Flürscheim – The effect of a scientific paper currency

from Michael Flürscheim
Clue to the Economic Labyrinth

Chapter IV – The Effect of a  Scientific Paper Currency

(a) in National Intercourse

Crises are Chronic
It is much easier to show how financial crises arise than how we ever are free of them. In reality, the chronic form of the crisis never quite leaves us, and it is only its acute phase, which is meant when we speak of periodically recurring crises or financial depressions. That even the acute stage has not become permanent can only be ascribed to that wonderful adaptability of our human nature, which enables us to scrape our way in all climes and under all kinds of conditions.

Two factors are at work: an almost incredible increase of trade, and a money to do it with not adequate to the service required. To make the money correspond to the turnover to which it has to minister, its quantity requires at least a twenty-fold increase; and this amount would again have to be increased four-fold were latent trade possibilities to be considered: that immense increase of our turnover which would ensue if the obstacles presented by inadequate means of exchange were removed.

These are the factors with which our powers of adaptability have to cope. We know how they accomplish the task: how on the narrow money basis an immense credit building has been erected, in which trade lives and moves as well as it can. A building about thirty times as high as its base, a dangerous structure, but after all—though a great deal too narrow—so wonderfully well built that, unless a depression in the commercial or political atmosphere brings disturbing air currents, apt to shake the flimsy fabric, or unless the earthquake of panic tears away part of the base, it stands for a time praised by all beholders, especially by those who collect the rent of the house. A high rent, forsooth, as it must be where such a risk premium has to be taken into account; a rent which is bound to ruin those who have to pay it in the shape of usury; a rent rapidly increasing through compound interest, and thus rendering the sojourn in the flimsy structure more intolerable from day to day.

The destructive Effects of our Currency
To leave allegory and come back to plain business language, I simply invite the reader to look a little closer into the nature of the currency, which serves as our medium of exchange. Those cheques, drafts, promissory notes, etc., are not passed without sacrifice by those who use them as a means of payment. The profit they expect from their business transactions may not cause the interest they pay to appear exorbitant for the time, but this interest is secured to the creditors by the most valuable possessions of the debtors. The hopes of profit in most cases prove evanescent, as they are bound to do in a business world existing under the Damocles sword of the continual danger that they owe from one day to another a money which—in nineteen cases at least out of twenty—does not exist. Too many unanticipated losses come in on every side, while expected profits are reduced through hundreds of causes. On the other hand, interest accumulates with the certainty of death, and nobody better realises the rapid passage of time than the man who has signed a P.N. due at a certain date. If the creditors were forced to accept in payment merchandise or services at fair prices, things might be arranged more easily, for our productive power is immense; and great as the debt is, if it could be paid with goods and services, it would soon be cancelled, capital and interest. But the creditors do not accept this kind of payment, or if they do exceptionally, it is only in case they can at once sell the goods for cash without any loss. The amounts thus due are so enormous, however, that where such sales are tried on a large scale, prices are considerably forced down. Ruin stares the debtor in the face; and it comes certainly when the creditor realises on whatever securities are in his hands, the result being a further impoverishment of the debtor class to the benefit of the rich. In my first book, written in German, Auf Friedlichem Wege (1884), I drew from every-day life the picture of

A MoneyLender and his Victims
A farmer borrows money from the money-lender to increase his stock; a manufacturer because he wants to add to his plant; a builder to construct some houses; a merchant to obtain more business capital. All give mortgages to the capitalist. Their enterprises, somehow or other, do not come up to expectation, and the final outcome is the ruin of the debtors; while the creditor who buys in their properties at the sale, and realises on them when times are a little better, becomes still richer. As a rule, the well-secured moneylenders play the part of the croupier at Monte Carlo. Those who deposit their money on his tables may, once in a while, haul in a gain; but in the long run, the croupier rakes in most of the money within his reach. He plays on the certainty of mathematical average results, while the gamblers count on mere occasional possibilities.

Part played by Land Ownership

No doubt private land ownership plays an important part in this game, in which the workers are the losers, while those who can secure their wealth through the monopolisation of Nature’s indestructible resources, sold or pawned to them, become constantly richer; and certainly no permanent reform is possible unless we manage to withdraw this security out of the hands of the few by making it the property of all. Unfortunately, many clear-sighted men who have mastered this great truth do not realise the important function, which our present currency system plays in the process.

