PP41RiU [Slightly edited by Thomas H. Greco, Jr., 13 January 2004]
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U N E M P L O Y M E N T
A S A P R O B L E M O F T U R N O V E R C R E D I T S
A N D T H E S U P P L Y O F M E A N S O F P A Y M E N T
BY DR. HEINRICH RITTERSHAUSEN,
Private Lecturer at the
advisor at the Bank Enquiry at the Reichsbank, 1933.
A DEFENCE OF THE "BANKING SCHOOL" OR "REAL BILLS DOCTRINE"
AGAINST THE INFLATIONISTS, THE DEFLATIONISTS AND THE "
WITH A FUNDAMENTAL DISCUSSION OF "FREE BANKING" PRINCIPLES & PRACTICES.
First published in Jan/July 1934 in the "Annalen der Gemeinwirtschaft" (Annals of Cooperative Economy), edited by Prof. Edgard Milhaud, 10th. year, vol. 1, entitled:
"Zahlungsverkehr, Einkaufsscheine und Arbeitsbeschaffung, S 153-207. (Payment Transactions, Purchasing Certificates and the Provision of Employment.)
The first English issue appeared as part of the same essay collection but under the heading: "Ending the Unemployment and Trade Crisis", William and Norgate Ltd.,
This translation is by John Zube and was made in continuous comparison with Spiller's translation in an attempt to improve upon it. An ideal translation is still to come. Some notes by John Zube are added in brackets.
Published in March 1979 by LIBERTARIAN MICROFICHE PUBLISHING, in the "PEACE PLANS" series, in PEACE PLANS No. 41, for the RESEARCH CENTRE FOR MONETARY AND FINANCIAL FREEDOM,
Sec. John Zube,
Main literature list: www.acenet.com.au/~jzube Supplementary list: www.butterbach.net/lmp/ Extensive alphabetized notes on monetary freedom: www.butterbach.net/freebank.htm E-mail: jzube@acenet.com.au
Two peace books by John Zube contain also much on monetary freedom. They are now accessible either through
www.exterritorial.info or www.panarchism.info
The libertarian CD-ROM project is also especially intended for free banking writings: www.butterbach.net/project.htm
Many more monetary freedom titles can be found in LMP's literature lists.
This text was scanned and somewhat proof-read and annotated by John Zube in December 2002.
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C O N T E N T S
A) Banks of Issue and Banknotes as Means for Organising Mutual Turnover ……………………………. 4
1. Need for an Organization Linking Production and Consumption ……………………………………. 4
2. Bill Transactions ……………………………………………………………………………………... 4
3. The Transition to the Modern Credit System ………………………………………………………... 4
4. The Scottish Banknote as the Basis for the Classical System of Note-issuing Banks …………….….. 5
5. The Deferred Proceeds from Sales as the Basis for Turnover Credits ……………………………….. 5
6. The Turnover Credit …………………………………………………………………………………. 5
7. The Turnover Credit Business of Banks ……………………………………………………………... 5
8. The Redemption of the Banknotes Issued …………………………………………………………… 6
9. The Note Credit as Exchange or Conversion Credit …………………………………………………..7
10. The Source of Turnover Credit ……………………………………………………………………… 7
11. Elasticity and Prevention of Abuses …………………………………………………………………. 7
12. Excluding the Danger of Inflation through the Principle of a Free Market Rate for Means of Payment,
thus Avoiding Compulsory Acceptance and Forced Value (Legal Tender) ………………………….. 7
13. Provision of Employment through Turnover Credit or through Investment Credit? …………………. 8
14. The Concepts 'Value Standard" and "Forced Currency" (Legal Tender) …………………………….. 9
15. A Danger of Inflation in Providing Employment Exists only when there Is a Forced Currency …… 10
16. The Giro Transactions as the Completion of the Classical System …………………………………. 11
B) The Gradual Destruction of the Classical System, from 1909 to 1932, as Cause of the Difficulties
Encountered in Re-Integrating the Unemployed ………………………………………………………. 11
1. Culmination and Decline of the Classical System ………………………………………………….. 11
2. The Obscuration of the Classical Banking Concepts through the Separation of Functions
between Note and Deposit Banks ……………………………………………………………………12
3. The Centralisation of the System of Note Issue as an Indication
for the Transition from Banknotes to Paper Money …………………………………………………. 13
4. The Fall of the Classical System through the Abandonment of Convertibility and
the Introduction of a Forced Currency (Legal Tender) ……………………………………………….13
5. The Abandonment of the Redemption Obligation and its Consequences ……………………………14
6. The Identity of the Rule of Legal Tender, the Central Banking Concept and Inflationism …………. 14
7. After the Fall of the Banks Followed the Destruction of the German Monetary System by the
Changeover from Money Based on Commercial Bills to Money Based on Financial Bills ………… 15
8. The Reichsbank Is, Temporarily, the Largest Mortgage Bank.
Lack of a Healthy Bank System Prevents the Re-Integration of the Unemployed in the Economy ….15
9. The Fateful Compensation of an Inflation of Financial Bill Money by
a Deflation of Commercial Bill Money ……………………………………………………………… 17
10. The False Support of the Banks Increases Unemployment …………………………………………. 17
11. Unnecessary Sacrifice of the Gold and Foreign Exchange Reserves Intensifies the Unemployment 19
12. Where Does the Inflation Danger Lie Today? ……………………………………………………… 20
(Hayek misunderstood R. so much that he called him an inflationist! - J.Z.)
13. The Aggravation of the Situation by the False Cure of Devaluation ………………………………. 20
14. Is the Central Bank System or Free Banking More Suitable
to Provide Employment and End the Crisis? ……………………………………………………….. 23
15. Decline of the Credit System and Aggravation of the Unemployment Problem
as the Outcome of an Unhealthy Development over Several Decades ……………………………... 23
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C) The Clearing Principle and the "Vier Gesetzentwuerfe" (Four Law Drafts)
to Re-integrate the Unemployed in the Economic Process ……………………………………………. 24
I. From Payment to Clearing …………………………………………………………………………… 24
II. Draft of a "Law" on Clearing Banks ………………………………………………………………… 26
III. Draft of a "Law" on the Issue of Reich Treasury Notes …………………………………………….. 31
IV. Draft of a "Law" on Raising the Price of Securities and Lowering the Effective Interest Rate
by the Introduction of Clearing in the Sphere of Loans …………………………………………….. 34
V. Draft of a "Law" on Stable Value Reckoning ………………………………………………………. 36
D) Conclusion ……………………………………………………………………………………………. 38
I. Fundamental Conclusion: Necessity of a Saturation with Means of Payment ……………………… 38
II. Practical Part-Solutions: The Central Banking System and the Future of
Our Bank and Payment System ……………………………………………………………………... 38
III. The Limits of the Importance of Turnover Credit
for the Solution of the Unemployment Problem …………………………………………………….. 39
FOOTNOTES .................................................................……………………………………………….. 41
AN EDITORIAL NOTE ON OTHER WORKS BY PROFESSOR RITTERSHAUSEN
AND ON CURRENT MONETARY FREEDOM THEORIES ………………………………………… 44
____________________________________________________________________________________________
"Since banks cannot even issue their own currencies, they are not allowed a free market in the very commodity (money) in which they deal!"
Terry Arthur in "95% is Crap".
"All writers on Scottish banking agree in praising its effects on the prosperity of the country. Within 150 years, under the double influence of her banking and educational system,
Henry Meulen in, Free Banking, chapter VIII.
"Credit money, based on human products:
Each producer mints his own money
in conjunction with his own banker.
That is the true function of bankers - dealers in debt."
Dr. H. G. Pearce.
"Good and honest banking is not impossible - it's just illegal." JZ.
"As the government obviously cannot supply
an honest and inflation-proof currency -
let private enterprise do the job!" - J.Z.
To provide for monetary exchanges is no more a sovereign right of governments
than to provide nappy exchanges. - J.Z.
"... governments cannot be trusted with power to determine what traders
should use as a medium of exchange."
Leonard E. Read, THE FREEMAN, 1/75.
"Cetero censeo: Exclusive and forced currency must be destroyed -
in a monetary revolution, by being out competed and refused.
We won't have widespread peace, freedom and wealth without this step." - J.Z.
"It is State interference with the money supply that causes the alternation of boom and slump -
the succession of boom and slump that provides the chief target
of criticism in the socialist attack on capitalism."
Henry Meulen, in "THE INDIVIDUALIST", 6175 .
... state control of money was generally started as a source of revenue."
Henry Meulen, in "THE INDIVIDUALIST", 12/74.
____________________________________________________________________________________________
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UNEMPLOYMENT AS A PROBLEM OF TURNOVER CREDITS
AND THE SUPPLY OF MEANS OF PAYMENT
A) BANKS OF ISSUE AND BANKNOTES AS MEANS FOR ORGANISING MUTUAL TURNOVER
1. NEED FOR AN ORGANIZATION LINKING PRODUCTION AND CONSUMPTION.
It is manifestly not enough to state theoretically that the proceeds resulting from production are turned into incomes by the payment of wages and other costs. Instead, a firm and regular organized relation between production and consumption must be established.
One might see the ideal of such an organization in a CONTRACTUAL AGREEMENT of the individuals concerned, to obtain goods and services of every kind ONLY FROM ONE ANOTHER. In such an association, under proper organization, unemployment could never exist. Thus it could guarantee job opportunities to its members. (2)
During the historical development, not such marketing associations but historically grown communities played a role. During the Middle Ages it was especially the village and town economy which served, extraordinarily, to organise the relations between producers and consumers. With the end of the medieval system these organizations were largely abolished. Their place was taken, in the modern economy with its numerous private exchange communities, by the BANKS. Thus the banks should not only be considered as profit-making enterprises.
Right from the beginning they had to fulfil certain functions in the life of the community which were of the greatest importance for the mutual employment of the citizens. One of the most important means of the financial technique used was the BILL OF EXCHANGE.
