COMPENSATION MONEY AND PUBLIC INSURANCE
THE POSSIBILITY OF DEVELOPING INSURANCE FACILITIES IN ASIA, IN COLONIES, AND NEW COUNTRIES, THROUGH APPLYING THE MILHAUD SYSTEM: TOGETHER WITH SOME REFLECTIONS ON THIS SYSTEM.
BY: ULRICH VON BECKERATH, BERLIN, 1938
PUBLIC INSURANCE AND COMPENSATION MONEY
The Possibility of Developing Insurance Facilities in Asia, in Colonies, and New Countries, through applying the Milhaud System; together with some Reflections on this System.
By Ulrich von Beckerath, Berlin, 1938
A reprint with permission. COPYRIGHT information: The third lengthy work of von Beckerath, in this issue, was reprinted with permission from the English translation of the originally German work which was first published by the "Annals of Public and Cooperative Economy", now at Liege, 45 quai de Rome, Belgium, in either 1937 or 1938 in four languages. The English edition, which I copied, was published in cooperation with the Annals by Williams & Norgate, London, 1938. REPRINT is free and desired provided the source is mentioned.
I. The Problem...................................... 208
II. The Popularization of the Insurance Idea in Asia through Public Insurance ........... 209
III. Traits Differentiating Public from Private Insurance ................... 211
IV. Organization of a System of Public Insurance on the Assumption that in the Near Future no Specific Guaranteed Capital will be Available nor Reinsurance with Private Companies ........ 211
A. Initial Stage ..................................... 211
B. The Goal to Aim at ................................... 212
C. Nature of Objects to be Insured and Extent of Insurance Protection ............ 213
D. Dependence of the Uniform Magnitude of Contributions on the Size of a Society ....... 213
E. Advantages of a Moderate Sized Society ......................... 214
F. Compulsory Membership .............................. 215
G. Grant of an Insurance Dependent on Voluntary Membership for Objects not subject to Compulsory Insurance ............................... 217
H. Mode of Paying Contributions ............................ 217
1. Due Dates .................................... 217
2. Means of Payment .............................. 218-236
NOTE: In both, my German and my English edition, there is no chapter "I"! - J.Z. (*) J. The Standards of Value in relation to Insurance in Asia more especially in Iran ...... 236-244
K. Indemnification of Losses only through Reinstatement of Destroyed Values and not through Cash Payments ............................ 244
L. Tariffs ..................................... ... 245
M. Dispensing with Reinsurance in Private Insurance Offices ................ 246
V. Fresh Legislation .................................. 248
VI. Insurance of Nomad Tribes .............................. 249
VII. Cooperation with a Country's Private Insurance Offices ................. 250
VIII. Federation of Public Societies .............................. 250
1. Time of foundation ................................ 250
2. Federational aid in catastrophes ........................... 250
3. Statistics prepared by the federation . ........................ 251
4. A federational periodical ............................... 251
IX. Concluding Remarks ............................. 251-265
"Universal politics as I perceive it is nothing but universal insurance."
Emile de GIRARDIN, 1852
I. THE PROBLEM
Asia, which is most probably the part of the globe where men first passed from hunting to stock-breeding and thence to agriculture; where first certain individuals who had become dissatisfied with the old tribal communism and its patriarchal customs, met and asserted their right to enter into contractual relations and chose their rulers and even new gods in order to safeguard their rights; Asia whose languages were apparently the first to draw a clear distinction between "robbers" and "heroes" and thus introduced the era of a burgess civilization - this Asia is still without a proper system of insurance.
To those who are not economists this deficiency may seem of no great account. They may object that the lack of a system of insurance did not prevent Confucius writing his Yun Lu ("The human factor in government"), nor the Brahmins their Veda ("The true source of the animating forces in animals") nor the inhabitants of the region between the Euphrates and the Tigris building their Babylon, a city not less spacious than New York and having also regularly laid out roads. (Babylon had a square city wall almost a hundred kilometers in circumference over 100 meters high, and over 30 meters thick. Its observatory, the "Tower of Babel", was over 200 meters high. We possess no information concerning its suburbs which no doubt were numerous and, densely populated.)
However, Asiatic communities lacked something that European communities gradually secured for themselves, namely stability.
A community can only possess stability if therein the number of those who have "no visible means of support" and who are thereby tempted to favor every political upheaval, does not exceed a certain proportion. These should not be confounded with the beggars and tramps of a country, for the latter have either become reconciled to their lot or their nature inclines them to a life of vagabondage. They may be a menace to individual citizens, but are not dangerous to Governments. However, those "Catiline existences" who have been by some mischance thrust out of their original paths but who, before want has broken their will power, still enjoy all the intellectual and moral powers of which officials, wholesale merchants, officers, even scholars are proud, menace both Governments and individual citizens who have anything to lose. We need only turn to any page of the history of an Asiatic country, to find this ancient truth abundantly confirmed. Already 2,500 years ago Lao Tse said that an orderly Government is impossible where "people do not take death seriously." (Tao-teh-king)
"Catiline existences" are brought into being by two kinds of influences: by social evils, more especially by a bad monetary and payment system, such as that of ancient Rome, or by mishaps, such as conflagrations and hail storms, floods and disease, deaths in the family and theft, all of which may be at least partly retrieved by a good insurance system. For every million inhabitants in probably every country there are approximately 40.000 private catastrophes annually, producing "Catiline existences" where there is no system of insurance. These existences are therefore created freely in Asia, for the scattered insurance found there is of little general importance economically.
The relation subsisting between public security in the widest sense and the necessity to insure against fire theft; illness, and death, is so evident that is has long been recognized. When the first insurance societies were founded - e.g., in Prussia and in Switzerland compulsory membership was justified by referring to that relation and the principles laid down two centuries ago by the ruling authorities concerned have lost nothing of their validity or importance.
The problem then arises how Asia may be endowed with a system of insurance appropriate for its circumstances. (The difference, say, between an Indian, a Chinese, and an Iranian average town is much smaller than it would be in Europe or America. A fruitful discussion of the problem embracing the whole of Asia is therefore feasible, despite any differences in the circumstances of particular Asiatic countries, and
hence successes achieved by a given ruler may have a valuable lesson to teach to Asiatic countries generally.)
In the development of an Asiatic insurance system the biogenetic law cannot be set aside. The new organism, that is, must pass through the same stages of development as the "species" has passed through before it. These fundamental stages were:
a) Small associations of persons, governed by mutuality whose members know one another and have often the same occupation. As statesman of the caliber of a Frederick the Great, a Hammurabi, or a Nizam al Mulk, the great vizier, will promote the formation of such societies wherever he can.
b) Since such associations are commonly inadequate, they must be followed by societies established by the Government first with compulsory membership. To that we shall return in the sequel. Concerning this, one remark: public insurance against acts of nature, as it exists, for instance, in the Prussian societies and the Swiss cantonal institutions, is sometimes mistaken by Asiatic economists for "social insurance" which relates exclusively to insurance of the person.
c) Insurance companies on the European and American mode model, after the insurance idea has become familiar to the masses through the public insurance societies. In the building up of such companies, considerable technical progress is still possible, but this is obstructed by hundreds of obsolete Acts in Europe and America, as well as by excessive State supervision (in some countries no "innovation" may be introduced without the consent of the supervising authority!), and also the notorious inflexibility and unprogressive ness of many of the companies, more particularly the large scale ones.
(Of this a practical instance: My eldest, a medical practitioner, had to give up obstetrics, which he liked and had somewhat specialized on, because of the high and inflexible medical malpractice insurance rates. They can now come to A $ 70,000 p.a. for any doctor assisting in child births, regardless of how many or few such cases he has each year. Where my son works now he has many more old age pensioners than young couples. Only a few doctors have such a large "turnover" of births that they can afford such insurance rate. The others simply do no longer engage in such practices. As a result, a medium sized N.S.W. town like Armidale has recently lost its last doctor ready to offer such help. The common sense approach would permit doctors and patients to sign a contract accepting the risks involved in any medical aid and agreeing not to sue. Alternatively, the insurance rates should be set in accordance with the numbers of births assisted by a doctor. Neither the authorities nor the medical practitioners nor the mothers are so far open-minded toward such alternatives. Thus pregnant women may have to travel a long distance to give birth in a few centers and would there be assisted only by a few over-worked specialists, who, when overworked, might make more mistakes than would their less skilled colleagues, who tend to work fewer hours. - J.Z., 30.11.01.)
None of these three types of organization is ever likely to prove superfluous. They should supplement one another, and a statesman will only watch that none of them should seek to suppress the others. Here are some proposals relating to the technical side:
II. THE POPULARIZATION OF THE INSURANCE IDEA IN ASIA THROUGH PUBLIC INSURANCE
Small associations based on mutuality, corresponding to the mutual aid funds of the guilds and corporations in mediaeval Europe, and even in ancient Rome, are no doubt also to be found in Asia. For instance as regards diverse regions, travelers report that camel drivers replace one another's collapsed or stolen camels precisely as formerly the German "cow guilds" came to the assistance of the peasantry. These associations, it seems, have not even always written rules. It may be reasonably supposed that the highly developed guilds of China include mutual aid funds, but even Chinese authors reporting on the associational life of their country, confess that it is difficult to obtain information on the subject. This may be possibly due to the fact that formerly the imperial Chinese Government mistrusted associations generally with the result that in some provinces even the most useful societies had to adopt the form of secret leagues. Then, too, it was necessary to keep secret the funds of the societies from rapacious officials. The attitude of the Manchu Emperors calls to mind that of Trajan, otherwise a great ruler, who prohibited all societies, to the point that, as transpires from his correspondence with Pliny, he would not even allow the formation of voluntary fire brigades.
The responsible statesmen, of Asiatic countries should in any case collect and publish the available information about mutual aid groups. It might very well be that important discoveries would thus be made regarding the technique of insurance. This supposition will not be lightly dismissed on a priori grounds if we remember that, for example, the merchant guilds of China conducted their operations in various spheres in a manner that would have done honor to the best theorists. Here is an illustration: They invented for themselves the tael system, which is theoretically very remarkable, operates excellently in practice, and is above all, safe against inflation. It is true that an Act of the Nanking Government of 1934 abolished it officially, but unofficially it is still widely used. Indeed, when the Giro Bank of Hamburg was reconstructed at the time of the Seven Years' War, it served as a model after Sonnin had called attention to it. The merchants of Ning-po developed a banking system with effective safeguards
against a "run", a system that also automatically assured that Ning-po's balance of payments would not be thrown into confusion by external trading. And here is another example. The credit insurance system of the Hong merchants of Canton, which was based on mutuality, served as a model for the New York Act of 1829 relating to the protection of bank deposits. In explaining the bill, Governor van Buren specifically referred to that system. One thing is certain, the system of mutual aid funds in countries like China, India, or Iran would be greatly furthered if the respective Governments instituted inquiries on the subject and published the results. (This opportunity could be utilized for making a collection of all local and provincial regulations relating to fire protection, which undoubtedly would yield valuable data.) The extensive inquiry conducted in 1893 by the American Labor Bureau into Building and Loan Associations might be taken as a model here, inasmuch as it effectively stimulated both building and saving in America and also led to these associations learning of one another's existence and benefiting by their mutual experience. It would be frequently practicable to utilize the arrangements of local mutual aid funds in the formation of public insurance societies. Of course, if a statesman desired to furnish his country with an efficiently operating insurance system without undue delay, he would not be satisfied with developing the existing popular mutual aid groups. He would, on the contrary, proceed as, for instance the Prussian kings proceeded before him, He would establish public insurance societies with compulsory membership, base them on mutuality, and arrange for the fullest self-government.