Scientific Currency gives immediate Help

That a scientific paper money would render an acute financial crisis impossible was demonstrated in the last chapter. Every such crisis is accompanied by a fall of prices, and with the scientific currency any fall would at once call forth a corresponding issue of money. At once, for the officials entrusted with this work need not wait for the periodical statistics when without their aid a fall of prices is clearly observable. The tabular standard will be merely the instrument for final adjustment of the more delicate oscillations and to prevent abuse.

Of course, there always will be unsuccessful men who cannot pay their debts, and whom no reform of any kind could help. Such men will have to be weeded out of the special field of work for which they are not adapted, and helped to find their legitimate scope. There always will be Micawbers; but even Micawber found his sphere of action after repeated failures had shown him how not to do it, and this process would be much facilitated through social reform.

We leave the exception and come to the rule, to the man who would remain solvent if his work, or the result of this work, his product, were saleable at paying prices. Our bankruptcy courts would have very little to do if this class were exempted from its operations, nor would the waste inherent in our present system of distribution be so great. It is just this difficulty, experienced by our producers, of selling their product at paying prices which forces thousands out of the productive field into that of distribution. The unsuccessful tradesman further increases the army of shopkeepers, of whom a fraction might do the economic work of the lot; so that most of them are mere drones, or—to express the fact more correctly—most of the work done by them as a class is wasted.

The Causes of the Crisis not due to Changes in the Process of Production

Our most important task, therefore, is to find out how the producers are to be enabled to sell their product regularly at a price which pays them decent wages for their labour.

The times are past when economists could console themselves and their readers with the reflection that—through the introduction of new machinery increasing the supply in some special field of production, or the changes of fashion diminishing the demand in another—temporary want of employment may be caused which will soon be adjusted by a new distribution of productive forces.

If temporary want of employment were the cause of the crisis we should grow out of it, instead of getting deeper into its meshes from year to year; for the very nature of our modern system of production and distribution tends in the direction of superseding those difficulties which in former times were in the way of any change in the department of production to which a worker belonged. If there was an over-production of shoes and an under-production of textiles, it was impossible for the shoemaker without work to obtain employment by weaving cloth, nor could the weaver in the reverse case do much good at shoemaking. The typesetter could not build machines, and the machinist could not have made any wages at type-setting. Then there was the difficulty of communication and transportation, which caused over-supply of workers in one place when there was a great demand for them in another.

Our progress in the arts has changed all that. The shoemaker can soon learn to mind some of the machines used in the textile factory, and the weaver can learn in a few days how one of the auxiliary machines in the shoe-works is managed. The typesetter can at once mind a milling machine after he has been shown its simple working, and the mechanic will soon learn how to work a linotype. The telegraph informs the whole world, within a few hours, that workers are required in a certain place, and steamboat and locomotive carry the unemployed thither. When

“Over-Production “

Is spoken of nowadays, something entirely different from this local or departmental dislocation is understood. We mean that strange and seemingly unaccountable phenomenon that in all fields of production— almost without exception—efficient workers bewail the growing difficulty they find in disposing of their products, or of the work creating the products. Overproduction and want of employment have become so habitual a complaint that we have gradually ceased to realise the enormity of this phenomenon. One single moment’s consideration, however, suffices to restore its vivid colours, temporarily effaced by the mere force of habit.

We speak of an over-production of clothing in a world in which millions have not half as much clothing as they need. ” Too many shirts? Well, that is a novelty in this intemperate earth, with its nine hundred millions of bare backs!” says Carlyle. In our cities builders complain that too many houses have been built, at a time when thousands are crowding into slums, or seeking shelter under the arches of bridges and in public parks because they can obtain nothing better. The farmer tells us that food production does not pay because the competition is too great—too much is produced, and millions have not enough to eat! And so it goes through all departments of production, whatever the name.

