[Taken from John Zube's Peace Plans #9]
This paper appeared first in "Deutsches Volksrecht" (15 July 1933) and soon afterwards in pamphlet form (Verlag Sparerbund). An outline of the plan had already appeared in the above mentioned review on 17 May 1933.
This is a reprint from the English version of "Zahlungsverkehr, Einkaufsscheine and Arbeitsbeschaffung, Annalen der Gemeinwirtschaft Genf, 10, Jahrgang, Heft 1, January-July 1934, Herausgeber Edgard Milhaud. The English version was published by Williams and Norgate Ltd., London 1935, under the title: "Ending the Unemployment and Trade Crisis by the introduction of purchasing certificates and the establishment of an international clearing system".
Permission by the author for a reprint was obtained, likewise the permission by the Annals of Collective Economy now re-named "Annals of Public and Cooperative Economy", Liege 45, quai de Rome, Belgium, for the reprint of this article and other money reform articles by U. von Beckerath, Walter Zander and Heinrich Rittershausen, even by other publications, provided the source is mentioned in detail. Ernest Benn Ltd., Bouverie House, Fleet St., London EC4, acting for Williams & Norgate, expressed likewise no objection against a reprint of U. von Beckerath's articles by me, nor, I do assume, to a reprint of the much shorter articles by the other authors. Their reply did not refer to these. No wonder, for among the wealth of literature published by this house they could not even trace the Beckerath articles although they assumed that they had been published in some selections.
The translation was made by G. Spiller, London. I changed it only slightly but do not guarantee that my alterations will always constitute an improvement on the original translation.
I. PRESENT POSITION
The German Reich Railway has been seriously affected by the trade depression. Its revenues shrink. And its orders for materials, etc., have had to be reduced in proportion. This, in turn, aggravates the existing depression and the railway revenues consequently drop still lower. At the same time the Railway is in an anomalous position. In view of its importance in the country's economic life, it is expected to adopt far-reaching measures to reduce unemployment, such as placing huge orders so as to revive industry. The Railway, however, can only fulfill these expectations to a modest degree because it is doubtful whether its future revenues would suffice for meeting its obligations as regards those orders. Prudence counsels circumspection. Hence the Railway Management
inclined to shift the risk involved in placing substantial orders onto the shoulders of the Central Bank (See the article in the Berliner "Boersen Courier" of 11 June 1933: "The Reich Railway and Employment". There it is stated: "The magnitude of the orders to be placed will depend entirely on the decision of the Reichsbank President regarding their re-financing by our Central Bank.") or, what is today its practical equivalent, the State. However, this bank of issue can undertake the financing of any schemes only in conformity with the law and with the demands of a sound currency policy, i.e., when they are covered by short term commercial bills. The Railway is only partly in a position to comply with this condition. Hence the Central Bank is generally obliged to refuse. In fact, the Railway cannot make itself responsible at present for placing big orders. It can therefore do little to augment employment.
II. THE PLAN OUTLINED
The Railway is justified in proceeding warily. Cash purchases are out of the question in present circumstances. On the other hand the promise to pay at a future date signifies the short sale of means of payment (On this subject consult Henry Meulen, Industrial Justice through Banking Reform, London, 1917 p. 16ff.), for the Railway undertakes to deliver something at a fixed date which a the time of the promise it only hoped to obtain. Whether its hope will materialize, is uncertain. The undertaking to pay at maturity contains therefore a speculative element, which is particularly hazardous in times of depression. It is therefore obvious that the Railway must be extremely circumspect in making credit purchases i.e. in promising to pay at a later date with resources which have yet to be secured.
But the Railway may promise something else, namely, to transport commodities and persons that is, to fulfill its function as a Railway. There is nothing speculative about that. The means required for this, rolling stock and other plant, are available. This is therefore fundamentally different from a promise to pay at a future date, for in the latter case the means of payment have yet to be secured and this by having transported passengers and goods. The capacity of the Railway to act as a carrier is at any rate unquestionable.
Such is the starting point of the plan. The Railway places orders to be paid for not in legal tender (Central Bank notes ), but in transport certificates which the Railway booking offices accept at their nominal value like ready money. The Railway thus pays its contractors with warrants entitling the contractors to its own services and thus exchanges the goods it receives directly against transport mileage. The certificates are made out to the bearer and are issued in denominations convenient for free circulation. Of course, no one would be legally bound to accept such certificates in payment. There is no compulsory acceptance. They are only legal tender against the Railway which issued them. Nor have they any legal value, for they do not represent a forced currency. The market rate is an open one, but the Railway has to accept the certificates any time, at their nominal value, regardless of the market rate.
