By Ulrich von Beckerath, 1882-1969
[Taken from Peace Plans #9, compiled by John Zube]
An essay on the theory and practice of the monetary freedom required to make the market really free.
"Proposals so simple, leaving the economic foundations undisturbed, and appealing so little to force! Certain current symptoms suggest that the world is beginning to get weary of violent solutions, that is, that part of the world which has come to know by experience wars, revolutions, blockades, hunger and trade depressions, and which has come to suspect that all these are somehow associated with defects in our monetary system." U. v. Beckerath, on p. 63.
Published first in English, German and French by the Annals of Collective Economy, now re-named Annals of Public and Cooperative Economy, in 1934 and secondly in: "Ending the Unemployment and Trade Crisis", edited by Edgard Milhaud, London, Williams & Norgate Ltd., 1935. Permission for this reprint has been obtained from the present Director of the Annals of Public and Cooperative Economy, Prof. Paul Lambert. The only condition he imposed for the reprint of the money reform articles of U. von Beckerath, Walter Zander and Heinrich Rittershausen, published in the Annals, either by me or later by other publishers is that the Annals are mentioned as source, including the year of appearance.
Present address of Annals of Public and Cooperative Economy: Liege, 45, quai de Rome, Belgium. The secretary of the Annals in Genf, Frau G. Calame, Acacias 7, 1227 Genf 24, Switzerland, can supply the volumes required for reprinting. Permission was furthermore obtained from Ernest Benn Ltd., Bouverie House Fleet Street, London E.C. 4, acting for Williams & Norgate, for the reprint of the English edition. Ulrich von Beckerath has transferred his literary rights to me. I welcome reprints. No charge!
The English translation was made by G. Spiller, London. Ulrich von Beckerath told me that he is not fully satisfied with this translation. He always tried to be a perfectionist in his written expression. I have there from, with Beckerath's consent, tried to somehow improve this translation, attempting to achieve an as literal one as I could but I do not feel sure that I have not introduced some new mistakes thereby. My English still leaves much to be desired. I would welcome a better translation and hope that this reprint will help to bring it about.
For technical reasons the numerous italics in the original could not be reproduced. Some of them were indicated in the original PEACE PLANS issue by spacing and have now been italicized.
"Il n'a jamais été de progrès sociaux que seux conçus par un individu lucide et voulus par un individu énergique.''
"There has never been social progress than that conceived by a lucid individual and willed by an energetic individual."
- H. L. Follin in: "Paroles d'un voyant"
CONTENTS
(1) PUBLIC REACTION TO THE MILHAUD PROPOSALS . 5
(2) POINTS DIFFERENTIATING THE MILHAUD REFORM PROPOSALS FROM THOSE OF OTHERS. 6
(3) THE MILHAUD PROPOSALS AS AN INTEGRAL WHOLE 6
(4) A BASIC FLAW IN OUR ECONOMIC SYSTEM. 7
A) The True Nature of a Money Debt. 7
B) Security in Cash Payments and in Non-Cash Settlements. 10
(5) THE MILHAUD PROPOSALS AS A BASIS FOR A NEW SYSTEM OF PECUNIARY SETTLEMENTS 10
A) The Prevailing Money Monopoly as a Cause of Money Shortage and there from of the Trade Depression. 10
B) Exchange of Commodities without Goods Warrants. 13
C) Exchange e of Commodities with Goods Warrants . 14
D) The Placing of Orders as a Factor in the Goods Warrants System 16
E) Short Term Validity of the Goods Warrants 21
F) An Improvement in the Civil Law as a Result of the Milhaud Proposals and as a First Step towards a Social Reform. 22
(6) THE REALIZATION OF THE FUNDAMENTAL CONCEPTIONS UNDERLYING THE MILHAUD PROPOSALS - SHOULD STATES NOT TAKE THE INITIATIVE . 24
A) Purchasing Certificates in External Trading on a Private Enterprise Basis . 24
B) Work Supply Banks As Private Institutions. 29
C) Technical. Details concerning the Issue of Goods Warrants by Work Supply Banks 34
a) Introduction. 34
b) Principles and Business Provisions regarding Loan Transactions of a Work Supply Bank in respect of Short Term Credits 35
I. Means of Payment. 35
II. Legal Form . 35
III. Guaranties for the Work Supply Bank in Loan Transactions . 35
IV. Usufruct Charges for Loaned Goods Warrants 36
V. Return of the Loaned Goods Warrants and Sundries 36
c) Rules 37
d) Principles & Provisions Governing the Obtaining of Credits through the Work Supply Bank 39
I. Nature of the Long-Term Credits Granted by the Work Supply Bank . 39
II. Capital Required for Long Term Credits, 39
III. Administration of Balances at the Work Supply Bank 40
IV. Notice of Withdrawal of Balances at the Work Supply Bank 40
V. Repayment of Long Term Credits. 41
D) Use of Goods Warrants to Finance Manufacturing Operations Occupying a Considerable Time 41
(7) OTHER ASPECTS. 46
A) Payment of Rent with Goods Warrants 46
B) Payment of Dividends with Goods Warrants 46
C) General Objections by "Practical Men 47
D) Issue of Goods Warrants and "Creation of Money" 48
E) Is a Homogeneous. Circulating Medium the Ideal 51
F) Security against Inflation of Means of Payment made of Paper 52
(8) CONCLUSION 57
For an alphabetical index see the end of PEACE PLANS No 11.
(1) PUBLIC REACTION TO THE MILHAUD PROPOSALS
Nobody doubts that a practical proposal to re-employ the twenty-five million unemployed of today's world would be of no less (indeed of far greater) importance than was, in its time, the introduction of railways or telegraphs. Thus it is surprising that the Milhaud proposals have not been, on the whole, more warmly received and more closely examined. Apparently, a staunch partisan of the proposals has not yet appeared. On several occasions Milhaud has personally defended his program but without bringing about a positive resolution in his listeners or readers. It is true that our times are not propitious for a scrupulous examination of new social reform schemes. Probably all Governments have had submitted to them hundreds if not thousands of projects. It has been stated for instance, that during the last few years the German Government received some 50.600 proposals and the Reichsbank over a thousand during the first months after the 13 th. of July, 1931. In former days, too there was no shortage of projects. In his article "Property and Law" published 14/411848, Bastiat reports that by that date over 500 proposals for the organization of labor and as many for the organization of credit had been submitted to the French Government. Hence the first impression created by the Milhaud proposals was inevitable: "What! another reform project and actually one relating to monetary reform!" But he who is acquainted with even a small proportion of the hitherto published projects acts will be surprised that the Milhaud proposals do not include certain points which appear in well nigh all other proposals and which, according to current opinion, should on no account be omitted. Let us examine these points.
(2) POINTS DIFFERENTIATING THE MILHAUD REFORM PROPOSALS FROM THOSE OF OTHERS
The total number of post war proposals aiming at combating the general trade depression, either published or submitted to governments, exceeds almost certainly 100.000. The Milhaud proposals differ favorably from these by the following characteristics , among others: a) Milhaud desires to retain gold as the standard of value and only bans it as a means of payment. Thus creditors would receive gold values in the place of gold. Here already Milhaud stands almost alone. The view that the old standard has "failed" and should be there from abolished is held fairly generally to day. As a matter of fact; however, it is not the gold standard that has failed, but those to whom we entrusted it. Or, as Rittershausen contends in his Neubau des deutschen Kreditsystems (Reform of the German Credit System), it is not the gold that has deteriorated, but the bank directors.
b) Milhaud proposes no re-distribution of the world's gold, Here again, Milhaud stands almost alone. Broadly speaking, the countries possessing little gold hold the countries owning much gold responsible for the economic crisis. Thus Milhaud belongs to the select few who do not share this prejudice.
c) Milhaud does not call for an economic autarchy. This is very old-fashioned. We had all become accustomed to the idea that a "home" watch industry in Greenland and "home" tea plantations on the Alpine glaciers were just the thing and that an exchange of Greenland blubber oil, Swiss watches, and Chinese tea would throw out of employment Eskimos, coolies, and Swiss factory workers.
Admittedly, these autarchists tend incidentally to demand a forcing of exports and a throttling of imports (although probably not one of them would voluntarily give up his morning coffee and his afternoon cigar, simply because they are imported goods). Milhaud is one of the few economists who fervently identify themselves with the old thesis: exports pay for imports and vice versa; credit and debit balances dwell only in men's imaginations and in defective trade statistics.
d) Milhaud belongs to the very small group of economists who hope to combat the depression first and foremost by reviving the consumer goods industries, that is, the industries producing articles in daily demand. Virtually all other economists ask that work should be found for the unemployed mainly or exclusively in the industries producing "durable" goods, among which are to be specially counted means of production and houses. Accordingly, the official measures in all countries to reduce unemployment have tried primarily to assist the production of "durable" goods. In boldly asserting that production is the servant of consumption, Milhaud also declines to call on his contemporaries to "return to the simplicity of their forefathers", so as to grapple successfully with the depression. Few only see the blatant contradiction of simultaneously stimulating sales and discouraging consumption. e) Milhaud submits no proposal for floating a Long Term loan. Practically all other reformers ask that the State should concentrate on raising a huge loan, preferably in the shape of an extra issue of paper money, and build houses therewith. f) It is true that Milhaud proposes a new means of payment; but neither does he demand that it should be a forced currency (forced rate of exchange) nor that it should be recognized as legal tender (i.e., compulsory acceptance and compulsory value in private dealings). The few who still share the classical view of a forced currency, namely that it is a specialty heinous form of despotism, may be almost counted on one's fingers. In Germany they are represented by the small group of the authors of the "Vier Gesetzentwuerfe" (Four Proposed Laws) (*) and further by the Sparerbund (League of Investors) among whose leaders Oberlandesgerichtspraesident Best and Justizrat Brink occupy a prominent place; in France, primarily by H. L. Follin; and in England, by Henry Meulen. g) Milhaud calls neither for a raising nor for a lowering of wages as a condition of reducing unemployment. He shows, however, that when his proposals shall have been put into effect, real wages will in all probability rise considerably. h) Nor does Milhaud demand an immediate reduction of overhead charges to permit a reduction in unemployment. But he does not overtook the fact that after the realization of his proposals, they will be probably decidedly lower, i) Milhaud does not stipulate as a preliminary the return of "confidence". He informs the skeptics that a number of persons, that is, the debtors of the issuing offices, chiefly shopkeepers would be obliged to accept the purchasing certificates, never mind whether general confidence existed or not. Expressed differently, Milhaud tells the timid, in effect: "Take your certificates to the shops and exchange them for commodities. In the very act, you will have rid yourself of your certificates and your mistrust." j) Milhaud deliberately concerns himself with a special problem and not with the social question as a whole; but he recognizes that once the monetary problem has been solved, the social question will have changed its character. It may be added that only then will its nature be clearly revealed to us. Hence Milhaud has little in common with his contemporaries. It is there from no wonder that he may, for some time yet, be scornfully treated as a "theorizer". It would also be in accord with a widespread custom if, before his contribution has come to be appreciated at its true value, critics shall have insisted that such and such; a thinker once proposed this or that part of his plan and such and such another thinker another other part, just as Bastiat was accused of plagiarizing Carey. However, the originator of a crucially important conception is not he who once gave expression to it without determinedly following it up, but he who successfully challenges therewith the world, even though his proposals, like all proposals whatever, may require to be modified in certain particulars.
