well as loans in the form of money, will continue to exist.
The material for the interest upon
these money-loans will, however, no longer be drawn from commerce (Money -
Wares - Surplus Money) but from production. It will consist of the increase of
the product obtained, without increase of the cost of production, by the
employer with the aid of a loan - and claimed by the loan-giver for himself,
because the ratio of demand and supply temporarily permits him to do so.
Basic interest is exacted during
exchange, not during production. It is not a share in the increased quantity of
wares produced with the help of a loan, but a share in all the wares dependent
upon the medium of exchange. Basic interest would still have been exacted even
if all workmen had possessed their own, precisely similar, means of production:
if all debts had been paid; if everyone paid for his purchases in cash; if
everyone lived in his own house. if the loan-market had been closed; if loans
in every form had been prohibited; if the exaction of interest had been
forbidden by law and religion.
The demand for loans, especially in
the form of means of production, is caused by the fact that more or better
wares can be turned out with these means of production than without them. If
the worker creating this demand finds an insufficient supply, he must surrender
to the loan-giver part of the surplus he hoped to realise with the desired
means of production - for no other reason than that the ratio between demand
and supply so decrees. And this ratio will continue to exist for some time
after the introduction of the Free-Money reform.
As long as the means of production
are capital, the produce of labour will also, even after the introduction of
Free-Money, be capital - not however as a ware, not in the market, not where
men bargain about the price. For there the claims for interest upon the wares
would cancel one another. But outside the circulation of wares, where the
question is, not a price, but the conditions of loan, not for purchasers, but
for borrowers; the produce of labour can remain capital and indeed must remain
capital as long as the means of production are capital. The opposite is true of
our traditional form of money which exacts its interest, not from borrowers,
but from the circulation of wares. It has plunged its snout into the very
blood-circulation of the people. Free-Money will deprive the medium of exchange
of its present leech-like characteristics. Free-Money is for this reason not
intrinsically capital. It cannot under all circumstances extort interest. It
shares the fate of the means of production, which can exact interest only as
long as demand does not overtake supply. If interest on real capital falls to
zero, interest-free loan-money will also have become a fact. With the
Free-Money reform basic interest disappears from the moment Free-Money meets
the wares. Free-Money as a medium of exchange is on the same level as the
wares. It is as if we had inserted potatoes as medium of exchange between iron
and wheat. Does anyone imagine that potatoes could exact interest from wheat or
iron ? But the disappearance of basic interest after the introduction of
Free-Money is no reason for the immediate disappearance of interest upon
loan-money. Free-Money will only clear the road for interest-free loans; more
it cannot do.
In this distinction between basic
interest and interest on loans, everything we have hitherto said about interest
is focussed to a point. Basic interest has up to the present escaped
observation because it was concealed behind its offspring, ordinary interest
upon loan-money. When a merchant borrows money and adds the interest he pays,
with his other general expenses, to the price of his wares, this was, up to the
present, assumed to be interest upon a loan. The merchant was supposed to
advance the money to the wares, to lend them something; and the producer was
supposed to pay the interest upon this loan. Such was the explanation. And
those who let this fallacy pass were not necessarily superficial thinkers. For
appearances are here indeed deceptive. Only the closest observation could
discover that the interest paid by the merchant for loan-money is not the
beginning but the end of the whole transaction. The merchant uses money to
exact basic interest from the wares, and as the money does not belong to him, he
delivers the basic interest to his capitalist. He acts here simply as cashier
for the capitalist. If the money had been his own he could have exacted basic
interest just as easily and put it in his pocket. In this case where is the
loan ? With a loan, service and return service are separated in time. The
interest upon a loan is wholly governed by the time that elapses between the
service and return service. But when money is being exchanged for wares, when
basic interest is being exacted, service and return service are at precisely
the same point of time. A loan-transaction leaves a debtor and creditor, an
exchange-transaction leaves no trace. A person goes into a shop, buys
something, pays and goes away. The transaction is then completed. Each party gives
and receives in the present the whole amount agreed upon. Where is, in this
case, the loan ? Loans often mean poverty, distress or burdensome debt; and
they always mean incapacity to pay at once for the thing desired. A person who
buys bread on credit because he cannot pay ready money receives a loan and pays
interest in the form of an increased price. But when a farmer brings a
cart-load of fat pigs to market to exchange them for money, there is no
poverty, no distress and no burden of debt. A loan-giver gives from his
superfluity; a loan-taker takes because of his want. But in exchange each party
has simultaneously superfluity and want; want of what he asks for, superfluity
of what he offers.
Basic interest, therefore, is in no
way related to interest upon loans. Basic interest is, as we have said, a
tribute, a tax, an extortion; it is many things, but it is not a return service
for a loan. Basic interest is a unique phenomenon which must be considered by
itself; it is a fundamental economic conception. A merchant is willing to pay
interest upon a loan of money because he knows that he, can recover the
interest from the wares. If basic interest disappears, if money loses the power
of exacting basic interest, merchants will no longer be able to offer interest
for loans to buy wares.
Here again a comparison with barter
will be useful. In barter wares are exchanged for one another without interest.
But if at the time of barter someone desires wares, not in exchange for his
wares, but as a loan, the ratio between the demand and supply of loans
determines absolutely whether, or how much, interest can be exacted. If a house
can be let for a rent greater than the amount of depreciation, it is obvious
that anyone who rents a house in its component parts (in the form of a loan of
wood, lime, iron, etc.) will have to pay interest.
(*The frequent repetitions in this chapter were
necessary in order to avoid the danger of confusing basic interest upon money
with interest upon loans.)
6. FORMER ATTEMPTS AT EXPLAINING CAPITAL INTEREST
Readers who now understand to what
circumstances houses, means of production, ships, etc. and money, owe their
characteristics as capital, will also wish to hear something of the attempts
hitherto made to explain interest. Those who desire thorough information on the
subject will find the theories of interest very fully described in
Boehm-Bawerk's "Capital and Capital-Interest". The following
classification is taken from that work. The author puts the question: Whence
and why does a capitalist receive interest ? and groups the answers as follows:
-
Theories of Fructification.
Theories of Productivity.
Theories of Utility.
Theories of Abstinence.
Theories of Work.
Theories of Exploitation.
As Boehm-Bawerk does not confine
himself to criticising the different theories, but also proposes a theory of
his own, he is inevitably guided by his own theory when examining the theories
of others, and his attention is attracted by evidence which speaks for or
against it - at the cost of other evidence which, considered from another
standpoint, gains greatly in importance and deserves a more thorough
investigation than that accorded it by Boehm-Bawerk. I find for instance on p.
47 the following remarks: -
"Sonnenfels, (*
Sonnenfels, Handlungswissenschaft, Vienna, 1758.)
influenced by Forbonnais, (* No reference.) sees the origin of interest in the interruption of the circulation
of money by money-collecting capitalists out of whose hands money can be
enticed again only by a tribute offered in the form of interest. He ascribes
various evil effects to interest: that it increases the price of commodities,
that it diminishes the reward of diligence (by this is meant probably the
proceeds of labour) of which it allows the owner of money to partake. He even
calls capitalists a class of non-workers who live by the sweat of the working
classes."
For us a man advancing such opinions
is an attractive personality, but Boehm-Bawerk does not examine this theory in
detail; he dismisses the originator of it with a few words about
"contradictory eloquence". But it may be that if these early writings
on interest were studied from the point of view of basic interest they would be
found to contain many remarkable statements. Possibly the independent
interest-creating power of our traditional form of money has not had to await
discovery and proof until the present day.