What can it all mean? Is there a deficiency in the means of transportation, often in the past the cause of starvation in one section of the world, while corn was being fed to the hogs in another? This obstacle diminishes from year to year, and does not apply in our case, with unsaleable goods of all kinds in the midst of the very people who need them. No, here it certainly is not distance that prevents an interchange of goods and services. Why, we have tailors wearing insufficient clothing because there is such an over-abundant stock on hand that they are denied employment, and thus deprived of the means wherewith to buy cloth! We have carpenters, bricklayers, stone-cutters, and other workers in the building trade who are without shelter because too many houses lack buyers or tenantsi and building has had to be stopped for a time! Do not such every-day sights teach us that neither the distance intervening between supply and demand nor the deficient organisation of production can be to blame; otherwise how could there be an unsatisfied demand for goods in the very trades wherein the producers in vain look out for purchasers?

Supply and Demand kept apart by Money Monopoly

If productive power and purchasing power were identical, such a state of things would be impossible; but situated as we are, purchasing power can only be obtained, as a rule, through the command of money or its representatives. As long as this money consists only of a scarce commodity in itself absolutely inadequate to perform the service expected from it, the break between productive power and purchasing power cannot be filled up. Half a century ago Jonathan Duncan recognised the real nature of the crisis. I quote from his work already mentioned:

“We have shown that, in the natural state of things, production can never exceed consumption, and that what is called over-trading in goods really means the under-production of money. It means that more commodities are brought to market than can be distributed, not because people do not want them, but because the instrument of distribution is incommensurate. If the wharves of a maritime port were choked up with goods which another country desires to possess, as, for instance, corn at New York needed in England, but that there were an insufficiency of ships to freight the corn to London or Liverpool, it would be very illogical to say that the Americans had over-traded in the production of corn; the case would be one of under-production of vessels, manifesting the absence of the instrument of distribution. A railway station further illustrates the argument. If there were more passengers than the train could carry, the directors, looking to their own interests, would not insist that the passengers were excessive, and complain of over-travelling, but decide that the means of conveyance were inadequate, and at once increase the number of carriages and locomotives. The question, then, amounts to this: Would there be any glut of produce if money were permitted to increase as fast as produce increased? But we may certainly answer this question in the negative, and the answer subverts the whole of Mr. Loyd’s theory. Whence arise the convulsion, pressure, and stagnation, which Mr. Loyd pronounces inevitable, and as certain to recur periodically in established cycles? Surely not from the reluctance of hungry people to consume food, or from the refusal of people in rags to wear warm and decent clothing; yet we are told that all the evil proceeds from the fact of those very people having been too industrious; they have over-traded, they have created too much, and the penalty is famine and nakedness! Under this theory, the condition of the productive classes is truly pitiable; if idle, they are treated as rogues and vagabonds; if industrious, they are deprived of bread.”

Without the help of credit in its different shapes, prices would have gone down very much deeper than they did. The value, the purchasing power of money, would have become much greater than it is in China to-day, or was in England in the thirteenth century, when, according to Thorold Rogers, a carpenter received 2d. a day, and an ox could be bought for 8 shillings; for taking into consideration our increased productive power, it is probable that our money stock is relatively smaller than it was at that period. This in itself would be no misfortune, for Thorold Rogers proves that, in the latter part of the fourteenth century anyhow, wages in England were higher than in our time when measured by purchasing power. It would, however, be ruinous if debts be taken into consideration—debts continually increasing not only through the effect of compound interest, but also of a money appreciation incomparably exceeding that of the last thirty years. Our credit has prevented such extremities, but this credit, much as it has extended, cannot keep up with the increasing demand made through our increasing productive power, because it is less and less accessible to those who need it most. Here we have an element of the crisis which has been little understood, and which needs careful consideration.

Effect of Wealth Accumulations

It is notorious that never in the history of the world have such enormous accumulations of wealth in the hands of a few men been known. Mr. James Burnley lately wrote about this subject in Chambers’s Journal, in a series of articles entitled, Studies of Millionaires. He enumerates 100 men whose wealth aggregates to a total of about 1,200 million pounds, which gives to each an average of 12 millions, or about half a million income. Only a few of these men ever spend the whole of their income; most of them save a large part, and thereby further increase the immense amounts put by for a rainy day, not reflecting that these very precautions hasten the approach of a cyclone against which no wealth shelter will avail.

Hoarding not the Cause

This never occurs to them, for few men comprehend how this saving can disturb in any way our process of circulation; how it can affect the stock of money available as a basis of our credit building; since it is well known that the habit of hoarding ready money has gone out of fashion, and that even the richest keep very little money or bullion on hand. Savings are now invested again in some way or other, and thus are given back into circulation.