(3) THE MILHAUD PROPOSALS AS AN INTEGRAL WHOLE
In the last resort, goods and services always exchange for goods and services. This principle has never been seriously disputed. It seems though that, apart from Milhaud,
(*) These are: Dr. Gustav Ramin, Dr. Heinrich Rittershausen, Ulrich von Beckerath, Hans Meis, Walter Unger, Dr. Walter Zander, and Dr. Munzer. I do intend to reprint this plan; too. - J. Z.
few have attempted to found thereon an economic plan without at once falling into primitive barter or African tribal communism. At all events, among recent reformers of this class, Milhaud occupies now first place.
The clear recognition of the fact that payment with Giralgeld (money other than legal tender cash, e.g. checks), which is already the common practice on the world market, need only be consistently developed in order to yield the advantages of both, a money and a barter economy, has enabled Milhaud to solve simultaneously two problems, seemingly far apart reviving external trade and finding work for the unemployed according to a coherent plan that might be realized from one day to another without causing any disturbance.
In the center of Milhaud's system stands the idea of the purchasing certificate. It may be expressed in this way: in small denominations it serves as a means of payment internally; in large, externally.
In the current system of payment, debtors must find purchasers for their goods or services, so as to satisfy their creditors with the proceeds of their sales. In Milhaud's purchasing certificate system, however, it is the business of creditors to find vendors in order to realize their assets. By means of the system of "production on orders placed", to be treated fully in the sequel, the possible inconveniences of payment by purchasing certificates might be so reduced that the creditors would not be worse of than they are today. But in principle, through the Milhaud plan, every debt becomes a debt which is not tendered but which has to be collected.
Since everybody is in turn creditor and debtor and since this mutual relationship represents, indeed, the essential nature of economic activities, Milhaud's reform, abstract as it may seem at first sight and little as it may at first affect the general form of trading, is extraordinarily far reaching. Not one of the numerous "practical men" who daily, on the basis of their "experience" (which really represents a frog's perspective), put forward proposals, have hit upon this fundamental but simple inversion. This confirms a sapient remark made by the German Secretary of State, Feder, in a speech delivered on 28 March 1933: "He who desires to direct a country's economy, must not be engaged in it."
Some of Milhaud's critics have thought that his arguments, which appear to them rather complicated, would fall if countries adopted another economic system. Manifestly, the other system they mean is Bolshevism. Here also, there is a self contained system aiming at the simultaneous solution of the two problems, that of unemployment and that of the protection of home industries; but this very system, in its diverse degenerate forms, has proved unequal to the task. In Russia numerous machines, and even whole factories, are lying idle, because for instance, a pair of missing screws worth a few dollars cannot be ordered from Pittsburgh, due to the Russian foreign exchange legislation. Even ten years after the proclamation of the dictatorship of the proletariat (which is in deeper servitude today than under the Czars), over a quarter of Russia's non-agricultural population was unemployed. The subsequent abolition of this unemployment recalls in many respects the increase of employment in ancient Egypt by the building of the pyramids undertaken by the Cheops and Chefren. Moreover, it should be noted that the Russian exchange legislation is in substance the same as that of "capitalistic" States and , in fact, altogether a product of what Marx called "vulgar economy" and which he combated. This "economy" dominates everything in Russia and if freedom of expression were not so restricted there, this could be proved out of Marx's writings even to those at present in the saddle in Russia. Happy Geneva, where these Annals appear, and where reason may speak without donning the cloak of authorities!
(4) A BASIC FLAW IN OUR ECONOMIC SYSTEM
A) The True Nature of a Money Debt
In wholesale commerce, and especially in transactions on the exchanges, it frequently happens that a merchant undertakes to deliver goods by a certain date, without possessing them at the time. He hopes to be able to secure the goods by the date agreed
upon. These sales are called short or uncovered forward sales. The legislative provisions of all countries eye this type of transaction with suspicion. Frequently, in order to stop such sales, legislative enactments have prohibited all dealings in futures. Sometimes such forward bargains only have been permitted where the vendor reserves to himself the right to cancel the contract, on payment of a premium. But almost invariably legislative provisions limit the possibility for legal proceedings in the case of "futures" and, above all, uncovered dealings, if they are permitted at all to contracts among merchants. This limitation is justified, for if any other but a merchant, who knows his business completely, were frequently to sell goods not yet in his possession, but which he hopes to procure by a given date, he would inevitably sooner or later be entangled in supply difficulties and thereby would injure both himself and others. As far back as 1417, the Hansa thus prohibited "the sale of herrings before they are caught, of corn before it is grows, and of cloth before it is woven." (Roscher, Handel and Gewerbfleiss, paragr. 15.)
Now it is one of the greatest peculiarities of our economic system, and one only quite recently discovered, that forward bargains and blank sales relating to the most important and commonest commodity, that of money, are not only not prohibited, but are actually favored by the laws of all countries.
Economists have hitherto overlooked the fact that our entire credit system, as well as labor contracts, leases, and many other agreements of daily occurrence constitute in reality short sales of money. The very idea that money as such may be sold, appears foreign to our present day economic theories. It appears that in Europe attention was first drawn to this by Henry Meulen, in a profound work entitled "Industrial Justice through Banking Reform" ( London, Richard J. James, 1917). Meulen quotes an American author unknown in Europe, Colonel W. B. Greene (he died 1878), who in his "Mutual Banking" stated: "We must remember that when we sell anything for specie, we buy the specie; and when we buy anything with specie we sell the specie." This brief but pregnant remark throws a new light on our economic system, for Greene's observation refers manifestly not only to ordinary sales but to every agreement involving a money payment. This aspect merits a special examination.
Who, before Greene and Meulen would have thought that in an employment contract the employer sells his employee blank and on credit gold or other legal tender? And yet this reflects closely the reality. Or who, before Greene or Meulen would have perceived that in an ordinary loan agreement the debtor sells the creditor blank and on credit gold or banknotes? And yet such is the fact.
However once we recognize the nature of agreements based on future payments, namely that they are blank sales of money, we shall not be surprised that in such transactions those difficulties of delivery become apparent which are inevitable in the case of this type of sales. For clarity's sake let us apply the new knowledge we have here gained to a particular example.
In 1929, the aggregate income of employed persons in Germany was around 43.000 million marks. What goes this signify? It means that the employing class had bound itself contractually to provide the employed class in the course of the year with over 40.000 million marks in gold or banknotes, although when the contract was concluded it did not possess the gold or banknotes involved. The employing class had sold gold or banknotes forward and blank, a transaction which in the case of cereals and almost all other goods is in most countries legally prohibited because of the associated risk of non-fulfillment. And yet goods, e.g., cereals, are more easily procurable than money. Indeed, the rule is that goods may be procured the more easily, the more difficult it is to procure ready money. ( Similar reflections will be found in Dr. G. Ramin's article on "Non-Cash Wage Payments" in the "Deutsche Bergwerkszeitung" (German Mining News) of 30 September 1931 and in the business report of the German Festmarkbank in Berlin of 31 December 1931.).
All leases are, in fact, short sales of gold or banknotes of tenants to landlords. Every credit agreement constitutes such a sale: That many sales involve no cash payments, as in clearing and balancing transactions, leaves the legal basis of the prevailing
methods of settling accounts unaffected. In conformity with the legislation of all countries, creditors are entitled to refuse non-cash payments and to insist on receiving legal tender, that is, metallic or paper money; insofar as these represent legal tender. (The later applies probably to all countries save China.)
We should probably not be far wrong in assuming that in Germany the aggregate total of all such time obligations during 1929 amounted to 100.000 million marks. That would correspond to two and a half times the aggregate income of employed persons. The amount does not appear excessive when we remember that the total turnover in Germany, inclusive of non-cash transactions, has certainly exceeded 1.000.000 million marks, whereof about half was negotiated by the Reichsbank. If we suppose 100,000 million marks as correct, then the amount per head of time transactions to be fulfilled within a year in Germany is about 1,500 marks. In other countries the amount may be approximately the same. If we now consider that the ready money circulating in Germany is not equal to 100 marks per head, we find that the total of time obligations during a year is over a dozen times greater than the value in which the time obligations are to be honored. Even the boldest and most experienced stock exchange speculator would deem it very hazardous to be burdened permanently with such time obligations. Strangely enough, the laws, the legal findings, and the public opinion of all countries regard such obligations in settlement of ordinary accounts as quite normal! And yet the probability that all time obligations will be honored, is certainty not greater than when twelve ball players stand far apart in a circle, throw the ball to one another, and expect that the ball will never be dropped. Even if we calculate the chance of a player throwing the ball correctly at 94%, there remains a probability greater than 50% that the ball will not pass round even once without a miss.
By a different route than that followed by Greene and Meulen, Milhaud reaches practically the same conclusion as they do. He there from pleads that at least while the depression lasts, a creditor as regards (a) external trading and
(b) wages contracts should not be entitled to payment in gold or in banknotes which are either convertible into gold or must be legally accepted as the equivalent of gold.
Instead, Milhaud would entitle a creditor to such goods or services as the creditor would have normally bought with the gold or the banknotes. In practice, this means that a creditor would be only entitled to a settlement by clearing (to receive compensation) in the economically soundest way. Naturally, Milhaud would not forbid a debtor to settle foreign liabilities in gold or pay wages in banknotes when he possesses such means of payment. To begin with, creditors are to renounce voluntarily the right to be paid in legal tender, and later this right is perhaps to be regulated anew legislatively.
The popular presentation of this line of thought is rendered somewhat difficult by the circumstance that workers are conceived as creditors and employers as debtors, a conception alien to popular thought. The common conception is rather that of regarding "workers" as "poor debtors" and "employers" as "rich creditors". Naturally, science cannot compromise with popular misconceptions.
Moreover, the difficult insight that an economy based entirely on clearing, involves in reality a return to pure barter, even though the inconveniences of primitive barter are avoided, makes it hard to render a popular presentation of the case. The older political economy did not elucidate this aspect; but an excellent discussion of the subject to which the reader is referred, will be found on p. 121 of Lexis' 'Volkswirtschaftslehre" (Political Economy), in the chapter headed "Theoretisch moegliche Ausschaltung des Barverkehrs" (Theoretically Possible Exclusion of Cash Settlements). The purchasing certificates proposed by Milhaud, which, in a very imperfect form, circulate among the American unemployed, is, in fact, a clearing note, i. e., an Instrument for conducting business on a non-cash basis, as we shall see later on.
A closely related question requires now examination, namely whether we are faced by a blank forward sale of means of payment when somebody, for example, buys goods and promises payment after three months in Milhaud's purchasing certificates. The case may seem identical with that where payment in gold or notes of the central bank is promised.
But in reality there is the following difference. Whether someone promises to pay with a certain product or a purchasing certificate which he would redeem with it, is manifestly indifferent. But when two owners of goods combine and say: "Each of us undertakes to accept the purchasing certificates of the other up to a certain amount", the legal position of the creditor of each of the two owners of goods is obviously strengthened and not weakened and no additional time risk is involved. When, moreover, the two, in order to simplify the legal position do not place their individual names on the certificates, but the name of the association they have formed, the position of the creditor is once more strengthened rather than weakened This is precisely the case when an owner of goods promises to pay in Milhaud's purchasing certificates. In effect, he only promises to pay with his own goods although he virtually adds: "My business friends, forming the X bank, do also place their goods and services at your disposal". The larger the number of the bank's clients, the greater is the choice of goods for the creditor and the more he is in the position of a creditor who receives gold or at least legal tender.