To describe in detail the development of banks as the payment and sales communities of the present, out of the transactions in bills of the late Middle Ages, would require too much time here. Thus it should suffice to reconstruct and isolate this development for today with the example of an
2. BILL TRANSACTIONS
Let us leave for a moment our modern and all too complicated environment and examine the simple economic life on a small island. Everybody produces and everybody exchanges his goods for those products of other producers which he requires. The necessary import is paid for by exports. As MEANS OF EXCHANGE in the widest sense, only CONVEYANCES and MONEY are required for this. The problem of the PHYSICAL TRANSPORTATION of goods from place to place is today almost entirely solved. Railway and automobile see to that. But the monetary transactions are still unsolved and misunderstood.
How can one best explain money and credit transactions under such simple conditions? We need merely assume that EVERYTHING IS FIRST PAID FOR WITH BILLS. Thus, through the sale of my products, I acquired a CLAIM FOR THE SALES PRICE, an ASSET IN MONEY. The thus acquired asset is here, as in the modern economy, the NATURAL MEANS OF PAYMENT OF THE INDIVIDUAL, which, in principle, suffices everywhere:
When I buy my own requirements from various suppliers, then I have to give these suppliers only BILLS by which I CEDE to them this claim. The suppliers, in turn, can now use the claim, which belongs now to them, in order to pay for THAT which they had bought. If the bills are made to fall due at the day of the most important annual fair, then they need only be CLEARED when due, precisely as is done now on the Exchange settlement days. Thus all payment transactions could be settled. Should some traders have bought MORE than they had received for their own products, then the small remaining balances had to be paid in CASH, e g. in coins, which usually did not make any difficulties. It is clear that this method of payment, which existed for centuries, served best for the exchange of goods. Moreover, it could NOT be DISTURBED BY FOREIGN INFLUENCES, unless a shortage of paper or ink arose.
3. THE TRANSITION TO THE MODERN CREDIT SYSTEM
This type of economy presupposed that everybody associated in this payment community, was known to the other members and thus had a certain amount of CREDIT. (That credit would have permitted the carrying over of small and still unsettled balances from the last clearing day to the next one, rather than forcing the debtor to pay in cash. - J.Z., 26.12.02.)
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This fundamental condition was shaken WITH THE ABOLITION OF THE GUILDS. A nameless proletariat arose of workers working by the day or week. These did no longer receive the major part of their income in free board and lodging at their master's house and a single payment at the annual fair. Instead, they were more and more paid weekly, with a cash wage which, originally, could not be supplied in cash means of payment. The old system could no longer cope with this new task. The bills were mostly for large and uneven amounts. They were indivisible and thus useless for wage payments. They were neither guaranteed not, as yet, due. Thus they were unsuitable as general means of payment.
4. THE SCOTTISH BANKNOTE AS THE BASIS FOR THE CLASSICAL SYSTEM
OF NOTE-ISSUING BANKS
From 1695 onwards the SCOTTISH NOTE-ISSUING BANKS created the BANKNOTE and thereby established the modern money and credit system. THEY CONVERTED the bills made out in uneven and much too large amounts into TYPIFIED PIECES, let us say of 10, 20, 50, 100 RM (or Francs, Pounds or Pesos) and ADDED THEIR OWN SIGNATURE. Thus they INSURED them in order to eliminate the credit risk. These banknotes were, so to speak, "CUT UP BILLS". They must not be confused with the notes of the Bank of England, which originated from the deposit certificates of the goldsmiths and which, under Peel's Bank Act, have still not entirely lost the character of gold deposit certificates, even today.
While the rise of the modern factory system had INTERRUPTED the circulation of the means of payment (the bills) at the point where the manufacturer wanted to pass on to his anonymous workforce the means of payment he had received, as wages, the circulation became CLOSED AGAIN by means of this invention. THE BANK, AT THIS POINT, CONVERTED THE CUMBERSOME BILLS INTO HANDY AND GUARANTEED PIECES WHICH THEN CONTINUED THE PROCESS OF CIRCULATION.
Now we need ONLY insert ANOTHER THREE COMPLICATIONS: TURNOVER CREDIT, CASH-LESS BANK TRANSFERS and the MONOPOLISATION OF THE NOTE ISSUE, to find ourselves IN THE MIDST OF THE MODERN MONEY AND CREDIT SYSTEM and to be able to understand HOW IT IS POSSIBLE THAT THE UNEMPLOYED MAY NOT PRODUCE THAT WHAT THEY WANT TO CONSUME AND WHY THE WORKERS ARE NOT PUT INTO THE POSITION WHERE THEY CAN CONSUME WHAT THEY HAVE PRODUCED.
5. THE DEFERRED PROCEEDS FROM SALES AS THE BASIS FOR TURNOVER CREDITS
Let us look, first of all, somewhat closer at HOW the SCOTTISH BANKNOTES GET INTO CIRCULATION and, what is almost still more important, HOW THEY RETURN FROM CIRCULATION.
The manufacturer, who delivers the bill to the bank, almost always sells ON CREDIT. The wholesaler, supplied by him, PASSES THIS CREDIT ON to the retailer. Thus is made possible the GOODS STORAGE at the retailers which has become economically indispensable and without which neither the selection of goods nor their continuous supply are possible.
While the manufacturer receives only bills when selling his goods, bills which fall due in e.g., 2 months, he has IMMEDIATELY to pay the WAGES for the labour spent on the products, to his labourers. THIS TIME INTERVAL IS ALSO BRIDGED BY THE SCOTTISH NOTE-ISSUING BANK.
It replaces the later due bills with IMMEDIATELY DUE ONES and with this "DISCOUNTING" it supplies a further extremely valuable service in addition to the "TYPIFICATION" and the "GUARANTY" which were already spoken of.
6. THE TURNOVER CREDIT
The bank which discounts the customers' bills handed in by the manufacturer, and which thus converts an inconvenient means of exchange into a convenient one, does also grant CREDIT as it simultaneously discounts, i.e. supplies IMMEDIATELY DUE SECURITIES for those which are NOT YET DUE. It gives the credit exclusively in its own notes.
This credit is a pure goods and turnover credit since it serves not for a loan on stocks, for speculation or other purposes, but, exclusively, for facilitating the sale of goods on short terms, i.e. for bridging the transport and sales period. Genuine turnover credit is only granted on the proceeds of goods already sold.
7. THE TURNOVER CREDIT BUSINESS OF BANKS
While circulating, the banknotes, thus put into trading, represent the equivalent to the products sold by the manufacturer but which have not yet got into the hands of the ultimate consumer.
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When the manufacturer has sold goods for 100,000 RM (Francs, Pounds, Pesos) and, correspondingly, discounted bills for 100,000 RM (3) then these 100,000 RM wage monies must remain in circulation UNTIL THE DAY on which the wage earners decide upon PURCHASES in the stores. For the same period, naturally, the products remain unsold to the ultimate consumers. On the day of the sale to the ultimate consumer, THE PATH OF THE GOODS ENDS AND THE REFLUX OF THE NOTES BEGINS. Then the goods have been removed from the storekeepers' shelves and require no further financing. The storekeepers use the banknotes received to pay the WHOLESALERS from whom they received the goods and the wholesalers pay with these receipts the MANUFACTURERS who, in turn, and with these means repay their credits from the bank.
Hence the circulation period of the sold goods BEGINS approximately when the corresponding wages are paid and it ENDS through the transfer of the goods into the hands of the ultimate consumers, exactly AT THE POINT where the notes in the pockets of the wage earners are spent and begin their reflux.
The circulation period of the goods and that of the commercial bills, that is, the length of the goods credit and the circulation period of the banknotes, must therefore have been approximately EQUAL in the classical banking ideal.
By this correspondence of the origin of the goods with the origin of the money circulation, and of the end of the goods with the end of the money circulation, which was always DEMANDED by the BANKING THEORY and which was realized by the practice of the Reichsbank until1914 (4), a MUCH MORE PRECISE QUANTITATIVE REGULATION OF THE MONEY CIRCULATION is achieved, as well as a much more certain exclusion of unsuitable credit demands, than can ever be offered (5) by the CURRENCY THEORY and the policy to stabilise the price level, especially after the ruinous experiences of the last few years.
IT IS THUS THE TASK OF SUCH A BANK TO GRANT THE BILL CREDIT FOR JUST AS MANY DAYS AS THE NOTES USUALLY REMAIN IN THE POCKETS OF THE WAGE EARNERS (which depends on the distribution of the household budget expenditures over the whole wage period), PROLONGED BY THE PERIOD REQUIRED FOR THE REFLUX OF THE NOTES FROM THE STOREKEEPER TO THE BANK.
Should the wholesaler, or any other link in the chain, feel inclined to temporarily invest the money received, then the maturing of the bills will prevent him from obstructing the rapid reflux of the notes.
Many bank directors of today will, it is true, not want to admit THAT TODAY ALSO the activity of the credit bank ought scarcely to differ from this process - as will soon be shown. For then they would confess that their own operations with parcels of shares, large scale credits and other "transactions" have not the significance which one would like to ascribe to them.
8. THE REDEMPTION OF THE BANKNOTES ISSUED
With what means, therefore, does this ideal turnover credit bank redeem its banknotes?
Not by keeping a gold treasure in readiness, like a goldsmith's bank which issues gold deposit certificates in the speculative hope that the bearers will hold on to the notes for a long time (Bank of England) - but, simply, through a kind of WITHDRAWAL WHILE RETURNING THE BILLS OF EXCHANGE RECEIVED. This withdrawal is nothing but the reversal of the exchange act which was first undertaken. The credits were granted for the period corresponding to the movement of the goods from the manufacturer into the hands of the ultimate consumer. They become due when the stocks of goods are sold. The manufacturers are also ready and forced to repay them (because they must have sales receipts and must redeem the discounted bills), and the bank does nothing else but merely reverse the initial exchange.