We shall now give a greatly
condensed summary of the above six theories, referring all who wish to study
the history of the theories of interest more closely to the above-named
excellent work of BoehmBawerk.
A detailed examination of these
theories is unnecessary, as anyone with the help of the theory of basic
interest, can discover the point at which the theorist, lured from his course
by a siren in the shape of a theory of value, runs full-sail upon some reef of
error.
The Theory of Fructification, by a
flight of fancy, deduces interest from rent on land. Because a field that
yields interest cap be bought with money, money and everything that can be
bought with money must yield interest. True, but this theory proves nothing at
all, for it falls to explain why money, which is expressly declared to be
unproductive, can buy a field that produces interest. Among those who adopted
this theory we are surprised to find Turgot and Henry George - honest men in
doubtful company. But probably we have here simply opinions held without deep
conviction and passed on to provoke discussion and to call the attention of
others to the problem of interest.
The Productivity Theory explains
interest by asserting that the means of production (capital) assist production
(labour). And this is true, for what could the proletariat do without means of
production ? But this theory asserts, further, that the resulting increase of
produce must obviously and naturally belong to the owner of the means of
production. This is not true and certainly not obvious, as is shown by the fact
that work and the means of production cannot be separated; that it is
impossible to say what part of the product is due to work and what part to the
means of production. If interest were due to the fact that a proletarian worker
can produce more with instruments of production than with his naked hands,
nothing whatever would in most cases be left over for the worker. An
agricultural worker without a field and a plough, or an engine-driver without
an engine is helpless. But work and the means of production cannot be
separated, and division of the product between owner of the means of production
and worker must be determined by circumstances other than the amount of
assistance rendered to production by the instruments of production. What are
these circumstances ?
Our answer is: The ratio in which
the workers share the product with the owners of the instruments of production
is determined by the demand and supply of these instruments, quite
independently of their efficiency. The means of production assist labour, hence
the demand from the proletariat. But this demand alone cannot determine
interest; supply has also a word to say. In the division of the product between
capitalists and proletariat everything depends upon the ratio of demand to
supply. The capitalist can expect interest on his means of production only as
long as demand exceeds supply. And the better, the more efficient the
instruments of production placed at the disposal of the workmen by the
capitalist. the more the produce of these instruments will help to swell their
supply, and thus to depress interest. But according to the productivity theory,
the contrary should be true: interest should increase in proportion to the
efficiency of the means of production. If there were a universal ten-fold
increase in the efficiency of the means of production, the productivity theory
would expect an enormous gain for the capitalist, whereas in reality such an
event would soon cause the supply of means of production to overtake demand,
with the result that interest, under pressure of this supply, would disappear
(on the supposition that money was not able to prevent such a
development).
The productivity theory is unable to
explain interest because it treats capital statically (as matter) instead of
dynamically (as a force). (* See Dr. Christen: Absolute
Währung, Annalen d. Deutschen Reiches, 1917, p.
742) It sees only the demand
caused by the usefulness of the means of production and fails to consider supply.
The productivity theory treats capital simply as matter; it overlooks the
forces necessary to convert this matter into capital.
The Utility Theories are the
offspring of the productivity theory, says Boehm-Bawerk. But BoehmBawerk
obscures the simple train of thought which leads to the productivity theory by
converting the problem into a problem of value - without saying upon which
theory of value his proof is based. When he speaks of the value of the product
we may think of the ratio in which commodities exchange for one another. But
what can we make of the expression "value of the means of production"
? The exchange of instruments of production is exceptional, yield of interest,
not price, being here spoken of. If the exception occurs, if an employer sells
his factory, the price is determined entirely by the yield of interest, as is
proved by the daily fluctuations of industrial shares and by the fact that the
selling price of a field is the sum which yields interest equal to the rent.
And what theory of value could be applied to the field ? If the factory to be
sold is resolved into its component parts, that is, into commodities, and the
value of these commodities is established, we have commodities and prices, not
means of production and interest. Commodities are produced for sale, means of
production for personal use or as capital to lend. Is there any theory of value
in existence which applies simultaneously to commodities and means of
production, to price and interest ? An impenetrable fog overhangs this
region.
Our author says for example on page
131:
"It should be obvious that even
if we have proved that capital has a power of producing goods or of producing
more goods, we are still not justified in assuming as proved that capital has a
power of producing more value (* Again the machinery of value!) than would otherwise have been produced, still less of producing
more value than it possesses. (* Again intrinsic value!) To substitute the latter conceptions for the former in the train of
reasoning would clearly be equivalent to pretending that something had been
proved which in reality had not been proved."
It may be that everything here said
of so-called value, of intrinsic value, of production of value, of stores of
value, of extracted or petrified value is obvious to those who hold the same
opinions as Boehm-Bawerk. But how can he possibly assume that all his readers
hold these opinions ? Does "the
problem of value" no longer
exist ? For many of us it is "obvious" that when the fog of value
condenses into a "conception of value", what the author really means
is simply a product in a certain quantity and of a certain quality, which can
be exchanged. But to those who understand value in this sense it is quite
obvious that the power of capital to produce mote goods includes the power of
capital to produce more value. If, for example, the general use of the
steam-engine doubles the product of labour, everyone will obtain, in exchange
for his doubled produce, double the quantity of goods he obtained formerly. If,
now, he calls the "value" of his produce what he obtains in exchange
for it, he obviously obtains in exchange for his produce (doubled by the use of
the steam-engine) exactly double the quantity of "value".
The Abstinence Theory, proposed by
Senior, begins well by seeking the explanation of interest in the existing
disproportion between the demand and supply of means of production. But the
abstinence theory stops halfway. Senior regards mankind as confirmed
spendthrifts, who prefer to live a few days in dissipation and for the
remainder of the year to pay interest upon a loan, rather than to renounce an
immediate enjoyment. Hence the scarcity of the means of production, the
disproportion between demand and supply; hence interest. The few persons who
practice abstinence are rewarded for their rare virtue by interest. Even these
few persons are abstinent, not because they prefer future enjoyment to present
prodigality, not because as youths they wish to save for marriage, as men for old
age, as fathers for their children; but because they know that their savings
will yield interest. Without this reward of virtue they, also, would live from
hand to mouth, they, also, would save no seedpotatoes but squander the whole
harvest in one mighty potato feast. Without interest no one would have any
motive for producing and preserving capital. Present enjoyment is always and
obviously preferable to future enjoyment. For no one knows whether he will be
alive in the future to enjoy the goods he saves!