It readily suggests itself that in order to achieve something as rapidly as possible, it might be best to start with establishing a private insurance office operating on the model of a European or American company that is, finding its clients through commission agents, covering its administrative expenses during the first few years by means of an organization fund and having recourse to reinsurance where its financial strength proved inadequate. There can be no objection to establishing such private offices, say joint stock companies, the shares of which are held by the State. Such companies would, in any event, gather experiences; and if skillfully conducted they might prove profitable, extending also their activities to domains not at first open to public insurance. However, the goal within about two decades or less, really to insure the greater part of the objects that need insuring in the country is not to be attained in any Asiatic country by private companies. Even the largest insurance company anywhere would lack the capital required for paying commissions and could not secure the number of agents needed. Difficulties too, would be experienced in reinsuring on a sufficiently broad scale. The goal might, however, be attained by public insurance.
If necessary, public insurance may get along without reinsurance and without initial capital. The experience of two centuries has demonstrated that. This circumstance is important for Asia where capital is scarce and where reinsurance for at least nine-tenths of the objects insured will, in the absence of pertinent statistics, be out of the question for a long time yet. (This does not mean, naturally, that reinsurance might not be feasible for one-tenth of the objects, provided this one-tenth is successfully insured.)
The methods of public insurance companies differ from those of private insurance. There is, however a consensus of opinion in Europe that in the present circumstances of this continent such a difference does not tell in favor of one or the other method. According to circumstances, both methods may be justified. For the time being, in the greater part of Asia, the application of the tested, special methods of the public insurance societies would be alone practicable if a comparatively large proportion of the possessions requiring to be insured, are to be really insured within a few years. In this connection statesmen should pay special attention to the considerations. advanced by Paul Alglave, who in 1901 published (through Chevalier-Maresq) a work of nearly a thousand pages on the German public insurance societies. In his final comments this author expresses a preference for public societies, but he admits that these societies would not have introduced the necessary technical improvements had it not been for the competition of private offices. On the other side, it might well be contended that this argument is weakened by the fact that in countries like England and America insurance has developed mainly along private enterprise lines. But this may be
countered by the consideration that during recent years in these countries, too, some economists and even some political parties have asked that private insurance should be supplemented by public insurance, on the ground that the former does not meet all justifiable demands, The most serious criticism of private companies and one hard to refute, is that they must either forgo insuring all sections of society or even the greater part, or spend economically excessive sums on canvassing. The private companies operating in Asia have not as yet insured as much as 1 % of the population. The cost of securing a new client is about equal to the amount of the first year's premium; often it greatly exceeds this. The second, and not less weighty , criticism directed against private offices, is that where the premium is not promptly paid, the insured is deprived wholly or partly of protection by insurance. Morally, this criticism is, of course, wholly unwarranted, for private companies are not charitable institutions. On the other hand, public societies collecting their premiums as taxes are collected, frequently even through the tax collector, can afford to be more generous to those in arrears with their premiums because they are certain later, when the insured are again solvent, to recover what is owing them, even with an additional percentage. (Private companies could do the same. Comp. 269-276. The Ed.)
(I worked for 7 1/2 years in compulsory public insurance in Germany, which covered health, accidents, invalidity, old age and death. What happened in practice with arrears was that huge sums owed by large firms were simply cancelled, because massive dismissals by such firms, would be politically harmful. At the same time, small firms owing such compulsory insurance contributions were driven into bankruptcy. The German law did not even allowed them to clear their debts to the public insurance companies against claims they had for the supply of goods and services to public authorities, which these were rather slow in paying them - and thus brought small firms into financial difficulties. These public bodies are as a rule over-sized and wasteful and have not yet managed, even after experiencing several inflations, to achieve a stable value investment for their reserves. Moreover, they tend to operate, even for old age insurance, on the levy principle, rather than greatly reducing the premium costs or greatly increasing the pay-outs by long-term, credit-insured and stable value productive investment of old age premiums. Beckerath later delivered an astounding proof for that, which indicated that during a normal working life of 40 years almost anybody could become a multi-millionaire in his old age via a modest annual contribution - invested at high interest rates. Beckerath also pointed out that small health insurance funds, for as few as 200 members, set up for employees of one firm, could operate much more economical than could country-wide health insurance schemes. Naturally, they would require some re-insurance. - J.Z., 30.11.01.
III. TRAITS DIFFERENTIATING PUBLIC FROM PRIVATE INSURANCE
The characteristic features of the first public insurance societies were the following:
a) Compulsory membership for all inhabitants of a certain category or a given administrative district, for example for all house owners of a province. (The claims of private insurance offices may at the same time be fairly met, more especially by freeing the larger objects factories, bazaars, caravansaries, bonded warehouses, etc. from compulsory membership.) (See pp. 269ff The Ed.)
b) Collection of outstanding insurance contributions with the aid of the authorities by means of a curtailed procedure namely by legally classing outstanding insurance contributions with outstanding taxes. (In the case of certain societies in Prussia all contributions due and not only outstanding ones, are collected by the fiscal authorities.) (See the comment on p. 272, The Ed.)
c) Exemption of societies from all taxes and from charges for all business transactions, if possible also exemption from paying postage. (The author assumes here the existence of a postal monopoly, a monopoly which he attacks e.g. on p. 24 and 119. Regarding tax exemption see the comment on page 275. The Ed.) Such a society could naturally not be established by private contract. It presupposes legislative action or decrees.
IV. ORGANIZATION OF A SYSTEM OF PUBLIC INSURANCE ON THE ASSUMPTION THAT IN THE NEAR FUTURE NO SPECIFIC GUARANTEED CAPITAL WILL BE AVAILABLE, NOR REINSURANCE WITH PRIVATE COMPANIES
A. INITIAL STAGE
To begin with, a small model society should be established in a district where the influence of the government is sufficiently strong. Following this example, similar societies would be gradually established more especially in neighboring districts, allowing fully for local peculiarities. The sphere of activity of the first model society should be a district containing not more than 100,000 inhabitants. This was the method followed in Prussia and in Switzerland, countries whose insurance arrangements have been exemplary for
many decades. Prussian experience more especially might be here very largely, utilized. It would be advisable that a work highly esteemed among German speaking peoples, that by the present Managing Director of the Pomeranian Feuersocietaet, Landesrat a. D. Dr. Eric Brunn, "Die Geschichte der Pommerschen Feuersocietaet" (History of the Pomeranian Fire Insurance Society), Stettin, 1935, should be translated into French and into the language of any country in question. The interested parties would thus learn that almost the same insurance problems requiring solution in Asia, had presented themselves in Prussia and how they were grappled with successfully.
B. THE GOAL TO AIM AT
The goal ought to be that all insurable possessions should really be insured. If, for instance, insurance in Iran is operated by societies restricted to districts having approximately 100.000 inhabitants, then about 120 such societies would be required. Once the first model society has been established, and operates successfully, enabling all interested parties to study it, it would become feasible to establish other societies in ten such districts in one year, with the result that in about twelve years every district in Iran would have its public insurance society. In India and China such a rapid pace could naturally be only imagined on the supposition that the provincial Governments should have obtained the necessary authorization for action. Such a society could not possibly be established "centrally , that is, by one man and for a territory containing, say, about 100 million inhabitants.
However, let us confine ourselves to Iran which during the last decade that is, since the accession of the present Shah has developed with amazing rapidity and which therefore enters first into account for insurance arrangements. (The author had for some time seriously considered migration to Persia in an advisory capacity to the then existing Persian government. The Ed.) Estimating the number of Iran's inhabitants as roughly 12 million (some two million families) and apart from the possessions which are at present insurable by private offices on the European model - the average insurable property per family at 10.000 rials (1 rial equals 4,50 grams fine silver, the total sum insurable by the newly established societies would be 20.000 million rials.
Assuming for the first few years an average annual damage quotient of roughly 10 per mil far too low an estimate, this quotient would represent the necessity of collecting for administrative and valuation expenses, fire fighting arrangements, etc., altogether about 20 per mil, which would be equal to roughly one-fiftieth of 20.000 millions, or 400 million rials, per annum. Here it may be noted that according to the pre-War statistics of the Russian Semstvo Offices (See Sergowsky, Theorie der Feuerversicherung, Prag, 1931, published by the Erste Boehmische Rueckversicherungsbank), which would be fairly applicable to present condition in Iran, a damage rate exceeding 10 per mil would have to be anticipated. Of the estimated revenue of the insurance societies of at least 400 million rials, given the methods of payment proposed in the sequel, at least 40 million rials could be diverted to the Central Government, which amount it could devote to the furtherance of every sort of insurance facilities. The necessary fire protection expenses could also be allocated out of the 400 million rials. The Prussian public insurance societies calculate that about one-fourteenth of the receipts have to be devoted to fire protection. For Iran the percentage proportion would probably be somewhat higher. The following estimate is relevant in the above connection. Assuming 1.200.000 insurable buildings in Iran, a fire frequency of 1 per 100 buildings annually would be equivalent to 1.000 fire damages or 1.000 monthly. On a moderate estimate, this is equal to 30 fire damages a day. It would be scarcely an exaggeration to suppose that today one-third of these damages mean economic ruin for the parties affected, reducing them indeed to beggary. The introduction of the type of insurance here proposed would prevent accordingly, on a conservative calculation, the creation of ten beggars daily.
C. NATURE OF OBJECTS TO BE INSURED AND EXTENT OF INSURANCE PROTECTION
Actually all kinds of objects enter into consideration, buildings as well as tools and products of labor. Those to be insured in Iran include about 1.100.000 small scale proprietors, primarily therefore peasants. But owners of landed estates and their objects would not be excluded from the category of the insured. However, the large objects of these owners, objects such as castles, big warehouses, and the like, should be and could be left to private insurance offices; but their small objects, such as flour mills, barns, etc., might very well be insured in the same society as the objects of peasants.
It would have to be settled whether the reinstatement price, the sales value, or any other kind of value, would be paid in case of loss. It may be noted in passing that insurance only properly fulfils its social purpose when the indemnity paid enables the insured to replace the damage object by a new object of good quality, e.g., a house burnt down and perhaps 30 years old, to be replaced by a new house, not worse than the old house was immediately after being built. This appears to contradict the fundamental insurance principle, according to which an indemnity should never lead to the enrichment of the insured. Yet it is a feasible proposition, and experts have long since pondered over it, namely that enrichment may be excluded by treating as a loan the difference between the reinstatement value and the sales value at the time the loss occurred. This loan might be repayable within 12 to 15 years,, or more or fewer, the amount unredeemed at any time paying about 1/2% monthly interest. (This would mean say, in the case of a loan of 1000 rials, repayable within 12 years, a payment of 10 rials a month for interest and amortization.) In this way the insured could not enrich himself by the added value. Incidentally, indemnification on the basis of the original value would have a result not contemplated by European insurance experts in this connection: it would materially reduce arsons committed out of revenge. If the enemy of the insured knows that the latter would realty suffer little or not at all through fire damage he will not have recourse to arson. In this connection it may perhaps not be amiss to refer to a film that was for a time very popular in Germany. That film was based on Gerhart Hauptmann's "The Weavers". There we find described how in a Silesian village, mutinous weavers are on the point of setting on fire a large spinning mill, but desist when one of them calls attention to the fact that the mill is insured against fire. Those competent estimate the risk in Asia of buildings being set alight through revenge as decidedly considerable.