Two Kinds of Circulation

However, there is a great difference between a circulation of money passing from hand to hand, from the man who received it in payment, into the market as a direct purchasing medium for goods and services, and the money which merely comes into circulation from the hands of somebody who obtained it from a capitalist in payment for land, mortgages, bonds or similar investments.

This will be more easily understood by illustrative comparison: Jones, a producer, receives money from Plutus, one of our 100 multi-millionaires, in payment of a piece of land; while Giles, another producer, is paid cash by Plutus for some sort of merchandise. In the case of Giles, circulation is not affected; what has been paid out by him as a producer comes back to him, for though sales may occasionally entail a loss, as a rule the producer who sells goods to a consumer makes wages or even a profit. This is well understood, so well that it has been assumed to apply to the other kind of transaction likewise. Our economists could find no difference—as far as the process of circulation is concerned—between the transaction in which the capitalist buys directly or indirectly from the producer any product of labour, and the one in which he merely pays or lends to the producer the money for something which is not a product of labour; in our illustration: land. And yet the difference between the two transactions is ominous.

The Effect of Accumulation on Circulation

We assume that in the possession of Jones the land had been an instrument of credit. His bank allowed him an overdraft on the title-deeds. This overdraft has to be made good before the deed is returned; and thus the money obtained from Plutus merely takes the place of the money formerly obtained from the bank by Jones. No new money has been paid into his business funds, and not one single penny has been added to his purchasing power.

” But,” will be replied by our economists, “the credit given to Jones by the bank and repaid by him will now be given to someone else, who will use it to purchase goods with; and we are practically right in saying that, as far as the process of circulation is concerned, it can make no difference whether this purchase has been made by the land-purchasing Plutus or by some other person to whom his money was passed over.”

This would be true if the bank had to refuse further loans on good land until the debt of Jones was repaid; but such is not the case—would only be the case if the bank merely lent out real money. We have seen that this is not the system of banks all the world over; in New Zealand, for instance, the advances and loans made by our banks in 1900 attained to £17,000,000. The whole money in the country did not exceed £3,000,000; but the institutions, including the savings-banks, owed for deposits and banknotes nearly £22,000,000. They had merely lent the money brought in by one set of people to another set. They acted as a kind of book-keepers of a sort amidst the business people of the country, who practically lent each other money, or rather the hope of getting money in case it was wanted; for very little money passed or even existed in the country. For this work of book-keeping and for the guarantee undertaken by them, the banks have enriched themselves by many millions since this colony was founded, of which more in the chapter on “Banking.” The mere fact of having no money does not in the least deter our banks from giving credits, from allowing the debtors to draw cheques; because they know that the cheques will come in as deposits on the other side, and generally real money will neither be demanded, nor could it be paid if demanded in six cases out of seven.

The result, therefore, of the transactions between Plutus and Jones will be that a rich man, who does not overdraw his account at the bank, bought land; on the strength of which a poor man drew a certain amount of cheques, which he now repays with the cheque obtained for his land from the capitalist who bought this land. Thus the currency originally given to the capitalist by his rent or interest debtors does not return into circulation, as the transaction has not enabled the land seller to increase his right of cheque drawing. Jones merely repaid his debt to the bank, and there the matter ends.

The debtors of a rich man pay him their interest or their rent. The money has been paid to them by other workers, who expect to find employment through the continued circulation of this money; but they are disappointed. The money has left the market, and it is kept out of the market. It has done nothing but change the basis of a given worker’s cheque operations. Instead of drawing his cheques on the basis of an overdraft secured upon a piece of land, Jones now draws them on account of the cheque obtained from Plutus. If land, bonds, or other securities of this kind, on which the banks allow overdrafts, were unlimited in amount, this would not matter; for someone else would obtain a credit on such security from the banks, and the cheques drawn on this new account would take the place of the repaid overdraft in circulation. But the quantity of such securities is limited; and, while credit is not refused to those who can supply them, from year to year more of these securities come into possession of a class of people too rich to require credit, and who do not use them as a basis of credit money, of currency circulation, as the parties who sold them had done.

In this way the accumulations of the rich disturb the equilibrium between supply and demand; in this way the money obtained by them does not return into circulation.