If such is human nature (how
abstemious in comparison are bees and marmots!) is it not astonishing that
mankind continues to exist and that anyone ever makes a loan in money ? Human
beings who are such reckless managers of their own property must, when
entrusted with the property of others, be under still greater temptation to
sacrifice future enjoyment to the sweets of the present. How can they ever pay
interest or repay borrowed capital ? And if our ancestors always consumed their
winter provisions before the winter began, it is difficult to account for the
fact of our existence. Or did our forefathers renounce immediate enjoyment
because the provisions in their cellars yielded interest, that is, became more
valuable, more abundant and of better quality ? Yet there is some truth in
Senior's theory. Doubtless interest owes its existence to scarcity of capital,
and scarcity of capital must be due to thriftlessness. But, strangely enough,
the spendthrifts are not those who pay the interest, but those who exact it. It
is true, indeed, that what the capitalists spend does not belong to them, but
to others; for the unemployment they cause for the purpose of exacting basic
interest through the interruption of the monetary circulation, is at the
expense of the workers. Capitalists spend the property of others, namely the
power of work of the toiling, thrifty masses. To prevent over-production of
capital and a fall in the rate of interest, they allow produce worth billions
of dollars to be destroyed, at the expense of others, as over-production during
economic crises. Hence the scarcity of capital, hence interest. Sermons about
abstinence should therefore be addressed to the capitalists, not to the
workers. The workers have shown that they can practice abstinence even unto
death by starvation to snatch back a small fraction of the capitalists' booty.
Such heroic abstinence they have shown in a thousand strikes; so if they could
be persuaded that to abolish interest they need only save - chew no tobacco.
drink no brandy - presumably they would do so. But under present conditions
what would be the result ? The moment interest upon real capital fell below
basic interest, a crisis. an economic catastrophe, would rob the workers of the
fruit of their abstinence.
But in any case the abstinence
theory leads straight to the following contradiction: Work, toil, sweat, to
produce and sell many commodities, but buy as few commodities as possible.
Starve, freeze, abstain, buy nothing of what you produce (that is, of what you
have destined for sale) - in order to gain the largest Possible surplus of
money for the formation of new real capital.
The originators of the abstinence
theory would have come upon this complete contradiction if they had followed up
their original line of argument, for they would have discovered the defects of
our present monetary system. Probably the same line of reasoning taught
Proudhon that gold blocks the road between commodities and real capital, and
prevents the conversion of an over-production of commodities, which depresses
prices and leads to an economic crisis, into an over-production of capital.
which depresses interest and stimulates exchange.
The Theories of Work declare that
interest is the product of the capitalist's labour. Rodbertus calls the
reception of interest an office; to Schaeffle coupon-cutting appears an
economic profession, his only criticism of which is that its
"services" are expensive; and Wagner calls stockholders "public
functionaries for the formation and employment of the national fund for the
means of production". Yet Boehm-Bawerk does these persons the honour of
numbering them among the investigators of interest!
The Theories of Exploitation explain
interest simply as a forcible deduction from the product of labour, which the
owners of the means of production are able to exact because the workers must
live by their work, and cannot work without instruments of production.
But does this particular theory
deserve the ill-epithet of exploitation ? " Does not the abstemious man,
in the abstinence theory, also exploit market conditions, when he makes use of
the scarcity of capital in the market to exact interest ?
According to this theory - its chief
upholders are the socialists - the owner of the means of production measures
the deduction from the product of labour, strangely enough, not by commercial
principles of trade and exchange, but by historical and moral standards. Marx
says: "A moral and historical factor enters into the determination of the
value of labour, in contrast to other commodities." (Capital, Vol. I.
VI).
But what has the maintenance of
labour to do with history and morality, with certain countries and certain
times ? For the average amount of food required to maintain labour is determined
by the labour itself ! It may vary with the difficulty of the task, with race,
with the strengthening or weakening of the digestive organs, but it can never
vary because of moral and historical causes. If morality is allowed to be a
factor in this, the central point of Marx's doctrine, he can no longer speak of
the "labour" contained in a commodity. With such spongy terminology
anything can be proved.
According to this theory the
capitalist makes careful inquiries: how the workman's mother, grandmother and
great-grandmother fed themselves, what these foodstuffs cost, and how much of
them a workman consumes in bringing up his children; for the capitalist is
greatly concerned that not only "his" workmen, but workmen in general
shall remain strong and healthy. This minimum the employer leaves to the
workers. The remainder he removes, unobtrusively, for himself.
This division of the product of
labour between employer and workman which is Marx's easy method of evading the
whole problem of interest (for in this manner the theory of wages includes the
theory of interest and rent) is the weak point in the theory of exploitation.
The preliminary assumption of this theory, that wages are determined by the
cost of breeding, training and feeding workmen and their offspring, is unsound,
as is the subterfuge that whenever wages go above or below this limit, the
feeling of the community as to what a workman needs determines the amount of
wages !
"During the last five years
wages have risen to such an extent on East-German estates that they are hardly
distinguishable from West-German rates, and the seasonal migration of labourers
(Sachsengängerei) has greatly diminished". This was recorded in the
newspapers in 1907. It is remarkable how suddenly the feeling of the community
changes in respect to what a worker needs for living! The change of prices on
the exchanges is, indeed. even still somewhat more sudden. Nevertheless a
period of five years is not long enough to be called a "historical"
development.
In Japan wages have risen 300%
within quite a short period - but surely not because the feeling of the
community about hunger and repletion has so suddenly changed to this extent.
This explanation of the contradictions with which the theory of exploitation bristles,
bears every mark of an argument advanced, for want of a better, by someone
driven into a corner.
One would be equally justified in
stating the theory of exploitation as follows: The capitalist takes from the
product of the worker everything he requires for living up to the standard
prescribed for his class by history and the feeling of the community, and for
bequeathing suitable legacies to his children. The rest he throws, without
taking the trouble to measure or count it, to the workers. This statement of
the theory has, indeed, several advantages over the form chosen by Marx. It
certainly sounds more plausible, for the capitalist would first, obviously,
think of himself before inquiring whether the workers could manage upon what
remained. The introduction of wheat-duties by the German agrarian party gave
wide publicity to this obvious fact.
The explanation, put forward by this
theory, of the origin of the proletariat essential for interest is also
extremely arbitrary. That large enterprises have often advantages over small
enterprises does not prove that these advantages must necessarily accrue to the
owners of the large enterprises. This would first have to be established by a
sound theory of wages. At the present day capital, whether in the form of a
machine of 10 or of 10,000 horse-power, produces the same interest, namely, on
the average, 4-5%. Even if large enterprises had always advantages over small
enterprises this would still not prove that the owners of the small enterprises
must be reduced to the ranks of the proletariat. Artisans and farmers need not
always remain so dull-witted as to fold their arms and let themselves be
supplanted by large enterprises - nor, as a matter of fact, have they done so.
They defend themselves - they combine a number of their small enterprises into
one large enterprise and in this way often succeed in uniting the advantages of
a large enterprise with the thousand minor advantages of small enterprises
(co-operative creameries and steam-threshers, village bulls, etc.). Nor is
there any reason. founded on the advantages of a large enterprise, why its
shares must be held by capitalists rather than by the workers themselves.
It is not, in short, so easy to
explain the origin of the proletariat. One may invoke the laws of rent or
forcible expropriation by the sword. But this does not explain why a
proletariat is evolved in the colonies. The sword is there unknown, and freeland
lies before the gates of the cities.
In the German colonies in Brazil
(Blumenau, Brusque) many industries, especially weaving factories, have been
founded, and in these factories the daughters of the German colonists work
under wretched conditions for low wages. Yet the fathers, brothers and husbands
of these proletarian women have unlimited quantities of the finest land at
their disposal. Hundreds of daughters of German colonists also work as domestic
servants in Sao Paulo.
It is not easy to explain the
continued existence, still less the increase, of the proletariat at the present
day, when movement is free, when the proletarian can emigrate to uninhabitated
countries and there
obtain land (* For the journey from
Europe to Argentina the Norddeutscher Lloyd in 1912 charged 25 dollars, or only
about a week's wages of a German harvest worker.), when
everyone can easily, by co-operation, enjoy the advantages of a large
enterprise-especially as modern liberal legislation tends to protect the
proletariat from economic brigandage.
