[TAKEN FROM JOHN ZUBE'S PEACE PLANS #9]
THE SUBJOINED STUDY IS THE OUTCOME OF A LECTURE DELIVERED BY THE AUTHOR ON 8 MARCH 1935 BEFORE THE NATIONAL INSTITUTE OF GENEVA (INSTITUT NATIONAL GENEVOIS).
THE DEVALUATION OF THE BELGA, WHICH SUPERVENED IN APRIL 1935, IS TAKEN ACCOUNT OF HERE. ON THE OTHER HAND, THE MAY 1935 CRISIS OF THE FRENCH Franc TOOK PLACE AFTER THIS STUDY HAD GONE TO PRESS. IT FORMS AN ADDITIONAL LINK IN THE LENGTHENING CHAIN OF MONETARY DIFFICULTIES AND OFFERS ONE MORE ILLUSTRATION OF THE DANGERS TO WHICH EVERY MONETARY SYSTEM, EVEN WHEN SUPPORTED BY AN ENORMOUS GOLD RESERVE, IS EXPOSED UNDER THE RULE OF A FORCED RATE FOR THE NOTES OF THE CENTRAL BANK. THE PROPOSALS SO FAR MADE KNOWN FOR ENDING THE FRENCH MONETARY CRISIS DO NOT SUGGEST ANYTHING BEYOND WHAT IS IMPLICIT IN THE VIEWS GENERALLY CURRENT TODAY.
(THIS REPRINT IS MADE FROM THE ENGLISH EDITION OF THE "ANNALS OF PUBLIC AND COOPERATIVE ECONOMY", THE VOLUME "ORGANIZED COMPENSATORY TRADING", EDITED BY PROF, EDGAR MILHAUD AND PUBLISHED BY WILLIAMS AND NORGATE, 1938. COMPARE PAGE 75. I POSSESS ONLY A PHOTOCOPY OF IT AND JUDGING BY THE STYLE TO OF THE TRANSLATION I ASSUME IT HAS BEEN UNDERTAKEN, LIKE THE OTHER TRANSLATIONS ABOVE, BY G. SPILLER, LONDON. I COMPARED THIS TRANSLATION WITH THE GERMAN VERSION, A PAMPHLET: "EIN AUSWEG AUS DEM Waehrungs Chaos", a special reprint from: Deutsche Sparer Zeitung, Berlin, No. 1820, 1935, and found the translation to be considerably better than those of plans 190 and 192. I undertook therefore only very slight changes.
Ulrich von Beckerath, made the following annotation to one of the German copies in my possession:
"Between philosophy and economics there exists an intimate relationship. Proudhon said rightly: 'L'économie c'est la métaphysique en action'. At present the philosophy of subordination prevails, being originally already developed by Plato and 'perfected' with regard to subordination by some scholastics (not by all). Hegel, later on, crowned this system. The subordination of individuals under the central banks of issue is related to the prevailing philosophy of subordination. Quos ego!" - The Ed, John Zube)
(1) THE MONETARY CHAOS
The States participating today in the world economy may, roughly said, be divided into two groups. One of these has abandoned the gold standard and has thus removed the foundations of its currency. The other has introduced foreign exchange legislation and has thereby abolished the freedom of settlement operations. The first group includes more particularly England, the sterling bloc countries, the United States, and Japan; the second group, Austria, Germany, Russia and the great majority of the remaining countries. Placed between these two groups, is the steadily disintegrating gold bloc. Italy left it for all intents only recently and yesterday as it were Belgium followed suit. If we bear in mind that since the War Franc e and Poland had already devaluated their currencies to a fraction of their pre-war parity, virtually Holland and Switzerland alone may be said to uphold the pre-war monetary system. However, even in these two small countries, which represent but a tiny fraction of the world economy, certain restrictions concerning the convertibility of banknotes and the gold market have been introduced, and the general uncertainty as to the future of currencies exerts a baleful influence in these countries, also.
(2) DISADVANTAGES OF DEVALUATION
Whether the abandonment of the gold standard is advantageous to an economy is decidedly problematic.