B) Security in Cash Payments & in Non-Cash Settlements
To judge by general experience, the losses incurred in non-cash transactions represent only an insignificant fraction of those which take place in cash operations: they are practically non-existent. The only real danger involved in non-cash transactions arises when creditors suddenly refuse to accept non-cash payments and demand ready money. This suggests the advisability of generalizing as far as possible non-cash settlements and limiting the right of creditors to demand cash. Unfortunately, this suggestion is not as self-evident as it seems, for it has occurred to few economists only and to even fewer "practical men". In his work "Money", Jevons reports that the leading London bankers declined to have anything to do with the Clearing House long after it was instituted (see p. 264 of the 1923 edition) and that in his day (in 1875, that is exactly a hundred years after the establishment of the London Clearing House) both the Liverpool merchants and the Liverpool banks would have nothing to do with clearing transactions, and insisted on receiving cash payments (p. 280).
The intellectual barrenness of "practical men" in all economic and generally also in political matters has often been noted by thinkers. The Bible is already remarkably clear on this point (Jesus Sirach, ch. 38/39). Adam Smith, in the chapter "Commercial System" of his classic work, comments severely on the economic views of merchants. And Rudolf von Mosch, an unjustly forgotten German social reformer, wrote in the 'eighties: "If professional associations were a natural breeding ground for far seeing reform projects, we should have today no lack of these, for almost all professions have heir special associations, periodicals, and congresses. What reform projects have these brought to light? Virtually none." ("Materialien zu einem Katechismus der Sozialreform (Materials for a Catechism on Social Reform), Berlin, 1888, p. 413. (I am still seeking a copy of this book now! - J.Z., 21.11.01.)
(5) THE MILHAUD PROPOSALS AS A BASIS FOR A NEW SYSTEM OF PECUNIARY SETTLEMENTS
A) The Prevailing Money Monopoly as a Cause of Money Shortage and there from of the Trade Depression
Milhaud repeatedly states that he only proposes an emergency measure and that he has no objection to the disappearance of the purchasing certificates in external trading and the goods warrants in internal trading once "normal" conditions have returned. But Milhaud is assuredly more fully aware than any one else that such an extension
of exchange transactions without State money is in reality the beginning of a new system of settling accounts indeed the beginning of a new economic order. The retention of the purchasing certificates and the goods warrants would be irreconcilable with the present economic system The most fundamental mark of this after all not very old economic order of ours is the State's money monopoly. Purchasing certificates in external trading and goods warrants in internal trading would break this monopoly. Once Milhaud's means of payment have been introduced, the supply of money would no longer be dependent on the discretion of the few who are entrusted with supervising the monopoly, for the supply of money would be regulated by the needs of the general economic life. In fact, any individual so long as he efficiently conducts his business, would be able to determine himself the measure of his monetary supply, just as he determines his supply or air and water.
We live today in a state of society which is no longer even "capitalistic" and where fewer than a hundred people dictate how much the world is to produce, how much of its products it may consume, what proportion of the social product may be retained within a country, and what proportion may be exported.
In addition, those few scores of human beings also influence decisively such conditions of exchange and production, as, for example, commercial treaties and credit supply, and they exercise that influence in all cases as far as their sense of duty prompts them to.
Who are these individuals? They are not Rathenau's "four hundred". Their day has long passed, Some have become insolvent; a few are even in prison; and perhaps every one of those whom Rathenau knew, has lost in power and wealth during these years of depression.
Who, then, rules the world today? In the first place, the heads of the central banks; then a few trade ministers and politicians and, apparently, a few writers whom the former consult all of them loyal, brave, honest, and even cultured individuals, who are held in high esteem and who, in sharp contrast with the ruling classes of the pre-war times, enjoy the confidence of over nine-tenths of the population. The only reproach sometimes leveled against them publicly, is that they make too little use of the authority they possess. Accordingly, day by day proposals are being made to place some as yet free domain under their dictatorship; today wage contracts tomorrow, the choice of a profession on leaving school; and next, the entire literature of economics. This tendency is not restricted to one country; t is to be found in Japan and America, in the Russian colossus and in the dwarf countries created by the War. China alone appears to form a notable exception, so far.
The opinion prevailing in almost all countries since the War that the State may rightfully claim a monopoly for all means of payment, not only for money, has become more emphatic with the development of the depression. Even noted scholars have asserted that the remnants of private money, as, for instance, check money, were partly responsible for the depression, and that these also should be there from taken over by the treasury. This widespread prejudice, that as many means of payment as possible should be monopolized by the State, has a very serious aspect. Indeed, when we examine its results, it suggests a comparison with witchcraft in the Middle Ages. The new money oligarchy has sprung out of this prejudice, just as the fear of witches gave rise to an oligarchy of omnipotent inquisitors. The old money aristocracy of the Rothschilds, the Morgans and the Vanderbilts has been quite eclipsed by the new oligarchy and places itself at the latter 's disposal, as readily as the man in the street. We have not, perhaps, sufficiently realized as yet that in no previous economic crisis had the worlds monetary supply depended on so few people as today and been controlled so exclusively by doctrinaire State interests. Neither has it as yet been examined whether this very circumstance involves the danger of the trade depression becoming permanent. And it has yet to be shown that the "forces of self recovery" that were active in former crises, were not connected with the free circulation of gold coins, the existence of private banks of issue, and other long forgotten facilities.
Some thinkers have justly compared money with language and said that what language is to human intercourse money is to the exchange of products. (Roscher quotes Hamann, Adam Mueller, and Schmitthenner.) If the comparison is valid, he who monopolizes the circulating medium is armed with a similar power as the individual who may have
succeeded in monopolizing language and brought men to the pass that they can only convey important information to one another through him. It seems that a few primitive tribes ruled by Shamans are not far removed from this to us almost incredible condition. According to Caesar, the Druids possessed such a monopoly among the Gauls. Along with these may be classed the law in the old kingdom of Sardinia which ordained that the lower classes were prohibited from learning to read and write.
And what is the reason that a monstrous monopoly such as that of money is today defended by almost all writers and without exception by all "practical men"? May a future sociology explain it! However, the origins of the modern view of money and of State predominance are not very recent. Herbert Spencer, who is almost forgotten today, prophesied already decades ago what was in store for us. ("The Coming Slavery", first printed in April 1884 in the Contemporary Review ), and prior to him Bastiat raised his voice against the already powerful worship of the State in his day. ("L'etat" The State in "Sophismes Economiques".) In vain!
The State monopoly of money is one of the basic demands of Communism. Already the Communist Manifesto of 1847 stated clearly under point 5 of its program: "Centralization of credit in the hands of the State, by means of a national bank with State capital and an exclusive monopoly." In an edition of the Manifesto intended for Germany, which appeared before the Revolution of 1848, we read under point 10: "The private banks will be superseded by a State bank whose notes will be legal tender. . "
The communist demands have been meanwhile realized almost in all countries, partly by the communists themselves, as in Russia, and partly by their enemies, who honestly believed that they thereby combated Communism. One thing is certain, namely that the communist monetary conception has triumphed even where all communist literature is prohibited. There is scarcely a parallel to be found in world history of an idea having so completely triumphed and having been accepted by rulers and ruled alike as a self evident proposition. Only in China where in 1853 the Government granted full freedom for the issue of notes (Ku Sui Lu, "Die Form bankmaessiger Transaktionen im Inneren Chinas" (The Form of Banking Transactions in the Interior of China), Hamburg, 1926) (Can anyone supply me with a copy - J.Z., 20.11.01.) and where full and judicious use is made of this freedom do demands for a monetary monopoly not yet dominate most men's minds entirely.
(If monetary freedom was legalized for as long in China and if full and judicious use had been made of it there, why then were conditions in China not greatly improved? Why is that great experiment not sufficiently recorded and remembered now, while Red China experienced up to 200 million unemployed? I suspect that considerable restrictions did remain and that at least customs and traditions hindered the full development of monetary freedom there. Meulen once asserted that goods warrants, not redeemable in English pounds or in gold could be freely issued in England. But were they, ever, to any considerable extent? Meulen himself was not interested in this monetary freedom option - and almost all other Englishmen were and are even less! The "tael" standard, a copper weight, privately agreed upon in Chinese contracts, was a safeguard against paper money inflation by the government. - I have still to get Dr. Walter Zander's article on this. Beckerath said, somewhere, that it was published in Shanghai newspaper, in 1935, if I remember right. By that time also, a Shanghai power plant was supposedly issuing its own electricity money for the payment of bills to it. But, were sufficient private and competing exchange media issued? I doubt that very much. Who knows and can supply references? That a few merchants made some private payment and clearing arrangements does not suffice to revolutionize the whole monetary sphere, e.g. the payment of wages, rents and daily consumer purchases. For me it was very significant that even after the invention of nail-making machines, around 1800, the manual production of nails, in supposedly first and highly industrialized England, went on, to some extent, up to ca. 1900, although there was no law against using machines for this purpose. As slowly are significant inventions introduced in many cases! Glass was invented about 14 times. There were xyz discoverers of America before Columbus! There has not been a rush to adopt either the very economical microfiche or the ridiculously cheap CD-ROMs for libertarian publishing or any sort of stampede for the many free banking texts that I offer on microfiche, towards complete publishing on this subject. - J. Z., 20.11.01.)
Milhaud is among the very few who venture to doubt the excellence of a planned economy (economie dirigée) largely influenced by the Central Banks. Just like Bastiat one of his spiritual predecessors he recognizes that when once external trading is free, statism would soon be reduced to its natural limits. It is true that Milhaud nowhere expressly states this. But he must pardon his friends if they regard him as a logical thinker, who could not have failed to notice such an evident inference. Even the American unemployed, in tentatively, primitively and inadequately organizing an exchange of services not based on legal tender, felt that they were creating a new economic order and were not afraid to state a this openly. (Report concerning the Natural Development Association in Salt Lake City, Utah, by Murray E. King, Annals; 1933, No. 2. pp 257-261.)
Milhaud's appeal to Governments and Central Banks calling on them to introduce the new system of exchange, is nevertheless tactically correct. Today only Governments and the Central Banks can take the first step in the direction of relaxing the present system of economic tutelage. Permission to utilize purchasing certificates in external trading presupposes such a relaxation, even if at first sight this permission seems to imply an extension of the planned economy.
Milhaud is one of the very first who has deliberately dissociated the unemployment problem from the problem of the distribution of the social product and thereby declared that the former may be solved within the framework of the present imperfect social order. This penetrating thought can only be compared with that which "the age of enlightenment" of over a century ago reached in the matter of epidemics. Men recognized then that pestilence and cholera were not at all to be attributed to human nature as such, not to be regarded as problems to be solved by greater piety and by pilgrimages. They were problems relating to water, soap, and the destruction of vermin that is, problems to be solved by purely technical measures, without the need of changing human nature itself.
(5) B) Exchange of Commodities without Goods Warrants
Many American unemployed, who helped themselves by resorting to barter, imagined that they were treading an entirely new road. It is, however, precisely in America, where primitive barter, as once practiced on the Congo, is no novelty. In paragr. 116 of his "Grundlagen der National Oekonomik" (Foundations of Political Economy ) Roscher remarks on this point: "In some parts of the United States barter was still widely prevalent near the close of the eighteenth century. For instance, in Vermont the doctor bartered his medicines for a horse, the printer his newspapers for corn, butter etc. (Ebeling, Geschichte and Erdbeschreibung History and Geography II. p 537.) In Maryland, the Assembly had fixed the reciprocal value of tobacco, pork, corn and wheat, (Ebeling, V, p. 435ff; Douglas, Summary of the British Settlements in North America 1760, V., pp 2, 359.) As late as 1815, lads ran through the streets of Corrientes, shouting: "Salt for candles, tobacco for bread!" etc . In paragr. 134 Roscher mentions that in 1843, in the Western States of America, farmers bartered 2 pounds of raw wool for 1 pound of woolen yarn and 4 bushels of wheat for 3 bushels of flour. Moreover, in 1618 there was in Virginia a forced rate of exchange for tobacco! (Paragr. 119.) During the inflation period in Germany barter was common among dealers, e.g., the provision dealer bartered his foodstuffs for shoes.