But as well as the sword, as well as
the advantages of large enterprises, as well as legislation devised to protect
rent, there is another cause at work that can explain the existence of the
proletarian masses - a cause that has hitherto been overlooked by the
investigators of interest. Our traditional form of money is capable, unaided,
of reducing the mass of the population to the condition of a proletariat; to do
so it needs no allies. The proletariat is an inevitable regularly-appearing
concomitant of our traditional form of money. The proletariat can be deduced
directly, without subterfuges, without arbitrary reasoning, without ifs and
buts, from the present form of money. Our present form of money must always be
accompanied by mass-poverty. In former times the sword was an efficient weapon
for separating the people from the means of production. The sword, however,
cannot hold the booty won. But from money the booty can never be tom. Interest
cleaves closer to money than blood or rent to the sword.
Many, in short, may share in the
plundering of the workers, and may, for this purpose, make use of divers
weapons. but all these weapons rust. Gold alone never rusts, gold alone can
boast that neither the division of inheritances, nor legislation, nor any form
of co-operative or communistic order, has power to deprive it of interest.
Interest upon money is proof against legislation and against the anathema of
the Church. The diversion by legislation of rent on land into the coffers of
the State is possible and compatible with private ownership of the land. Here
and there an attempt of this kind is being made. But no law can deprive our
traditional money of even a fraction of the interest it exacts.
Our traditional form of money has
produced the proletarian masses, the existence of which gives rise to the
theory of exploitation; and it has successfully counteracted the natural forces
tending to dissolve these impoverished masses. To be complete, the theory of
exploitation must go back a step and seek interest, not in the factory, not in
private ownership of the means of production, but in the exchange of the
produce of labour for money. The separation of the people from their means of
production is merely a result, not the cause, of interest.
7. THE COMPONENTS OF GROSS INTEREST
(Basic Interest, Premium for Risk
and Hausse-Premium)
(* I have substituted
"Hausse-premium" for "Ristorno", the word formerly used by
me, as it better expresses the meaning: the money-giver's share in an expected
rise of prices.)
Those who seek to test the
correctness of the above theory of interest by statistics will frequently come
upon apparent contradictions. The reason is that besides basic interest the
rate of interest usually contains components which have nothing to do with
interest.
In addition to insurance against
risk, the rate of interest often contains a peculiar component dependent upon
variations in the general level of prices of commodities. To emphasise the
connection with rising prices, and to provide a term which can be used outside
Germany, I shall call this component a Hausse-premium. This means the share of
the profit from an expected rise of prices (Hausse) falling to the giver of
money.
To understand the nature of this
component of interest one need only observe the conduct of borrowers and
lenders of money when a general rise of prices is expected. A characteristic
feature of a general rise of prices is that borrowed money can be paid back
with part of the commodities that have been bought by means of the money and
then sold. An extra profit, over and above the legitimate profit of commerce, a
surplus, therefore remains. This surplus must of course provoke a universal
appetite for buying proportionate to the probable amount of the surplus and,
above all, to the degree of certainty with which the continuation of the rise
of prices can be expected.
Those who work with borrowed money
then increase their requests for money from the banks to the extreme limit of
their credit (which, as a rule, increases, since the rise of prices favours
debtors); and those who have previously lent money prepare to start business
independently, foregoing their intention only if borrowers, by raising the rate
of interest offered, make them sharers in the expected gain.
Through the general rise of prices
(trade-boom, business prosperity) the possessor of ready money and claims to
ready money (Government loans, mortgages, etc.) is threatened with loss, since he
receives less and less commodities for his money. The only way in which the
possessor of money can protect himself against this loss is to sell the
threatened securities, and with the money realised to buy industrial shares,
commodities, houses, as the prices of these things, it is commonly expected,
will increase. After this double transaction the trade-boom can no longer
injure the individual in question; the loss falls on the purchaser of the
threatened securities. But as these purchasers also understand the situation,
they buy the Government securities only at a reduced price, and they increase
the deduction (discount) which they make when buying bills of exchange. In this
way a kind of equilibrium is established.
But now suppose some clever person
says to himself: "I have, indeed, no money, but I have credit. I shall
borrow money upon bills of exchange and buy commodities, industrial shares and
the like. And when the bills of exchange fall due, I shall sell, at the higher
prices, what I have bought, and pay my debt, keeping the difference for
myself." Clever persons of this kind are plentiful, and they are all to be
found at the same time, in the same place, namely in the banker's waiting-room.
Small manufacturers, small merchants and the richest in the land are there in
company. They have all an insatiable appetite for money. But the man of money
sees the throng and knows that his money is insufficient to satisfy them all.
(If he did satisfy them, they would return next morning and ask for double the
amount). To reduce the throng he raises the rate of interest (discount) and he
keeps raising it until the clever persons are uncertain whether the profit from
the transaction they have planned can cover the increased amount of interest.
Equilibrium is then established; the appetite for money disappears; the throng
in the waiting-room of the man of money melts away. What the possessor of money
loses through a rise of prices has then gone over into the rate of
interest.
Thus the rate of interest must replace
what money-capital loses through a rise of commodity prices. If, for instance,
the expected rise of prices amounts to 5% annually, and basic interest is 3 or
4%, the interest upon loans must rise to 8 or 9%, to leave money-capital
unaffected. If the capitalist deducts from this 9% the 5% corresponding to the
rise of prices and adds it to his capital, his position is as strong as before
the rise of prices. 105=100, that is, for 105 he now receives the same amount
of commodities as he used to receive for 100.
It would not be surprising if a
closer examination revealed that in spite of the higher dividends and the
higher rate of interest during the last 10 or 15 years, German capitalists
(with the exception of landowners) had received, on the average, an abnormally
low rate of pure interest. Prices during this period have risen sharply. 1,000
marks fifteen years ago purchased quite as much as 1,500 marks at the present
day. If a capitalist makes the above calculation, what becomes of the profit
from the high dividends and the increase in the price of shares ? Where is the
so-called increase of value ? And a capitalist must so calculate, for the
amount of his money, expressed in figures, is immaterial, otherwise a
millionaire would only have to travel to Portugal to become a
multi-millionaire.
The greatest sufferers from a rise of prices are the
holders of securities bearing a fixed rate of interest; for if they sell such
securities they lose through the fall in the selling-price, and if they keep them,
they receive less commodities for the interest. If the great rise of prices had
been foreseen fifteen years ago, the price of consols would have fallen still
further perhaps to 50. (* All this was written before the
war. See also: Gesell, Die Anpassung des Geldes an die Bedürfnisse des
Verkehrs. Buenos Aires, 1897.)
It is therefore clear that the
expectation of a general rise of prices will increase the requests for loans of
money, and that the owners of money will consequently be in a position to exact
a higher rate of interest.
The rise in the rate of interest is
therefore caused by the universal, or almost universal, belief that prices are
about to rise, and it depends ultimately upon the fact that borrowers hope to
meet their liabilities with part of the commodities that owe their existence to
the borrowed money. During a rise of prices the rate of interest admits a
foreign component that has nothing to do with capital interest. We call this
component a hausse-premium, that is, the money-giver's share in the profit
expected from a rise of prices.