In most cases the object aimed at has not been attained. So far as devaluation is intended to stimulate exports, we should not forget that for most countries the magnitude of their export trade compared to that of their total trade is comparatively insignificant. This alone renders it questionable to embark, for the sake of the export trade, on measures which modify the basis of a national economy as a whole.
Moreover, such measures, if successful, may be imitated by any other country, thus nullifying their favorable effect. Accordingly, the abandonment of the gold standard has led to "a race for the worst currency", in which the most powerful States are participating. It is obvious that in the long run such measures for the stimulation of the export trade are bound to prove worthless,
Moreover, devaluation does not only affect the export trade of a country. On the contrary it touches every branch of an economy. This holds most especially of imports since these must become dearer to the precise extent that exports become cheaper. So far as exporting, like in Germany for example, presupposes the importing of raw materials, a portion of the anticipated gain is thus necessarily lost. But in general, import restrictions, so popular today in many countries, lead eventually to a decline in exports, for the simple reason that in the last resort exports can only be paid with imports.
Furthermore, money debts abroad are augmented by a devaluation of the currency.
However, what is of crucial importance is the fact that an abandonment of the gold standard involves the devaluation of the entire savings of a country, particularly as invested in savings banks, State loans, bonds, and mortgages. If the effect of a general adjustment of prices to the fall in the value of money is not visible at first or is deferred by artificial devices, eventually prices always rise when a currency has been devaluated,
Thus while the intended advantage for the export trade is emphatically dubious and at best only of passing importance, the loss in savings and capital is certain and lasting.
But even if the reason for abandoning the gold standard, as in the case of the United States, is the desire to devaluate capital savings, that is, if it is intended thereby to adjust the claims of creditors to fallen prices and to the shrunken turn-over of the debtors the success is nevertheless more than doubtful. For what is decisive for the value of a claim is not so much its magnitude as the business turnover of the debtor. Everything depends therefore on increasing trade and this is nowise assured by attacking the rights of creditors, to say nothing of the moral and economic disorganization which this creates.
The heavy depletions on the capital market, the abrogation of the rights of creditors, the menace to State credit, and the decline in the standard of living, represent drawbacks which ultimately outweigh the transitory advantages.
(3) DISADVANTAGES OF FOREIGN EXCHANGE LEGISLATION
The injuriousness of foreign exchange legislation is even more patent. Everybody agrees and the President of the Reichsbank, Dr. Schacht, has repeatedly expressed himself to this effect, that foreign exchange legislation constitutes a great evil, even though in most quarters such legislation is considered inevitable.
Foreign exchange legislation places obstacles in the way of settlement operations. These obstacles, in turn, hamper trade. But every decline in trading leads necessarily to a decline in well-being, as the latter, in our age of the division of labor, depends on commerce. Everything therefore that obstructs trading tends to intensify want and unemployment.
(4) INADEQUACY OF COMPENSATION AND CLEARING AGREEMENTS
All attempts to surmount the difficulties involved in foreign exchange legislation have hitherto proved abortive. This is especially true of the different forms of compensatory trading and is evident as regards its earlier developments. It could happen then, for instance, that an instrument manufacturer had to accept in exchange coffee and was thus compelled to become a produce dealer. In principle, later developments left matters unchanged. It is the very essence of a compensatory transaction that there is
properly speaking no money payment involved and that the goods themselves have to fulfill this function. That is, every such transaction represents a barter operation.
Whilst it is agreed that movements of goods (in the broadest sense) underlay all settlements, nevertheless as much as fifteen centuries ago the Roman Emperor Justinian explained in his Corpus Juris why barter operations are necessarily inferior to monetary transactions. And yet the distinguishing mark of the present-day international compensatory trade is the abandonment of the monetary system and the falling back on barter. It is evident that a form of economy which the Corpus Juris deemed obsolete, must be unequal to the task of conducting efficiently the exchange of goods in our highly developed age. A serious effort should therefore be made to re-instate the system of monetary settlements in international transactions.