Upon return of the banknotes, it surrenders the now paid for bill documents. IT EXCHANGES THE BANKNOTES INTO BILLS OF EXCHANGE. AFTER, PREVIOUSLY, HAVING CHANGED THE BILLS INTO NOTES, THAT IS, IT UNDERTAKES A RETURN DEAL.
Provided, it issues all notes in the indicated manner then it requires no gold reserve.
The note circulation is sound if the bank declares itself willing to accept its own notes in this way, in all payments to itself and at any time, and if, moreover, it takes care that continuously as many payments as possible are to be made to its cashiers - by granting SHORT term credits and credits exclusively upon sales proceeds and to sound debtors only.
The secret of the value of such free notes lies in the continuous DEMAND for them - because notes are continuously needed for making due payments to the bank.
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9. THE NOTE CREDIT AS EXCHANGE OR CONVERSION CREDIT
According to the admirable classical system, a turnover credit is thus merely an exchange or conversion credit in which inconvenient means of payment are transformed into convenient ones or claims from sales are transformed into claims against a bank. All the disturbances under which today's credit system suffers, cannot happen under this system as discount or exchange credits, to state it again, are only granted for as many days as are needed to get the goods from the sale at the factory into the hands of the ultimate consumer. This period coincides with the number of days for which the wage earners retain the banknotes in order to have enough means of payment until next pay day.
10. THE SOURCE OF TURNOVER CREDIT
It is thus ALL NOTE HOLDERS TOGETHER who finance the whole goods turnover from the producer to the consumer. The note holders, between them, have in this always as much purchasing power as there are goods in transit and in the hands of the wholesalers and retailers. Through holding the notes, the note holders extend to the banks as much credit as is required for financing the passage of these goods.
With the spending of every 100 RM (Francs, Pounds or Pesos) note by the note holder, in the stores, the equivalent of 100 RM worth of goods are paid for and require no longer any financing. The note circulation is, correspondingly, reduced and, lastly, the credit to the bank, and by the bank, is reduced by 100 RM.
Thus the goods turnover is financed from a source which is ADEQUATE regarding amount and duration and is inexorably correlated to the yield.
11. ELASTICITY AND PREVENTION OF ABUSES
Always as much money is issued under this system as goods are produced and, continously, as much money is withdrawn from circulation as goods are consumed. It need never happen that goods in all spheres are simultaneously unsaleable due to there being not enough money around because any "increase of the quantity of money would bring the danger of inflation" etc. Here we can never have either a shortage or an excess of turnover credit because RISING SALES by manufacturers PRODUCE also additional bill material and additional amounts in banknotes, in the pockets of additionally employed labourers, during the payment period, and vice versa, - if only no serious technical mistakes are made.
DEFLATION is not possible under this system since the banks will compete with each other to grant advances upon the rather limited genuine claims out of goods sales, with the result that the interest rates for sound credits cannot rise by much above the handling costs of the banks.
An EXCESS is likewise not possible, in spite of the absence of a metallic cover, for on the same day that the notes return, the advanced sales proceeds of the goods also arrive at the bank. On this day the notes are returned to the bank by people who want to repay credits just due to be repaid. The notes are RE-EXCHANGED just like mortgage bonds of a mortgage bonds are credited on the current account of a mortgage debtor, when he hands them in for amortisation purposes.
ONLY A CREDIT TRANSFORMATION, NOT A CREDIT CREATION occurs. The mortgage banks are likewise incapable of producing an inflation, if they do nothing but transform difficult fungible mortgages into easily fungible mortgage bonds, thus giving an existing claim a better form. Every abuse, every step beyond this, spells INFLATION.
Apart from credit transformation there exists only the credit creation which is ALWAYS inflationary. Only the absolute restriction to transformation excludes inflation. (On the qualification on this statement see below. Legal tender is required to inflate a paper currency. Otherwise this "creator" creates merely a discount of his currency. - J.Z., 26.12.02.)
12. EXCLUDING THE DANGER OF INFLATION THROUGH THE PRINCIPLE OF A FREE MARKET RATE FOR MEANS OF PAYMENT, THUS AVOIDING COMPULSORY ACCEPTANCE AND FORCED VALUE (LEGAL TENDER).
This restriction to transformed credit requires effective safety measures so that it does not remain a mere idealistic principle with compliance being left to the good will and discretion of the banker. The Scottish system recognises
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the weakness of men and is distinguished from all other systems by technically excluding inflation through an organisational measure, i.e., THROUGH THE FREE MARKET RATE FOR BANKNOTES, which is the opposite of compulsory acceptance and forced currency (legal tender), both of which are not improvements but a "deterioration" of banknotes.
Once the bank issues TOO MANY banknotes, i.e. as soon as it makes advances upon other claims than for the purchase price claims from goods sales, or grants longer credit periods, it can no longer redeem the notes by re-exchanging them. Then it must try to pay with somehow obtained cash means, gold, foreign exchange etc., when the notes return. When this abuse reaches noticeable proportions, then the notes are depreciated (discounted) as the necessary demand for them is no longer achieved by sufficient maturities of bills. The notes of this bank depreciate by comparison with other sound means of payment in the country. They are then only reluctantly accepted and only at a discount at perhaps, 90 % or even 70 % of their nominal value.
Such a bank could not grant any new credits at all as the debtor would receive only 70% and would risk having to repay the depreciated credit at 100% and, moreover, his labourers would refuse to accept as bad means of payment. One would refuse to accept such notes like one refuses to accept cheques drawn upon an insolvent bank.
(Note by JZ: Here Rittershausen seems to overlook the other side of the coin: A new debtor does not have to take a loan of 100 RM in these banknotes as a loan of 100RM, reckoned in stable value RM, but e.g. only as one of 70 RM, if this rate corresponds to their exchange rate on the market. Naturally, he could also altogether refuse these notes. But he would not be likely to do so in our example. Seeing that the issuer has to take his own notes at any time at par (otherwise he would be liable to fraud charges), the debtor could immediately repay his 70 RM - in stable RM - with a mere 70 RM - in nominal values - of these depreciated notes, thus leaving the bank with a loss of 30% and him with a profit of 30 RM - in, admittedly, depreciated - notes. This, probably more than the reverse, would prevent the bank from over-issuing - in its own interest!)
Such a system is only feasible when several note-issuing banks exist parallel to each other and when, apart from the banknotes, also sound coins and State paper money circulate. It existed, in almost all countries of the world, for more than 100 years.
(Note by JZ: The sound coins could be private ones. Likewise, the sound State paper money could be replaced e.g. by sound private local currencies made of paper. What is really necessary for the development of a free market rate of means of exchange, is only stable value reckoning. This could, for instance and for the time being, be achieved by a free gold market, freedom for pricing in gold weight units and a free market rate for all exchange media which transfer such gold weight values.)
13. PROVISION OF EMPLOYMENT THROUGH TURNOVER CREDIT
OR THROUGH INVESTMENT CREDIT?
Time and again we meet the assertion that the provision of employment through sound exchange of consumer goods by means of credits would act inflationary. This question is, therefore, of decisive importance.
If one will not or cannot employ labourers through investments by means of latent capital formation then, obviously, one must achieve that the unemployed produce themselves those goods which they want to consume and, furthermore, that they are placed in a position where they can consume what they have produced. For this only sound banks and turnover credits are prime necessities. Means of production and tools are mostly available in abundance, in the form of shut-down factories etc. Moreover, the still operating factories and agricultural enterprises would gladly engage unemployed, if sales were no problem. And additional sales would begin from the moment the unemployed are set to work in these factories - because from then on they would receive wages and additional income which they would spend (thereby giving orders).
Such income would, in the meantime, consist in the advances of the banks, until the money circuit is completed, the goods circulation made possible thereby, the money has flown back to the issuing bank and the goods are consumed.
Advances and banknote issue must precede. They cannot follow the turnover of goods, for otherwise, because of lack of means of exchange, there would be no such goods turnover.
Once the money circle is closed and the goods are consumed, then this game can begin anew. Thus a continuous process of exchange is begun whereby in most countries more than 3/4 of the population live:
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Namely from the mutual production for one another, from the mutual sale to one another.
Although in most countries the present crisis was probably initiated by a disturbance of the process of investment and capital accumulation, it has, nevertheless, been greatly aggravated by the subsequent increasing disturbances of the turnover and exchange process.
Every attempt to provide employment in this way is, usually, thwarted by the argument that inflation would occur. This is all the worse as this way of providing employment is, obviously, the easiest and most natural one. It does not require any long-term indebtedness with all its dangers. Neither customers nor banks run greater risks: the turnover credit is usually repaid within a few weeks. The unemployed are not employed just ONCE for one or two years, for an expenditure of several milliards, instead, they are PERMANENTLY RE-INTEGRATED in the natural process of production.
That a healthy process of capital formation and investment is always continuous but works over longer periods of time, the author has shown in his monograph "Arbeitslosigkeit und Kapitalbildung (Unemployment and Capital Formation ), Fischer, Jena, 1930. But there the continuity is more difficult to recognize, more dangerous and less popular. This is one reason to PRIMARILY restore the turnover process, the basis of our whole economic life, the precondition for the activity of saving and investing.
14. THE CONCEPTS "VALUE STANDARD" AND "FORCED, CURRENCY" (LEGAL TENDER)
To understand the argument of a danger of inflation, which is always upheld against any provision of employment by means of organising the turnover credit, we have to briefly analyse these two basic concepts and to call attention to certain aspects which were no longer sufficiently observed by the schools of monetary boom and bust theories of the last few decades, no matter how dominant they had been before the war in all large countries of the continent, from Germany to Spain.