However, history makes it plain that primitive barter transactions are quickly abandoned and forgotten when even a bad money, in whatever form, circulates for a few years in a sufficient quantity. Hence the barter trading of the American unemployed today, without its extension through a system of goods warrants in accordance with Milhaud's principles, cannot lead to a new economic order. Economic history will consider such trading as a curiosity, as it considers the Virginia edict of 1618 regarding a forced rate of exchange for tobacco.
However, that the goods warrant by itself is not sufficient for effecting frictionless exchange of unordered goods (He added later: "for which there is no strong daily demand" The Ed.) is shown by the history of the barter banks in France, England and Germany. (Roscher, paragr. 75; Helene Simon, "Robert Owen", Jena 1905, p. 250.) In the United States these highly informative facts seem as yet quite unknown.
It should be also noted that Adam Smith by no means overlooked the possibility of a return to barter in the case of a shortage of money. In the chapter headed: "Of the Principle of the Commercial or Mercantile System" of his "Wealth of Nations", he remarks on this point: "If money is wanted, barter will supply its place, though with a good deal of inconvenience. Buying and selling upon credit, and the different dealers compensating their credits with one another, once a month, or once a year, will supply it with less inconvenience. A well regulated paper money will supply it not only without any inconvenience, but in some cases with some advantages." (Bk. IV/1)
It is sure that this passage clashes with another, which is far better known and has often been quoted, a passage which became of decisive importance for the monetary doctrine of the 150 years that followed Smith. Unfortunately, it is held to represent Adam Smiths real opinion regarding the replacement of gold and silver by paper money. In the chapter "Of Money" he writes: "The whole paper money of every kind which can easily circulate in any country, never can exceed the value of the gold and silver, of which it supplies the place, or which (the commerce being supposed the same) would circulate there if there was no paper money. ." (p 331)
The qualification "the commerce being supposed the same does", not neutralize the mistake here made by Adam Smith. According to this the whole turnover of a country nights if necessary, be mediated with gold and silver, a state of things from which our time is as far removed as were the Middle Ages or any other epoch. In truth, not all the world's gold and silver could serve as medium for the entire turnover of one country, like Germany, where the Reichsbank and the Post together have, even in bad years, a turnover far exceeding 500.000 million marks.
Yet the passage, whereof we have quoted the first portion, has influenced the monetary legislation of all countries down to our time. In all probability, the passage was written much before the one we cited first, although in the work the two passages are placed only a few pages apart.
(5) C) Exchange of Commodities with Goods Warrants
In an economy based on the division of labor, a frequent exchange of immediately consumable goods for such as are not immediately consumable, is natural and almost normal. In primitive barter, however, the goods exchanged are almost always such as are immediately required. That was so in ancient times and is so in our day, In thinking of the barter associations called into being by the United States unemployed, one is tempted to recall the basic biogenetic law, according to which the new born progeny, from the moment of its conception, passes through the stages that marked the evolution of its kind. Thus in inter commerce, peoples who only knew barter, rarely acquired by barter except what they needed for immediate use. Roscher, in his Grundlagen, etc. paragr, 118, mentions in this connection the Goahiro Indians of modern times and the Livonians of the twelfth century. Similar tendencies were explicably observable when barter transactions were first resorted to among the United States unemployed. Thus the transactions were limited to bartering what was immediately and urgently necessary for life. Soon, however, the unemployed discovered that the hours of labor, which they bartered for urgent necessities, could not possibly be employed in their entirety on the production of such consumable goods. At the same time they recognized that barter might continue provided the claims of those who were prepared to wait for delivery could be protected. The introduction of goods warrants solved the difficulty. This meant a decisive progress. Primitive barter signifies a return to an older economic order, whereas barter by means of goods warrants is undoubtedly the beginning of a new order.
A complete theory of the goods warrant similar to that of Long Term credits, has yet to be elaborated by our economists. It is certain, however, that the goods warrant by itself is not enough to ensure in all cases a frictionless exchange of unordered goods.
A goods warrant can only circulate at par if someone is ready to accept it at its face value at any time and offers there from an equivalent which is in urgent and general demand. The railway, for instance, is such an acceptor. The subject has been for the first time examined in Dr. W. Zander's "Eisenbahngeld und Arbeitslosigkeit" (Railway Money and Unemployment), which appeared in Berlin in July 1933 and has been reproduced in the Annals. Zander has dealt so ably with the practical aspect of railway money that a general theory of the goods warrant might be easily deduced there from. The German Reich Railway fully bears out Zander's reflections, seeing that during the inflation period, and particularly during the transition time 1923/24, it issued scrip. According to the Statistisches Jahrbuch fuer das Deutsche Reich (Statistical Year Book for the German Empire), 44 th annual issue, p, 313, there was in circulation on 31 December 1923 railway scrip to the value of about 251 million gold marks. Oeser, the Minister to whom this initiative was due, probably saved thereby the German economy from grave convulsions.
Germany's entire monetary circulation on 31 December 1923 was 2,273,6 million Reichsmarks, of which there from only 11% was in railway scrip, It might be thought that the absence of so small a proportion of the whole would have entailed no serious consequences and should have been there from dispensed with for the sake of maintaining uniformity in the circulating medium. But it is far from true that economic difficulties wax and wane in direct ratio with the supply of money. Indeed, as has frequently been remarked, money may rightly be conceived as the blood of the body economic. Just as a diminution, by one-tenth of the normally required quantity of blood in the body does not weaken it by one-tenth but by far more, so a seemingly trivial deflation may very seriously affect our economy. Contrariwise, a seemingly trivial increase in the
available means of payment at a critical juncture, may suffice to produce an economic recovery. John De Watt Warner's "The Currency Famine of 1893" (published in the periodical "Sound Currency" at New York, 15/2/1895) offers a striking illustration of this. The quantity of gold, silver, and paper then circulating in the Union was about 1,700 million dollars, a very considerable amount. But when in August 1893 the "famine" broke out, even millionaires at the seaside sometimes could not scrape together the few dollars required for a return ticket to New York. At that time business saved itself a fact not remembered today by also resorting to a kind of goods warrant, of which altogether about 80 million dollars' worth were issued. That amount constituted only about 5% of the money in circulation; but this small addition sufficed to keep the economy going and especially to pay wages with. Without these 80 million dollars of goods warrants, looting would have probably ensued. The security offered for the goods warrants varied considerably. Almost everywhere, however, banks, shops and factories accepted the goods warrants at their face value in settlement, and publicly undertook to do this. Banks and factories were likewise the issuers. Warner's study written with keen insight and containing highly interesting particulars, would be well worth reprinting in order to wrest the facts from oblivion. Even more remarkable than the effect of the United States goods warrants of 1893 was that of the Prussian Loan Banknotes of 1848, which we shall discuss in the sequel.
Milhaud is fully aware that there must be an acceptor for the goods warrants, who will accept them at all times at par and who offers as an equivalent something that is in general demand. Milhaud proposes to anchor his purchasing certificates in taxation. This proposal merits close consideration. Suppose that unemployment riots endangered the existence of a government and the latter had only the choice between being swept away or making within twenty-four hours a serious and for everyone unmistakable beginning with the abolition of unemployment. The Government could not proceed otherwise than by supplying the unemployed with some form of goods warrants, e.g., as a loan to employers to cover wage payments, perhaps even as loans to the unemployed themselves, and to ensure the parity of the goods warrants by validating them for tax payments, as Milhaud suggests.
The tax basis is a security available at any time even when the Government machinery is no longer intact. In the hour of danger the government might inform the municipalities by wireless that they are authorized to establish Work Supply Banks (as Milhaud proposes) and that all tax obligations may be discharged with the goods warrants issued by these banks (but that the forced currency only applies to government pay offices). Most probably, the impending danger would be averted through this, and days and perhaps weeks might be gained during which the technical arrangements could be perfected. The menaced Government would be hailed as a social savior and, as a result, its authority would be more firmly grounded than that of any possible communist dictatorship could ever be. How different, for instance, would have been the recent history of Cuba and Spain if the overthrown or even murdered rulers had been acquainted with Milhaud's proposals! When will the great reformer arise in these countries, who will make it clear to the masses that today believe only in the most brutal force, that an association of 100 workers, capable of intelligently applying the system of goods warrants, would be a greater menace to capitalism than all the world's bomb-throwers combined!
The declarations of the governments now in power in all countries and of the parties that oppose them, demonstrate however that they do not view the unemployment problem as a problem of means of payment. In these circumstances, it is unlikely that such governments would provide a tax basis for the goods warrants created through the self help of the unemployed. It will be necessary there from to dispense provisionally with such a foundation. Thus the idea suggests itself naturally that as large a number as possible, especially of workers, should undertake to accept the goods warrants. Of course, we class as workers those unemployed at present, those working short time, as well as those still fully employed but who may any day lose their employment. It may possibly also be found that the undertaking of the workers to accept the goods warrants cannot be executed without
guaranteeing the sale of the goods, payable by means of goods warrants, through the previous placing of orders.
(5) D) The Placing of Orders as a Factor in the Goods Warrants System
When, a century ago, Robert Owen founded his exchange bank, many of his followers recognized that rendering the workers independent of the money market was not enough, and that to a larger extent than heretofore employment must be linked to orders placed. (Helen Simon, "Robert Owen", p, 230.) Owen himself does not appear to have stressed this and rather regarded as an essential the replacement of gold as a standard of value by the working hour. The emphasis by English workers in 1833, on the placing of orders as one element of a new economic order, showed great insight, and it is a pity that the economists of that period entirely ignored this point in the labor program.
The fact that today production is rarely based on orders and is mostly for the market is, of course not the sole cause of the marketing crisis. It is, however a conditio sine qua non of every such crisis. The hitherto attempted explanations of these crises appear to have done scant justice to this aspect.
The primary characteristic of a crisis is that the population cannot repurchase its own product. But the fact that production is not for firm orders, but for the market, also explains why sometimes the population is not willing to re-purchase its product. Such reserve on the part of purchasers is far from uncommon. Nor is it in doubt that this reserve often results in the same individuals who at first refuse to buy; producing the conditions whereby they can no longer afford to buy.
(Goods warrants promising merely redemption in goods and services that are in daily demand and, moreover, with a time limit for their validity of no more than e.g. 3 months, are unlikely to be hoarded. Even if they were hoarded, new goods and service warrants could be issued on the same basis to make up for any currency shortage. Thus, I do not believe that in the sphere of wage and salary payment means there is much need for a system of placing orders. Orders for larger purchases, a car or furniture or a holiday, for instance, are another matter. - J.Z., 21.11.01.)