Similarly with so called clearing agreements between countries. These have now become very common, but they cannot remove the difficulties arising from foreign exchange legislation, for apart from the fact that in most cases, as between Germany and Switzerland, they have led to a considerable dislocation of trade, they are necessarily confined to transactions between two countries while the realities of life demand freedom of movement in every direction and rebel against bi-lateral arrangements. They lack therefore the necessary fungibility and the attempts to supersede the monetary system in this way have hence failed. The League of Nations Committee for inquiring into international clearing agreements has accordingly drawn attention recently to their disadvantages and recommended their abolition.
(5) NEED FOR STABLE STANDARDS OF VALUE
AND FOR REMOVING RESTRICTIONS TO SETTLEMENT OPERATIONS
Shrinkage of international and of intra-national trade, want and unemployment, heavy investment losses; and a general uncertainty and loss of confidence, characterize the present situation in most countries. It is imperative to create once more reliable and stable standards of value and to secure the removal of the impediments to settlement operations between countries, The solution of these closely related problems has become a question of life and death for our social order.
(6) FALSIFYING THE GOLD STANDARD THROUGH BANKNOTES BEING LEGAL TENDER
Whatever the monetary system of a country, it is essential that the measure of value should be clearly and unequivocally determined. Thus where there is a gold currency, a silver currency, or an index currency, the value should be measured by gold, silver, and the index respectively. This basis of measuring economic values, and therefore of any monetary system, is destroyed when in the case of a gold or silver currency the notes of the bank of issue are made legal tender, for this compels everybody to accept these notes in payment regardless of their real value. Compulsory acceptance renders it even impossible to measure the notes by the unit of value and thus to ascertain their value within the country. Indeed, it establishes a legal fiction on the basis of which note and unit of value are identical. For this reason, the names of the units of value - e.g. the terms dollar, mark, pound, become ambiguous in that they mean now a fixed weight of gold and then the note of a bank of issue. Accordingly, the measure of value, on the un-ambiguity of which everything depends, comes to have two definitions. This renders impossible any real measurement and thus the whole monetary system is falsified. This falsification is generally hidden from the public as long as the central bank is legally obliged to redeem its notes. This, however, only masks the reality, since convertibility introduces in the measurement of value an alien element. Indeed the fact that convertibility becomes a decisive factor, shows how the whole problem has assumed a different complexion. Where convertibility is suspended, we have only a pure paper currency, this despite strenuous legislative and administrative efforts to keep the value of be paper at a certain definite level, for what counts now
is no longer the value of the gold but the question whether the note of the central bank, measured by gold, changes its value. In fact, the system that has been in general use since the beginning of the World War, including the so called gold standard or nominal gold currencies, may be described as paper currency.
(7) COMPULSORY ACCEPTANCE A RELATIVE NOVELTY
Although the compulsory acceptance of banknotes appears today so natural that most people cannot imagine a means of payment not having that character, this system has in reality only come into general use in recent times. Here are two illustrations:
Par. 2 of the German Bank Law of 1875, provided: "Payments statutorily required to be made in money need not be accepted when tendered in banknotes and the constituent States cannot enact such an obligation for the State treasuries."
This provision was only replaced by its converse in 1909. Article 3 of the Act of 1 June 1909 decreed :. "The notes of the Reichsbank are legal tender."
The course of development was similar in Switzerland. Here article 39 of the Federal Constitution of 1874 prohibited once and for all the compulsory acceptance of banknotes. However, already in 1891 the Constitution was amended and they became legal tender in 1914.
(8) COMPULSORY ACCEPTANCE ESTABLISHES THE DEPENDENCY OF THE CURRENCY ON THE CENTRAL BANK
The statutory obligation to accept the notes of the central bank in settlement operations involves not only the falsification of the basis of the currency. It also makes the fate of the currency dependent on that of the central bank and frequently on that of the banking system generally. If for any reason the central bank can no longer redeem its notes or maintain their parity - that is, if the market rate of the bonds it issues falls - then, owing to the legal equivalence between the notes of this bank and the legal standard of value, the calculation of values generally will be prejudicially affected. Thus it was in the main the situation of the Bank of England, which led in 1931 to the abandonment of the gold standard and similarly, it was the National Bank of Belgium that suggested in 1935 the devaluation of the currency.