The VALUE STANDARD is no more than the legal declaration that the legal unit for measuring values is called this or that name, say Reichsmark or Peso, and is equal in value to so or so many grams of fine gold. The best parallel for this is the MEASURE OF LENGTH called the "metre", which is equal in length to a bar of platinum kept in a deep cellar in
But even this is explained by the metre parallel. If the government, e.g. in order to aid the textile industry, passed a law that a metre measure need merely be made of PINE-WOOD in order to be a legal metre measure (Forced Metre), then the inflation begins. Then the dishonest merchant, who would cut a piece from this metre measure off, in order to receive more money for the same bale of cloth, could no longer be prevented from doing so, for in every prosecution the court would have to admit that the quantity of the cloth was correctly measured inasmuch as the legally prescribed pine-wood metre was used. This economic abuse would not at all be stopped by e.g., breaking the platinum bar in Paris (or by abolishing the gold standard), BUT, EXCLUSIVELY, BY REVOKING THE ACT WHICH CONFERS LEGAL MEASURING POWER TO ANY OTHER METRE MEASURES THAN THE ONE ORIGINAL METRE IN PARIS.
(Note by J.Z., 26.12.02: In this version this is not a good analogy. Wooden, plastic, cloth and steel tape meters are extensively used and mostly reasonably accurate. Shortening would be noticed because they have millimetre and centimetre markings and because numerous competing measures are owned by the buyers. Thus a cheating merchant would soon be found out and denounced and might lose his business. Without legal tender the cheap length measures are, nevertheless, good enough & voluntarily accepted substitutes length measures for most purposes, just like the agreement upon a gold weight unit for pricing and clearing only, would be a good substitute for a gold coin or gold bar of the same weight. Thus the single metre standard, in rare metal, can be cheaply and effectively substituted by millions of meter measures made out of cheap materials, serving many of the length measuring requirements of the world, while the single and original one in
Likewise, INFLATION OF MONEY CAN ONLY OCCUR WHEN ONE CONCEDES CERTAIN PAPER MEANS OF PAYMENT THE LEGAL TENDER CHARACTERISTIC according to which they have still to be taken as 100 even if their value is only 90, i.e. when money is given FORCED CURRENCY.
It is inconceivable how the original metre in
However, if the bill is bad, the bills had to be continuously prolonged - because the bank had issued notes on long terms, or the debtor got into undisclosed payment difficulties, then there is no application for such deteriorated notes, NO DEMAND for them, which could raise their exchange rate to par within a few hours. Instead, a lasting
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discount occurs - as we have seen in the history of the note-issuing banks, again and again. The bank is then paralysed. It is ripe for liquidation and other banks take its place.
15. A DANGER OF INFLATION IN PROVIDING EMPLOYMENT EXISTS ONLY
WHEN THERE IS A FORCED CURRENCY
This principle cannot be stressed enough against the argument that inflation would threaten. All accessory means of payment which are not legal tender can, in case of abuse or over-issue, only ruin themselves but never the legal currency. The problem of a double currency can also no more arise among such free means of payment than with payment by cheques.
Value standard and means of payment should be sharply distinguished.
With non-compulsory private means of payment one can no more inflate THAN ONE COULD DESTROY THE VALUE OF SHARES ON THE SHARE MARKET WITH DEPRECIATED SHARES. If Mr. L. issued 100 million Reichsmarks of worthless shares of a "Gigantic Share Company", and if he found buyers, then these unfortunate people have certainly lost their money. But it would not be obvious how the market price of IG Farben or Rio Tinto shares could possibly be reduced thereby. On the contrary, this instance demonstrates that the IG Farben Share would only be ruined if the government passed a law to give the Gigantic shares legal tender, if, to stay with our image, it declared these shares to be DELIVERABLE FOR IG FARBEN SHARES. Then, indeed, the IG Farben shares would fall very much and then
Exactly as on the share market, so also on the money market (for banknotes etc.), the multiplication of redeemable money substitutes can never depreciate the currency (value standard). This followed already from the example of the metre measure.
The great money theorists have expressed themselves unambiguously on this subject:
Compare, among others, Knapp, "Staatliche Theorie des Geldes (State Theory of Money, 4th. edition, p. 161,
von Mises, "Theorie des Geldes und der Umlaufsmittel" (Theory of Money and of Circulating Media ), 1924, p.331, Adolf Wagner, "Zettelbankpolitik" (Banks of Issue Policy), 1873, p. 36, Lexis, "Handwoerterbuch der Staatswissenschaften" (Encyclopaedia of Social Sciences), 3rd. edition, article "Cheque" etc., Carl Menger, ibid, article "Geld" (Money), vol. IV, pp. 601-603, J .G. Courcelle-Seneuil, "La Banque Libre" (The Free Bank), Paris, 1867, Horn, "Bankfreiheit" (Free Banking ), 1867, - it was also published in French, de Viti de Marco, "Finanzwissenschaft (bei Staatspapiergeld)", (The Science of Finance) (under state paper money ), 1931, see also the Acts concerning the "Kgl. Giro- u. Lehn Banco", 1765, the Royal Prussian Bank and the Reichsbank until 1910 (continuing explicit rejection of compulsory acceptance), R. Just, "Geldinflation" (Money Inflation ), Jena, 1921, p. 113 ff., Dr. Walter Zander, "Eisenbahngeld und Arbeitslosigkeit" (Railway Money and Unemployment ), Annalen der Gemeinwirtschaft, 1934, vol. 1, U. von Beckerath, "Die Durchfuehrung der Vorschlaege von Milhaud", (The Realization of Milhaud's Proposals), ibid, 1934, vol. X/1, Henry Meulen, Industrial Justice through Banking Reform, London,1917, etc.
Even Lord Overstone has said:
"When I mismanage my private bank then I am ruined but the public will suffer only little. But if the Bank of England makes a large mistake, then the bank can, indeed, save itself" (with the aid of legal tender - the author) "but extensive harm is caused for the whole community."
(Note by JZ: The last quotation is re-translated from German into English!)
A revival of the theory of a free market rate for means of payment appears, therefore, urgently necessary - in the interest of providing employment. Probably the period from 1815 to 1844 in England, with its doctrine resting wholly on legal tender, was as much a temporary error in the history of money as the after war period which we experience now.
The above named authors! whom we cannot quote here for lack of space, bring convincing and astonishing proofs for this supposition.
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16. THE GIRO TRANSACTIONS AS THE COMPLETION OF THE CLASSICAL SYSTEM
In principle, this originally Scottish credit and banknote system - this system of well thought out mutual provision of jobs, does not differ from the simplest bill of exchange operations which were our starting point. Even the GIRO TRANSACTIONS which we will now describe, amount only to a refinement and not to a deviation from the idea that the BANKING SYSTEM IS AN ORGANIZATION FOR MUTUAL GOODS SALES and has no other purpose than this.
("The banking system" as far as note issuing banks are concerned, issuing banknotes and other paper means of exchange. There are several other kinds of banks for other purposes. - J.Z., 26.12.02.)
We have so far assumed in our sketch that the entire payment circle is achieved entirely with banknotes. But today we see a large part of all payment transactions conducted in the much more simple and cheaper cash-less method of GIRO TRANSACTIONS: The retailers, who received from the 45 milliard Reichsmark of wages and salaries in Germany, in 1927, almost 40 milliard Reichsmark, do not attempt to bundle up these notes and dispatch them by registered mail to their suppliers (usually in other locations). Instead, THEY PAY THE DAILY TAKINGS ALREADY ON THE NEXT DAY into the nearest deposit and cheque bank and use the credit balance thus gained FOR TRANSFERS TO THEIR SUPPLIERS. While formerly the circuit for about 90% of the circulating cash ran as follows:
PART 1: Bank - pay office of the manufacturer - wage earner - shop,
PART 2: Shop - wholesaler - manufacturer - return to the bank,
today only the first part of this circuit is undertaken by the cash circulation as already the shopkeeper returns the notes to the bank and thereby ends the note circulation. Indeed, the retailer does not deposit this money into the account of the MANUFACTURER, who was debited with the turnover credit when the banknotes were originally issued, but, instead, he deposits them on HIS OWN account. Thus, with this deposit, the credit transaction is not at all finished but merely transformed. In this way the GIRO DEPOSITS at the bank RISE by exactly the amount that the banknote circulation was diminished on the same day. With the additional deposits the credit grant is CON-TINUED. These new transferable deposits, taking the place of the second part of the classical circuit scheme, now WANDER, in form of bank transfers, THROUGH a long chain of bank accounts of the suppliers and sub-suppliers, until they arrive at last at the account of the original manufacturer. With that the bank credit which originated the banknote circulation is repaid. Simultaneously, the giro deposits drop to the original amount. Detailed researches showed that the cash circulation in
Thus it is no longer all banknote holders together who today, by their possession of the notes which represent a credit grant, finance the goods circulation in an elastic way. Instead, almost 3/5 of the credit sphere does now originate from the owners of actually continuously turned-over giro accounts.
NOTE circulation and giro accounts COMBINED, however, have remained as elastic as, previously, the note circulation was on its own. Both ARISE from a TURNOVER CREDIT and DISAPPEAR through its REPAYMENT. Both are independent of the amount of savings deposits and of capital accumulation in a country and, also, independent from the intake of foreign credits. It is thus incorrect to speak of the necessity to accept foreign turnover capital. Both (note circulation and giro accounts), do not represent a fundamental change compared with the previous simple bill of exchange circuit but merely a refinement.
B) THE GRADUAL DESTRUCTION OF THE CLASSICAL SYSTEM, FROM 1909 TO 1932, AS CAUSE OF THE DIFFICULTIES ENCOUNTERED IN RE-INTEGRATING THE UNEMPLOYED
1. CULMINATION AND DECLINE OF THE CLASSICAL SYSTEM
With the development of the GIRO AND CHEQUE TRANSACTIONS (which, however are yet capable of a large expansion as should be stated here quite expressly), the classical system could be considered as essentially COMPLETED. It was working for more than a century in
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How the decline and fall of this once famous system is to be explained may here remain undiscussed. It happens, indeed, quite often that too great successes lead to stagnation, to a replacement of leading personalities by mere representative people - until it is almost too late, even for the best manager, to save the old system.