This component of the rate of
interest disappears of course at once when the expected general rise of prices
has been realised. It is not the realisation of a rise of prices, but the hope
of a future rise of prices that stimulates people to purchase commodities, to
invest their money in new enterprises and to besiege the bank with requests for
loans. When the hope of a further rise of prices has dwindled away, there is no
stimulus to purchase, and money returns to the banks. The rate of interest then
falls; the hausse-premium withdraws from the rate of interest. Obviously when a
general fall of prices is expected every trace of hausse-premium disappears
from the rate of interest.
The amount of the hausse-premium
depends of course entirely upon the amount prices are expected to rise. If a
sudden large jump of prices is expected, the claims of the banks will advance
at the same pace and there will be a sudden large jump in the rate of
interest.
When a general rise of prices was
expected in Germany a few years ago, the rate of interest rose to 7%. Shortly
afterwards a fall of prices was expected and the rate of interest fell to 3%.
The difference can be ascribed with certainty to the hausse-premium. In
Argentina the rate of interest sometimes stood at 15%, namely at times when the
continuous increase of the stock of paper-money drove prices up by leaps and
bounds. When, afterwards, the increase of paper-money ceased, interest fell to
5%. We have here a hausse-premium of 10%. Henry George states that there was a
time when 2% monthly was not considered an exorbitant rate of interest in
California. This was during the great Californian gold discoveries.
As there is no limit to a general
rise of prices (a pound of candles at one time exchanged for 100 livres in
assignats at Paris), there is no limit to the hausse-premium. It is easy to
imagine circumstances in which a hausse-premium would drive the rate of
interest up to 20, 50 or 100%. The increase in the rate of interest is
determined simply by the amount prices are expected to rise before the date of
repayment. If, for example, a rumour gained currency that gold deposits of
immense richness had been discovered under the ice-fields of Siberia and if, in
confirmation of this news, great shipments of gold were reported, the
inevitable result would be a universal zest for buying which would increase to
infinity the requests for loans made to the owners of money. Such a discovery
of gold would cause an unparalleled rise in the rate of interest. The
hausse-premium could never, of course, quite equal the surplus expected from
the general rise of prices, since in that case, the expected gain would at once
be completely absorbed by the discount. But the more reliable and certain the
estimate of the expected rise of prices, the more nearly would the
hausse-premium equal the surplus.
(* At the end of the German
paper-money swindle (1923), interest was paid at the rate of 100% per diem; the
capital doubling in this way daily !)
In consequence of pressure from the
creditor-class laws have been passed from time to time in many countries with
the purpose of reducing the prices of commodities to an earlier lower level.
(By the withdrawal from circulation of paper-money which had been issued
overabundantly, or by the demonetisation of silver, for example). A few years
ago (1898) such a law was passed in Argentina by which the general level of
prices was reduced from 3 to 1.
If any country at the present day
were, on the contrary, to yield to the wishes of debtors and to drive prices
step by step upwards by increasing the stock of money in such a way that prices
annually increased 10%, the certainty of the expected surplus would bring the
hausse-premium very near this 10%.
The recognition of the
hausse-premium as a special component of the rate of interest is essential for
the explanation of most phenomena in connection with interest. How, for
instance, can we otherwise explain the fact that the rate of interest and the
amount of savings-bank deposits as a rule increase simultaneously - unless we
abandon the theory that interest is deducted from the proceeds of labour?
The division of the rate of interest
into interest, premium for risk and hausse-premium gives a completely
satisfactory explanation of what appears to be an inexplicable anomaly. For
only pure capital-interest is deducted from the proceeds of labour; the
hausse-premium is resolved into the higher prices. The worker, whose wages also
follow the rise of prices, is consequently unaffected by the higher rate of
interest. He pays higher prices and receives a higher wage; equilibrium is here
established. The borrower pays a high rate of interest but receives a higher
price for what he sells, here also equilibrium is established. The capitalist
receives back his money scourged and mutilated, but is compensated by the
higher rate of interest. Here again there is equilibrium. Only the explanation
of the increase of savings is wanting, and it must be sought in the fact that
during a general rise of prices (a trade-boom) unemployment disappears.
It is only the rate of interest,
therefore, not interest itself, that increases simultaneously with savingsbanks
deposits.
8. PURE CAPITAL-INTEREST A FIXED MAGNITUDE
We have just shown that when a
general rise of prices (trade-boom, trade-prosperity) is expected, the rate of
interest contains, besides capital-interest and a premium for risk, a third
component, a haussepremium. (The money-giver's share in an expected rise of
prices.) From this it follows that if we wish to determine the variation in
capital-interest, we cannot at once compare the rates of interest at the
different periods. To do so would be as futile as to compare money-wages in
different countries, at different times, without at the same time taking into
account the prices of commodities.
But as the hausse-premium occurs
only during a rise of prices and at once disappears when the rise of prices
comes to an end, we can assume that the rate of interest during periods of
falling prices, many of which are recorded in history, consists only of pure
capital-interest and a premium for risk. The rate of interest during such
periods is therefore a reliable index of the movements of capitalinterest.
A continuous general fall of prices
occurred, as is well-known, during the period from about the century before the
birth of Christ to about the year 1400. (*In the
cities of France, Italy and Spain which lowered the
monetary standard or, in other words, which practised
so-called debasement of the coinage, the fall of prices came to an end sooner.) During this long period the monetary circulation was confined to
gold and silver (paper-money did not yet exist), and the mines of these metals,
especially the Spanish silver mines, were exhausted. Partly owing to
prohibitions of interest (though these were often inoperative) the gold handed
down from former times circulated with difficulty and was gradually lost. This
general fall of prices has been proved by well-known facts and is, indeed,
nowhere denied.
In Gustav Billeter's "History
of the Rate of Interest in Greece and Rome up to the Reign of Justinian"
the following facts are recorded:
p.163: "At Rome from the time
of Sulla (82 B.C. to 79 B.C.) we already find the rate of interest fixed in its
chief types, namely 4% to 6%."
p.164: "Cicero writes at the
end of the year B.C. 62 'Persons of repute, with good credit, find money in
plenty at 6%'." Billeter adds "This tacitly expresses a falling
tendency and, in fact, we find shortly afterwards a lower rate."
p. 167: " The rate of interest
at the time of the civil wars (about the year 29 B.C.) was 12% and even persons
with good credit were obliged to pay this rate. From 4-6% the rate of interest
had thus reached 12%. But it soon sank back to the old level of 4%."
(The temporary rate of interest of
12% in war time is perhaps sufficiently explained by an unusually high premium
for risk. We must also take into account the possibility that in spite of the
general scarcity of money, prices may occasionally have increased from local or
temporary causes, and that the rate of interest may therefore occasionally have
contained a hausse-premium. A change in the rate of circulation of money,
caused possibly by a change in the administration of the laws against interest,
would suffice to explain such phenomena.)
p.180: In the Roman Empire before
the reign of Justinian: "For safe investments we find 3-15%, but 3% is
extremely rare; this rate appears plainly to be the lowest even for investments
resembling annuities. 15% is altogether rare; 12% is not exactly rare, but not
typical; 10% is rare. The typical rate lies between 4 and 6%. Within these
limits we can find no differentiation due to place or time; the only
differentiation is due to the nature of the investment, 4% being a low rate, 6%
quite the normal rate, and 5% the intermediate rate for very safe investments;
these rates being also normal for ordinary security. The normal rate of
interest when expressly stated is 4-6%, never 12%. The rate of capitalisation
is 4% and 3.5%."
p. 180: The time of Justinian
(527-565 A.D.) "The conclusions to be drawn are therefore that under
special circumstances the rate of capitalisation can rise to near 8% and fall
to about 2% or 3%. Examination of the average rates gave 5% as probably normal,
generally a little too high; 6%-7% also as an average rate but somewhat high,
so that this rate could not be considered quite normal. We can probably assume
that a rate a little below 5%, to about 6%, was the true average."