(A much larger factor inducing arson is that insured, who, in financial difficulties, would to get the cash of an insurance settlement. This kind of risk can be reduced by not granting the insured a cash settlement but by paying their replacement bills. B. discusses that later. - B.'s system of financing insurance companies would tend to reduce financial difficulties in the country. - J.Z., 1.12.01.)
As has been hitherto the case in all countries, the authorities should begin with fire insurance. Later, perhaps already after a few months, other risks, e.g., storms, floods, hail robbery) even war, among others, might be dealt with. Insurance of persons (against death, illness, invalidity, and accidents) would readily follow once insurance of objects is established. That is, the idea of insurance as such must be impressed on the masses by a striking exemplification, such as that of insurance against fire.
D.DEPENDENCE OF THE UNIFORM MAGNITUDE OF CONTRIBUTIONS ON THE SIZE OF A SOCIETY
Of course, if the insurance principle is to be realized by a society, it must be of a certain minimum size, In general, modern insurance technicians demand a fairly large size, i.e., a fairly large number of risks, in order to permit the operation of the insurance principle and of the law of large numbers. In practice this means that the contributions should not seriously fluctuate from one due date to another and that there should be no need to establish exceedingly large reserve funds, say, larger than would correspond to the average of the annual levies. No insurance scientist is likely to be satisfied with an office that insures objects and operates on modern principles which has insured fewer than 1.000 objects. This minimum would be in fact reached it one society were established for about every 100.000 inhabitants Most modern insurance offices have insured considerably more objects and many specialists consider that a stable insurance company, operating without reinsurance and reserves, requires that at least 20,000 separate objects should
be insured, the largest of which should not exceed five time the value of an average object. But even where the number of insurances is relatively small, decidedly satisfactory insurance protection is attainable, if we remember that the method of collecting the contributions is of great importance, although this importance cannot be easily demonstrated mathematically. To illustrate, Managing Dir. Dr. Brunn reports in chapter 5 of his above mentioned work concerning a small fire fund which, in the eighteenth century, peasants of the cathedral lands of Cammin in Pomerania, had established on a basis of mutuality. The fund was already long established and had 154 members when in 1782 the authorities examined its soundness. It had always given satisfaction to its members. That was because the peasants paid their contributions in kind and received their indemnities also in kind. The contributions consisted in transporting house timber to the site of the burnt down building (the timber came from the Royal Forests and was mostly obtained gratis) and in the delivery of corn, straw, etc., when fire destroyed the harvest of one of the members. ft is thus evident that many a peasant who might find if difficult to pay a cash premium of as little as 1 thaler, might nevertheless easily contribute material values or labor worth 20 thalers, especially if he is not being pressed for time. For instance, we may readily imagine that, where a house has been destroyed by fire, the neighbors might, for some months, devote a few hours daily to the work of rebuilding, by transporting, by deliveries in kind, and by personal labor. In this way a small insurance society, such as that of our Pomeranian peasants, comes to be as effective as a group ten or twenty times larger, but collecting its premiums in cash. Facilities should be created to enable the peasants of almost all Asiatic countries, who are short of cash but possess material values and labor power, to contribute in goods and services. In other words, the efficient functioning of an insurance system in countries with an economic system such as that prevailing in Asia, should not be made to depend on favorable economic conditions providing sufficient ready money.
E. ADVANTAGES OF A MODERATE SIZED SOCIETY
There is an "optimum" for the size of an insurance institution that is, deviations from this optimum in an upward or downward direction are prejudicial of course only to a slight extent where the deviation is within moderate limits. The size of insurance undertakings has a similar economic effect as the size of factories, whose profitability is greatest where the size is within certain moderate limits. (According to pre-War statistics, daily papers, for example, with an edition of 80.000 copies, yield the relatively highest surplus.) Leaving aside however, that from a purely rely business point of view, the size of every enterprise has a maximum beyond which it ceases to be as advantageous as a smaller firm, there is the fact that in insurance matters an extension beyond a certain limit Is technically undesirable. It is true that, according to the laws of probability, an insurance office should yield the more uniform results the larger its size. But experience shows that this is by no means the case and that, on the contrary, a moderate sized society is more advantageously placed than a very large one, this because the homogeneity of the business done, almost necessarily decreases with increase in size. In this connection the investigations of the Swiss Supervisory Authority for insurance companies, about the stability of the insurance offices operating in. Switzerland, have yielded valuable conclusions. And there is also the psychological aspect. In the case of the insurance societies to be established in Asiatic countries, the size of the societies, at least to begin with, should not prevent the insured from feeling that they are bound together as neighbors. In the case of fires, for instance, every member should be able to reach the scene of the fire within a day's journey in order to be able to convince himself personally how the insurance office deals with fire damages. The experience of small insurance companies in Germany, and probably in the whole world, has shown that even high premiums are willingLy paid if the members, have seen the place of the fire themselves, have received a direct impression of the extent of the fire, and can personally assure themselves how the insurance society's
management deals with fire losses. The moderate size of an insurance society whose contributors feel as neighbors possesses a further advantage. Arsons on the part of the insured in order to draw the fire indemnity, are frequently discovered where the neighbors take a personal interest in the fire. Similarly, the deliberate ignoring of precautionary measures, with the same object in view, which plays an even more important part than direct arson by proprietors, is almost always soon revealed, if the neighbors participate in settling the loss incurred or where, at least, the settlement takes place in their presence. The determination not to pay an incendiary a considerable indemnity out of their own pockets creates in the contributors a great and strong interest to ascertain the cause of the fire, and what the shrewdest settlement official of a large scale private insurance company might very likely not discover, will be exposed by his neighbor.
In the case of medium-sized or small insurance societies, where the members feel they are neighbors, and where heavy contributions are imposed when heavy losses are incurred and light ones in the opposite instances, the members keep an eye on the fire protection arrangements of their neighbors and those of the other insured, e.g., whether water buckets are available, whether the wells are in a proper state, etc. In the case of those insured in a large private company, where fixed premiums are paid, the personal interest is absent. This remark suggests the desirability of weighing the moral risk as it affects insurance societies, namely, the risk inherent in the person insured, which is large with careless, negligent, or criminally disposed persons and small otherwise. In general, the "moral risk" should not be neglected. It amounts probably to half the total risk, perhaps even more that is, fire indemnities might be broadly half what they are, if so many fires were not occasioned maliciously or through the negligence of the insured parties. We shall return to this aspect in the section dealing with indemnification.
It would be advisable to organize a meeting of the members after every considerable fire loss, where they might, on the one hand, express their opinion on the fire and the lessons to be learnt from it and, on the other, where the office manager might furnish information on the nature of insurance protection, e.g. the danger of underinsuring, the need for protective arrangements etc. Such explanations presented immediately after a fire, and if possible near the scene of the disaster, would always make a profound impression. Meetings of this kind would be less practicable to arrange in the case of large-scale offices. In districts of about 100,000 inhabitants, one fire damage a day might be expected, That is about as much as the manager of the district society can, at the beginning, personally examine and supervise in its settlement. Accordingly, the optimum for an insurance society at the initial stage is about 100.00 inhabitants.
F. COMPULSORY MEMBERSHIP
In his "Rechtslehre", especially in par. 8, Kant stated that everybody is entitled to compel another to form part of a "juridical community" that would permit both to possess property by right and to protect this property against depredations. Kant's principles could be easily extended to justify to the same degree compulsory membership in a juridical community which, in the case of fire, indemnified the affected party and membership in a juridical community for protection against theft and murder. But apart from this, the experience of two centuries has taught us that the initiation of a system of insurance protection, embracing a sufficient number of persons, can seldom be accomplished without resorting to compulsory membership. However, experience also shows that, particularly at the commencement, compulsory membership is frequently regarded by the individuals concerned as an abuse of State authority. The insurance contributions, that is, are considered as a new and unjustifiable tax. Should it also happen that at its inception there are really some abuses, then not even absolute rulers would be powerful enough to force insurance through. Such was the case over two centuries ago in Prussia, where the grandfather of Frederick the Great was
unable to overcome the opposition of the population against a compulsory insurance system.
The weightiest argument of the population against obligatory insurance was at that time the difficulty of paying the contributions in cash. It was urged that a house owner could not possibly find the money for all the payments due from him and was therefore constantly obliged to beg for a respite, today of the tax collector, tomorrow of the mortgage creditor, and the day after of some purveyor. Even quite insignificant additions to the expenses payable in ready money, it was said, could ruin those house owners who had reached the limit of solvency, and among these would have to be counted, it was then contended, the large majority, Of course, those who argued thus did not know that a good insurance arrangement reduces regularly the interest burden on house property and this by a far larger amount than is involved in the insurance premium, It is however, a fact that this favorable influence does not affect all house-owners forthwith and that during the first few years some of them may actually experience difficulties in making payments because of the system of insurance protection. But all these arguments are satisfactorily disposed of by a system of paying contributions based on Milhaud's principles. With this system the lack of ready money in the national economy or among individuals, ceases to form an obstacle to the smooth working of an insurance system. In the succeeding chapter we shall examine this subject more closely.
But even with our present imperfect payment system there is a great and manifest advantage in obligatory fire insurance. This should enable a tactful statesman to overcome any initial resistance. He must follow the example of the Prussian rulers and introduce the first insurance societies with compulsory membership immediately after great conflagrations, in the districts where they had occurred. Experience shows that the population of those districts does not in such circumstances regard compulsory membership a burden, but a benefit, certainly not an abuse of State authority. Add to which that immediately after the establishment of a public insurance society the credit conditions of the particular district, due to the increased security of the creditors, markedly improve, bringing down the interest rate. The principle of compulsory participation should not, of course, be exaggerated. Let us suppose that in a country district of 100.000 inhabitants there are 10.000 buildings belonging to poor peasants as well as perhaps 10 large factories and a large bonded warehouse. Should the factory owners and also the customs be compelled to participate in the insurance scheme, then it might well happen that if a factory or, what would be worse, the bonded warehouse burnt down, the levy imposed might considerably exceed the paying capacity of the 10.000 peasants. The factory owner or the customs authorities would accordingly not receive the full indemnity they were entitled to. Hence all objects should be exempt from compulsory participation which in the case of fire damage, would impose excessive contributions on the members. Naturally, the society would not receive the contributions for those large objects, but this disadvantage leaving aside that it is balanced by the reduction of the risk incurred is not too great, for it is just such objects which are preferred by private insurance companies, more particularly by the foreign companies operating in Asia. Accordingly, large objects need not forgo the protection of insurance because they are exempted from compulsory participation. Such exemption offers, on the contrary the condition of a peaceable coexistence of public and private insurance, creating thereby the possibility of protecting by insurance all property in need of being insured (precisely as at present in Germany).
Model texts in French, for the required laws on compulsory membership, might be found in the legislation of the Swiss cantons, to which we refer here for the information of the reader.