2. THE OBSCURATION OF THE CLASSICAL BANKING CONCEPTS THROUGH THE SEPARATION OF FUNCTIONS BETWEEN NOTE AND DEPOSIT BANKS
We will confine our description to the German conditions. This development went on in
The first downward step is certainly to be seen in the SEPARATION OF THE NOTE ISSUE from the deposit bank business, by which our present-day banking operations are already externally distinguished from the Scottish Bank System. With this we come to the CENTRAL NOTE-ISSUING BANKS, today existing in almost all countries, and regarded as an untouchable achievement of the human spirit, but which, perhaps already in 50 years, will be abandoned in the lumber room of history as a scarcely intelligible concept.
This separation of functions was essentially HISTORICALLY developed. Aside the banks of issue, which discounted bills and also accepted deposits, there arose, in most countries (6) large JOINT STOCK BANKS which practised the deposit business and, as a counterpart, also the current account credit system (originally as an open financing of turnover without the bills of exchange discipline) and they DEVELOPED OVERPOWERINGLY. Naturally, they could only finance the last 3/5 of the goods turnover according to the classical system, as they could only seize for themselves the CASH-LESS part of a portion of the payment transactions. With regard to cash they remained dependent on the banks of issue.
(Note by JZ: 1 suspect that the growth of the banks of issue was retarded largely by the convertibility requirements imposed by the
Thereby the simple structure of the classical system was OBSCURED for the first time. The banks of issue thus became "banks of banks". Today they issue about 80% of their notes no longer to businessmen whose orders for raw materials and goods turnover they can clearly see in their accounts, but to BANKS which assure them that the NAMES of the bill debtors SOUND so well that they would even "unseen" stand surety with their endorsement, an assertion that has ALMOST NOTHING TO DO any longer with the INTENDED TURNOVER OPERATION and with the TRANSFORMATION OF SALES PROCEEDS into means of PAYMENT. It already embodies the fatal substitution of the security principle for the turnover principle.
Moreover, the large deposit banks do not present ALL goods bills to the central bank but merely some and this sporadically, when they are in need of cash. Thus the note issuing bank has lost all effective control.
Finally, the deposit banks offer their customers convenient current account credit and hence the businessmen have forgotten how to pay with bills of exchange - while the note-issuing banks continued to insist upon the old principle of commercial bills. Thus the banks of issue had finally to be satisfied with receiving obvious finance bills as the good bill material had become very rare.
NOW THE BANK OF ISSUE HAD TO ATTEMPT TO "FEEL OUT" (7) THE PROPER QUANTITY OF NOTES AS IT HAD LOST THE DIRECT CONTACT WITH THE EXCHANGE PROCESSES OF THE BUSINESS WORLD. INSTEAD, IT BECAME A CASH SUPPLY CENTRE FOR THE LEADING BANKS. Not the bank of issue determined how much it should issue but the leading banks fetched as much as they just needed. BUT WITH THIS ONE ARRIVED AT THE BORDERLINE OF THE NOW ENDLESS AND NOW RESTRICTED ISSUE OF NOTES WHICH IS CHARACTERISTIC FOR THE PAPER MONEY THAT, IN CONTRAST TO BANKNOTES, HAS RIGHTLY GIVEN THIS DANGEROUS TYPE OF MEANS OF PAYMENT A BAD NAME and which is an obstacle to the provision of employment.
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3. THE CENTRALISATION OF THE SYSTEM OF NOTE ISSUE AS AN INDICATION FOR THE TRANSITION FROM BANKNOTES TO PAPER MONEY
Hand in hand with this development ran the centralisation of the system of note issue. The State entered into close relations with one of the note issuing banks. He gave it privileges and entrusted all its payment transactions to it and accepted its notes at its pay offices. The notes of such a bank were bound to gain an unsound diffusion. They were NO LONGER EXCLUSIVELY based upon the fact that the institution EXCHANGED the new sales proceeds, daily arising from the continuous sales of the whole production, or rather the bills based on this, into a more convenient means of payment, but also, to some extent, upon the CREDIT OF THE STATE. This bank became the "central bank of issue" while the other banks of issue either disappeared or became insignificant.
THIS MONOPOLISTIC SYSTEM which in such purity exists in no other sphere, could never have maintained itself if it had not offered - not to the State as a community of people - but, instead, to the STATE AS THE EXCHEQUER, IMMENSE ADVANTAGES.
FR. KNAPP described the frequently recurring cases in which the State, in its emergencies, EXPLOITS THIS RICH BANK AS A SOURCE OF CREDIT:
"When this bank, semi-coerced, grants its "guardian", the State, large credits, which have nothing to do with the goods turnover, the question arises: '... HOW CAN IT REDEEM THE BANKNOTES FURTHERMORE? IT IS IMPOSSIBLE.' "
(Because the State cannot repay on the day the notes are presented for payment, i.e. after about 26 days.)
Knapp continued:
"This is well understood by the State. Accordingly, it decides, first by decree and later by law: The bank is released from the obligation to redeem."
The State then declares
"these notes to be legal currency (equal to LEGAL MEANS OF PAYMENT) ..."
Thus these notes get LEGAL TENDER for all payments between private people. Through this highly noteworthy process, which is usually only seen as a terrible accident, the cool observer can state the following: Money transactions do not come to an end although the currency HAS CHANGED ITS CHARACTER. IT DOES NO LONGER CONSIST OF SPECIE BUT OF PAPER. THE STATE HAS FALLEN INTO THE PAPER MONEY ECONOMY" (8 & 9)
The legal tender money represented by such "banknotes" with forced currency, obeys quite different laws than the genuine turnover bank money of the private payment community which has been described by us. In particular, IT CAN BE MULTIPLIED WITHOUT LIMITS AND IT CAN BE FORCED UPON PEOPLE AND IT IS THUS EXTREMELY DANGEROUS WITH REGARD TO INFLATION.
4. THE FALL OF THE CLASSICAL SYSTEM THROUGH THE ABANDONMENT OF CONVERTIBILITY AND THE INTRODUCTION OF A FORCED CURRENCY (LEGAL TENDER)
Thus F. Knapp, the past master of German monetary theory, has described also for those, who cannot always follow his views, in a convincing and impressive manner and already a decade before the war, the approaching downfall of the classical credit system which, not so long afterwards was realized in Germany and in almost all countries, France excepted.
The less important redemption obligation existed for little more than one year, from 17/5/1930 to 13/7/1931, at a time when the German credit system already threatened to break apart under the burden of the unbearable short term foreign indebtedness.
In such a desperate situation the redemption policy was unable to develop its healing powers - as the free market rate and the understanding of it were missing.
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5. THE ABANDONMENT OF THE REDEMPTION OBLIGATION AND ITS CONSEQUENCES
As long as the redemption obligation existed, or, to quote Knapp again,
"as long as the bank is obliged to redeem its notes in money issued by the State, the State need take no further steps to keep the banknotes in their accessory position." (10).
Thus all other precautionary measures against the danger of inflation were superfluous because inflation is only possible under the rule of legal tender.
(Note by JZ: If the latter is true then rare metal redemption by the issuer, like other precautionary measures, is also unnecessary.)
Now, after the ABANDONMENT OF CONVERTIBILITY of the notes, SPECIAL BRAKES BECAME NECESSARY: THE GOLD BRAKE or gold cover, the unreliable and always lagging PRICE STATISTICS and, finally, after these have become unsuitable, the foreign exchange brake. With this the classical concept, whose renewed realisation is so necessary today, which sees in the money and credit system an aid to the goods turnover, has become ABANDONED AND A QUITE DIFFERENT KIND OF MONEY has been raised to the throne, i.e., PAPER MONEY as opposed to the banknotes. It is a peculiarity of paper money to fluctuate widely and without any stability between inflation and deflation. Only paper money can be subject to the excesses which we experienced in the years 1923 and 1931/2. Moreover, paper money deals with the financing of turnover only, so to speak, by the way, without achieving substantial results.
6. THE IDENTITY OF THE RULE OF LEGAL TENDER, THE CENTRAL BANKING CONCEPT AND INFLATIONISM
This dangerous and economically condemnable regime of legal tender (11) would never have been resolved upon if it had not, apart from its advantages for the Exchequer, one characteristic which defeated all objective considerations:
According to the dominant view the FINANCING OF WAR was impossible without a "strong bank of issue". Accordingly, in
In reality, the FREE NOTE-ISSUING BANKS were, in case of war NOT 'STRONG',' MERELY BECAUSE THEY COULD NOT CAUSE AN INFLATION. THEY COULD not give the State any war credits because four weeks later they would have gone bankrupt because of this inflationary abuse.
It was overlooked that, according to Frh. von Stein (1812), we have, in a properly managed STATE PAPER MONEY WITH A FREE MARKET RATE, a much stronger and a harmless means to finance war.
(Note by JZ: Here it should be admitted that a large scale and unpopular war could be easier financed with inflation because thus its true costs could be better hidden from the population. Naturally, for the peaceful man this is only one more argument against legal tender.)
BEHIND THE DRIVE TOWARDS A "STRONG CENTRAL BANK" THE INTENTION WAS HIDDEN TO PRODUCE AN INFLATION, SOMETIME, and this is only conceivable when the redemption obligation is repealed and LEGAL TENDER IS INTRODUCED. THE IDEA OF CENTRAL BANKING AND INFLATIO-NISM ARE IDEOLOGICALLY AND HISTORICALLY INSEPARABLE. It is thus not surprising that Cassell and more and more representatives of the central banking system do recommend today the abolition of the gold standard and thereby publicly reveal themselves as inflationists. Every radical opponent of inflation must lastly also be an opponent of a "strong central bank" because this inevitably seduces into a legal tender regime and, thereby, into inflation. Likewise, he must wish for a restoration of the currency conditions prior to 1910, when the German economy, not without reasons, passed through an unprecedented period of prosperity without being threatened by inflation.