These interrelations seem to have been but little studied hitherto. Yet a closer examination would be well worthwhile, although it is evident that not every marketing crisis has been started by a strike of purchasers. A fact, however, may be mentioned, one which Irving Fisher was perhaps the first to stress In economic literature falling prices are frequently confused with low prices and rising prices with high ones. In conformity with this, it is commonly contended that low prices stimulate consumption and that, in an undisturbed market, this would be there from conducive to a natural trade recovery. But whilst low prices stimulate buying more than high prices, falling prices invariably discourage buying. So long as prices are falling and this may continue for years - everybody postpones buying in the hope that tomorrow's prices will be lower still. Hence only when prices are thought to have become stabilized or a tendency for prices to rise has set in does buying become "normal". Thus not only is production for markets a precondition of every sales crisis, but consumption through markets also tends to aggravate, and not to cure, an oncoming depression.
(Here one should consider that under freedom to issue alternative and optional exchange media a deflationary tendency could not be large and could not persist for long. Thus prices would NOT tend to become falling ones, due to potential buyers postponing as much as they can any further purchases. The more the goods warrant system is applied the less would orders be required for the turnover of daily needed consumer goods and services. A relatively rapid "consumption through markets" could be assured through the limited validity period for goods and service warrants. They stream back before they become invalid - and achieve corresponding sales for their issuers. In later years B. did not stress the "order system" very much. At when he wrote the above, he seems to have been still in love with it. - Later on, he stressed much more that only goods and services already sold , at least by the producers or suppliers to wholesalers, not goods and services to be still produced in a somewhat distant future, should form the basis for the issue of exchange media. With this he had in mind e.g. the "shop foundation" or the readiness to supply of petrol stations, railway and bus services, the services of tradesmen, professionals, of power plants, water works, insurance services etc. - Naturally, one can equate an insurance contract or a water or electricity supply contract also as a placed order. - While still living in Berlin, and on a miniature scale, I tried to negotiate a regular fruit supply contract with a green grocer, promising to purchase monthly at least DM 30 worth of fruits and vegetables from him, and asking for a small discount on this firm order. He was good natured but a bit thick-headed and not amenable to arguments, so the discount was refused - but I continued my regular purchases from him, whereupon on x-mas I received, unexpectedly, a large basket of free fruit, with a comment like: There is your discount! - Here and now my second son has had an account for many years with a large hardware store, at which he is a regular customer, while building 3 houses. Thus he does not have to pay cash for each item but gets a regular monthly bill for all his month's purchases, with a considerable discount. This comes also relatively close to an order system. - J.Z., 21.11.01.)
Hence there is much to be said for the demand of the English workers in 1833, that production should be governed more by orders placed and less by market considerations.
Call up in imagination Thuenen's famous "isolated State". If in that State all production were governed by orders placed and every party ordering were solvent, no sales crisis could occur in that State. This is obvious from the following considerations which, however, call for a brief analysis of the concept of "solvency".
Let us assume that our isolated State possesses one or more well-managed banks of issue; that these banks are authorized or indeed bound to make advances in notes on orders placed, most especially for wage payments and other production costs to be paid in cash. We should then observe a complete correspondence between the circulation of money and that of goods. Expressed differently, solvency would be general and follow from the system of production on, orders placed.
Artisans manufacturers, laborers, farmers and others, would produce commodities and bring them to this country's sales establishments where they would lie waiting for the purchasers. Then the employees would present themselves a second time at the shops, but this time as buyers. They would buy the goods they had ordered, pay for
them in notes, and take them home. With the notes they had received the shopkeeper would then pay their wholesalers: and with their own profits they would also make purchases, i.e., they would get rid of their notes in other shops. In their turn, the wholesalers would pay their manufacturers or farmers with the notes they had received and also indulge in purchases with their business gains. But the manufacturers, farmers, and other producers are precisely those persons who received the notes in the shape of advances from the bank of issue. They are now in a position to repay these advances, and this also in notes. The repayments having been made, the banks would destroy the returned notes and thus the circulating process would be at an end. It is true that the country would have then no saleable goods and no circulation media; but the process of production might be at once resumed.
What has been stated here regarding an isolated State, holds very largely of the non-isolated State, but proportionately less the smaller and the less isolated a territory is, However even such a small territorial unit as Belgium, for instance, would probably benefit by the system. If Belgium possessed a few banks of issue that granted advances in notes on orders from "average customers", this might secure for every Belgian willing to labor 4 or 5 hours' work daily, That would be possible, even though Belgium, more than any other country, is intimately bound up with the world economy. The 4 or 5 hours would naturally only produce a mere subsistence wage and many workers would have, there from, also to undertake jobs for which they were not trained. For a time there would be only "work of Belgians for Belgians", and not work for the world market. To the degree, however, that business circles outside Belgium could be induced to join the system, production could provide correspondingly more than a bare subsistence wage.
With a view to properly appreciating the effects of the system of placing orders, we shall make the following supposition: The textile workers of the isolated State are to be dismissed because of lack of employment in the textile industry. They decide to create employment for themselves by each ordering textiles to the value of one month's wages and this in the shops where they regularly deal. The aggregate wages for the month amount to (say) 100 million. The shops there from, receive orders to this amount. The shops work with a margin (say) of 20 million. Their orders to the wholesalers are there from only for 80 million. Suppose that the wholesalers' margin is 30 million. Thus the textile industry will then inform the textile workers that here is work, but only for half their number; the other half will not be required. After the workers have recovered from their surprise at the disappointing results of the orders they placed, they will change their tactics. In placing their orders at the shops, they will say: "We are placing orders for 100 million; but only on condition that you place orders for the same amount, You may order for 80 million from the wholesalers, but you must also place orders for another 20 million. Moreover, you must somehow arrange that those who receive your orders proceed similarly and produce satisfactory evidence of having done this. We demand that the full amount of our orders be passed on and that your orders shall entail at last labor orders amounting to 100 million."
By deliberately choosing with whom to deal, a people can effect greater social changes than by the bloodiest revolution.
If the workers proceeded in this way, they wilt probably not entirety succeed in securing a full 100 million worth of labor to the textile industry But the labor market as a whole would benefit by 100 million, and not a few of the textile workers would find employment in other industries. The guaranteeing of the orders placed, both as regards
a) the disposal of the ordered goods, and b) the passing on of the orders, so that the total amount involved in the orders should be felt as a demand on the labor market, represents an important economic function. Decades will no doubt elapse before this system is so developed, as are today the installment payments system (hire purchase), the discounting of bills, or mortgage loans. A beginning might be most conveniently made by those factory workers whose employers are engaged in mass production and have large and efficient offices. The orders of these workers could be entered on set forms. E.g., the
orders might be accepted by the workers' cooperative societies, a procedure which would greatly allay the workers' apprehensions. Most of the cooperatives, too, have order forms, supervision, etc., and their members readily fall in with such arrangements. Suppose a worker orders a suit of clothes at a store, say either in the textile department of his cooperative society or at another sales establishment. His order form might read as follows:
Should the worker not call for the ordered goods, the firm that received the order would forward the order form to his employer who, when the next wage payment falls due, would place it into the worker's wage envelope. After that, here is no doubt that the order will be honored.
The system can here only be barely sketched. A detailed description would fill a volume, not because the system is complicated (which it is not) but because it is widely applicable and because the parthes ordering might escape through many loopholes unless the legal basis is comprehensive and carefully elaborated.
For all intents, there is noting novel in the principle of placing orders and in the reflux of paper money through the execution of an order. The old private banks of issue, first and foremost the Scotch, habitually applied it, though not always in a form clearly recognizable by us. Frequently the additional securities were the real ones.
That the "reflux principle" and also the mutual responsibility of clients of a bank of issue as a" payment partnership" were already clearly realized by Adam Smith, follows from the chapter "Of Money", in his "Wealth of Nations", particularly from the paragraph commencing with the words, "Whoever has a credit of this kind ." (Vol. I, p. 329 of the World Classics edition.)
Formerly, the poorer sections of society were not included among "persons ordering", partly because their intellectual status was too low and partly because their requirements involved only a bare subsistence standard and there from could be calculated and ascertained long in advance. The regularity in sales, which may be secured as regards the well to do classes by the system of placing orders was assured, without such a system, for the poorer sections of society in the eighteenth century by their wretched standard of life as well as, frequently, by their dependence on certain shops.
Bendixen, probably the last exponent of the principle of the old bank of issue, states definitely: "Only sold goods can form the basis for the creation of money." ("Wesen des Geldes" "Nature of Money", 3rd edition, p. 83.)
Whether a monopoly, such as that of a railway, justifies the issue of paper money without a precedent sale of the monopolized goods (or services), Bendixen did not inquire into, because his subject, that of the German Reichsbank, did not suggest the problem. The gap has, however been filled by Zander's "Eisenbahngeld."
There is for us here no tangible difference between "sold" and "ordered". One difference as against the teachings of the old bank of issue theory is, expressed b the fact that we propose here, the inclusion of the poorer sections of society among hose who deliberately apply the principle and desire to become its upholders. Surely, it does not argue an overwrought optimism that the poorer sections of society should
gradually come to understand that he who orders goods and takes care that the order is passed on uncurtailed, orders opportunity to work and that he who orders his own livelihood, creates a demand on the labor market exactly equal to producing this livelihood, We thus place orders and secure work for others; but others also place orders and secure thus work for us, We become indebted to the extent of the orders we place, and we acquire assets to the extent that we receive orders. We pay with our assets, and it is the business of the bank so to break up and standardize the assets by means of goods warrants that they can serve as means of payment. We are bound to accept the bank's goods warrants to the extent of our indebtedness The person ordering frees himself from his indebtedness by calling at the shop for the goods he ordered and handing over therefor the goods warrants which he had to accept in lieu of money. Instead of a cover in specie, as demanded by an old prejudice, the goods in the shops serve as redemption fund. The forced currency, which modern prejudice insists on, is replaced, on the one hand, by the indebtedness created by the order placed and the undertaking on the other hand, to allow one's own debt to count against oneself in clearing
It ought to be one of the tasks of economists to convey these at first somewhat abstract sounding maxims to the poorer sections of society by means of explanations and illustrations in the same way as they did this for our manufacturers and merchants some decades back.
Without an alliance with science, the poorer sections of society are lost They believe they have a program and even attempt to realize it by sanguinary revolutions. What kind of program do they possess, on closer examination? For over a century they have put forward the same demands over & over again, demands that are vague, have no concrete content, and seem to be "practical" only because they are divorced' from "theory", i.e. from deeper insight, Consider, for instance, the reform program of the French Confédération Générale du Travail (General Confederation of Workers), published in "L'Oeuvre" of 22/2/1934:
should consider the above demands as constituting a program is pardonable but not that their leaders should have formulated it. Since the above eight demands are not the outcome of reflection but of the want of it, it is not surprising that they should have sprung up everywhere and sporadically during the last few decades. Especially during recent years has it frequently happened that the lower classes have revolted, have had recourse to brute force, and have proclaimed some one or several of the above demands. Often the revolt is suppressed, and what do the victors do then? Equally unreflective as the vanquished, but feeling that something has to be done, they proclaim the same "program" only couched in different terms. No reforms follow, just because the program has no factual basis and is only the expression of a pious wish.