The laws of Asiatic countries might be more liberal in one point than most Swiss laws are at present; namely by waiving compulsory membership in all instances where a proprietor establishes that he is already adequately insured, privately. The State should never force its services on the people or the individual, if these have already helped themselves or are able and willing to help themselves. This principle of the Prussian statesmen of the memorable per period between 1807 and 1813, which, by the way, already Confucius and Lao Tse constantly
reiterated, should guide the rulers of Asia. A true statesman takes pride in bringing his people a step nearer to responsible manhood.
G. GRANT OF AN INSURANCE DEPENDENT ON VOLUNTARY MEMBERSHIP FOR OBJECTS NOT SUBJECT TO COMPULSORY INSURANCE
In many cases there will be a doubt whether a given object should or should not be subject to compulsory insurance. In order to allow of an amicable settlement of such cases, there should be a provision that the society may insure certain objects even if their owners are not obliged to insure them in the society. Here is an example. It is doubtful whether a. given mosque of the value of 1 million rials is subject to compulsory participation. The peasants in the village concerned would probably strongly desire that their mosque should be insured in their society. There need not be any objection to this. However, some limit to voluntary insurance must naturally be fixed. It might be, for instance, provided that no object would be insured which, in the case of a total loss would impose on the members a greater monthly contribution than the equivalent of the wages of an adult for one day. (Objects of more than five fold the value of the average insurance amount no society should insure at its own risk.) Whence it follows that fairly large objects might be insured by relatively small societies if the indemnity may be paid in installments and if, in addition, there is a provision in the insurance conditions that when there is an unusual multiplication of fire losses the society's payments to the individual sufferers from damage may be deferred until the statutory maximum contributions in the succeeding year, or even in succeeding years, suffice to pay for the fire losses. These restrictions would, of course, not apply to the degree that the several societies reciprocally granted a reinsurance to one another. We shall return to this aspect, (A maximum levy, say triple the annual "normal levy", should be fixed for the paying members.)
Considerable latitude in the matter of voluntary participation would have to be allowed as regards insuring objects that are not buildings Harvests tools, furniture and the like and much else which may come to light after the establishment of a society, are probably not compulsorily insurable, but would be easily dealt with by voluntary insurance.
It is also feasible that the society should later undertake kinds of insurance dependent wholly on voluntary membership, a g., insurance against storm damage and burglary. We cannot enter into details here.
H. MODE OF PAYING CONTRIBUTIONS
1. Due Dates
Societies will not be able to begin with fixed contributions payable at regular intervals. They would have unavoidably to commence with periodically collected levies. It might be provided for instance that whenever the accumulated fire losses reach a certain figure in Iran perhaps 50.000 rials a levy would be announced. However, in order that the insured sufferers from damage should not have to wait too long, they must, as was also the case formerly in various Prussian provinces, receive a written statement from the insurance management that they will be entitled to such and such an amount out of the next levy. On the basis of such a certificate, the claimant could easily obtain a loan, either from his neighbors or from merchants, particularly a loan in material values, that is, one not in ready money. After the society has existed for some time, it will, instead of collecting levies at irregular intervals and according to need, attempt to collect as far as possible regular contributions of an equal amount and also to create reserve funds, on the one hand and, on the other, to raise, occasionally, small loans (loans in money or in material values). Heavy levies it will impose only in case of heavy fire losses. By regularly collaborating with a bank or with a group of
merchants, more especially with shopkeepers, the society would be in a position to proceed in this way. However, should such collaboration not be practicable, then, at least at the beginning, nothing would remain but to impose heavier or lighter levies, according to need,.
2. Means of Payment
The insurance system must be constructed in such a way that if, for some reason, the customary means of payment become suddenly scarce, then the system would still operate. The disappearance of coins from a district or from a given economic domain (as from agriculture), or the disappearance of banknotes generally, should not prevent an insurance society from indemnifying losses. Since, however, a society can evidently only indemnify with what it has received as insurance contributions, it becomes necessary to organize a system of paying indemnities and arranging for contributions, which in the event of a failure of the current system of payments, may be forthwith applicable. Indeed, particularly in Asia, a part of the transactions of the society would have to be thus permanently dealt with, inasmuch as at present there is not only frequently, but perpetually, a deficiency or means of payment in most regions of Asia,
Hence arises the problem whether simple payments in kind may not possibly come to replace money payments. He who has examined an inventory of objects destroyed by fire, one drawn up on the occasion of a conflagration in a rural district, the sufferer from damage living in humble circumstances, being perhaps a peasant, is aware that even such an inventory contains items which could not possibly be replaced by the contributions in kind of the members, not even if the society had many thousand members and these members belonged to every class of society.
That which any one in some existing community has to offer or has in store at a given moment, is never exactly covered by what another belonging to the same community needs at the same moment. This holds true even if we forget that some sort of transport has always to take place before the offer can satisfy the demand and that, on its part, the transport labor, too, is subject to the law of supply and demand. But ignoring this, the disparity relates also to he point of time at which the offer is first made, and to the quantity as well as to the quality, using the term in its general sense) offered.
A carpet or a clock is never wanted at precisely the moment it was first offered. And that which the owner of the carpet or of the clock would desire to have in return for it is never available at just such time and in just such quantity and quality from the parties requiring the carpet and the clock as would satisfy the need (demand would not be the right term here) of the two proprietors. This statement holds even if we regard the whole earth as an economic unit and if we suppose that the economic bond between the Tabriz carpet weaver or the London clock proprietor on the one side, and, on the other, those who could contribute something to the support of these two and are at the same time "interested" in their goods, would be as easy and convenient as possible, a supposition that is far from completely justified.
All the more is there a disparity in demand and supply between persons belonging to relatively small communities. Indeed, in comparison with the population of the whole earth, the population of any country or of any city, and of course the number of the members of even the largest insurance society, is very small. If therefore all payments in an insurance society were to be made in kind, these would have to be confined to objects where the above-mentioned disparity would be or could be overcome with relative ease. Thus, peasants could help heir neighbors to rebuild a burnt down barn and to replenish it with cereals, or owners of herds could replace their neighbor's stolen cattle. But if the insured is to have replaced in kind his tobacco pipe, his clock, his carpet, and his kitchen utensils, from the belongings of the society's members, it would be found that no rules could be formulated concerning such replacements, at least no rules properly adjusting services and counter services. Adjustment is however, easy if trading is included and also at the same time a category that enables us to free ourselves from the disparity between supply and need. This category is a means of payment relatively
constant in value, standardized, and subdivided in appropriate denominations.
With its stable value, this means of payment overcomes the difference in time between the first offer, on the one hand, and the springing-up of a corresponding need, on the other. In other words, it bridges the difference in the quality of that which an individual at a given moment is ready to exchange and that which another individual needs at the same moment, this by allowing for the fact that after a certain time the qualities of the supply by the one and those of the needs of the other, are covered. By its convenient transferability it overcomes, moreover, the disparity between the quantity of the goods held ready for exchange by certain individuals and the always different quantity of goods that other individuals are in need of. And the transferability, in turn, is ensured by the appropriate subdivision and standardization of the means of payment.
Money is naturally the most convenient means of payment, be it in the form of coins or in that of paper money. But the statement that no country can possess sufficient money, to mediate its whole turnover, has been confirmed in practice in Asia from the earliest times, and more particularly has agriculture in Asia suffered for ages from a serious shortage of money, a shortage that is not likely to be removed in the near future,
Payment in kind is here also out of the question. Hence there remains only one possible means of payment, the goods warrant.
Goods warrants represent a means of payment of which there never need be any shortage. They are not money, nor are they orders to pay, although their value is conveniently expressed in money. They are a means of payment sui generis, the full theory of which has yet to be elaborated. But what is most important in this theory will be found explained in Milhaud's diverse writings (Annals of Collective Economy for the years 1932 to 1936), in any event sufficiently to prove that the practical utilization of goods warrants in any economic domain where a shortage of money is felt or feared, need no longer cause anxiety. What Milhaud has said about the form of the goods warrant, which alone is of importance for the national economy, namely, the purchasing certificate, is enough to base thereon the system of payment of an insurance society determined to continue its operations even when the last coin or the last banknote has, for whatever reason, disappeared from its domain, returning, however, at once to money payments when, and to the extent that, money is available. lake.
We shall presuppose as known the theories propounded and exhaustively proved by Milhaud as well as his numberless convincing illustrations. (For his theories, see ANNALS OF COLLECTIVE ECONOMY for 1932 to 1936 or his works published by Williams & Norgate, London.) Here we shall confine ourselves to showing the possibility of their application to a definite economic branch.
For an insurance society two kinds of goods warrants enter into account:
a) Goods warrants issued by the society in connection with its payments for fire-losses and for administrative expenses; b) Goods warrants issued by the members of the insurance society.
In practice that is, in at least 90 % of all payments made by and to the society - the goods warrants issued by the society will be used. The wording of such might read:
Issued by the public insurance society ........... of ................
In the case of all payments due to it, the society shall accept this warrant in lieu of cash. Similarly, the members of the society shaft accept the warrant in all payments due to them, as cash, in accordance with the provisions on the payment of contributions printed below. The holder of warrants can lay no claim to receiving cash or other means of payment of any kind. The validity of this warrant expires on ....... after which the society shall decide at its discretion whether and on what terms it will accept this goods warrant or whether it will regard it as having lapsed.
NUMBER ...... DATE ....... SIGNATURE ..........
To pay with such warrants, the society must naturally covenant with its members that in fire losses, and also so long as they have not paid their contributions, they must accept such warrants in lieu of money in their commercial transactions. The society must also arrange with its staff to accept its warrants in lieu of money payments. It will proceed similarly with the suppliers from whom it orders stationary, equipment, etc.
Let us now suppose that the society has to indemnify several members who have suffered fire losses amounting altogether to 50.000 rials. An inquiry among the members has elicited that the required levy could only be paid by few of them in cash. In that case the society will pay the indemnity in goods warrants and notify this to all members. Furthermore, the society will in the customary way announce the levy, i.e., inform member A that he has to pay 10 rials in money or goods warrants; member B 25 rials; and member C 15 rials. The society will also inform all members that every one who has not within a stated time, say 2 days, paid his contribution in ready money, must exhibit a poster stating: "Warrants of the Insurance Society are accepted here in lieu of cash payments due to this member (here insert name)."
The first text of such a public notice was indicated by Milhaud in a discourse delivered in December 1931 and printed in the ANNALS of the following year. Superficially, it seems to be a question here of a simple, so to speak of a technical, arrangement; but in reality, the import of the basis of the Milhaud goods warrants is very far reaching .
The first direct conclusion that follows is of considerable importance from the standpoint of monetary theory. The value of a goods warrant thus based is not only determined by supply and demand, but by a third factor which the theory of value has apparently not sufficiently taken note of, namely just this readiness of certain individuals to accept the warrant in lieu of money when somebody buys from them something or makes payments. This readiness is manifestly not a demand, It is even less an offer, nor is it quite identical with cover. In the case of cover the holder of the warrant would have claim to a certain quantity of goods. The goods warrants of warehouses are e.g., covered by the warehouse goods. In exchange
for the goods warrant he can obtain quantity of goods at the warehouse. In the case of the purchasing certificate, however, the holder is entitled to no more goods than corresponds to the market price, precisely as with the holder of a piece of money.