Billeter's researches here come to
an end. Let is recapitulate his results:
In Sulla's time (82-79 B.C.) the
rate of interest was 4-6%. In Cicero's time (62 B.C.) money was plentiful at
6%. After a short interruption caused by war (29 B.C.) the former rate of
interest, 4%, reappeared. During the period of the Roman Empire before
Justinian, the usual rate was 4%-6%. During the reign of Justinian, 527-565,
the average rate of interest was 5-6%.
What is the meaning of these
figures? They mean that during a period of 600 years the rate of interest
tended to remain at almost exactly the same level as at present, 1,500 years
later. The rate of interest of 4-6% was perhaps slightly higher than at the
present day, but the difference can be ascribed to the premium for risk which,
in classical times and during the Middle Ages, was higher than at present when
legislation, morality and the Church have extended their protection to
interest.
These figures prove that interest is
independent of economic, political and social circumstances. They give the lie
to all the economists who have hitherto attempted to explain interest,
particularly to those who hold some form of the theory of productivity (the
only current theory with even the semblance of truth). That the same interest
is paid for modern means of production such as steam threshingmachines,
self-binders, double-barrelled guns and dynamite, as was paid 2000 years ago
for reapinghook, flail, cross-bow or wedge proves plainly enough that interest
is not dependent upon the usefulness or efficiency of the means of
production.
These figures mean that interest is
due to circumstances that made their influence felt 2,000 years ago, and that
this influence continued during a period of 600 years in almost exactly the
same strength as at the present day. What are these circumstances ? Not one of
the current theories of interest gives even a hint in answer to this question.
Billeter's investigations
unfortunately end at the period of Justinian and, as far as I know, there is no
trustworthy investigation of the following period up to the time of Columbus.
It would, indeed, be difficult to obtain reliable data relating to this period,
at any rate in Christian countries; for the prohibition of interest became more
and more strict, and the monetary circulation, and with it commerce, decreased
in consequence of the progressive scarcity of the precious metals. From 1400
onwards begins the depreciation on a large scale, of the monetary standard, and
the recognition of pure capital-interest in the rate of interest becomes
impossible. For this period Billeter would have had to combine his
investigations with statistics of prices, to separate the hausse-premium from
the rate of interest.
(The fact that Pope Clement V at the
Council of Vienna (1311) could threaten with excommunication lay princes who
passed laws favourable to interest shows the weakness of commerce at that date
and the infrequency of loan-transactions. It was possible to treat isolated
sinners with severity; but if commerce had been brisk and the breaking of the
prohibition a daily occurrence, the Pope could not have dared to use such a
threat. The proof of this is that when commerce increased, the opposition of
the Church to interest at once fell away).
With the expansion of base coinage
in the fifteenth century (which had the same effect on prices as the invention
of paper-money) and with the opening of the silver mines in the Harz mountains,
in Austria and in Hungary, an economic system based on money become possible in
many parts of Europe; and with the discovery of America began the great
price-revolution of the sixteenth and seventeenth centuries. Prices rose
steadily and the rate of interest was burdened with a heavy hausse-premium. It
is not surprising, therefore, that during this period the rate of interest was
very high.
From Adam Smith's "Wealth of
Nations" I take the following figures: In 1546, 10% was fixed as the
maximum legal rate of interest. This law was renewed by Queen Elizabeth in
1566, and 10% remained the legal rate until 1624.
At the latter date the
price-revolution had almost come to an end and the general rise of prices
proceeded more quietly. Simultaneously the rate of interest fell. The legal
rate was reduced in 1624 to 8% and, shortly after the restoration of the
Stuarts (1660), to 6%. In 1715 it was reduced to 5%.
Adam Smith remarks that the legal
regulation of the rate of interest appears always to have followed, not to have
preceded, the market rate.
Since the time of Queen Anne
(1703-1714) 5% seems to have been above, rather than below, the market rate.
This is natural, since at that period the price-revolution was complete. The
rate of interest now consisted solely of pure capital-interest and a premium
for risk.
"Before the last war",
writes Adam Smith, "the Government borrowed at 3 %, and private persons
with good credit borrowed in the capital and in many other parts of the
kingdom, at 3%, 4 and 4.5%."
That is, exactly the conditions
which we have at the present day.
Are further facts necessary to prove
that pure capital-interest is a fixed magnitude; that it never falls below 3%,
or rises above 4-5:%; that fluctuations in the rate of interest are not due to
fluctuations in the rate of basic interest ? When has the rate of interest
risen in modern times ? Only in conjunction with a rise in the prices of
commodities. After the Californian gold discoveries the rate of interest rose to
such a height that, in spite of the increased price of wheat, German landowners
with debts drew public attention to their plight. The increased prices of wheat
were absorbed by increased demands for wages. And when the Californian mines
became exhausted, prices fell, in company with the rate of interest. Then came
the war-indemnity from France, high prices and a high rate of interest. After
the great collapse in 1873 both prices and the rate of interest fell. During
the last periods of economic prosperity, 1897 to 1900, and 1904 to 1907, the
rate of interest rose. Prices then fell and with them the rate of interest. At
present prices are slowly rising; so is the rate of interest. In short, if one
deducts from the rate of interest the hausse-premium due to the general rise of
prices, what remains, namely pure interest, is a fixed quantity.
But for variations in the
price-level, the rate of interest would have remained at 3 - 4% during the last
2,000 years.
Why does interest never fall below 3
% ? Why does interest never, even temporarily, even for one day in the year,
even for one year in the century, even for one century in two thousand years,
fall to zero ?
The answer has been given in this
book.
I now conclude my exposition of The
Natural Economic Order, my aim being, not to furnish detailed solutions of
separate economic problems, but to indicate the formulae by which such problems
can be solved. No separate economic problem, however, has hitherto been brought
to my notice which could not be satisfactorily solved by application of the
formulae, Free-Land and Free-Money.
Those who raise objections to The
Natural Economic Order should begin by asking themselves whether they do not belong
to the numerous class of persons who profess the following creed: "I hate
disturbance, I hate civil strife and international warfare. I am steeped in
pacifism and only ask to be allowed to live in peace with my fellow-countrymen
and all the world - on my income derived from rent and interest."
To the criticism of these good
people I reply: "With your objections you are merely searching for some
means of escape, whereas in reality there is no escape. Nothing that I say has
any effect on you, for your personal wishes, unconnected with the subject under
discussion, again and again block the road to understanding. Your perverted
impulse of self-preservation resists acceptance of my theory and prevents you
from finding the answers to your own objections. Consider the young man to whom
Jesus said: 'Go and sell what thou hast and give to the poor, and come and
follow me.' But the young man went away sorrowful, for he had great
possessions."