Nobody has more clearly recognized the great, even immediate danger for the workers, particularly in our age, resulting from the indefiniteness of their programs, than H. L. Follin, one of France's acutest thinkers. His "Paroles d'un voyant", it is true, appeared only in 1934 (published by Riviére in Paris), but was in existence before the German Revolution of 1933, a revolution which Follin regarded as inevitable because the German Left was without a program. He writes: "It is rendering a disservice to the masses to provide them with vague formulas which they wrongly interpret and which create in them the illusion that the formulas represent the reality which they do not understand. This pseudo science, this tendency to be satisfied with mere phrases and to speak loosely, this aversion against the degree of intense thinking required to recognize which kind of reality corresponds to every word, these are scourges of our times and the press bears the main responsibility for them." Potent forces are at work preparing the same fate for French socialism which has befallen during the last few years Russian socialism (Bolshevism is not Socialism), Italian socialism, that of the Balkan countries and of Austria.
One of the few bulwarks against these forces is the C.G.T. But the present situation really calls for something else than programs of the above type. In the conditions of today this something else must be a movement which has for its aim the immediate realization of the principles enunciated by Milhaud. The next step for the C.G.T. should be there from, to set up study committees in all localities where it has influence. The committees should seek to come to an agreement with the employers of the district concerning the carrying into effect of the Milhaud proposals, and this not in general terms, but precisely in the locality concerned. If only one of these series of negotiations were to be crowned with success, the C.G.T. would have won for France, and not only for France, a second battle of Valmy, although not against an external enemy, a battle on the evening of which Goethe uttered his memorable words: "Today and here starts a new epoch in world history, and you can all say that you were present at it." Nobody will grudge the C.G.T. such a victory, if indeed it intends to deserve it.
Between the indefiniteness of the political programs of the past and the many wars, and the indefiniteness of the social programs of the past and the many bloody revolutions there is an intimate connection.
When once the workers instead of erecting barricades, go to the shops and discuss with the shopkeepers the question of becoming customers and of placing orders for large quantities of goods at agreed prices, one of the incidental results would be to realize an old ideal, that of stabilizing the price level.
Whilst it is true that, considered purely arithmetically the stabilization would not be quite perfect, it would go far enough to be satisfactory for all practical purposes This stabilization would even then ensue if the part ordering were allowed, against a payment of forfeit money, corresponding to a "call" in wholesale or stock exchange business, to withdraw its order. (To accord the same concession to producers, in exchange for a premium, would be just and practicable as mistakes in calculation could be thereby compensated.) The stabilization of the price level through the placing of orders would be probably much greater than that attained by any of the hitherto proposed index currency systems. The stabilization would be also greater
because it would affect not only the average price, as the index currency attempts to, but individual prices.
Furthermore, the placing of orders would relieve many owners of goods of the necessity of snatching daily from one another their customers, and this would reduce sales costs. According to statistics relating to American department stores, the sales costs frequently amount to about half of what the purchaser pays, in not a few cases even more. The system of placing orders will there from considerably reduce the price level without any one suffering hereby.
For simplicity's sake it is here assumed that the total production of a country is based on orders received. In practice, however, there is no need to go so far. The sale of many goods and services proceeds with great regularity and almost automatically. It does this without the placing of orders as reliably as with them. For example, no population today could dispense with the railway services, and a large proportion of railway "goods", that is, of transport mileage, could be sold without any orders received. Practical experience might eventually show that the placing of orders for about one-tenth of a country's production would suffice to abolish all unemployment. But this possibility should not prevent us to apply the system of placing orders as widely as practicable, at first.
Nor should it be overlooked that whilst an institution such as a railway, is not dependent on orders received by it, the orders it places for rolling stock, etc., and which it pays for with railway money, indirectly increase its own turnover, as Zander has shown in his "Eisenbahngeld.".
(5) E) Short Term Validity of the Goods Warrants
Since the goods financed by means of goods warrants are as a rule only moderately durable, it must somehow be prevented that perhaps 5 years after production somebody presents a goods-warrant and claims delivery of the goods ordered. Milhaud has recognized this danger and demands there from that the goods warrants should be valid for a stated period only. This aspect gave rise to a prolonged discussion. (See: Annals, Nos. 1 and 2, 1933.) It was, however, generally recognized that the time restriction of the goods warrants counters one danger, which, although slight, is greater than zero. It was also pointed out by some that the restriction might cause inconvenience to those who accept the warrants shortly before they expire. It might have been added that many people, without being money hoarders, are bound to accumulate means of payment for certain dates, e .g., employers and mortgage debtors. By such a time restriction, these might be moved to refuse acceptance of this paper money in order to be certain to avoid the possibility of missing the due date. Our remarks in the preceding section have for instance, hinted that the time validity of the goods warrants might be limited otherwise than by rendering them valueless after a stated time. This, as we have seen , might be accomplished by definitely prescribing their passage from the issuing center to the worker and thence back to the issuing center, and this by means of two contracts - a. Engagement contract, wherein the worker undertakes to accept the goods warrants in lieu of ready money, b. Loan contract wherein the employer undertakes to accept them in his capacity as debtor.
These contracts would guarantee the prescribed passage. If this were done, the format limitation of the time validity indicated through a corresponding notice on the goods warrants, might be dispensed with.
This does not assert that in all circumstances the method of a definite time limit, after which the goods warrants become valueless, is inferior to the restriction enforced by the contractual method of ordering. Both methods should be tested and even from time to time re-tested. In fact, the time limit proposed by Milhaud is considerably longer than would be as a rule the time limit under the "bespoke system". Any serious inconveniences, there from, are not to be anticipated in the realization of
Milhaud's proposal. Moreover, Milhaud has noted that the system of goods warrants operates the more smoothly the more the placing of orders appears as an element therein. (Annals 1933, No. 2, pp. 182, 227.) That the fine (to be discussed later) imposed by the bank when a payment is not made in goods warrants but in other monetary tokens, will greatly accelerate the reflux of goods warrants, is evident. Another arrangement will produce a similar effect, namely the possibility of investing the goods warrants and profiting by the interest received. Since Milhaud has himself stressed the difference between saving and hoarding (Annals, 1933, No. 2, p. 180), it is manifest that few would think of hoarding the warrants if they could open a savings account with them. The instance when people would hoard them would not be more frequent than where somebody buys a railway ticket and deliberately, out of stupidity or spite, refrains from using it.
(5) F ) An Improvement in the Civil Law as a Result of the Milhaud Proposals and as a First Step towards a Social Reform
The concept "crisis" is of a highly subjective character. During the years 1927 to 1929, which present themselves today in a rosy light, most people were under the impression that there was but a slight diminution of the crisis over that of the immediately preceding years. There were still great numbers of wholly and partially unemployed many difficulties in discharging liabilities, much spare tonnage, masses of unsaleable goods, and a continuous stream of new proposals for grappling with the depression. It was hoped that 1930 would see the beginning of a real recovery. A proposal, such as Milhaud's, would have, there from, been also appropriate in 1927 and would certainly not have been rejected on the ground that all was well economically and that there was nothing amiss as regards monetary matters. If we are right in this respect, it follows that the realization of Milhaud's proposals should not be made dependent on, for instance, some official body declaring that we are passing through a crisis or that the crisis is over. Indeed, we may reasonably surmise that if in the "prosperous" years 1927 to 1929, the part of the business world then already entangled in difficulties, had been allowed to help itself by applying Milhaud's system, the economic crisis would never have assumed its present magnitude and very likely would never have developed. This suggests that the essence of the Milhaud proposals should be regarded as of permanent application.
What then is their essence? The official compensation office for external trading? The center issuing purchasing certificates with a view to paying for relief works?
These proposals are of decided value, but their essence is surely the abrogation of the right of creditors (whether vendors of goods or workers) to demand payment in legal tender. This essence is of a negative nature. That which remains as the sole means for satisfying creditors, namely a) direct payment with goods or goods warrants, or
b) balancing (clearing) on a monetary basis, may be realized in a variety of ways.
Once it is recognized that the right of creditors to demand gold or legal tender is a main cause of the depression and that the abrogation of this right if only on a voluntary basis and for a limited period, perhaps even not in all domains, would offer an effective means for ending the depression, the idea suggests itself that the said right of creditors should be altogether abrogated by an amendment of the Civil Law, replacing it by the right of creditors to be paid by clearing in a form as favorable as possible to them but economically tolerable to the community, This would only involve a logical development of the legislation on time bargains existing in many countries; pursuant to which such bargains are only protected legally where the debtor is permitted to withdraw from them on the payment of forfeit money or a premium. In fact, such forfeit money sales are frequently not even legally protected or
only on condition that they are concluded among members of the stock exchange. That we are here only contemplating a consistent development of the existing legislation concerned with dealings in "futures" will be manifest from the preceding considerations.
For countries like England or the United States such an amendment of the Civil Law depriving forward sales of gold and banknotes of legal protection, would not represent anything novel, for non-cash payments, that is payments by means of a clearing operation, have been common there for many decades, even among the masses. The proposed reform would legalize a custom; that is all.
A modest beginning might be made with bills and checks in that such bonds also might be made subject by the drawer to the general bill or the check legislation ,wherein the text only states that the drawer will accept them in payment in lieu of money, but that the holder is not entitled to have them redeemed in money. It is true that recent international arrangements on bill and check legislation are not favorable to such a solution but they do not exclude it. To submit here detailed legislative proposals on the subject would exceed the scope of this paper. It may be remarked, however, that the legislation suggested takes up the problem where, more than 1500 years ago, it was left by Marcus Aurelius, one of the greatest statesmen of all times and countries. It was Marcus Aurelius who first introduced the clearing principle in Civil Law (Heilfron, Roemische Rechtsgeschichte, History of Roman Law, p 521.) Before his day, only a quite exceptional and limited use had been made of this principle. It is highly significant that the next king who after Marcus Aurelius, merited to be called a philosopher on the throne, namely Frederick the Great, also recognized the economic importance of the principle. If article 6 of his "Reglement der Koeniglichen Giro and Lehn Banko", of 17 June 1765, had been seriously put into force, which was not the case, the settlement of payments by clearing would have at that early date become almost generally established in Prussia. Furthermore, the "Allgemeines Landrecht" (Civil Code ), drawn up in Frederick's reign, pays close attention to clearing and devotes to it 77 paragraphs, whereto have to be added 37 paragraphs concerning the union of the rights of creditor and debtor in one person (Confusio ). The German Civil Law today is satisfied with 10 meager paragraphs and the Napoleonic Code, which recent legislation has unfortunately followed, with 13 paragraphs only. One of these, paragr. 1290, is so badly drafted that French courts do not apply it.
The effect of the Civil Law on conditions of employment has so far been left practically unexamined. Probably the only volume that has appeared on the subject is Rittershausen's "Reform der Muendelsicherheits Bestimmungen, zugleich ein Beitrag zum Erwerbslosen Problem" (Reform of the Provisions concerning Trustee Investments, representing also a contribution to the Unemployment Problem", Jena, 1929, which contains valuable suggestions.
That a clearing house curtails the business possibilities of the central banks of issue and even offers the chance of escaping from their tutelage altogether, has naturally been observed by their partisans. Owing to this, e.g., the Russian currency legislation of 1930 has refused cooperatives the right to accept checks without permission of the Russian Central Bank. In 1933 another country went even further and declared all agreements null and void where a creditor of banks and akin institutions renounces his right to demand payment in ready money. Such a provision, if creditors as a body were to exercise their full rights thereunder, could in a few hours bring stark ruin to the most flourishing national economy.