The third element revealed itself very distinctly and was clearly recognized by the more reflective among the economists at the time when bimetallism existed. For example, in France a debtor could for several decades discharge his debt at discretion either in gold or, in 15 1/2 times its weight, in silver. As long as this was so, especially with such an important creditor as the Excheckr, which accepted both modes of payment, the ratio between gold and silver could not in any country deviate far from 1 : 15 1/2, whatever the productive relations of the two metals and whatever the supply and the demand The readiness of French creditors, although enforceable by the Courts, to consider 15 1/2 kg. silver as of the same value as 1 kg. gold, almost completely outweighed the influence of supply and demand.
An appropriate name for that third element has not yet become current. We might, perhaps, call it "readiness to accept" or "readiness to sell". Incidentally remarked, the value of coins resides also in the main on readiness to accept, principally by shops. As frequently contended here, the value of gold and silver is not immanent in these. Nor is it based, except minimally, on the owner of the coin being able, if he cares to, to have it worked up for his own use, e.g., as an ornament, as happens frequently in Asia.
(Some of the terms used in this connection have been: "shop foundation", "service foundation", "tax foundation", "service foundation", "readiness to accept foundation", "debt foundation" and "clearing foundation". More suitable terms will sooner or later be found or coined. - J.Z., 1.12.01.)
Arising out of the recognition that the value of every kind of money is in the first instance circulatory in nature and also out of the legitimate demand that the value of money should be made as plain to the public as technical reasons permit, follows the moral justification of the rule, which in some places is actually realized, that shops must have fixed prices (*) and must charge these prices to everybody alike. In countries where only gold coins are legal tender (but thus far such countries do not exist), the regulation would have to be amended to the effect that the shopkeeper must post up a notice in his establishment stating at what (*) (I presume he meant: Clearly expressed prices rather than unmarked ones, to be negotiated in every case. Prices, to function as prices, must remain flexible according to market conditions. - J.Z., 1.12.01.)
exchange rate he accepts locally current means of payment other than gold coins.
If no such notice were posted up, it would be presumed that he accepted them at par.
Without such a regulation even a gold currency is defective because without it the value of gold is not quite accurately determined. Indeed, just because of this dubiousness, it fluctuates more than it would otherwise do in any case more than the popular conception of a gold price presupposes.
The recognition of the importance of fixed shop prices and an obligation to charge these prices to everybody alike is by no means a purely theoretical matter. During inflationary periods governments bethink themselves of this, because they then clearly perceive that those two obligations enhance the stability of a currency. Accordingly, during the post war period; such regulations were probably issued in all countries having an inflated currency.
(I think that here he wrongly mixed up prices temporarily set and publicized by individual sellers, according to market conditions, with prices controlled by governments. The latter do never indicate a stable currency but, rather the opposite. B. has often expressed himself as an opponent of any price-, rent-, wage-, interest-rate and foreign exchange control by any government. - However, criticizing governmental price control during the Nazi regime was dangerous - and thus just not done in public. - J.Z., 1.12.01.)
The conception of readiness to accept, as an element in the value of means of payment, which was introduced into economics through h a practical illustration furnished by Milhaud, makes it at once clear that the hitherto existing requirements for covering and guaranteeing (or founding) a paper money not convertible into currency goods (e.g., gold or silver), have not been strict enough.
Cover might be considered to be that into which a holder of money is entitled to convert his money, e.g., State loan certificates in the case of the German Rentenbanknotes of 1923 or greenbacks during the American Civil War.
A money basis, or foundation, might be considered to be that which tends value to money in transactions generally, e.g., the readiness of the State to accept it at par in tax payments.
If such an expression could be brought into general use, the man in the street would refuse to accept as cover for paper money land and buildings or "the wealth of the country", just as the scientific view has long rejected such kinds of "cover". If an attempt were made to introduce such paper money compulsorily, the man in the street would ask: "And where is my right to exchange, at my discretion, paper money for the stated cover?"
Such a question would kill at its inception every inflation. Even where, as in Russia during recent years, it is introduced by compulsion and deceit, such an expression, if in common use, would render it futile.
According to the expression suggested here, Milhaud's purchasing certificates would be both well covered and well guaranteed well covered by the goods ready for removal, by every warrant holder, from the debtors of the issuing centre or from the issuing centre itself; well guaranteed, by the legally enforceable obligation to supply goods for the notes.
Although it was known before Milhaud that "real values", and even newly created real values, did not suffice to cover paper money; it is now coming to be recognized that not even a cover with "liquid values" suffices to guarantee the stable value of paper money. The newly created quantity of paper money must have for its known complementary basis a readiness to accept, at least corresponding to the nominal value of the quantity of paper money issued. This may even be, if necessary, associated with an enforceable demand for the goods waiting to be bought. Sums due to creditors are naturally to be regarded as a basis not worse than goods sold and waiting to be fetched.
(REFLUX currency vs. ASSET currency. Consumer goods and services in daily demand, ready for sale, vs. "covers" by capital goods - Oscillating vs. permanently circulating money. Ticket money vs. exclusive and forced currency. Not all capital values are monetizable. The issue principle applicable to capital "values" does warrants only the issue of capital securities, not currency notes. Not everything that is valuable is good enough to base a sound currency on. Your house is valuable, but can you circulate its value in form of currency - and redeem your currency upon demand, brick by brick? Or your land, square foot by square foot? - J.Z., 1.12.01.)
By properly applying the category "readiness to accept", Milhaud's system obviates the danger of the purchasing certificates losing their value. (The danger of inflation, i.e., the danger of a general rise in prices by creating additional purchasing power, which is not the same as the danger of depreciation, is obviated by the certificates having no fixed exchange value).
(They are not legal tender, that is, they have no "forced acceptance" and "forced value", except towards the issuer and his debtors, who, under contract to the issuer and in their own interest, will be prepared to accept them at any time at par. In general circulation the goods warrants etc. are "optional money". This means that they do have a free market rate, reckoned against their own - and other value standards. They are not only refusable but also discountable - and in rare cases could get a premium value or "agio", instead of a more frequent discount or "disagio". Usually they will circulate, in their normal local circulation sphere, among the members of a "payment community", at par. In them their function as exchange media is not coercively and inseparably combined with their stated value standard, as it is with the governments' forced and exclusive paper currencies. - I am more and more convinced that all the relevant terms and conditions should be collected and alphabetized and explained in a handbook - but have not yet got around, either, to compile it. The index to these three classical works on monetary freedom will be helpful towards such an encyclopedia. - J. Z., 1.12.01.)
This is not achieved in an abstract manner, one only apprehended by the trained expert, but in a concrete way, one easily understood by every certificate holder, namely through notices posted up by those ready to accept. (Any doubter has only to visit a shop where the notice is posted up, buy there something with his certificate and thus rid himself both of his doubts and of his certificate - even in times of panic.)
Roscher came near to this viewpoint, and even cited, in his par. 67 of his "National Oekonomie des Handels und Gewerbfleisses", several examples where depreciation was avoided by readiness to accept; but he could not divest himself of his prejudice in favor of convertibility. He mentions three cases where the Bank of England was threatened by a "run" once in 1707; then during the rebellion of 1745, where the declaration of 1.140 merchants, that they would accept the notes at par, removed all danger - within three hours; and once again during the Seven Years' War when Choiseuil's
agents vainly attempted to sow suspicion among the population, notwithstanding the declaration of the London merchants. (The Annals - 1935, p. 150 - 139 of peace plan 194), mentions a case that occurred in Berlin in July 1870.
Since the Milhaud system creates, alongside the fresh purchasing power a corresponding proportion of fresh readiness to sell, it avoids the creation of additional purchasing power in the current sense of the expression; for the nature of this latter power consists precisely in the fact that it is not accompanied by a simultaneously created new readiness to sell in the circulating sphere of the new money.
(The term "ticket money", if not "goods warrant" or "purchasing certificate" or "service warrant", describes this situation best. The issuer obliges himself to deliver. That is not a threat or a confiscatory act but the offer of a service that has an exchange value. His optional money is no "requisitioning certificate", like legal tender paper money, against the values supplied by others or by all people in a country. - J.Z., 1.12.01.)
Similarly, by properly applying the category of readiness to sell, a deflation becomes impossible where, on a dearth of means of payment setting in, the authorities and a sufficiently large number of citizens remember at once to apply the principles of the Milhaud system. Why this? Because within any economic domain where Milhaud's principles are applied, it is possible to create, for labor power engaged in a commercially useful manner, the corresponding amount of means of exchange. For every transaction that has become necessary, new payment facilities are simultaneously created (in essence they are clearing possibilities), and everybody may be therefore so placed as if he had coins instead of goods awaiting purchasers or bills that have fallen due.
(His own readiness to deliver goods or services, preferably associated with other such local suppliers, can be thus be turned into convenient enough local purchasing power to pay his bills and this purchasing power, by its very nature, will return to him - and his local associates, to be redeemed in the goods and services which he and they do thereby offer. - J.Z., 1.12.01.)
No transaction, as happens so often under the system of an "exclusive currency", need be suppressed in order that another may take place, e.g., the supplying of the population with every means of consumption, even with articles of luxury, including foreign ones. They need not be delayed because there are at the same time important pubic works to be executed roads and houses to be built, etc.
In the case of collecting public or private dues from persons who can offer goods or services - but not money, the difference between the system of "exclusive currency", where simply purchasing power expresses compulsory requisitioning (of goods and services supplied by others! - J.Z., 1.12.01) and the Milhaud system, where the economy is governed by the sales aspect, becomes clearly apparent.
This difference may be observed in a special instance, such as the one examined in this paper, namely that of the payment of insurance premiums. But the difference becomes most especially obvious in the illustration given by Milhaud of the payment of taxes with purchasing certificates, and this in both cases when in the payment of taxes purchasing certificates issued by the tax payers are used and when the taxes are paid with purchasing certificates issued by the State on the basis of the goods it offers (namely tax receipts) i.e., when the tax payments are made with inconvertible State paper money not having a forced rate of exchange.
(The Milhaud system would make the ruler of a medium sized State richer and more powerful than any of his neighbors, who perhaps rule over much larger, more populous, and more fertile lands, but who do not apply this system.)
In the collection of dues in conformity with the Milhaud system, the receiver of the dues, e.g., the tax authority, the insurance society, or the landlord, does not reduce that quantity of purchasing power among the category of purchasers which that category would dispose of if the dues had not been collected. (It is understood that the two social classes of purchasers and vendors are only conceptually differentiated and do not represent different sections of society.) Hence under the Milhaud system of settlement, the category of purchasers does not buy less than it would have bought without the due collected. What happens is, on the contrary, as follows. The category of vendors, inclusive of the vendors of labor power, must supply more than it would have had to without the due. Otherwise expressed, with the due this category must labor more than it would have had to. The additional output will then be additionally sold by the class of vendors. But the category of vendors does not earn thereby more than it would have earned, with lighter sales without the due.
(At least in English his explanation sounds too abstract to me. I can only hope that the German original, as well as the French & Italian translations of the Annals made these points more clear. Perhaps he should have added to such passages: Read them more than once, if they are not clear enough upon first perusal - Taxes and voluntary contributions leave you less of your earnings - or make you work harder or longer. See the following paragraph. - J.Z., 1.12.01.)