Almost a century ago Lord Overstone grasped this interdependence when he said that if he ruined his private bank, he would be ruined, but that if the Bank of England committed a gross blunder, the Bank could save itself, but the whole of the community might have to suffer grievously.
(9) COMPULSORY ACCEPTANCE A CONDITION OF EVERY INFLATION
Moreover compulsory acceptance for banknotes forms the legal and conceptual basis of every inflation. In the absence of such an obligation, bank crashes, with all their dire consequences, may occur, but never an inflation, because the destruction of the standard of value and the falsifying of all monetary relations, which are the mark of every inflation, can never result from the collapse of a single bank. This confusion is only possible when a legal equivalence has been established between the notes of this bank and the standard of value. It was compulsory acceptance that brought forth the ominous slogan of the German inflation period: "One Mark is as good as another" ("Mark gleich Mark"). History has not known an inflation not due to the legal obligation to accept.
(10) THE GOLD STANDARD AS GOLD FOR ACCOUNT
If then, the pre-conditions of an inflation are to be eliminated and a reliable and stable currency is to be assured, if, more especially, the gold standard is to be restored, the falsification introduced in recent decades must be eradicated and the earlier separation between standard of value and means of payment
must be re-established. A compulsory exchange rate excludes a stable and safe currency. No wonder the distinguished German historian Niebuhr stigmatized compulsory acceptance as "a legislative provision both ridiculous and abominable." (Nachgelassene Schriften nichtphilologischen Inhalts, 1842, p. 485 ff.).
The re-introduction of the gold standard in Germany in October 1923, after the inflation, offers an impressive and instructive illustration. The notes of the Reichsbank, which were legal tender, had completely collapsed and their value could only be stated in astronomical fractions. At long last it was decided to introduce calculating in gold value. First, taxes were thus calculated. Then a new institute of issue, the Rentenbank was founded, whose accountancy basis was to be gold units. There was, and this cannot be too strongly insisted on, no legal obligation for the public to accept the new notes in payment, and these notes have to this day never become legal tender. They have therefore never been identified with the unit of value, which was then the gold mark. This system, which lasted from the passing of the inflation in the autumn of 1923 until the introduction of the new Bank Act in the summer of 1924 (which Act formed part of the series of Dawes Acts), was therefore a pure system of calculating in gold units which was not falsified by any compulsory acceptance.
A similar example, although confined to one domain only, is offered by China which recently adopted a gold unit for its customs charges. By a decree of the Minister of Finance of 15 January 1930, counting in silver in the departments of maritime customs, the most important for the Chinese budget, was replaced by counting in gold. The basis for these calculations in gold is a weight of 60,186 centigram's of fine gold and represents the customs gold unit. This customs unit is exclusively a calculating unit and the decree specifically provides that the payment of duties may, as before be made in local means of payment, that is in silver dollars and in banknotes. Of course, these are only accepted in payment at the current exchange rate, this being measured by the customs gold unit.
In conformity with the foregoing illustrations it is therefore suggested here to introduce generally (whilst abrogating the statutory obligation to accept the notes of a central bank) calculating in gold value and thus to reestablish the conditions existing until 1909 in Germany and until 1914 in Switzerland.
(11) IS THE INCONVERTIBILITY OF NOTES INCOMPATIBLE WITH THE ABROGATION OF COMPULSORY ACCEPTANCE
It might be objected that before the War compulsory acceptance could be dispensed with because then, unlike now, the notes could at any time be converted into gold. The objection does not hold for convertibility is not of decisive importance, as will transpire from what follows.
(12) CONVERTIBILITY AS A BASIS FOR PAPER MEANS OF PAYMENT
It is generally believed that the value of banknotes resides in their being convertible into metallic currency, banknotes being considered in the main a substitute for gold or silver. Already Adam Smith, in a famous passage in his "Wealth of Nations" (bk, ch 2), declared that all paper money represented only gold or silver. Similarly the Bullion Report of the British Parliament of 1810, which was very strongly influenced by Ricardo, expressed itself to the same effect. Probably not a single theory in the whole domain of political economy has evoked such universal assent.