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7. AFTER THE FALL OF THE BANKS FOLLOWED THE DESTRUCTION OF THE GERMAN MONETARY SYSTEM - BY THE CHANGEOVER FROM MONEY BASED ON COMMERCIAL BILLS TO MONEY BASED ON FINANCIAL BILLS
This long prepared decline was followed by a CATASTROPHIC BREACH which is now to be described. Until the summer of 1931 the Reichsbank complied with the paragraphs 28 and 25, sections 6 and 21 of the Bank Act which limited the activity of the Reichsbank quite definitely, namely, in essence, to the discounting OF BILLS OF EXCHANGE MATURING IN AT MOST THREE MONTHS. Aside from gold, and cheques in transition, these ALONE WERE PERMITTED AS COVER FOR THE NOTE ISSUE.
Par. 28 runs:
"a) Gold cover of 40%.
b) For the remainder, discounted bills and cheques which satisfy the requirements listed in par. 21."
This Par. 21 determined, at the end of section 2:
"THE BILLS DISCOUNTED BY THE BANK SHALL ONLY BE GOOD COMMERCIAL BILLS."
Dr. Hjalmar Schacht commented upon this important clause in his Commentary, on p. 142, as follows:
"With regard to the purpose of the banks of issue, the previously applied principle that the bills discounted by the bank must exclusively be good commercial bills, has been expressly laid down in the new Bank Act. Thereby the Bank is PROHIBITED from discounting any other bills, e.g., the so-called FINANCE OR CREDIT BILLS or of bills which are drawn for speculative purposes."
The penal clauses also refer to these two paragraphs, thereby stressing their importance still further.
CONSEQUENTLY, the Bank Act allows ONLY TWO KINDS of banknotes which we may name, with G. Ramin, in order to state the subject quite plainly, GOLD MONEY AND COMMERCIAL BILL MONEY. (14)
This does also correspond to the terminology of paragraph 28.
CONTRARY to these provisions, since the credit crisis of 1931, THE REICHSBANK HAD DISCOUNTED FINANCIAL BILLS to the amount of about 2,000 million Marks. This is generally known and documented by the creation of the "Akzept und Garantiebank" (Acceptance and Guaranty Bank). These financial bills were accepted to maintain the solvency of the illiquid credit banks which had exaggerated the deposit system. Here the Reichsbank did not give advances upon sales proceeds but, instead, took over the illiquid assets of the large banks and savings institutions, assets which do not liquidate themselves but require continuous prolongations, contrary to the 3 months limit. In addition, it granted the municipalities and savings institutions credits of over 1,300 million RM, also of a long term kind. As it was not authorised to grant these credits, either, it masked these illiquid loans by transforming them into bills and by the involvement of the "Akzept und Garantiebank" (Acceptance and Guaranty Bank) which was especially founded to bypass the law. Thereby it offended against a further clause of the current Bank Act: Par. 25, sec. 6 determines that the Reichsbank may NEITHER INDIRECTLY NOR DIRECTLY grant any credits to the Reich, its component States and the municipalities, apart from a current account credit of 100 million RM and a treasury bill discount of up to 400 million RM (paragraphs 21, Nos. 2a and 3g).
Moreover, the Reichsbank neglected everything necessary to ensure the disappearance of this illegal and dangerous financial bill money and to restore the lawful condition.
8. THE REICHSBANK IS, TEMPORARILY, THE-LARGEST MORTGAGE BANK.
LACK OF A HEALTHY BANK SYSTEM PREVENTS THE RE-INTEGRATION OF THE UNEMPLOYED IN THE ECONOMY
Through the Reichsbank's ignoring, from 1931 to March 1933, the provisions of the Bank Act and issuing financial bill money for half to two thirds of its note circulation, a prolonged moratorium for the banks was, indeed, avoided. But this did not improve the situation of these institutions and of the industries and masses of workers dependent upon them. The obligation towards the Reichsbank took the place of the vanished deposits. The Reichsbank thus became, so to speak, the largest depositor of the banks and was prevented from taking action. It become increasingly more dependent on the banks. The debtors became less and less solvent since the goods turnover steadily diminished because the healthy turnover credit could no longer be sufficiently financed. (Compare on this the remarks of Dr. Schacht, among others.)
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Only the forced sales of the means of production themselves remained, that is of the factories and the real estate and they would yield almost nothing and led to the total depreciation of all book values and to the greatest discontent of the masses of unemployed which grew parallel with this development. No longer goods turnover but real estate assets become now the basis for Reichsbank loans. Therefore, it became, for a time, the LARGEST MORTGAGE BANK OF GERMANY and its notes at that period might accurately be called non-interest bearing MORTGAGE BONDS in small denominations. The German banks, being dependent upon the Central Bank, were also paralysed thereby. A BANKING SYSTEM WAS LACKING to make the circulation of goods possible and to organise the mutual securing of employment by the people, by mutually giving orders. In consequence, under the influence of these and the following mistakes, THE NUMBER OF UNEMPLOYED in Germany INCREASED TO 6 MILLION. If one includes the statistically not recorded and thus omitted unemployed, then one arrives at approximately 8 million. (Compare the table below.)
T A B L E I
____________________________________________________________________________________________
At the close Number of Social Service Recipients Welfare Total of
of Employed Unemployment Crisis Unemployed Unemployed
(1) Insurance Assistance (2) (3)
IN THOUSANDS
|
March |
1931 |
14,092 |
2,317 |
923 |
1,027 |
4,744 |
|
June |
1931 |
15,253 |
1,412 |
941 |
1,098 |
3,954 |
|
Dec. |
1931 |
12,440 |
1,542 |
1,506 |
1,697 |
5,668 |
|
Jan. |
1932 |
12,085 |
1,885 |
1,596 |
1,858 |
6,042 |
|
Feb. |
1932 |
11,928 |
1,852 |
1,674 |
1,994 |
6,128 |
|
Sep. |
1932 |
12,834 |
618 |
1,231 |
2,550 |
5.103 |
|
Dec. |
1932 |
11,983 |
722 |
1,281 |
2,800 |
5,103 |
|
Jan. |
1933 |
11,487 |
953 |
1,419 |
2.860 |
6,014 |
|
Feb. |
1933 |
11,533 |
942 |
1,513 |
2,880 |
6,001 |
|
June |
1933 |
13,307 |
416 |
1.310 |
2,430 (4) |
4,857 |
|
Oct. |
1933 |
14,063 |
317 |
1.072 |
1,487 |
3,745 |
|
Nov. |
1933 |
14,020 |
345 |
1,058 |
1,434 |
3,715 |
|
Dec. |
1933 |
13,020 |
554 |
1,175 |
1,410 |
4,058 |
|
Jan. |
1934 |
13,518 |
549 |
1,166 |
1,317 |
4,058 |
|
Feb. |
1934 |
13,690 |
419 |
1,087 |
1,188 |
3,374 |
|
March |
1934 |
14,687 |
249 |
911 |
984 |
2,798 |
|
April |
1934 |
15,362 |
219 |
841 |
884 |
2,609 |
(1) According to the (purged) statistics of the health insurance companies.
(2) According to the local welfare associations. The number of the welfare recipients simultaneously recognized by
the employment offices is always lower.
(3) At the employment offices.
(4) The number of the welfare-unemployed for April to June has afterwards been corrected by the German
"Gemeindetag". Since June it does no longer include welfare and emergency programme workers.
____________________________________________________________________________________________
Of the trade union members finally more than 45% were unemployed. (They kept their wages above the market level! - J.Z., 26.12.02.)
The causal and simultaneous connection with the degeneration of credit could be shown in details. But we will now continue listing the phenomena in the decline of the turnover credit which caused these terrible disasters.
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9. THE FATEFUL COMPENSATION OF AN INFLATION OF FINANCIAL BILL MONEY BY A DEFLATION OF COMMERCIAL BILL MONEY
If one had issued as much financial bill money in normal times, then an inflation would have resulted. That, at that time, no inflation followed, is explained by the fact that a corresponding amount of sound commercial bill money was displaced.
In order to be able to maintain the numerous rotten credits, one organized AN ABNORMAL AND DEFLA-TIONARY RESTRICTION OF THE COMMERCIAL BILL MONEY. Since turnover credit is as indispensable for the marketing of goods as their dispatch by railway and trucks, the goods turnover of the economy was thereby most seriously disturbed. ONE HAD PARALYSED ABOUT ONE THIRD OF THE TOTAL GOODS TURNOVER IN THE COUNTRY in order to be able to fulfil the categorical demands of rotten institutions whose interests were separate from those of the whole community, and in order to save their managers, whose debit balan-ces one could not examine because some of these personalities called themselves experts and even resorted to scientific arguments.
Through the thus enforced unsaleability of goods, at a time of greatest unemployment, so many even of the solid enterprises were brought to the edge of the abyss that the whole of the assets of the banks were in jeopardy. The remedy commonly recommended by egoistic, naive and scientifically untrained "experts" proved to be a DESTRUCTIVE MEASURE OF THE FIRST ORDER for the banks. It could not even safeguard the private fortunes of the bank directors as the disaster assumed unexpected proportions and spread like wild fire.
It was assumed, when the financial bill money was issued, that a high interest rate would soon achieve its reflux. Accordingly, an increase of the discount rate to 30% was demanded. In this one forgot that with FINANCIAL BILL MONEY, which was the ultimate cause of all inflations yet experienced, the effective reflux of the commercial bill is entirely absent since the underlying credits are economically long term ones.