In the payment of public and private dues according to the Milhaud system, the total number of hours worked by the nation is therefore increased. This may be because idle labor power is now set to work (which is a pure advantage) ( Except to the intentionally idle! - J.Z.) or because the labor power engaged works longer hours or more intensively than before. (This is commonly regarded as a disadvantage and therefore stimulates the introduction of machinery where none had been used.) Indeed, James Steuart, whose principal work appeared 10 years before that of Adam Smith, remarked that with a good paper money system, public dues, even if high, do not impoverish the population, but only raise the degree of employment, maybe excessively, i.e., crushing it with work when the dues claimed are too high.
That the Milhaud certificates, on their way from the issuing centre through the national economy and back again to the issuing centre (where they are then destroyed), frequently change their owners and thereby transfer purchasing power, does not invalidate the above contention. Such a transfer of purchasing power takes also place, for instance, when mortgage bonds are used in land purchases a very frequent occurrence and yet no one would argue that the issuing of mortgage bonds creates additional purchasing power. It is conclusive here that the fresh purchasing power is compensated at the very moment of its creation by the simultaneously created fresh readiness to sell.
(This "readiness to sell" does not have to be "fresh". It could include older stocks of consumer goods, which under an exclusive and forced currency, could not be sold to consumers who were, under the prevailing "monetary despotism", insufficiently supplied with sound purchasing power. The main thing is that the "readiness to sell" is balancing or covering the issues and that only as much in ticket money can be issued, i.e., will be readily accepted, as the consumers of the offered goods and services do want more of the goods and services offered in them, and are thus willing to give their goods, services and labor for this "ticket-money" or goods- and service vouchers, in monetary denominations and freely transferable certificates - which oblige only the issuers - namely, to deliver what they are willing and ready to deliver for them and promised to deliver for them: Usually a wide-enough and at least local range of consumer goods and services or other payment and clearing options. With the reflux of the certificates the certificates will be gone from circulation and so will the goods and services have disappeared from the market, in which they have been redeemed. The goods and the money side remain balanced, or, more accurately, become properly balanced for the first time and can remain balanced from then on! - J.Z., 1.12.01.)
This becomes manifest by the second fact, namely that the purchasing certificate, the instrument of the freshly created purchasing power, is physically destroyed, immediately after its return to the issuing centre that is, within a short time, Expressed differently, the purchasing certificate must reach a certain quarter where it can no longer exercise or transfer purchasing power.
Some will be tempted to suspect inflationary intentions behind this. They will argue that if the purchasing power is really compensated the moment it is created, the whole process might as well not have taken place.
A mathematical analogy may furnish the answer to this. The quadratic equation, x . x + a . x = b, does not, notoriously, enable us to determine the unknown x by the ordinary arithmetical rules. If, however we add the quantity a/2 . a/2 to both sides of the equation, which, of course, cannot affect its value, we obtain a term on the left side which is equal to ( x + a/2 ) . (x + a/2 ), This allows us to extract the square root on both sides of the equation, which of course does not change the value of the equation, and which yields on the left side: x + a/2. If we then subtract the quantity a/2 on both sides of the equation, which again cannot affect its value, there is left on the left side x only, and the equation is solved by means of seemingly indifferent, but in reality, indispensable operations. The quantity x represents, in a sense the quantify of material values which the receiver of dues (say the State, the municipality, etc.) claims. The quantities a and b represent the quantity of the material values and the circulating means of payment which he does not claim, but which are seemingly bound, in an indissoluble unity in the general circulatory process, with other material values and with other means of payment. By using the wholly indifferent quantity a/2, which symbolizes the purchasing certificates and the associated readiness to so sell, the x may be separated and then acquired by the receiver of dues. A chemical analogy would equally serve our purpose. What catalysts are in chemistry, purchasing certificates are in the national economy. They act by their mere presence, but take no part in the chemical changes ensuing.
The creation (*) of purchasing power and of an at least equally great additional readiness to sell created at the same time and place (e.g., by means of the certificates issued by an insurance company, certificates which the management and the members accept in payment as ready money and for which the sufferers from damage purchase something) is a different thing from the anticipation of payments and is not therefore a "pre-financing" either. In a free society, this creation (*) constitutes the only available method of mobilizing labor power, whether idle or active, but which is to yield greater output.
All other types of mobilizing labor power amount in the last resort to forced labor and infringe the freedom of a society, easily annihilating it, as happened in the great French Revolution. At the conclusion of this study something will be said concerning monetary phenomena and their political aspect, with special reference to that historic event. To mobilize labor power is not the same as occupying it permanently after its mobilization. In the Milhaud system the first issue only mobilizes labor power; but only through the regular continuation of issues is labor power permanently employed. Should the issue be stopped, the employment of the mobilized labor power would also stop (or become dependent on the money available) the reflux would soon withdraw the certificates from circulation, and everything would be as before the issue. This may be even desirable, as when a government, for defense purposes, wishes to mobilize 100 million hours of labor, perhaps for budding a fortress, but can only pay for it with its own certificates and not with coins. Accordingly, it issues certificates for 100 million labor hours, imposes a tax of an equivalent amount on the country, but has no
intention of employing this supplementary labor power after the fortress is built.
(*) (I dislike the use of "creation" in this connection, seeing how confused, generally, the notions are on the "creation" of money or the "creation of credit" and even on "fiat money", with the latter term so misunderstood, especially by metallic redemption fanatics, that they consider ALL currencies not redeemable in specie to be mere "fiat money". What the process really does is not so much a "creation" out of nothing, of purchasing power, or of "money out of thin air", as has been so often asserted, but, rather, the transformation of an already existing purchasing power, namely that of goods, services and labor ready for sale, but in their illiquid form, into a temporary and equivalent liquid form, which facilitates their turnover. It makes the suppliers of goods and services able to pay and likewise their potential customers. The "ability to pay" and the "ability to clear ones debts" is increased, thereby, but is done not out of proportion with the ability to deliver goods, services and labor but, rather, in exact proportion to these factors. The liquidity thus achieved is in exact proportion to the liquidity needed. The certificates - or corresponding electronic credits - become something like a super-efficient oil that eliminates friction between all possible and desired exchanges. The "quantity theory of money" applies only to the inherently unlimited multiplication of legal tender money, i.e., money that cannot be refused or discounted and that has no free competition and can thus drive up all prices. Under full monetary freedom and sufficient comprehension and practice of it, the only price rises, from the monetary side, that will follow the free emission of goods-, service- and labor warrants, will be those which do away with the emergency sales prices - for goods, services and labor - and restore untrammeled free market conditions - i. e., prices for goods, services and labor, reckoned in sound and competing exchange media and value standards. On the contrary, this change will also reduce sales costs, like advertising, and it will increase turnovers and, to that extent, it will lead to a reduction of goods prices, while at the same time it will release an enormous amount of liquid demand for labor and services, in form of all the ready for sale and mostly mass-produced goods in the stores - they come to millions to billions in every large shopping centre, so far not fully expressed as purchasing power for labor and services, thereby increasing the value of labor and services offered in the market, realizing for them the full potential of mass production for the market, under conditions where sales become as easy and automatic as production has become, assuming, naturally, that production has been sufficiently informed, as it can be with modern means of communication, about all of its potential market. - J.Z., 1.12.01.)
If we are clear as to these concatenations, we shall be convinced that the idea cherished by many economists of the possibility of an "initial sparking", i.e., of the surmounting of the depression by a single impulse is mistaken. (Only the Milhaud system can rescue us!) The suggestion amounts to this, that through a single issue of supplementary legal tender a "dosed" inflation may be produced and that by this means the "stuck vehicle" of the economy may be restarted. That is, we picture to ourselves an economy like a motor car stuck in the mud, a car which is otherwise in perfect condition, and need only be extracted once from the mud e.g., through an exceptional pull of its engine. The "initial sparking" is to achieve that.
The above picture is true to this extent that under the present system of "exclusive currency" every cause of the depression acts "progressively". For instance, the unsaleability of a tenth part of the annual output of a country may very easily throw out of work for the year not a tenth but perhaps a third of all workers. Measures for combating (*) the depression have a corresponding progressive" effect and for every workless re-engaged another is indirectly in demand without our being able to say why.
(*) (I dislike the terms "fight" or "combat" in this connection when all that is needed is to "end" monetary despotism, either by the repeal of the relevant laws or by systematically and widely ignoring them, based, naturally, upon sufficient knowledge of and appreciation of the monetary freedom alternatives. Should warlike terms should be used when merely ideas, techniques, more suitable terminology, enlightenment, publicity and experimental freedom are required and not a single shot or other violent act - J.Z., 1.12.01.)
But, to return to our simile, the car is not in good condition; that is, it is not lubricated; it needs oil, a substance that has to be renewed like petrol. However in the darkness (felt by minds not yet illuminated by Milhaud's writings ) we suspect mud-stuck tires when it is realty a question of resistance at the axles.
The idea that a "dosed inflation" is needed, is due to a decided servility towards the State a servility which, moreover, as experience teaches, is rarely associated with the honest desire to serve the people - the people, this child not yet of age, although destined to great things in the future.
The "étatist" naively ascribes to the State the right to inflate. (And when the State enacts laws, they contain provisions, such as par. 1895 of the Code Napoleon, which practically calls on the class of debtors to constantly further new inflations. In strong contrast, the old Prussian legislation endeavored, primarily, to render creditors independent of all monetary changes. See "Kommentar zum Allgemeinen Preussischen Landrecht", by Koch, vol. 1, pp. 783-784, Berlin 1853, concerning the interpretation of par. 787 to 789 of part I, eleventh title. The German Civil Code is also conceived in that spirit and it required the appreciation laws - more correctly, depreciation laws - of 1925, in order, to popularize, at least partly, the opposite conception.)
If, according to widely current views, existing Governments possess eo ipso the right to inflate, they would be justified in applying it to the advantage of their favorites for the time being, without consulting the people, i.e., to the advantage of those who call for an inflation. But current opinion goes even much further, not only in this or that country, but in every land. Everybody engaged in molding public opinion hopes at some time or other to become one of the ruler's favorites and, in this hope, he confers on him also the right to impose taxation, as a sovereign, i.e., to employ it to the advantage of his favorites for the time being.
Both conceptions, that of the right to inflate and of the right to tax, correspond exactly to the conceptions ruling for many centuries, e.g., throughout the Middle Ages, when they were even carefully defined. They are presumably inherited from that period, in the physiological sense of this word, like so many other superficially very modern mentalities. (See Annals, 1935, p. 176 ff PEACE PLANS 10 p. 154ff.)
But even boundless respect for the State cannot cancel the fact that in our society the collection of taxes is nothing but the sale of tax receipts by the excheckr (its goods!) of course, a compulsory sale, but for that reason, assured. (Louis XIV. would have deemed such a contention a degradation of God's grace; Napoleon, on the other hand, an offence against the deference due to the supreme military commander. Even Stalin would sharply censure, in appropriate soviet terminology, the implied offence against the sovereignty of the proletariat. But Frederick the Great would have appreciated this standpoint and probably also Louis XVIII., who was shot at by ultra-royalists because he was a Voltairean and in no way a 100% old style royalist.