It is therefore natural that this view should have been incorporated in legislative enactments. Since paper money is regarded as a substitute for gold or silver, it must be at any time convertible into these. Banknotes and convertibility are therefore interdependent conceptions and hence all bank acts the world over contain definite provisions concerning convertibility, metallic cover, and the ratio of the notes issued to the current gold reserve. Indeed, every monetary claim is hence regarded as being in the last resort a claim for payment in gold, although there is no necessary connection between this and a gold standard, for a gold standard primarily presupposes, apart from calculating in gold, that a creditor cannot refuse
acceptance of a payment in gold, i.e., that there is a general obligation to accept gold but by no means the right of a creditor to insist, in any and all circumstances, on being paid, directly or indirectly, in gold.
Firmly based, on the one hand, as seems the general conviction that convertibility is necessary (and practically everywhere the ratio of the gold cover is deemed to be of the utmost importance), there is, on the other, no doubt that today most banknotes have become legally, or at least actually, inconvertible, without thereby losing all their value. In fact, for some notes there exist today no provisions of redemption, and yet they possess value. Accordingly, there must be, apart from convertibility, another basis for the value of paper means of payment.
(13) STATE FIAT AS BASIS OF VALUE FOR PAPER MEANS OF PAYMENT -
All eyes are turned towards the State to see whether, by its fiat, it is able to confer value on valueless paper. It becomes however quickly manifest that the power of the State is strictly limited in this sphere. All large scale monetary devaluations known to history have referred to means of payment the value of which rested on a State fiat. This holds, for example, of the notes which the Scotchman John Law issued in Franc e at the beginning of the eighteenth century and even more so of the assignats of the French Revolution. In both instances acceptance was at first not compulsory. But presently the obligation to accept them was decreed and soon re-enforced by penalties. On 11 April 1793 the French Government prohibited the use of all metallic money on pains of six years in chains, and in September of the same year the decrying - that is, the verbal discrediting of the assignats - became punishable with death and the confiscation of property.
These drastic measures proved, however, unavailing. The exchange value of the assignats declined steadily. At the close of 1793 it was only 22% and in 1795 it had fallen to under 1%.
Not so dramatic, but not less impressive and instructive, were the experiences during the two great American monetary devaluations on the occasion of the war of liberation and of the civil war. There, too, the fiat of the State was unable to prevent devaluation.
But by far the greatest financial catastrophe of modern times was the German postwar inflation. It is common knowledge that the legal obligation to accept the banknotes of the Reichsbank could not prevent their complete collapse and it is most significant that the notes of the Rentenbank, which succeeded in stopping the inflation, have never been legal tender.
Nor was it different in the case of the Austrian and Russian inflations. Nowhere, in fact has the power of the State been able to prevent devaluation.
But this was not only the fate of weak States crushed by defeat. France and Italy, both victors in the World War, had to suffer heavy devaluations which annihilated more than four-fifth of the value of their currency.
It cannot be therefore the State's fiat which confers value on inconvertible paper money.
(14) CONFIDENCE AS A BASIS OF VALUE FOR PAPER MEANS OF PAYMENTS
Not even confidence and national enthusiasm, revolutionary determination and religious belief, can accomplish this in the long run. One example may suffice. When during the French Revolution in April 1793 the above mentioned currency law was promulgated, the whole population of Metz assembled on the Place de la Légalité, took a solemn oath, in the presence of the garrison, the National Guard, and the administrative and the judiciary staff, not to draw any distinction between the face value of the paper money and silver. Similarly, from Toulon where analogous ceremonies took place, the Government received a report stating that the population would carry out the law with the religious respect (respect religieux") due to it. However, after a few days the workmen at the arsenal of Toulon petitioned that they might have their wages paid in silver, for, they declared, "try as we may, we cannot live otherwise". (See Marion, "Histoire financiére de la Franc e", vol. 3; p. 47, Paris, 1921.)