The PERNICIOUS CONSEQUENCE of this false theory of the advantage of a high interest rate was that THIS ENORMOUS DISCOUNT RATE of, at times, 15% and, later, still 10 and 7%, was ALSO applied TO THE COMMERCIAL BILL MONEY whereby the deflationary paralysis of the goods exchange was carried still further. Thus, by 1932, WE WERE CONFRONTED WITH THE ALTERNATIVE OF EITHER A PRIMITIVE BARTER EXCHANGE OF GOODS or a radical break with the present system, combined with a return to proven credit principles.
10. THE FALSE SUPPORT OF THE BANKS INCREASES UNEMPLOYMENT
The Reichsbank thus supported sick banks and gave the impression that they were backed by the Reich. This "virtual State guaranty" led the population to withdraw, in the middle of the crisis, their balances from the healthy banks that were actively concerned with turnover and the provision of employment. Furthermore, the healthy enter-prises were saddled with the cost of this assistance to the banks, of over 1.5 milliard Reichsmark, through taxation, whilst the sick banks paid almost no taxes or were altogether exempted. This penalising of good economic conduct and of the ACTIVE PROVISION OF EMPLOYMENT WAS FOLLOWED, IN THE SUCCEEDING YEARS, BY THE WORST CONSEQUENCES:
A large proportion, especially of the best entrepreneurs, of the medium and small scale industries, upon whom Germany's wealth in manpower and jobs and its strength, especially in exports, had rested, were wiped out while speculative corporations, built by economically inexpert persons, remained in operation, with greater and greater losses, until Dr. Schacht, here also, came to the rescue in the Spring of 1933.
Dr. LUTHER had taken over from his predecessor, Reichsbank President Dr. Hjalmar SCHACHT, in Spring 1930, a sound Reichsbank, holding almost 3 milliards in gold and foreign exchange and ample reserves. According to its balance sheet it disposed on 31/12/1931 still over the following imposing holdings in gold and foreign exchange:
A S S E T S
1. Gold holdings, unencumbered (bars, domestic & foreign coins):
a) in the bank safes …………………………………………… 1 993 550 688.00 RM
b) with foreign central banks ………………………………… 222 230 965.00 RM
2. Holdings in foreign bills and cheques ………………………… 290 733 661.00 RM
_______________________________________________________________________
Gold and foreign exchange total: 2 506 515 314.00 RM
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These assets were taken over by Dr. Luther. When he departed and handed back the management to Dr. Schacht, he left him a seriously sick institution, over-loaded with financial bills and bad credits, deprived of its reserves, with only about 200 million RM in gold and foreign exchange left, an institution which was quite incapable to finance the goods turnover of Germany as was its duty according to the Bank Act. Thus it was surrounded by the greatest unemployment and numerous collapsing firms.
The Reichsbank itself, at the beginning of the bank crisis of 1931, had almost no debts and liabilities abroad, as little as the four small banks of issue in
The three large-scale
According to the information published by the economic and statistical section of the Reichsbank for the Bank Enquiry of 1933, the number of German banks and their branches was made up as follows, at the end of 1931:
T A B L
|
Number of the German Banks and their branches |
No. of the Institutions |
No. of the branches, agencies etc. |
Total of existing bank centres |
Grand Total at the end of 1931 |
|
I. Private credit banks in form of joint stock companies: 1. a) without branches (sound) |
2 |
- |
2 |
|
|
b) with branches |
3 |
1,323 |
1,326 |
|
|
2. Other joint stock banks, among them 50 with branches 3. Overseas branches (3) and special banks (62) II. Private Banks, about |
170 65 800 |
1,707 151 180 |
1,877 216 980 |
|
|
|
Sub-total, |
I & II : |
4,401 |
|
|
III. Cooperative banks (6.8 million members) |
||||
|
1. Workers' banks |
82 |
781 |
863 |
|
|
2. Industrial credit coops |
1,328 |
- |
1,328 |
|
|
3. Agricultural credit cooperatives |
19,910 |
- |
19,910 |
|
|
4. Consumer cooperatives with savings facilities |
1,229 |
- |
1,229 |
23,330 |
|
IV. Public credit institutions |
||||
|
1. State banks & giro centres 27 with a branch network |
39 |
396 |
445 |
|
|
2. District banks |
8 |
61 |
69 |
|
|
3. Municipal banks (& Saxon Giro centres) |
584 |
65 |
649 |
|
|
4. Savings banks |
2,570 |
10,510 |
13,080 |
14.233 |
|
Grand Total of Table II, sum of |
columns I - IV, |
at the end of 1931: |
41,964 banks & branches |
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According to the amounts of the balances, the about 35,000 banks and bank branches embraced approximately two thirds and the sick three large banks etc. about one third of all banking. The big banks had their interests predominantly with the big firms of industry - of which there were, according to the official count of 1925, only 66, each with more than 5,000 workers. Between them they employed only 559,000 workers whilst the total number of those gainfully employed in
The German Bank Act, based on the experiences gathered in crises during more than 150 years, had obliged the Reichsbank, by its provisions and penal clauses, to grant credit only to sound banks and this only for the turnover of goods and the provision of employment through the exchange of goods and services - and to leave the unsound banks to their fate. However, Reichsbank and the Reich Government decided upon the reverse: They broke the Bank Act, a protective law of the first order against such abuses. They supported the unsound banks with almost 2,000 million Reichsmark in subsidies, out of tax funds. They thereby offered a camouflaged government guaranty to unsound banks and thus deprived the sound banks of their customers.
They declared that "
11. UNNECESSARY SACRIFICE OF THE GOLD AND FOREIGN EXCHANGE RESERVES INTENSIFIED THE UNEMPLOYMENT
The sacrifice of the gold and foreign exchange holdings of the Reichsbank proved soon to have been a serious blunder. Dr. Schacht will have to work for years, with extraordinary energy and expertise, to make good this mistake. As the few large deposit banks which were overloaded with short term foreign debts, no longer possessed good commercial bill material in considerable quantities - which the Reichsbank, perhaps, in a liberal interpretation of its duties, might have been morally obliged to discount, there was no reason for the Reichsbank to take over the dubious assets of these banks and to hand over to them, in exchange, gold and foreign exchange by the milliards, in cash, amounts which were later urgently needed by the sound economy.
After the gold and foreign exchange reserves of the Reichsbank were in this way aimlessly squandered, it turned out that only a portion of the debts had been repaid.
Thus the calamity continued and turned into an emergency for all German banks, into a threat for the Reichsbank and for the stability of the currency. One cannot link the fate of a bank of issue with an unsound banking group and failing industrial corporations without jeopardising the currency and foreign exchange position.
(I hold that such reserves are not needed for a sound currency. They represent unused and wasted capital reserves. - J.Z., 26.12.02.)
The bank of issue thus took over the debts of third parties. Without reason, it took up the obligations of others - and had to surrender for them its gold holdings. The subsequent shortage of gold and foreign exchange is not a consequence of an unfavourable balance of trade but of the existence of matured foreign debts which one has, so to speak, declared to be one's own, without any good reason. WITH THIS FOREIGN EXCHANGE SHORTAGE AND FOREIGN EXCHANGE DIFFICULTIES ONE HAS THEN EXCUSED, FOR YEARS, THE FAILURE TO ADOPT ANY MEASURE TO PROVIDE EMPLOYMENT. In these mistakes lies thus one of the so far neglected major causes of the worsening of unemployment.
(Foreign exchange is not necessary for trading with foreign countries. One can pay with assignments upon their own goods and services. - J.Z., 26.12.02.)
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12. WHERE DOES THE INFLATION DANGER LIE TODAY?
Against the inflation argument, which is constantly used to fight the natural provision of employment by turnover credit, one can simply say that the cart is put before the horse when the private financing of new and additional turnovers is stigmatised as dangerous while, at the same time, the OLD credit grant system by means of the creation of prohibited financial bill money, through prolongations, is uncritically passed over. In this situation the only right thing to do can only be to promote the payment transactions concerned with turnover and to proceed against the old, frozen and inflationary mass of means of payment, which is hoarded to a threatening degree, by abolishing their compulsory market rate (legal tender) and by withdrawing them. Prof. Lexis, then advisor of the Reichsbank, and others, had made similar observations during the crisis of 1907.
No one should be permitted to assert here (uncontradicted) that a small inflation is the unavoidable medicine and that the proposal represented here would also amount to a minor inflation and that this should be frankly admitted. On the contrary, inflation is a means of destruction. The applause it finds in certain business circles is due to the fact that it makes the prolongation of bad credits possible, at the expense of the healthy requirements of turnover credit and that it prevents clear understanding of the true causes of the disease.
13. THE AGGRAVATION OF THE SITUATION BY THE FALSE CURE OF DEVALUATION
From this general unemployment, foreign exchange crisis, illiquidity and ficticiousness of values and prices, one should have boldly returned to the simple and solid principles of banks of issue. However, this return would have revealed grave abuses, especially in highly respected firms. Hence, in England, the U.S.A. and in many other States, one decided to follow the road to disaster and artificiality one step further and, thereby, to reach ROCK BOTTOM IN THE DEGENERATION OF THE BANKNOTE ISSUE SYSTEM: DEVALUATION. The rate of foreign exchange on foreign markets was left FREE and thus one seemingly responded to the healthy demand for the restoration of the market. But, simultaneously, one played a trick which annulled the favourable effect of the free market rate. This method, of a single or continuous alteration of the gold purchase rate of the central bank, has been revived by IRVING FISHER and, unfortunately, also by J. M. KEYNES, who have therefore, apart from their very great scientific renown, the doubtful merit of having added another link to the chain of degenerative phenomena of the present banknote system. This method was formerly known only from the legal proceedings taken against insolvent banks of issue.