And what is State paper money if tax collection is a sale of tax receipts? Even if, in order to awaken in the
population the necessary awe for it, State paper money were printed from silver plates, as it is said to have been anciently in Spain; even if its acceptance were represented in solemn proclamations as an irremissible patriotic act, as during the American War of Independence, at Washington's instance, who could not buy hay or cloth for "Continentals" (Bullock "Monetary History of the United States , p 66 ). The same George Washington who talked another language when his own tenants offered him in payment Continentals at par (And who had got his troops, in the end and intentionally marched into the wilderness, in order to be "paid off" there - with inflated paper money. Thus he made himself and his cohorts safe from their justified anger! See P. Webster on this! - J.Z., 1.12.01.); even if the refusal to accept assignats at par is punishable with 20 years' penal servitude French Act of 1 August, 1793; Jastrow's "Textbuecher", vol. 4, p. 61); even so, State paper money is and always has been a prosaic purchasing certificate for tax receipts, and noting else. (The instances where considerable quantities of material values could be bought for State paper money, have almost always been of little importance economically, even during the assignat period, when the cover of assignats by real estate was simply a self deception, although many confiscated plots of land were sold for assignats.) Before purchasing certificates were invented, or rather, before the idea underlying them was clearly elaborated, the mistake was pardonable, but not so do day.
If we take State paper money to be what it really is, namely, purchasing certificates wherewith to buy tax receipts, an economically correct standpoint towards the demand of an "initial sparking", by means of a "dosed inflation", at once presents itself This is irrespective of the fact that in the light of such clear knowledge the old servile feeling complexes can no longer continue and that such knowledge suggests of itself the demand for a just price for tax receipts as well - thereby supplanting the old concepts. (A great transformation. Dissatisfied subjects are easily disposed of but the dissatisfied purchaser has always had his way and eventually goes were he is honestly treated.)
The right attitude towards the demand for a "dosed inflation" is naturally that an inflation, whether dosed or not, is to be rejected, but that an issue of State paper money, greater than are the current tax receipts, may be considered, and even must be, if a shortage of money exists and tax payers are at the same time in arrears. In such case a supplementary issue of State paper money may very well aid in collecting the outstanding taxes, and this by overcoming the shortage of means of payment. It could not achieve this, however, if, e .g., there is a deficiency of means of payment in Amoy and the paper money is issued in Shanghai for the payment of the salaries of officials.
But for the purpose of collecting tax arrears it is not necessary to issue forced currency. Ordinary, unforced "treasury notes" (this was a very good name for the first Prussian State paper money), would suffice. Indeed, they would serve even much better. As the treasury notes stream back constantly and are then destroyed, whilst new notes are issued in those localities where a deficiency of means of payment is felt to exist, Milhaud's principle is being realized in the sphere of public administration.
Since considerable tax arrears are always associated with other deflationary phenomena (e.g., increase in unemployment and in forced auction sales) which vanish with the possibility of paying the arrears, the supplementary issue has "set the car going", has, one may say, "supplied it with oil''. Thus, superficially, the inflation economist seems to be justified. He misses, however, the raising of prices, which, in his opinion, is the main point. But an inflationary increase in prices does not set in, rendering it therefore impossible to buy (say) a farm in Hu-pei for the price of a silver cigarette case (the peasant was unable to pay his taxes), or acquire a horse owned by this peasant for the price of a few hob nails in Shanghai. A forced rate for the newly issued state paper money would mask the actual processes accompanying the issue and the subsequent reflux. It would also conceal the limits to inflation, which readily become manifest when there is a free market rate for means of payment. Also, given a forced rate, the general public, out of "fear of inflation", would cease to become creditor in any form.
If we consider how easily all the favorable effects that may rightly be anticipated from paper money, may be obtained from an unforced paper money; furthermore, the destructive effects regularly ensuing from a forced currency, even under a well-intentioned Government, one would be inclined to compare the economists who insist on a forced currency, with the master builders of the imposing and now excavated
castles of Mycene and elsewhere, who, as we know, also substituted compulsion for the use of mortar and sentenced every building operative to death in whose piece of work a knife could be inserted between the piled up stones The suggestion that there were other ways would naturally have been stigmatized by the ancient "practical men" as "abstract" and "sentimental".
When tax payments art not in arrears, an additional readiness to buy tax receipts does not exist. In this case unforced additional paper money cannot be issued without depreciating it from the beginning, rendering thus impracticable further issues. It would be similar if there were tax arrears but more paper money were issued than corresponds to the value of the arrears. If then, in order to remove certain deflationary tendencies in an economic domain, additional State paper money is issued and, to render this possible, a forced rate is decreed, inflation becomes inevitable. Such an inflation therefore could not put an end, permanently, to the prevailing unemployment. Even if, for the moment, the inflation diminished unemployment, it would soon become evident that purchasing power and unemployment have only been transposed in time. (Similar to where they have been transposed in space through taxation for the purpose of increasing employment.) The purchasing power of many who receive this money is raised a little, for the moment, only to be correspondingly, mostly more than "correspondingly" diminished on the next general occasion when payments fall due. Hence, in the middle of an inflation, there occur outbursts of unemployment that surprise all concerned.
(One factor contributing to this effect is that prices being temporarily set in the expectation of continuing further inflation, race ahead of the current over issue of legal tender money. - The Ed.)
For example, this happened frequently enough in Germany during 1921 and 1923 and most especially after the cessation of the inflation in 1924, when from 7 April onwards Germany experienced one of the worst depressions in recent history. The inevitable aggravation of unemployment through inflation is so well known among real students of national economies that Talleyrand was able to predict, down to the very details, the sharp French deflation that followed the assignats period. (See his speech on September 170 before the National Assembly, reproduced in the work "L'inflation", published by Laville, Paris, 1926.)
(How to avoid this supposedly inevitable "hard option", of a temporary sharp unemployment, following the cessation of inflation, has been described in my small pamphlet: "The Soft Option," in PEACE PLANS 19. It is available on my website: www.acenet.com.au/~jzube. - J.Z., 2.12.01.)
The statement that the issue of unforced purchasing certificates creates additional purchasing power neither in the public nor in the private economy (in the sense hitherto attached to the expression), but that such an issue, by increasing labor output, creates a temporarily increased readiness to sell, will be found described concretely on one of the later pages of this chapter (p. 229) by means of the example of a saddler who is insured in a public society operating on the principles here expounded but who cannot pay his premium with money.
This example may serve as an analogy for the collection of taxes from persons who notwithstanding that the issue of State paper money has been correctly made, can yet neither procure this nor any other means of payment, although anxious to do so.
Such persons, if they possess useful material values intended for sale, or can offer useful services, might be permitted to pay their taxes with purchasing certificates made out by themselves, but with a surcharge. This should correspond to the amount of inconvenience occasioned to the Excheckr in negotiating such certificates. The surcharge might be less, if at least a few friends of the taxpayer were ready to accept these certificates in lieu of ready money. It might be dispensed with altogether when a whole village (for instance) declares itself ready to accept at par the certificates of their fellow citizen, or if a group of at least 100 persons is ready to act thus for at least six months.
By issuing such edicts, a statesman would promote the organization of persons into mutual payment associations (an idea first pronounced by Knapp, but rediscovered by Rittershausen in our day), which could only be advantageous for his work and his country. What a difference between this statesman and another who - for instance, in order to buy uniforms of the value of 1.000 gold coins believes that he must compel the country's tailors to regard his paper money as of the same value as his gold coins; who is thereby brought to the issue of a forced currency; and who stands thus always with one foot in the inflation stream. The statesman who teaches his people to provide itself
with its own means of payment, should there be a shortage of these for any reason, does for it almost as much as did that leader in primitive times who first taught his people to provide themselves with their own fire when that bestowed by heaven (i.e., that lit by an accidental lightning strike) had become extinguished. As late as the last century, the Pesherahs of South America lacked a leader of this sort. (The memory of such individuals, who were regarded by the fire priests of their time as very inconvenient "heretics", is kept alive in the Prometheus legend.)
Since every possibility of applying the principles of the Milhaud system throws light on all other possibilities of its application, as well as on the principles of the system itself, the foregoing generalization of the payment of insurance premiums, in conformity with the Milhaud system of settlement, to the payment of dues generally, was perhaps not superfluous. Let us now return to the goods warrants of the insurance societies.
The value of the goods warrant of an insurance society is therefore primarily maintained at par by reason of the readiness to accept them on the part of the policy holders and of the society itself. Nor may we estimate at nil the demand of those insured in the society, who possess ready money and who, at the least fall in the discount rate of the warrants, buy them up so as to dispose of them at par to the society. In fact, when, for whatever reason, the discount rate is high enough, say reaching 10 %, members possessing ready money would find it advantageous to buy up the warrants and pay them in to the society, stating that they were for meeting future levies. Here the problem arises how such reserves might be invested. One way would be to grant loans to members who desire to provide themselves with fire fighting equipment, e.g., fire ladders, manual extinguishers, and the like. The loans could be granted as amortization loans, the society's goods warrants being used both for the loan itself and for repayments. Loans to communities for acquiring fire engines and other fire fighting appliances would also enter into consideration. Moreover, Governments could do much for fire protection, if they exempted from taxation every capital investment intended to produce fire fighting equipment. In this way Asiatic towns could in 30 years possess as efficient fire protection arrangements as do European towns.
To return, however, to the exchange rate of the goods warrants. Undoubtedly, as long as ready money exists among those who owe the society contributions, the rate of the goods warrants cannot drop much below par. A discount can, of course, only arise, if either some holders of goods warrants form a wrong opinion about the value of the warrants and therefore dispose of them at a price below their real value, or if the society pays out more in goods warrants than is justified by the contributions falling due fairly soon. As soon as the discount on the goods warrants exceeds 1%, it becomes advisable to examine at once the books of the society, to ascertain the amount of outstanding levies, and to inquire into the sum involved in the outstanding goods warrants and the manner of their issuance, and, finally, to make public, without delay, the result of the investigation. Besides, those persons who disposed of their goods warrants at a discount, should be asked why they chose to lose and why they did not prefer to pass on the goods warrants to parties who would have accepted them at par.
A discount probably always arises owing to individuals who are not members of the society or to members who have paid their contributions and are therefore not bound to accept the goods warrants, drawing a distinction in sales between goods warrants and ready money. Where the issue is properly organized by the society, no one in the society's district will tend to decline to accept the goods warrants at par. On the contrary, normally many persons who are not members will also post up notices declaring themselves ready to accept the warrants in lieu of ready money (see Milhaud), and this simply in order to increase their turnover.
For the sake of clarity, let us examine the case of the insured A, B, and C in the above illustration, who respectively owe contributions of 10, 25, and 15 rials. If, for instance, A is the owner of a flock of sheep, he will be in a position, when selling wool, hides, or live sheep, to accept a society's goods warrant for say 10 rials, as he would accept 10 rials in silver. He can then take the goods warrant received in payment for his goods and remit it to the society as his contribution. B is perhaps a peasant. In that case when selling corn
or vegetables, he can accept goods warrants to the value of 25 rials as ready money and pay these in at the society. C is perhaps a shopkeeper. He can accept goods warrants to the value of 15 rials when selling his wares, and may, in his turn, pay in goods warrants the contributions he owes to the society.