The subject is too important and too new to meet full understanding at once, and yet without clear comprehension at this point, a vital part of the problem must remain an unsolved riddle. I therefore beg my readers not to skip, but, on the contrary, to thoroughly study, again and again, this momentous relation between wealth distribution and the supply of the circulating medium. To give all possible help on my part, I shall now sum up the subject by condensing its principal features into as few sentences as possible.

M is the effective legal tender money stock of the world, practically represented by 800 million pounds sterling of gold coins and bullion. Part of this stock circulates, part of it is hoarded by parties who do not issue any credit money for it, and the balance lies dormant in the vaults and safes of the banks and the business world to serve as the basis of a thirty-fold credit money circulation: C (money promises or representatives). To simplify, we shall leave the circulating money out of account as too insignificant when compared with the total of the circulation, and also the hoards not used as a basis of credit money; for this kind of money has practically disappeared from the world for the time, and we shall consider 30 C as representing the whole circulation.

Thirty C is not enough to supply a means of exchange sufficient to enable the expansion of trade: T, to keep step with that of productive power: P, so as to preserve its level with buying or purchasing power: B. Unless B = P, commercial depressions and want of employment are unavoidable. Through improved machinery and other causes P doubles to 2 P, but B can only advance to 2 B if T can advance to 2 T. This is only feasible if 30 C can advance to 60 C.[1] (The increase of M itself through mining—after abrasion, use in the arts and hoards not serving as the base of C are deducted—is too insignificant when compared with the enormous increase of P and T to need consideration.) Such an advance is dangerous, even where the best of securities are offered, as long as M alone is legal tender; for it signifies that 60 instead of 30 promises of money are to rest on one single M as their basis; but our capitalists are willing to run this danger where what they consider good security is supplied. These securities are practically only of two kinds: 1, land or monopolies connected with it; and 2, the bonds of governments or public bodies. The latter may safely be left out of consideration where such a large amount of new securities is required as the increase of 30 C to 60 C implies, though every succeeding year sees an average issue of over  £100,000,000 new bonds. We must also take into account that a very large part of these bonds are in, or gradually come into the possession of the rich, who do not use them as collaterals for credits. Nor are they needed; for—though the surface of the land does not increase, land values—L— grow with P. But, as shown in the case of Jones and Plutus, L is continually passing from the possession of those who use it as a security for the issue of C into that of men who require no credit. Later on, we shall investigate the causes, which tend to accelerate this transfer, and so increase the rapidity with which the gulf widens between the demand of larger quantities of C and the possibility of supplying the security, the collaterals, without which C is not forthcoming. The form, which C takes is immaterial. In Germany the banks give their credits in the shape of their acceptances on bills of exchange, drawn upon them by the debtor, usually at three months’ date, which then are discounted or circulate as a means of payment, and thus take the place of the overdrawn cheque, customary with us.

Temporary Revivals of Trade Explained

As C thus lags behind the demand, B, T, and P have to suffer, and the crisis is inevitable.

Once the foregoing causes of the growing discrepancy between productive and purchasing power are well understood, the occurrence of crises will consequently no more excite surprise; the difficulty will only be to understand how we ever can have comparatively good times as long as the described fundamental cause is at work. Even this, however, can easily be explained. We must not forget that the real nature of the evil is almost absolutely unknown. A few students of economic science may have an inkling of the truth; but the masses, including our captains of industry and commerce, have come to look at commercial and financial crises somewhat in the light of meteorological phenomena, certain to occur at more or less regular intervals, forgotten as soon as they are over—just as a fine sunshine will make us turn out light-heartedly in thinner garments, as if rains were done away with for ever, quite unmindful of the fact that only yesterday we were caught in a shower which wetted us all through. In the same way, the least sign of returning prosperity finds us all eager to make up for the enforced abstinence of the depression we have just endured, and this very infectious hopefulness must naturally have the effect of stimulating business. It matters little what may have produced the first signs of reviving trade. It may be a war, with its destruction of labour’s products, and its requirements of life and property annihilating machinery, its withdrawal from the labour market of thousands of strong men, whose consumption temporarily increases, and whose absence from competition enables those who remain to obtain full and paying employment, and thus to also augment their consumption. Or there may have been expensive changes in armaments such as followed that onslaught of the Merrimac on the wooden ships of the Union fleet which introduced an era of armoured ships; or experiences like the Prussian victories in the sixties which forced all nations to exchange the obsolete muzzle loader for our modern guns. Or some great progress in the technic field, such as the last two decades experienced in electrotechnics, may have called forth a large demand for products of labour. However the temporary revival came about, its effects are over-estimated and its transitoriness is ignored. At once hope rises on all sides, and this effect reacts upon the cause. The retailer gives larger orders than the increased demand warrants, the merchant lays in a larger stock to be better prepared to meet the requirements of the trade, and the factories working at full pressure increase their facilities by adding new buildings and more machinery. The so-induced demand for more workers raises wages, consumption is correspondingly increased, the demand becomes greater, and thus is seemingly justified the assumption that at last the good times have really come.