Devaluation and free market rate are completely different. Under a pure gold currency and a free market rate for means of payment, when a free gold market exists and the foreign exchange control is repealed, then e.g. Reichsbank notes could be freely exported and valued. Under this system, Reichsbank notes could suffer a considerable discount for a few days. Their only value would consist - as the redemption obligation is abolished - in their usefulness for purchases in Germany. That would be a strong stimulus for German exports. The tariff barriers encircling the country concerned could be partly or wholly surmounted. The market rate of the banknotes would, to some extent, be a function of the height of tariffs of THAT country in which the banknotes are. When tariffs are low, then one would value the notes in foreign countries, presumably, at par, under prohibitive tariffs, theoretically, at zero. It would then be ENTIRELY A PROBLEM OF THE FOREIGNERS AND THEIR GOVERNMENTS to give or destroy the value of the German notes held by them. Presumably, one would make EFFORTS TO REDUCE TARIFFS, particularly in those countries which so far had prohibitive tariffs against German goods and, at the same time, a favourable balance of payments against Germany, i.e. in countries where one claimed payment without being prepared to accept goods.
The same applies to all debtor countries, hence, especially, to most of the South American States. Their creditors would then, presumably, endeavour to induce their own governments to reduce the tariffs so that South American goods could enter, in payment.
An ABUSE FOR DUMPING PURPOSES need NOT be feared for only the export of the DEBTOR COUNTRIES to the extent of the so far unpaid DEBT BALANCE becomes possible and nothing more.
Thus the par value of the German banknotes on foreign markets would, presumably, be soon restored.
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Nor could a foreign exchange shortage happen for, e.g. in the case of Germany, the "misfortune" would consist in the fact that the foreigners could continuously raise MORE payment claims against us than we could against them. In the foreign portfolios German banknotes, commercial bills etc. would accumulate which have value only when something is PURCHASED with them. Thus MORE export is enforced - unless one proceeds, in the foreign countries, to burn or hoard the German notes. Thus the free market rate turns the Reichsbank notes into Milhaud's "purchasing certificates" (17). They help to adjust the balance of payments without the Reichsbank having to worry about it.
HOW MUCH THIS SYSTEM OF THE FREE MARKET RATE, that prevailed before the war in almost all countries, IS IN CONTRAST TO TODAY'S DEVALUATION, we can gather from the following considerations. When the bank of issue grants long-term credits, "internally" and especially "externally", then there are no immediate payments due from abroad. Little comes in but much goes out. This is called a foreign exchange shortage. The redemption in gold is then mostly abolished. Under the legal tender regime, the foreign exchange control system is then, usually, introduced. But if a free market rate for banknotes exists - and outside a country's borders it always exists - THEN A DISCOUNT OF THE NOTES OCCURS. In this case the bank can choose one of two roads:
1. EITHER THE BANK KEEPS TO ITS TRADITIONAL AND LEGAL PURCHASE PRICE FOR GOLD. Then
it neither receives additional gold nor can it increase its shrunken holdings of gold because gold is at a premium, i.e., it is too expensive. It does not grant any further new credits than those necessary for short goods turnover. THEN SOMETHING AMAZING HAPPENS: The "run" of consumers on the goods in shops, of the debtors on creditors, especially on the bank as creditor of bills, and on the taxation offices if, as in Germany, the tax offices have still to take these notes at par value. For only at three places can the holders of such notes, depreciated for a few days, pass their paper notes on at par value - while all other places reckon in stable values (in gold) and demand a premium when payment is in these banknotes:
in debt payments to the BANK,
in tax payments to the TAXATION OFFICES and
in the SHOPS, because lastly, all turnover credits of the bank of issue are represented in the shops which offer goods in return for them.
This "terrible" run is not evil at all for it happens in the economically desirable direction: In the end and for some milliards, goods are sold, taxes paid and warehouse stocks reduced and the bank of issue is again liquid because it has received a torrential reflux of notes.
This reflux of notes also happens from abroad, for we assume that the export of notes is again free and that note holders will hurry to purchase with them in Germany - which is excellent for the balance of trade.
By means of this salutary crisis the equilibrium in internal and external credit operations is thus restored within a few days. The surfeit of notes and the foreign exchange shortage, as well as the discount, have disappeared: THROUGH STIMULATING PURCHASES WHILE MAINTAINING THE PURCHASE PRICE FOR GOLD.
This road has been prescribed as the only permissible one by the provisions of at least the continental banks of issue - which are based on the identical experience during the crises of centuries. (For instance: Par. 22 of the Bank Act.)
2. THE OTHER ROAD is the following: The note-issuing bank acts like a mismanaged mortgage bank on the day before it closes its doors. It does not care about the losses of the holders of its mortgage bonds. Instead, it attempts even now TO FORCE GREAT QUANTITIES OF ITS SICK NOTES (MORTGAGE BONDS) INTO CIRCULATION, BELOW PAR AND AT FALLING MARKET RATES, THUS IMPUDENTLY AGGRAVATING ITS ABUSES. As it is not interested in the credit business but solely in gold and a profit margin on gold and as no one will accept its depreciated papers at par, IT HAS TO INCREASE THE LEGAL PURCHASE PRICE OF GOLD FOR THIS PURPOSE! It can now buy masses of gold, that is, offer notes at the expense of the speculative losses of the note holders, who are cheated out of the automatic restoration of the par value. Then the bank asserts, boastingly, that it has done much for the (depreciated) currency!
All embarrassed bank managers have acted thus during the older period of free note issuing banks in Europe (until about 1850 or 1900).
41/22
Exchange and employment opportunities were thus harmed IN THE LONG RUN. The penal laws have counteracted such abuses. (Compare the Bank Acts.)
THIS SECOND WAY IS NOWADAYS CALLED DEVALUATION. If the central banks or treasuries of the devaluation countries since 1931 would not have increased their gold purchase price, then the notes of the Bank of England etc. could have shown a strong discount only for a few days. After that the above indicated recovery tendencies would have triumphed. It required enormous gold purchases at increased prices, in other words, COLOSSAL SALES OF ENGLISH ETC. CURRENCIES, AT RIDICULOUSLY LOW PRICES, TO NULLIFY THESE TENDENCIES. As everyone knows, one tried, repeatedly, during the first months, to enforce a return to the old par value. (The Bank of England, for instance, and the TREASURY, had to purchase gold stocks amounting probably to 100 to 200 million gold Pounds!)
We seek (in this paper) to combine the advantages of the free market rate and of the pure gold standard, an elastic balancing and export incentives with the safeguarding of contracts and capital investments. The system of 1909 contains them. With such a German tradition it is not surprising that it was Dr. SCHACHT who, in April 1924, in the midst of the greatest foreign exchange shortage, and a command economy, ended speculation and restored freedom in German foreign trade and foreign exchange transactions, and enforced the strongest reflux of notes., with one stroke - by freeing the market rate and HOLDING FAST TO THE OLD GOLD PURCHASE PRICE. This procedure was, unfortunately, not understood by a false monetary theory so that public opinion is today unaware of this experience. Probably this is the only example in the history of modern crises where such a huge central note issuing bank acted quite correctly during the crisis.
Regarding the GOLD PURCHASE PRICE of the central bank there are only two systems: the RETENTION of a fixed rate at which the bank of issue purchases gold or ABOLITION and deliberate alteration of this rate.
The former is the successfully tested PRE-WAR SYSTEM of the well-administered countries (a pure gold currency with a free market rate for notes but fixed purchase price for gold at the bank of issue).
The other is inflation or devaluation which are both only different aspects of the same reality (compulsory acceptance or legal tender within and alteration of the purchase price for gold by the bank of issue).
That one can solve the problem of unemployment with inflation, TEMPORARILY, at the price of extraordinary sacrifices and with the greatest destructive effects, is known. The contribution of J. Fisher and Keynes does, therefore, not mean anything new, especially not a lasting recovery, but a FURTHER DESTRUCTION OF CREDIT.
We are here not confronted with an INCREASE IN THE VALUE OF GOLD, which makes a devaluation necessary, as it is only the PRICES OF GOODS which have been driven downwards by a destruction of turnover credits and markets which continued for years. Gold had nothing to do with that.
The justification of devaluation with an alleged inability to compete abroad and with the fall of exports because of excessive inland prices is also untenable. The OVER-PRICING OF GOODS in certain countries finds its cause in the growing price control by large trusts whose price policy knows no bounds and who thereby ruin the provision of employment and the currency.
(Note by JZ: I would deny the latter - unless one takes into consideration the indirect effect: the readiness of most governments to devaluate the currency in order to enforce, temporarily, exports of the overpriced goods of these influential trusts.)
A RESTRICTION OF THE ACTIVITY OF TRUSTS WOULD, WITHOUT A TRUE DEFLATION, LEAD TO AN EFFECTIVE REDUCTION OF PRICES.
(Note by JZ: I do not think Prof. Rittershausen had in mind trust-busting through special legislation and court actions of the present type. I believe that he would favour, instead, a repeal of all their legal privileges, their tariff protection, their tax concessions and subsidies, their preferred treatment in credits given by a monopolised system and the repeal of the regulatory and licensing system restricting their competitors. In a truly competitive economy they would hardly constitute a threat.)
41/23
All savers together would then no longer have to pay the costs of this selfishness, which has been pursued too far. The producers must make efforts regarding quality and prices. Artificial means should not deceive us on this.
14. IS THE CENTRAL BANK SYSTEM OR FREE BANKING MORE SUITABLE TO PROVIDE EMPLOYMENT AND END THE CRISIS?
Already Hock uttered prophetic words on this subject, sounding like a judgement on today's banking and currency crises in all countries. (Quoted here from Leopold Lasker's "Bankfreiheit" (Free Banking ), 1871, page 66.):
"For a monopoly bank the State must step in, in times of a crisis, granting advances, standing guarantor for it, infringing the law in its favour, permitting a moratorium, authorising its notes to circulate further, although it can no longer redeem them, perhaps conferring a forced rate (le