Today the advocates of goods warrants have still to fight for the right to issue them, The coming ages will stand for the opposite view of obliging every economic domain to issue as many of its own goods warrants as are necessary to prevent a disturbance in the monetary circulation of other economic domains. Indeed every individual will be bound to dispose of his assets through a clearing bank which issues goods warrants. Others' balances or means of payment issued by others, would thus be permitted to be used only if the own balances, or the means of payment issued by the debtor himself, proved inadequate. For Germany, for instance, such a reform would involve the amendment or abrogation of the following legislative provisions: paragr. 39 of the Banking Act, which was imposed on Germany by the Dawes Plan; par. 115 of the "Gewer beordnung" (Trade Regulations), whereby workers are entitled to demand
payment in ready money; paragr. 32 of the Cooperative Societies' Act; and the Bruening Dietrich Legislation concerning emergency money, with its later supplements.
In an economy not inconvenienced by a money monopoly and regulated by a system of production based on orders placed, the demand for labor will always equal the supply, probably even equal all the labor which can be supplied in it. Such an economy will have no unemployment problem; but, on the contrary, it will be always concerned with the problem of how to reduce the burden of labor by means of machinery and by every other kind of social advance.
The champions of the monopoly of the central banks of issue will one day stand before the bar of world history, as in English history the opponents of William Dockwray, who, in 1680, to the common benefit, introduced the penny post, but who also amidst the applause of the obscurantists, was compelled by the Duke of York, who held the postal monopoly, to renounce his project. England had accordingly to wait another century and a half before this reform was realized. (Macaulay, "State of England in 1685", History, vol. I.) Or there is the case of the opponents of mechanically propelled conveyances a century ago, an age which only knew steam vehicles but these of a decidedly practical character. By an Act of Parliament, which provide that for the "protection of the public" a man with a red flag must walk in front of every steam vehicle, social development was arrested for many decades.
(6) THE REALIZATION OF THE FUNDAMENTAL CONCEPTIONS UNDERLYING THE MILHAUD PROPOSALS, SHOULD STATES NOT TAKE THE INITIATIVE
A) Purchasing Certificates in External Trading on a Private Enterprise Basis
As Milhaud has shown, the great shrinkage in world trade had two principal causes, of which the second was the immediate consequence of the first: 1. the right of creditors to demand payment in gold;
2. the restrictive foreign exchange laws, of which perhaps a thousand have been issued during the last three years.
The foreign exchange laws have introduced confusion not only in trade but in men's ideas. They had a legitimate purpose, namely to restrict the right of creditors to demand payment in gold. But the method whereby the foreign exchange laws of all countries are seeking to attain this end, will probably create a similar impression on our descendants as the anti-sorcery legislation of our ancestors. One basic defect of perhaps all these laws is that they fail to distinguish a) claims arising out of Short Term deposits utilized for Long Term investments, the deposits thus becoming "frozen" b) claims which cannot be met because they call for payment in gold and the debtor possesses only goods; c) claims which cannot be met because they call for payment in notes of a central bank of issue or may be demanded in such notes whilst the central bank of issue will not or cannot place such notes at the debtors disposal, although he holds goods that are in demand.
With regard to a), Rittershausen has dealt with it luminously and comprehensively, in his work "Neubau des deutschen Kreditsystems" (Reform of the German Credit System, Berlin, 1932. It suffices there from to refer the reader to this work,
b) is the central theme of Milhaud's plan.
(And c) is Beckerath's main theme, seeing that few have any longer a chance to get their government paper redeemed by the government in a gold weight value that was originally promised. Now one can get its paper only replaced by it or any of the banks it has permitted, in other government paper money of the same nominal value, on the "principle" of "Mark equals Mark" or "Dollar equals Dollar", which is quite untrue for Marks or Dollars that were issued years earlier. The abstract paper money "standard" of the government is like a very elastic rubber band that over the years or decades becomes more and more stretched - until it finally breaks altogether. Imagine, by analogy, the weight, length and volume "standards" being made smaller all the time! How many or how few years will pass before e.g. $ 10 will be the lowest note or coin issued? On what remains of a free gold market, all government currencies have gone down greatly over the last few decades, interrupted by some temporary gains, due to deflationary policies by a government or by a temporary slowing down of a rapid inflation that forced many to seek refuge in gold, or by sudden sales of some of the gold hoards that governments had accumulated. - J.Z., 21.11.01.)
In some countries, as in Austria, the trouble began with bank depositors giving notice of withdrawal of their Short Term deposits. The banks, however, were not in a position to pay because they had not invested this money in liquid securities. This mistake was not admitted and many bluntly declared: the gold standard has failed!
Since then agreements have been reached with all the creditors so that now the deposits are or can be repaid in proportion as money is received from the banks debtors. The present situation is there from such that now foreign creditors in every country could be satisfied with Milhaud purchasing certificates. Three years ago this would not have been the case. At that time, when an extraordinary large part of their total deposits was claimed at short notice, the banks could not have repaid in gold, banknotes, or, purchasing certificates.
However, not only concerning the bank crisis of 1931 and its consequences, but quite generally at present, there are views in circulation regarding currency and foreign exchange which will probably amaze posterity, but which must be allowed for, if we desire to induce the worlds actual rulers to cooperate in reforming the present monetary system and organization of settling accounts. One of these views is that the export of banknotes may occasion a marked fall in their exchange value abroad, with the result that there would be 'naturally" an inflation at home. It was most probably for this reason that Milhaud proposed to cover the purchasing certificates with banknotes, but did not enter into a discussion as regards whether the banknotes themselves might or might not be as well remitted abroad. Since the banknotes of almost all countries have become inconvertible today and since their value rests only on the possibility of utilizing them internally, a banknote taken abroad has exactly the same effect as a purchasing certificate. Some of the results aimed at by Milhaud might be there from also attained if the export of banknotes were freely allowed. Such a proposal, however would encounter such a bias among governments, bankers economic periodicals, and the public generally, that it would not have any chance to succeed.
In this connection it might be useful to inquire how one could proceed if there were no laws regarding foreign exchange, or at least tolerable ones, as, for instance, in China England, and Peru. These countries, too, have every reason to apply some precautions for preventing a sudden big demand of gold to which their reserves might not be equal. The question thus suggested is whether in these instances also governmental compensation offices and, as Milhaud recommends, the covering of purchasing certificates by banknotes, would be advisable.
Experience with compensation offices has not been encouraging so far. Almost everywhere where such offices have been established, they have obstructed rather than facilitated trade and have tended, for one reason or another, to hinder obvious possibilities of compensation. They mostly argue: "Compensation does not bring foreign exchange! It also favors imports, whilst the country's interests demand a diminution in imports and an increase of exports". Thus during recent months the obstruction of compensations on the part of the Rumanian Compensation Office has been widely commented on . Moreover, to cite one more example: When a French group proposed to finance in Latvia the project of the Duna power works (which had long been under consideration) and to accept payment in timber, other groups succeeded in preventing this compensation by having recourse to the simple and naive argument that their volume of trade would be thereby reduced.
The objection frequently heard that compensation brings no foreign exchange merits special attention. It confirms the experience of ages that authorities do not easily alter their views. Hence, whilst in almost all countries payments in gold are suspended and gold coins are scarcely obtainable anywhere, and whilst there from all foreign exchange represents for external creditors only purchasing certificates and most foreign exchange is less than that, the attitude of the authorities towards foreign exchange is still the same as in 1913, when they were convertible into gold, The authorities have thus far continued to act on their old views, naturally supported (to tell the truth) by at least nine-tenths of the country's "practical men". What is to be done?
All things considered, the most practicable course to follow might be this: The traders of the different countries where no, or at least no extravagant, foreign
exchange legislation exists should organize for their own convenience a private clearing center. As soon as this center yielded satisfactory results, attention should be drawn to its methods and the advantages it offers explained. Thus, moved by the pressure of a public opinion, enlightened by the logic of experience, the authorities might possibly be induced to revoke the foreign exchange legislation insofar as it prohibits clearing transactions of the Milhaud type.
In the meantime the names and addresses of those suppliers would be noted who are prepared to deliver raw materials against purchasing certificates, i.e., either against governmentally guaranteed purchasing certificates, as proposed by Milhaud, or against such as are guaranteed privately. This list of suppliers would then constitute a perpetual contradiction of the strange idea developed since the war in some countries, that raw materials can only be obtained in return for foreign exchange and that "naturally" one would have to export before one could obtain the foreign exchange "required" for imports.
Private clearing would also eliminate a danger which has been hitherto rarely discussed. That the claim of creditors to be paid in gold should be replaced by a claim to be paid in goods or services is beyond doubt for every judicious thinker who has followed Milhaud's arguments. And similar arguments prove that the right to demand payment in the inconvertible notes of a central bank of issue or in other forms of legal tender should be also limited to the extent that its fulfillment is possible. In fact, it is fairly evident that dependence on the stock of banknotes of a single country involves a much greater risk for debtors than the possibility of utilizing stocks of gold abroad, in an emergency, even at much sacrifice. It is as if in a restaurant many persons are to eat at a given table. This is possible when each at any moment may trespass with his arm or his plate on his neighbor's domain. But if each is strictly confined to his few square inches of space (say) by partitions, nobody will be able to move properly, the bringing and removal of dishes will be rendered much more difficult, and the guests will have much less choice.
The theory, it is true, widely prevails that the central bank of issue of every country is able to satisfy all "legitimate" monetary requirements. Havenstein, a former President of the Reichsbank, based on this theory, which he regarded as a self-evident truth, his demand before the Bank Enquiry Commission, on 15 October 1908 that German banknotes should be legal tender. Experience however has demonstrated that the theory is mistaken, although naturally the assertion of the central banks of issue of all countries, to the effect that a demand for means of payment not satisfied by them is not a "legitimate" demand, can neither be proved nor disproved by purely logical methods.
The risk that a debtor may be obliged to remit means of payment that are simply nonexistent can only be avoided if the contract itself allows them, if necessary, to compensate.
Such permission would presuppose a corresponding form of bonds in external trading. This could be realized in sundry ways. It would be simplest if the bond ceased to read: "On such and such a date I undertake to pay to X., or to his order, the following amount: ."
and if, instead, it read: "From such and such a date onwards I undertake to accept this bond in payments of such and such an amount due to me, in lieu of ready money; but I also reserve to myself the right to pay the holder, instead, in legal tender up to the amount stated", or:
"On such and such a date I undertake to pay at my option, either to X., or to his order such and such an amount or, as an alternative I undertake to accept this bond in payments due to me at the, increased amount of in lieu of ready money. From the date mentioned onward, every holder of this bond is entitled to learn from me how he may realize the bond against me."
This makes it clear that the problem of satisfying foreign creditors not with gold but with goods is of exactly the same nature as the problem of paying internal debts not with gold but with goods. Hence the measures just proposed resemble those concerned with finding work for the workless, as in Milhaud's plan.
The next step to be taken to facilitate for foreign creditors the use of bonds bearing a text such as that suggested above would be that several traders should combine, each of them accepting the bond of any of the others up to the amount of his own debt. This procedure is also capable of improvement, in that the associations of traders might agree to exchange a bond for suitably divided and standardized bonds that are not made out to a given individual but to the association and its debtors. Such a procedure would closely correspond to that resorted to in the discounting of bills by the old Scotch banks of issue; only that in our case the bank would not bind itself to pay in specie. Today the procedure of the old Scotch banks is almost forgotten, but old works expound it and no explanation need there from be furnished here.
It seems that traders in China, where private banks of issue are still lawful, are beginning to favor such a solution. If this be the case, the next step would be for Chinese merchants to seek to arrange that the inconvertible notes of the private banks of issue should be accepted as foreign exchange in as many countries as possible or to induce the central banks of issue formally to declare that the notes are not foreign exchange but may be quite freely negotiated. This last remark is not, as might be thought, superfluous. According to certain legal provisions existing in some countries, means of payment not recognized as foreign exchange, are not, on this ground alone, necessarily allowed to circulate freely.