III. HISTORICAL PRECEDENTS
Railway money is not a new thing in German. When Friedrich List, just a century ago, established the Leipzig Dresden Railway, he was authorized to issue 500.000 thaler one third of the Company's capital in the form of "railway money certificates, subject to the provision that no obligation would arise therefrom to the State". These certificates remained in circulation for about forty years and fully attained their object. Only after the formation of the Reich, were they, as a result of certain financial reforms, replaced by Reich treasury notes.
During the inflation period, the German Reich Railway issued its own money, some of which was on a gold standard basis and retained its value. These were the so called Oeser notes, of which according to the "Statistisches Jahrbuch" for 1924/5 (p.313), there were in circulation on 31 December 1923, 141,9 million gold marks.
In the plan here submitted, these historical precedents have been further elaborated. It may a mentioned, finally, in this connection in that whilst these lines were being written, the Italian State Railway floated
a lottery loan including among the prizes 1.000 first class monthly season tickets. The issue had a very unusual success and was at once over subscribed. It will be evident to the reader that the offer of free season tickets accords with the spirit of the present plan.
IV. CIRCULATION OF THE RAILWAY MONEY
The extent of the circulation of the railway money will depend on its applicability. The starting point is the contractor who received the certificates directly from the Railway. To the degree that he can profitably utilize the services of the Railway himself that is by having persons and goods to send by rail, the certificates manifestly have value for him. This value is equivalent to the payments he would have to make for dispatching those persons and goods. If for instance, his monthly expenses for freights and passenger tickets averaged 1.600 marks he could utilize transport certificates to that value as if they were cash. Insofar the certificates have par value for him. If a large scale supplier were involved such as an ElectroTrust, it would be able to make considerable use of the certificates.
Insofar as the contractor has no use for the certificates in his business, he will dispose of them otherwise. His sub-contractors who depend on the railway services come here into consideration in the first place. He will therefore, as far as possible, place his orders on the basis of payments to be made in transport certificates. Beyond this, he can have recourse to the free market. As practically everybody depends on the railway services, the market for these certificates is extremely large. Hence not only firms come in question, but all private persons who ever wish to travel or have goods to dispatch by rail. Moreover, there is the probability that the manual and clerical workers of the contracting firms may agree to accept as part of their remuneration railway money, as they could make use of it themselves (monthly season tickets and holiday travel) or dispose of it in shops whose owners can utilize it or pass it on.
The value of the circulating certificates will be determined by the law of supply and demand. Should the market rate once fall below the nominal value say to 95% thereof, then everybody who has to use the railway services, be it to travel, now or in the near future, or to forward goods by rail, would be eager to acquire certificates, for the Railway is obliged to accept the latter at their face value, regardless of their market rate. The customer of the railway (prospective passenger or forwarder ) could thus obtain an exchange profit, in this case 5 % of his railway expenses. The incentive to acquire these certificates thus grows precisely as their market value drops and, accordingly, a fall in their value stimulates the demand for them. In turn, the growing demand will raise the market rate until the demand will slacken, that is until the nominal value is again reached. A free market rate for the railway money guarantees therefore its soundness.
Hence those who regularly use the railway, including more especially large firms, would instruct their bankers to purchase transport certificates as soon as they have fallen below par. At the stock exchange the railway money would be regularly dealt in and retail trading therein might be facilitated if, in the immediate vicinity of the railway booking offices, exchange bureaus sold railway money. The trade in transport certificates would be hence free and unlimited.
The Railway would naturally undertake not to raise its tariffs as long as the transport certificates remained in circulation, for otherwise it might deprecate the value of the certificates for its own benefit. It is obvious that it would have to safeguard commerce in this respect.
V. IMPORTANCE FOR THE RAILWAY
The Railway would manifestly profit by such a plan, for it could freely place orders for any materials it might require. For this purpose, it would have no longer need of legal tender, which it would have to obtain first. It could, instead, undertake to pay with a means completely at its disposal namely transport services. Thus the Railway would secure the materials it is short of in the easiest and most natural manner.
Instead of an empty sale of legal tender, there would be an exchange of already existing values. The financial situation of the Railway would thus be greatly eased. Here is an advantage far greater than that involved in an ordinary credit transaction, for even if the date of payment for materials received should be very liberally conceived, the Railway would be eventually obliged to offer payment in banknotes, which it must first obtain. The plan here submitted would relieve the Railway altogether of the necessity to accumulate cash. The risk is passed on to the contractor, who on his part, is in a position to bear it, since he received new additional orders he would not otherwise obtain, and since he can reimburse himself by bringing the certificates into circulation. The proposed method of settlement would thus carry with it no dubious consequences for the railway.