Purely theoretically considered, it would suffice that every insured in arrears with his contribution, need only accept such a number of goods warrants in payment as would correspond to the amount of his contribution. In practice, however, friction might ensue thereby. Hence in order to augment the possibility of utilizing the society's goods warrants, each insured in arrears with his contribution, must be required, if necessary, to accept in payment goods warrants to at least double the amount of the contribution. (W. B. Greene, in his "Mutual Banking, which was rescued from oblivion by Henry Meulen, reaches a very similar conclusion, namely that a member of a mutual bank has, if necessary, to accept the goods warrants of his bank up to double the amount he owes it. In developing his exchange bank, Proudhon equally considered that the members must accept the warrants at their nominal value, but demanded, going in this far too far, that every member must accept every amount.)
Without a doubt, the total amount of goods warrants issued by an insurance society, assuming a conscientious and capable management, would be always covered by the obligation to accept them of numerous persons, all of whom can offer effective values. It may, of course, happen that an insured possesses or produces material values for which there is no regular demand: The ivory carvers of China, who carve those ivory balls, twenty of which are sometimes worked into one another, each moving freely, and of which, even the smallest & innermost, displays carved figures, these ivory carvers are sometimes obliged to wait for years for a purchaser. (These art products can be admired in European museums. In Buddhist temples they are shown to the faithful in order to impress on them what human patience and care can accomplish when they have a definite goal in view.) Would such a craftsman's obligation to accept serve as well for cover as that of a baker or of a rickshaw owner? To judge such a case fairly, it should be remembered that the ivory carver would not present an essentially different risk if he undertook to pay, not with goods warrants but with money. If he lived in London and was insured there, his position and that of his insurance office would not be different. If he did not tender payment within the period fixed by the insurance conditions, his insurance protection would come to an end, whether he lived in London or in Tabriz, whether he paid in goods warrants or in gold coins.
But would not the cover of the goods warrants suffer if some insured did not pay, or if they carried on a business which only allowed them to make payments at long intervals? This is so, and if there were many such serious cases, the society would be obliged to impose an additional contribution on those insured who, technically and economically, do not represent such an abnormal risk as an ivory carver does precisely as an European mutual insurance office that has indemnified losses out of a raised loan, but half whose members, for some reason, suddenly cease paying. Dangers to which any mutual insurance office in any country is exposed, although it does not issue goods warrants, cannot be fairly regarded as special dangers arising out of the goods warrants system, when it concerns a society operating with such warrants.
It remains now to be seen what should be the attitude of the society to members who can pay their contributions neither in money nor in the society's goods warrants. In the sequel we shall find that, in the last resort, the principles of the Milhaud system of settlement suggest in such instances the acceptance of the debtor's own purchasing certificate, as well as an attempt to negotiate it, before the creditor proceeds to his "ultimo ratio", i. e., a forced auction sale. Such a debtor's purchasing certificate might be made out almost exactly as would the goods warrant issued by a society, only that the debtor would be described therein as obligee and the text would be phrased somewhat less technically. For the sake of greater clarity, here is such a text: (See overleaf after the next paragraph. - The Ed.)
The document made out by the debtor should be called purchasing certificate, whilst the documents made out by the society, since nothing concrete is to be bought with them, might preferably be called goods warrants, although the financial principle remains the same in the two cases. Accordingly, the debtor is obliged to accept his own purchasing certificate in lieu of ready money when somebody buys something
of him or tenders payment on any legal ground. It would also conflict with the principles of good faith if the debtor refused to name the persons who are likely to make payments to him shortly or are responsible for making payments to him The society or the holder of the certificates may then endeavor dispose of them to those persons.
PURCHASING CERTIFICATE
This certificate will be accepted by ( name and address ) in lieu of ready money to the amount of
10 RIALS
in all payments due to him. The above named will make no distinction between legal tender and this certificate, nor inquire before accepting payment whether settlement is to be in legal tender or in this certificate. The above named is ready to inform the holder of those persons from whom he expects payments within the following two weeks. The validity of the certificate expires on ....... x After that date the above named will decide at his discretion about the acceptance of this certificate, reserving to himself the right of repudiation.
No. ....... Date ........ Signature .......
Certified by creditors: ........ Date ........ Signature .........
The inconvenience occasioned by the debtor, transforming into a purchasing certificate made out by himself the demand for payment made on him by the society, should be fairly compensated. The amount need not be smaller than the inconvenience and expense the debtor would have incurred in selling his goods, for this has not to be incurred by the creditor.
In highly commercialized countries such as the United States, it is calculated that sale costs amount to approximately half the amount paid by the consumer. In Asia sale costs must be far higher. Moreover, the society for which this is an additional kind of activity, has to go to relatively greater trouble to negotiate the purchasing certificate of say the owner of a flock of sheep, than the latter would have to take, seeing that it is his avocation. to sell sheep. Also, according to universal usage, accrued interest is to be added where the debtor delays payment. However since these surcharges only mean that the debtor who offers his own purchasing certificates is, notwithstanding the increase in the amount, not worse off than if he had paid in current means of payment, there should be added another surcharge high enough to induce him to do his utmost to procure the necessary current means of payment for settling with his creditors before offering his own purchasing certificates. These various considerations suggest that it would not be unfair if a society's debtor who perhaps owes it contributions to the amount of 50 rials, should be obliged to make out a purchasing certificate for about 150 rials (or 3 certificates of 50 rials each), if he leaves its negotiation to the society. Should, however, an insured show ill will and reject every offer by the society or leaves it unanswered, there would only be left the alternative, at least under the present legal system even with a society applying the Milhaud system to proceed, as is the rule all the world over, to a forced auction sale.
For the payment of indemnities, the society will not always be able to utilize purchasing certificates issued for single debtors. It will, however, frequently be possible for it to pay its suppliers with them. Here is an illustration. Suppose a saddler owes the society 100 rials, but is unable to pay because it is winter time and few saddles are bought then. In that case the society may perhaps accept a purchasing certificate in payment, the saddler undertaking to accept it in lieu of 300 rials in cash when he next sells a saddle. The society would perhaps be able to utilize such a certificate when it buys, e.g., a cabinet or a typewriter. Allowing for a discount of 50%, the supplier will readily accept the certificate in payment and would probably find somebody who will, in turn, accept it at a discount and thus secure for himself a very cheap saddle. To prevent misunderstandings, it may be stated that in his writings Milhaud does not propose such
a surcharge. But Milhaud has shown how, in the cases he describes, namely those relating to external trading and wage payments, a purchasing certificate can be converted into a general means of payment, so that the creditor requires no surcharges to be fully satisfied, Here, however, we are discussing cases where the tyro (novice or beginner The Ed.) might think that the Milhaud system is inapplicable. Actually, this is a mistake.
Similar reflections to those relating to contributions in arrears are applicable to payments to the society in discharge of loans it grants, loans granted in cases where the damage done is greater than those the society, according to its conditions, was bound to meet or even justified in meeting; also loans serving as an investment for its reserves. Suppose the society has granted a farmer a loan to enable him to purchase a fire appliance and the time has come for him to tender the society 500 rials in part payment. Suppose, moreover, that there is in this region a great shortage of ready money. Assume also that this region has been free for some time from fires, so that the society had no occasion to set in circulation its own goods warrants. Then it may very well happen that a farmer, who is quite willing to pay and who has much produce to dispose of, is yet not in a position to pay the 500 rials, because of the aforementioned money shortage. In such a case the society, if for special reasons it does not grant a respite, will, to the farmer's advantage as well as its own, accept his purchasing certificates in convenient denominations.
By revealing entirely new payment facilities, the preceding examples make it clear that the principles of the Milhaud system of payment, if the system has operated long enough in any country, would finally transform the debt legislation to the advantage of creditor and debtor alike. This transformation will be accomplished through the debtor, before he is threatened with a forced sale, being permitted to issue purchasing certificates which the creditor then utilizes. Similarly, the courts would condemn the debtor to issue purchasing certificates, if in their judgment the country suffered from a general shortage of means of payment or if, for other reasons, the debtor could not procure sufficient means of payment, at least not without sacrifices that could not fairly be demanded of him. Even should the debtor refuse to issue purchasing certificates or leave unanswered a demand to do this, a court pronouncing judgment in conformity with the principles of the Milhaud system, would, if, existing legislation permitted it, not proceed at once to decreeing a forced sale. The court would issue purchasing certificates for the debtor, i.e., in his name, which the debtor would then be obliged to accept in payments in lieu of money.
Only if this procedure proved impracticable, or if it appeared disadvantageous for the creditor (which would rarely be the case), would the court refrain from providing the creditor with purchasing certificates. If the creditor on the other hand, should be unable, despite his endeavors, to utilize the certificates within a certain time, he would have to bear the loss. The surcharges represent the insurance premium for this contingency.
The increase in the amount owed, if the creditor accepts the debtor's own purchasing certificates, would differ according to whether the system is generally applied in a country or not. That is, if the system is generally applied, there would be no lack of merchants or banks which would deal specifically in utilizing the certificates of debtors unknown to the general public and whose purchasing certificates could therefore not be utilized for general payments. Correspondingly, the creditor's difficulties in utilizing the debtor's purchasing certificates would diminish or even disappear. The banks or merchants concerned would perhaps take over the creditor's purchasing certificates at a discount of 5% and still earn a net 30%, rendering it hence unnecessary to more than double the original sum owed, i. e., to raise the amount higher than would correspond to the middleman's 15% of the amount of the purchasing certificate.
After the introduction of such a system, cases such as occurred in Germany before the War and no doubt in all other countries, would become practically impossible. Thus a house of the value of 100.000 marks, realized 1,000 marks at a forced sale. Of course, possibly both debtor and creditor were ruined thereby, As already pointed out in No. 1 of the Annals of 1934 (p. 22f of PEACE PLANS 9), this suggests the need of far reaching Legislative reforms. The International Law Association should consider this matter at one of its coming conferences.
After suitable legislation had been passed and trade had adjusted itself thereto within a few years, perhaps ten or twenty, a surcharge of about one-third of the original debt would suffice to indemnify the creditor and the middlemen dealing in purchasing certificates of a debtor unknown to the public, instead of currently negotiable means of payment. It is certain that legislation indemnifying a creditor in this way, instead of immediately ordering, as is now the custom in almost all countries, a distraint, would introduce a quite different and more far reaching protection of property, both that residing in claims and any other, than has hitherto been attained by debt legislation. The latter has thus far set itself the impossible goal of always securing for the creditor "exclusive currency" and yet not to destroy the productive energies of the country. Hence one day it one-sidedly favored the creditor and the next the debtor.
The mistaken principle, of the hitherto prevailing legislation concerning the repayment of loans, may be expressed as follows. This legislation has misapprehended the fundamental difference between the repayment of a loan and the returning of a depositum irregular, i.e., of a deposit where the recipient is not required to return the objects deposited, but objects of the same kind, as is the case, say, when cereals are stored in grain elevators. Legislatures then began to distinguish the two kinds of repayment. This was the case in German legislation, more particularly in the "'Allgemeines Landrecht fuer die Preussischen Staaten", which appeared in 1794, but was already drawn up under Frederick the Great. (This was superseded in 1900 by the German Code of Civil Law.) In part I eleventh title, par, 793, we read regarding Loans: &