The Reaction

But the same forces have been at work all the time; have been, in fact, intensified by the revival. The increased demand for goods has further stimulated the inventive spirit; enterprising manufacturers have introduced improved machinery, which enables them to produce more with the same number of hands. For a time the banks have been a little easier in allowing overdrafts, and capitalists who otherwise would have invested only in the best securities are infected by the general hopefulness, and invest money in business. They become silent partners, buy stock in newly founded limited companies, or lend money at interest. Only the small fry, however, are caught in that way; the men of Mr. Burnley’s list are too old hands at the business not to know that, though temporary profits might thus be obtained, in the long run nothing is gained—that, in fact, the final losses overbalance temporary profits. Their experience has shown them that large fortunes can only be preserved and increased by investments in monopolies of some sort, and whether such monopolies consist in the possession of farms, building sites, mines, quarries, forests, oil wells, telegraph lines, canals or railroads, they are all summed up under the heading of land-ownership or land control, if we leave patents out of sight as of only short duration. They therefore let the little ones buy the stock of manufacturing concerns, while they content themselves with owning the land on which cotton and wool are produced, the coal, iron, copper, tin mines, and other sources of the raw materials needed by the factories, certain that in time all will come to their mill, as the oil refineries had to submit to the raw oil monopoly. All they will do beyond this to help the new companies is to give them credits on the strength of their land, certain that sooner or later the whole property will thus fall into their hands without any further outlay. Anyhow, the old process of a gradual passing of land values out of the possession of the masses who have used them as a basis of credit money, into the hands of men who do not need any credit, is bound to continue all the time, and finally to produce its effect on the currency. Its restriction through these permanent causes continues, while the inflation through the transient causes naturally can only be of a temporary nature; for the exceptional demand caused by the war and other causes ceases sooner or later, and the increased taxation which the war entailed further reduces the purchasing power of the masses, while the influx of the dismissed soldiers, now competing in the wage market, depresses wages and thus further reduces the demand of consumers. Add to this the increased output from all those new factories built during the revival, and it will easily be seen how it happens that first the shopkeepers find themselves loaded with more stock than they can expect to sell for some time in consequence of the decreased demand, and even forced to ask prolongations of bills from the merchants, who, being met by the double trouble of decreasing orders and slower payments, get into difficulties which soon reach the manufacturer and farmer. Credits in the bank are reduced, and the interest rate paid by the traders rises just when both the demand for goods diminishes, and when the money for sales comes in more slowly.[2]

Workers are dismissed, or others put at half time, which again decreases consumption, and thus further strengthens the effects of the depression.

The Crisis

The depression soon degenerates into a crisis, and when a few large failures have frightened the banks into greater caution, and thus into precipitating fresh failures, the crisis becomes a panic, and the panic intensifies until the strongest do not know whether they will be able to weather the storm. Business now offers the phenomenon of a river, which has been stopped in its course by some obstacle in its bed. It rises and rises until the moment arrives when the stowed waters burst their bounds with terrific effect. Thus the temporary arrests of the chronic crisis stream, called revivals of business, have no other effect but to substitute the crash for the gradual descent. To use another metaphor, these business revivals are only the advancing waves of a receding tide. The careless observer, seeing one particular wave come inshore farther than its immediate predecessors, may conclude that the tide is rising, when, in reality, it is rapidly running out. So those who look superficially on business revivals are too apt to ignore the fact that the tide is still running out in spite of the few advancing waves, which impress them. That another catastrophe is rapidly approaching while I am writing this in June 1901, may not yet be visible to unpractised eyes, nor do I claim extraordinary powers of perception when I predict a collapse of trade in the near future. As long as the heavy expenses in South Africa continue, the exceptional demand may, for a time, stave off this collapse, but it is sure to come soon after the peace. In fact, since a century, all great wars have been followed by trade depressions within a year or two, rarely three, after the conclusion of peace. This appears quite natural to. any one who has studied the causes of the comparatively good times we have just enjoyed, and those of the chronic crisis of which these good times can only be a short interruption. Not only must such interruptions become shorter and shorter all the time, but even what we style a revival would have been looked at as a moderate crisis half a century ago.