The Railway's sole obligation arising out its issue of railway money, would be to undertake that all its booking offices should accept the transport certificates at any time at their face value, irrespective of their current market rate. The Railway would have only to place its services at the disposal of the certificate holders. It would be in no way bound to redeem the certificates in gold, in banknotes, or in any other way. The sole mode of redemption is their acceptance for services rendered. The issue of the transport certificates would involve therefore no risk whatever for the Railway. The certificates are completely safe against a "run". Even should there be grave mistrust of the Railway Management, no one could claim anything beyond the right to have persons or goods transported. The worst that could happen, in the case of a heavy fall in the exchange rate of the certificates, would be that because of the cheap opportunity thus provided, more travels would be undertaken and more goods forwarded than otherwise. This could never imperil the Railway.
In these circumstances the placing of orders will be facilitated for the Railway. The country's productive activity would thus rise and with it the Railways turnover. Incidentally, this might lead to a fall in costs and therefore to an increase in possible profits. In order to strengthen its credit, the Railway would be in any case anxious to increase as far as possible the circulation of its own money. It would therefore induce firms under its influence to accept the certificates in payment. In this category, might be placed hotels, restaurants, workshops, canteens, ports, and shipping offices. That, for competitive reasons, would in turn induce enterprises not controlled by the Railway, also to accept the certificates. There is hence every probability that railway money would not only be accepted in the refreshment rooms of railway stations, but in restaurants generally, so long as the possibility exists of making use of the certificates or of passing them on. The circulation of the certificates might therefore be a very considerable one.
When the certificate issued by the Railway returns to the railway offices in the form of payments made for passenger tickets and freight costs, its mission would be at an end. The circle is closed. The Railway, having rendered in services an equivalent for the materials it had received, the transport certificate would now have to be destroyed.
VI. NO DEFICIENCY IN CASH TAKINGS
It might be argued that the Railway would have to re-issue the certificates returned to it in order to meet its various obligations and that thereupon the price of the certificates would fall and their issue become altogether purposeless. The objection is invalid. It is founded on a crass misapprehension. It overlooks the fact that the sequence of the contemplated financial operations is just the opposite to that averred by the objectors in issuing transport certificates, the Railway would have no intention of distributing them gratis, but would use them for covering necessary expenditure. For instance, with their aid it might purchase signal lamps. In this way it would come into possession of the signal tamps without having to offer legal tender currency notes. When the certificates had found their way back, then the mutual accounts would have been closed. The Railway would have the signal lamps and the contractor, having made use of the certificates, would have been paid. The transaction would be thus liquidated and the Railway must destroy the returned certificates.
It is a mistake to suppose that the Railway would be obliged to reissue the Certificates for the purpose of purchasing signal lamps. On the contrary, the signal lamps would have been already acquired and paid for. No more means of payment would be required for the acquisition of these signal lamps. There would therefore be neither a need nor a possibility for the repeated issue of the returned notes. The certificates issued by the Railway had been already expended by it the common use of the language expresses this clearly and could not therefore be re-issued, for no one could make use of one and the same note twice over.
What of the present system here the Railway has first to acquire legal tender bank notes by selling transport mileage. If it succeeds in this, it may expend the banknotes thus acquired for the purchase of signal lamps. The process is therefore just the reverse of that implied in the system of railway money. This also holds where, as is customary, the signal Lamps are obtained on a credit basis for in this case, too, the Railway can only settle its account regarding the signal lamps after having acquired the necessary legal tender means of payment by marketing its transport services. Even in this case the Railway has to use the notes received at its offices to cover its expenditure. Railway money dispenses with all this. The signal lamps are already paid for when the certificates return to the Railway. A deficiency in cash takings, consequently, does not take place. To assume the contrary, is to misapprehend the principles underlying the contemplated transactions.
Evidently, in utilizing its transport certificates, the Railway would have to allow for its general financial situation. It would therefore plan no purchases whose kind and extent it could not afford. On the contrary, it would concentrate to begin with on securing with them such materials as are indispensable for the efficient working of its system i.e., coal, oil, other fuels, urgent replacements including coaches and engines, etc. Subsequently, less urgent needs could be satisfied. There would be also the possibility of avoiding the dismissal of workers and officials and of reductions of wages and salaries which might otherwise be necessary by an arrangement with those affected, if legally admissible, to receive part of their remuneration in railway money. Indeed, once railway money freely circulated, the repeal of the recent reductions in wages and salaries and the return to the conditions prevailing in 1929, might become practicable. However, these are not questions regarding the nature of railway money itself but the uses to which it might be put. The Railway Management would be folly competent to deal with the latter point.