Everyone would of course like to
enjoy the blessings of civil and international peace, and at the same time live
on capital-interest. But those who have discovered that the possibility of
doing so is a Utopian fantasy, an illusion of naive minds; those who recognise
that war and interest are inseparable, must choose one or other of these
alternatives: Either interest and war, or earned income and peace. Such
persons, if really animated by peaceful, Christian feelings, will accept with
enthusiasm the latter alternative; such persons have the right inner
preparation for understanding The Natural Economic Order, it is for them that
the book has been written, and it is they also who, undeterred by opposition,
will carry through the reforms it proposes.
Appendix
LIST OF WRITINGS BY SILVIO GESELL
1891. Currency Reform as Bridge to
the Social State. (Buenos Aires. 45 pages).
Contains most of Gesell's ideas in
outline, including his proposal for non-hoardable money.
1891. Nervus Rerum (Buenos Aires. 84 pages).
Motto on the title-page: "With
our present form of money, the slightest alarm causes the withdrawal of money
from circulation. At any moment, consequently, the exchange of commodities may
be arrested; at any moment the most important of all means of intercourse
organised by the State may refuse its services."
1892. The Nationalisation of Money. (Buenos Aires. 105 pages).
Motto on the title-page: "The
currency should be, like railways, simply a public organisation for mediating
the exchange of commodities; those who use it should be obliged to pay
freight." In an economic parable Gesell describes an island settlement
which adopts an acorn currency. At first the commodities are exchanged by
weighing the acorns (non-hoardable currency, as the acorns shrink).
Later, payments are made by counting
the acorns (hoardable currency, leading to interest).
1897. The Adaptation of Money to the Needs of Modem Commerce. (Buenos
Aires).
1898. The Argentine Currency Question. (Buenos Aires. 36 pages).
On the disastrous consequences of
deflation.
1901. The Monopoly of the Swiss
National Bank. (Bern. 30 pages).
A warning about the danger of
inflation latent in the proposed charter of the Bank.
1902-4. A monthly periodical for
currency- and land-reform. (Bern).
Advocating individualism and
laissez-faire in contrast to State-control, "the religion of slaves."
The economic parable, praised by J. M. Keynes, with which Gesell introduces his
analysis of interest (p. 365) is reprinted from this periodical.
1906. The Natural Economic Order. (See back of short title).
1907. Active Currency Policy. (Leipzig. 80 pages).
In collaboration with Emst
Frankfurth - a currency policy under the gold standard with pricestabilisation
as aim, including central-bank discount policy and open market operations. 1916. Gold and Peace? (Bern. 20 pages).
1917. Free-Land, the Essential
Condition of Peace. (Zürich. 23 pages).
Two lectures on peace, reprinted in
the German and French editions of The Natural Economic Order. 1920. A German Currency Office: Economic,
Political and Financial preliminaries for its establishment.
(Berlin. 30 pages).
A memorandum addressed to the
National Assembly at Weimar.
1920. On stabilisation of the
exchanges. See p. 359.
1922. Memorandum for the German
Trade Unions for use in action concerning Currency, Foreign Exchanges,
Reparations. (Erfurt. 96 pages).
1927. Dismantling the State.
(Berlin. 94 pages).
German title: Der abgebaute Staat. A
plea for elimimtion of bureaucracy in every sphere of life, and a forecast of
the resulting society.
For the German titles of Gesell's works see
the German edition of The Natural Econondc Order (Zitzmann Verlag, Lauf bei
Nümberg, Germany). A biography of Gesell by Werner Schmid was published at Bern
(in German) in 1953.
Six of the above works have been
translated into English.
METHODS OF APPLYING THE PRINCIPLE OF FREE-MONEY
(Translator, 1958). There are many
methods of applying the principle of Free-Money, the most important being:
Tabular Free-Money, Stamped Free-Money, Serial Free-Money, and Supplementary
Free-Money.
Tabular Free-Money was the earliest
proposal. In Currency Reform as Bridge to the Social State (1891), Gesell
suggests letting the face-value of the Free-Money notes ("rusting
banknotes" as he then called them) decrease from 100 at the beginning to
95 at the end of the year, the current value of the note being shown in a table
printed on it. This plan, which has advantages from the banker's standpoint,
was retained in the first edition of the present work (1906).
Stamped Free-Money, suggested by
George Nordmann, a Swiss merchant, was adopted by Gesell in the second (1916)
and subsequent editions. The Free-Money notes, instead of losing 5% of their
facevalue in the course of the year, would be kept at their full face-value by
weekly or monthly stamping at the holder's expense.
With weekly stamping, shown in
schematic form on page 270 the number of stamps (52) on each note could be
reduced to 13 by grouping the stamps in quarters (13 stamps to each quarter)
and cutting off each fully-stamped quarter when the note was passing through a
bank or public treasury, with the mention: "First (or Second, or Third)
Quarter fully-stamped." Or the notes could be re-issued at 6monthly or
quarterly intervals, instead of annually. With monthly stamping and half-yearly
note-issues, six stamps would be the maximum number attached to a note.
If the currency stamps were used
only for stamping the notes (and not also as small change), they could be
printed on cellophane rolls like the self-adhesive tape used for fastening
parcels. Or, instead of adhesive stamps, machine stamping could be adopted, as
at present with letters and parcels.
Stamped Free-Money has advantages in
the market, outside the gathering places of money. In almost all the practical
realisations of Free-Money (in Germany by Hans Timm in Gesell's lifetime, and
by the mining entrepreneur Hebecker, using Timm's "Wära", at
Schwanenkirchen in 1931, in Austria by the Mayor of Wörgl in 1932, and in the
many later experiments throughout the United States) stamped Free-Money was the
form adopted.
With Serial Free-Money each
denomination of the currency notes is issued in four or more series
distinguished, by a number and bold marking, for example 1 - 4 red bars across the
note. At determined intervals one of the series, drawn by lot, ceases to be
legal tender but is exchanged for a fresh series by the Currency Office - after
deduction of the legal depreciation for all four series. With some
modifications this plan could be applied to small-change coins. Serial
Free-Money has the merit of reducing interference with the currency to
one-quarter; three-quarters of the currency continues to circulate
undisturbed.
With Supplementary Free-Money the legal
depreciation is compensated in each transaction by a supplementary payment by
the holder of the note, as at present in many countries with the purchase tax
(sales tax).
Theoretically the principle of
Free-Money could be applied by a continuous regular inflation of prices of 5%
annually, with, to protect creditors, a corresponding modification of an
long-term money contracts. (For 18 years the continuous irregular inflation,
without modification of money contracts, practised by almost all countries, has
realised one aim of Free-Money: the elimination of depressions and unemployment
- but at the expense of creditors, and with many grave economic
disturbances).
During the great American depression
of the thirties, when the United States currency, in spite of liberal credit
policy, failed to circulate, legislation was introduced in the Senate and House
of Representatives (Bankhead - Pettengill Bill, 1933) directing the Federal
Treasury to issue $1,000 million in $1 stamped notes. To each of these notes it
was proposed to attach weekly a 2-cent stamp, a depreciation charge of 100%
which would have made the whole issue self-liquidating within a year, through
sale of the stamps.
In Switzerland a Plan for applying
the principle of Gesell's Free-Money was proposed in 1948 in the Federal
Parliament as an amendment (Bernoulli - Schmid) to the charter of the Swiss
National Bank. To forestall depressions, this plan proposes to empower the Bank
to counteract any statistically observed slackening of velocity of the currency
circulation, by cancelling some or all the higher denominations of the notes,
the cancelled notes to be immediately exchanged for fresh notes after a
deduction not exceeding, in any one year, 6% of the value of the note.