On a superficial view, the solution here proposed might seem diametrically opposed to Milhaud's. Milhaud covers his purchasing certificates with banknotes which are deposited at the compensation offices. Here, on the contrary it is suggested to issue a kind of inconvertible banknotes which are covered or exchangeable at the banks by purchasing certificates made out to the order of a given firm. The difference between the two proposals is, however, relatively unimportant and is concerned with the formally juridical aspect rather than with the concrete side. A more detailed examination, which must be waived here, would prove this, but that everybody can readily undertake for himself.
We have referred to China. That country is possibly destined to initiate a reorganization of world trade. Its population equals that of Europe and its civilization is not inferior to that of Europe and certainly not to that of America. Difficulties arising from variations in monetary standards, which represent for Europeans and Americans insurmountable mental impediments do not exist for the Chinese merchant. From earliest youth he is accustomed to think in multiple currencies that constantly vary in their interrelations. For centuries copper and silver currencies have peaceably coexisted in China. At the same time the Chinese merchant is quite familiar with the diverse foreign gold and paper currencies. Occasional attempts by Chinese Governments to interfere in monetary matters, have hitherto been regularly answered by their edicts being ignored and, at the worst by buying off the "Marshall" responsible for the issue of such an edict. In times of deflation, merchants have recourse to their own notes and goods warrants, and in times of inflation they know how to calculate in stable values.
China's monetary arrangements have repeatedly served as models to other nations. When in 1770 the clearing bank of Hamburg was reorganized, Sonnin, a master builder, advised that it would be best to follow the example set by Chinese traders and his advice was accepted. The New York Act of 1829 concerning the protection of note owners, was directly suggested by the prevailing practice of the Hong merchants of Canton, as is expressly stated in the reasons adduced for the Act by Governor Van Buren. Chinese traders have thus far successfully resisted the introduction of foreign exchange legislation and the control of external trading. Even lines of thought such as have been first pressed home on Europeans by Milhaud, find themselves realized in China.
For instance, the merchants of Newchwang were shrewd enough so to organize the imports into their city with the aid of their banks that payments were made in goods and not in specie. H. B. Morse, in "The Gilds of China" (1932, pp. 60-61), says on this subject: "One method of regulating the trade at the port in the interest of the gild members is peculiar to Newchwang and, in describing it, it is necessary to use the past tense, since the influx of foreign interests and the general introduction of foreign banknotes since 1900, and more especially since 1905, has worked a great change,
and probably relaxed the grasp of the gild on the trade of the port. A merchant setting imports nominally for cash, was, unless he was willing to submit to a discount of from one to five per cent, according to the market rate, compelled to accept payment in 'transfer money' i.e., by check giving him a credit at a bank. Specie too, was attracted to the banks in this town by the offer of a premium ranging from 0.2 to as much as 6 per cent., and could be withdrawn only on quarter day, four times a year. Withdrawal was discouraged by crediting the account quarterly with premium, if not withdrawn at the same rate as if deposited. During the deposit while the money could not be withdrawn, checks could be drawn against it for "transfer" to the account of another, not necessarily at the same bank, Exports, too could be bought only with "transfer" money and al quotations for drafts on other places were in terms of transfer money except for copper coinage, e, there never was money in Newchwang outside the banks; members of the gild and aliens were driven to take, in goods for exports, the proceeds of sale of their imports, and always through the agency of members of the gild. No one had cash to offer, except at heavy cost; and no one was in a position to act independently, even if the Great Gild had been as weak as it was strong, and if it could be imagined as permitting what, in fact it never did permit."
The economic history of Europe offers a pendant to this. Roscher mentions that in the Middle Ages in the north German town Bardowiek it was decreed that peasants selling provisions in Bardowiek were bound to purchase fish in the town to the amount of their takings. It would be worth the while of historians to unearth further examples of how formerly some communities adopted measures to prevent external traders throwing their monetary affairs into confusion.
The weakness of the Newchwang system was that it forced the same merchants who had sent goods to Newchwang, to purchase goods from Newchwang. Now normally the trade balance of a locality is only established in a very circuitous manner, as illustrated by Milhaud in a number of examples. (Adam Smith also touches on this aspect in several passages of his "Wealth of Nations", e.g., in the last paragraph of book 4, chapter III.
In the case of Newchwang, it would have been perhaps more natural for English merchants to have shipped thereto iron ware and American cotton goods, and for the compensation to have taken place through an importation of goods from Manchuria (of which Newchwang was the port) to Japan and for Japan to have settled then with England and America.
But Newchwang represents but one example of the capacity of Chinese merchants to trade even where there is a shortage of money. A merchant class accustomed to grapple with so many and great difficulties, appears destined to play a leading part in the coming world economy.
The almost exclusively used method today of paying for imports in the currency of the importing country and not in that of the exporting country, is by no means traditional. This method was only invented during the post war period. It seems that it did not begin to be general until after 1921, when by an Act of 24 December 1920 German firms were prohibited from making out invoices in marks without the express authorization of the Reichsbank. Shortly before, German exporters had shipped machinery to America calculated the price in marks and when, after the expiry of the agreed time limit, payment was tendered in marks, these just sufficed for buying a few nails! The decree was there from reasonable and justified. The German example. was then imitated by other inflationist countries, and that too was natural. But when the currencies concerned had been stabilized, the mode of invoicing should have changed. In 1913, for instance, no Austrian manufacturer exporting to Turkey would have invoiced otherwise than in Austrian crowns. In the pre-war methods of payment this almost meant the evolution of the bill of exchange, which the Turkish importer accepted, into a purchasing certificate negotiable in Austria. The idea that the balance of payment of countries is adjusted by gold shipments is only a prejudice to be found in textbooks. (Liefmann should be credited with having first directed attention to this.) Gold shipments were rare and not extensive in pre-war days and were intended almost exclusively for supplying the gold industries. It is also doubtful whether the statistics of gold shipments were accurate. As Locke rightly says, legal provisions relating to gold exports, to their announcement, etc., are to gold what a fence is to a cuckoo.
The Treaty of Versailles has contributed its full share to disseminate false notions concerning payment in foreign exchange. Article 262 imposed on Germany the obligation, at the option of the creditors, to provide gold dollars, gold francs, gold pounds, or gold lire, payable in the capitals of the currency countries concerned, This Article thus presupposed as self-evident that it only depended on Germany's good will to provide these means of payment regardless of the volume of its trade with those countries. Relief would obviously have been afforded by admitting means of payment also promising a certain gold value but valid in Germany only, e.g. dollar bills of German firms, which they were obliged to accept on maturity, precisely as if they had been legal tender; but this relief was never granted, neither was it, however definitely claimed. The monetary views were equally confused on both sides. One of the most far reaching effects of the Milhaud proposals will probably be that thereby the understanding of the real nature of international means of payment has been deepened, so that in future no one will be willing to undertake or exact monetary liabilities which can only be met by a happy chance.
(6) B) Work Supply Banks as Private Institutions
For the exploitation of waterfalls, coal deposits, wind power, yes even of the sun's heat and of the tide, banks and other private enterprises exist, but for the utilization of unused labor power companies have yet to be formed if we leave aside Owen's National Association of the United Trades of Great Britain and Ireland to Employ the Unemployed and to Educate the Children of the Working Classes established in 1833, (Helene Simon, Robert Owen, p 229.) This circumstance will amaze our decedents probably as much as we marvel at our predecessors, who for thousands of years preferred to rub millstones against each other rather than to let this be done by brook or wind. As Milhaud has shown, such companies may be formed in connection with the system of goods warrants and the only question is who will take the initiative, if the State and its central bank of issue should somehow not be available for this purpose. That it is indifferent for the system who issues the warrants, Mr. Mahaim also clearly recognized. (Annals, 1933 no. 2 p. 214.) The retail trades would be the most appropriate. Big stores, such as those of Wertheim, Thetz, Lafayette, Woolworth etc., could, apart from legal impediments, undoubtedly make the following stipulation to their suppliers: "Payment will be in good warrants which all our departments will accept in lieu of ready money." Even the remuneration of the employees might be in goods warrants. If a store took then the precaution to utilize at once every banknote received for the purchase of goods warrants in general circulation, so that a constant additional demand is created for them, the Goods warrants would certainly always stand at par in the locality where they were issued and the store would thus contribute to the improvement of the supply of circulating mediums and would thereby increase the number of employed persons.
It may be estimated that the general monetary circulation could easily absorb the goods warrants of a department store at least to the amount of its weekly turnover, probably considerably beyond. What would be feasible for a big store, would be even more easy for an association of small shops, because such an association would offer the public the advantage of spatially well distributed accepting centers. According to Chatters (Annals, 1933, no. 2, p. 324) such an experiment was actually tried in Evanston, Ill. Particulars on the subject would be most desirable. Goods warrants issued by sales establishments would be no novelty for Germany and Austria. During the inflation period many businesses issued goods warrants having a gold basis, which found ready acceptance.
In the case both of small shops and of big stores the problem of supervising the issue of goods warrants would naturally arise. Some center or bank could easily undertake this function, placing its visa on the warrants, and reporting frequently, at least once weekly, on its activities. These visaed warrants would assure the public that they may at any time be readily exchanged for goods or services in daily demand,
or, as Rittershausen has well expressed it, that they have an adequate shop foundation (Ladenfundation). In practice, a simple form of supervision is available, in that the bank might loan the goods warrants to the stores and shops and arrange with them that they should not issue their own warrants, e.g., warrants ordered by them from printing offices. The goods warrants cashed by the shops would be daily, or at least weekly, remitted to the bank for cancellation. Fresh goods warrants would be obtainable from the bank daily or weekly. Formally this manner of control would be equivalent to a credit transaction between the band and the retail firms and that to the amount involved in the loaned goods warrants. The bank, too, would take proceedings against borrowers who had not returned the warrants within the specified period. This might be most suitably effected juridically, by suing the borrower for the payment of an amount equal to the illegally retained warrants, but permitting, naturally, as an alternative, the return of these warrants.
This juridical form is not so new or peculiar, as might seem at first. The old Scotch banks of issue, of which a luminous account will be found in Adam Smith's "Wealth of Nations", were on the whole organized on this principle, only that the envious English Legislators compelled the banks to redeem their notes (the goods warrants of past days) at any time in metallic currency. (On this subject, see the aforementioned work by Meulen, which throws a completely new light on these relationships.) A great many of the experiences then made in Scotland and subsequently in the United States might be taken into account today in connection with the issue of goods warrants by banks on behalf of retail firms, although the old Scotch and later, the American banks of issue counted among their customers not only traders but predominantly farmers.
Retail dealers would also be specially adapted for making a beginning with the issue of goods warrants, because their stocks constitute the real working capital of every country, be it in China or in Europe. Each banknote, even if issued by a central bank having a very large gold reserve, would be at once at a discount if the department stores and the shops refused to accept them. Indeed in present circumstances, banknotes really must be considered as warrants on the stocks accumulated in sales establishments. Every system of goods warrants must somehow allow for this and every center issuing goods warrants will have to come to some agreement with stores and shops.
Today, unfortunately, sales establishments would not count in the matter of large scale issues of goods warrants, at least not in Europe. The reason lies mainly in the extreme dependence of retail firms on the existing banks and thus indirectly on the central banks of issue which naturally will not al