VII. HOW MUCH RAILWAY MONEY COULD BE ISSUED
For the value of the certificates, the amount issued is of decided importance. This aspect should be therefore closely examined. A legally fixed upper limit for the issue does not appear desirable. Such limits are necessary in the case of bank notes which are legal tender, for then there is nothing to indicate whether too many or too few bank notes are circulating. All is different, however, where there is an open market rate. It would always show whether the market can accept still more.
The fixing of an upper limit at any time should be hence left to the issuing office on whom the full responsibility should rest. Still, estimates as to the maximum quantity that might be reasonably brought into circulation, are possible. The amount of the capital invested is no adequate measure as list imagined. (*) The general turnover would be a more accurate gauge. This alone can suggest the amount of railway money that might be profitably issued. It is evident that the number of the certificates should not be greater than can conveniently return to the Railway booking offices, for if the reflux is disturbed and blockages occur, the value of the certificates would necessarily be reduced. Assuming an annual railway turnover of about 3.000 million marks this roughly may have been the turnover of the German Reichsbahn during the last year an issue of 1.000 million marks would not seem exaggerated. Naturally, the amount of the issue would be governed
(*) Compare his work: "Ueber ein Saechsisches Eisenbahnsystem als Grundlage eines allgemeinen deutschen Eisenbahnsystems sowie den Prospektus des Eisenbahnkomitees zu Leipzig an das Publikum". complete works, Hobbing, 3/1 S. 167 f ., 3/2 S. 65 8.
by the amount of the railway money that had streamed back, that is, it would be issued not all at once but continuously, in strict accordance with its actual employability. On the above assumption, about 80 million marks, for instance, might be issued monthly. But the open market rate should govern every step taken. As soon as the market rate fell below a certain minimum value, say 95%, further issues would have to be immediately stopped, apart from the actual difficulty for the Railway of bringing fresh certificates into circulation at a discount. The stoppage would at once lead to a reduction of the circulation. The certificates already issued would stream back and the market rate, as a result of the increased demand and the suspension of issues, would soon return to par. To the extent that a legal regulation of an upper limit can at all come into consideration, this would have to consist in prescribing that the issue of railway money should be suspended as soon as the market rate has fallen to the above-mentioned percentage.
The greatest stress should be laid on the returned certificates being immediately destroyed. On no account should they be brought again into circulation. As at the Bank of England, every note should be permitted to be issued only once. If fresh parcels of notes are to be issued, the principles above enunciated would have to be respected and it would have to be made quite clear that it is a question of a new issue and not a matter of putting into circulation again certificates previously issued. The notes would therefore be numbered consecutively and there would have to be daily reports of the numbers issued and of those destroyed.
If the notes keep circulating, it may be confidently assumed that a considerable proportion of them would continue to circulate and would therefore not return. The experience of the Saxon railway money makes this assumption feasible. But an alert management will not be tempted thereby to issue more notes than could actually be returned and will thus avoid any possibility of the notes depreciating. However, even if the limit here set were once overstepped, the Railway and not the public would suffer. The Railway would be in the position of a theatre which had sold its tickets at too low a price.
VIII. FACE VALUE, UNIT, AND STABILITY OF VALUE
The particulars of the railway money are the following: Each certificate would have to state that at every railway booking office and at any time it will be accepted in payment, at its face value.
Here the question arises how the face value is to be fixed. This involves a general problem of settlement techniques. The matter will, accordingly, depend on what monetary standard prevails in the country where the railway money is issued. In most cases the gold standard would be the basis. The railway money would in that case be made out in, say, gold mark or gold pound. In this connection we ought to avoid the very common confusion of the notes of the central bank of issue, with the currency unit itself. In principle the note of the central bank of issue, as for example the pound note, should be distinguished from the currency unit, the gold pound. If this difference is already recognized in a country, the railway money would be naturally also based on the gold unit. Thus the stable value notes issued in 1923 by the German Reich Railway were based on gold.
If the above distinction is not drawn and if it be impracticable when introducing railway money to apply the principles of a genuine stable value reckoning, then it should be linked to the notes of the central bank of issue. The notes would express, for instance, dollars and pounds, meaning by that paper dollars and paper pounds. In that case the value fluctuations of the notes of the central bank of issue would manifestly be reflected in the railway money. Should, for example, the value of the pound note continue to fall, the value of English railway money relating to the pound note, would correspondingly fall. The linkage with the notes of the central bank of issue, instead of with the currency unit itself, would be especially advisable where commerce and particularly the Railway transacts its business on the basis of these notes.
There remains, lastly, the possibility of basing the nominal value neither on the currency unit nor on bank notes, but on transport mileage. Then the railway tariff would needs have to be on the same basis. This mode of calculation would correspond to the "rye mark", the "book mark" & similar standards of value of the inflation period.