Gesell rejected the plan of 5%
compensated inflation and he also rejected proposals to raise the legal
depreciation rate of the notes above what is needed to load money with the
carrying costs to which, by their nature, the wares are subject - estimated at
about 5% annually. But Gesell did not advocate exclusively any of the other
proposals; he held that the technique of Free-Money, like all technique, must
be determined in practice, by trial and modification.
(* See Professor Irving Fisher:
Stamp Scrip (1933); Fritz Schwarz: Das Experiment von Wörgl (1950); Karl
Walker: Die Technik der Umlaufsicherung des Geldes (1952). The New York Public
Library has an immense collection of material relating to the American local
realisations of Free-Money.)
PUBLISHED REFERENCES TO GESELL'S THEORY
Dr. Ernst Hunkel, Deutsche
Freiwirtschaft (April, 1919):
"Gesell is not an academic
economist laboriously compiling foot-notes and bibliographies, and adding
statistics to statistics in partial economic investigations. He has two
advantages over the vast majority of experts hall-marked by the State; first,
long experience as a merchant, importer, landowner and farmer; but above all
the genius that penetrates and grasps economic principles. I have studied
economics under such sterling investigators and teachers as Wagner, Schmoller,
Sering and Neumann, and remain their grateful pupil, but I confess that in
spite of this piled-up learning the real nature of economic and social problems
remained for me a book with seven seals until I became acquainted with Gesell's
ideas. When I understood them and made them my own, economic science became as
clear as crystal."
Dr. Oscar Stillich, Lecturer, Berlin
University: Das Freigeld, eine Kritik (Berlin, 1923):
"The Natural Economic Order is
a great independent achievement such as few contemporary economists can claim;
in contents and expression it is a constructive work which stands mountainhigh
above the average products of modern economic literature. The literature on the
currency question hitherto published in Germany was unintelligible to those
without previous economic training, and for this reason it was never read by
the masses. Then appeared Silvio Gesell and his school with a series of
brilliant writings which threw new light on the currency problem and acted as a
powerful stimulant. Gesell's works are models of clear and stimulating
exposition; they contain a noble wine, excellent for the palate though perhaps
for many somewhat heady. But these works include much that is fruitful and of
scientific value, much that will not disappear from economic science. Gesell
has destroyed the illusion of gold and given a theory of paper money that can
claim to be considered final. The whole theory of metal covering for money is
closely examined and completely rejected. Here where nominalists such as Knapp
failed, Gesell has succeeded. To sum up, Gesell has produced the most
fundamental analysis of the currency question that we possess."
Gustav Landauer, revolutionary
socialist: Aufruf zum Sozialismus (Berlin, 1919):
"Of great value is Silvio
Gesell's proposal to introduce a medium of exchange that does not, as at
present, gain in value from year to year, but, on the contrary, loses value
progressively, so that anyone who has obtained possession of the medium of
exchange has no other interest than to exchange it again as soon as possible
for the produce of others. Gesell is one of the very few who have recognised
Proudhon's greatness, and while learning from him, have succeeded in developing
his theories along independent lines."
John Maynard Keynes: General Theory
of Employment, Interest and Money (1936):
"Gesell's main book is written
in cool, scientific language; though it is suffused throughout by a more
passionate, a more emotional devotion to social justice than some think decent
in a scientist. The purpose of the book may be described as the establishment
of an anti-Marxian socialism, a reaction against laissez-faire built on
theoretical foundations totally unlike those of Marx in being based on an
unfettering of competition instead of its abolition . . . I believe that the
future will learn more from the spirit of Gesell than from that of Marx. The
preface to The Natural Economic Order will indicate to the reader the moral
quality of Gesell. The answer to Marxism is, I think, to be found along the
lines of this preface." (p. 355).
"The idea behind Gesell's
stamped money is sound." (p.357).
Professor Irving Fisher, Yale University:
Booms and Depressions (1933)
p.142.
"If only buying could be
started first, business borrowing would follow. For this purpose (of directly
stimulating the buyers), a unique 'stamped dollar' plan has been devised - a
sort of tax on hoarding. This plan did not come to my attention until after
this book had been finished. The plan offers the most efficient method of
controlling hoarding and probably the speediest way out of the
depression." Stable Money (1934)
pp. 9, 11.
"One of the most interesting
examples of monetary manipulation is to be found in the silver
"Bracteates" of central Europe between 1150 and 1350 . . . Recoinage
was periodical . . . A ruler would call in all outstanding coins twice or three
times a year and exchange them for new ones after deducting a seignorage fee of
about 25 % . . . It is said that trade, handicrafts and the arts received a
stimulus from the eagerness of the people to get rid of their money . .
."
"This first example of
something akin to velocity control is of particular interest in the history of
stabilisation. After the bracteates had disappeared about 1350, this principle
was forgotten until it reappeared definitely in the writing of Silvio Gesell.
After his death velocity control was in some instances applied in the form of
Stamp Scrip during 1931 - 33 in Germany, Austria and the United
States."
Stamp Scrip (1933) p.67.
"There are some of us who
believe Stamp Scrip to be more than a temporary auxiliary currency for the
present emergency, believing that if its volume and stamp intervals were
regulated according to various conditions, it would be the best regulator of
monetary speed. which is the most baffling factor in stabilising the price
level."
H. T. H. Gaitskell, later Chancellor
of the Exchequer: What everybody wants to know about Money, by nine economists
from Oxford. Edited by G. D. H. Cole (1933).
"Gesell has a great deal in
common with John Bright . . . this remarkable suggestion presented by its
author with such clarity and literary grace . . . Theory would anticipate and
practice has shown that given certain conditions the adoption of Free-Money
must improve a trade situation . . . good policy for depression in countries
where notes are used freely . . . theoretically perfectly sound. It is one of
the few attempts which have been made to deal with what is undoubtedly one of
the intractable elements in industrial fluctuations. The prolongation of the
depression in face of vigorous expansionist monetary policy can only be
ascribed to a further fall in velocity. Any method for dealing with this must
merit attention."
Subbas Chandra Bose (1897 - 1945)
sometime Mayor of Calcutta, member and sometime President of the Indian
National Congress:
"We have no use for the
teachings of the former generation regarding land-tenure and money. New
teachings on money-interest have come to the forefront, as those evolved by
Silvio Gesell. Free India will not be a country of capitalists, big landowners
and castes, but a true social and political democracy." (Undated quotation
from Freedom and Plenty, Los Angeles).
Mahmout Abu Saud, economic adviser,
Moroccan Government: economic expert, Arab League; external Professor of Law,
Rabat University. (Formerly Prof. of economics, Kabul University, and economic
adviser, State Bank of Pakistan).
"No great investigator of the
social and economic structure has so long been denied recognition as Silvio
Gesell. His masterpiece The Natural Economic Order, is a key to economic
problems and a challenge both to capitalism and to Marxian socialism. Gesell's
theory of interest is in harmony with the teaching of the Koran and should be
welcomed in all Islamic countries. His plan for an interest-free economy is a
solid basis for constructive attempts to liberate man from the slavery of his
own illusions, from the tyranny of mistaken tradition, and from exploitation by
his fellowman." (Mitteilungen der LS. Partei der Schweiz, Bern. February,
1958).
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