Want of Employment and its Effects

At the height of our booms even a growing difficulty of finding paying employment in any branch of occupation stares us in the face, and the preoccupation of parents in looking out for an opening in life for their children is one of our saddest spectacles. Those who have the bestowal of Government offices know something of this; for it is quite natural that the increasing difficulty of finding work in the channels of business, of making a decent living by farming, manufacturing, or selling goods, by teaching, healing, pleading, etc., forces men and women to supplicate for any kind of Government work. The dangers arising from this are best exemplified in the United States, where office-hunting has corrupted the whole of the political machinery. No remedy will avail against this and other growing evils, unless we can get at the foundations of our present money system and our existing land laws.

Effect of the new Currency

Now we have arrived at the point where the full effects of a scientific paper currency can be understood. So far, we could only see how such a currency could put a stop to the sudden collapses we are so used to, by means of its price-maintaining power, but we could not discern how it could prevent the chronic crisis: the slowly but surely widening gulf between productive and purchasing power. We have realised that credit, our real means of exchange, the basis of circulation, and consequently the condition without which production becomes impossible, is founded on a limited amount of securities gradually passing into the possession of the creditor class from that of the debtor class: the producers. Thus the production, and consequently the purchasing power of the latter, is more and more crippled. Therefore, unless the new currency can be made accessible—not only to the owners of land values and bonds, but to the producers at large—we can never expect it to prove a real remedy in our chronic disease of under-consumption, alias over-production.

Merchandise becomes a Security

This accessibility of the proposed currency to the producers is reached through bringing into the foreground a new class of securities, which, under present conditions, play a relatively unimportant part in finance: Merchandise, the product of labour. What at present causes its partial exclusion from the rank of credit collaterals, and restricts the security value of certain classes of merchandise, which are accepted as collaterals, is the risk of a decrease in their value. Part of this risk, caused through the perishability of all products of human labour, can, to a certain extent, be eliminated by insurance and safe storage. This risk is comparatively small with most products, which do not partake of the nature of food-stuffs. The risk due to price variations, however, is comparatively great, as our daily market quotations prove, and especially the results of our auction sales. It is well known that the latter, except for certain raw materials of very extended use, often bring only a fraction of cost price; and as auctions must always serve as the simplest means for a creditor to realise on his security, it is not astonishing if, in present circumstances, capitalists are very chary of giving credits on merchandise. This must entirely change in the case of a money based on the prices of merchandise, especially when the prices realised at auctions are taken into account proportionately to their share in the general turnover. The more the reform makes advances on merchandise the rule instead of the exception, the more will this share grow in importance. The very result of the reform on prices realised under these conditions will tend to give to the auction system the pre-eminence in the methods of distribution. Manufacturers and farmers, producers of all kinds, will resort to this simple method of disposing of their produce at wholesale, in preference to any other, as soon as a certain reliance can be placed on the prices obtained. And, on the other hand, this reliance will be strengthened in the same measure in which auctions predominate; for as auctions predominate, their prices will gradually become the almost exclusive gauge for the money-issuing department of the Government; and the effect of the money issue, in its turn, will steady the auction sale prices.

Unlimited Basis of Credit

The new basis of credit thus created in most departments of production is of such an elastic nature that its monopolisation becomes an absolute impossibility. Its limits are co-equal to those of production, which in our time are practically limited only by the demands of consumption. Merely the want of customers limits our present production, which does not begin to approach the extent of our latent productive power. If the goods could be sold, our production, even without new inventions, would soon double, treble, quadruple its present total; and new labour-saving inventions will be forthcoming as soon as the demand for the product justifies their use. It seems certain that within a very short period a ten-fold increase of production could be reached, principally because the waste of power inherent in the present system would disappear with the demand for more goods. I shall treat this part of the subject in the chapter on ” Socialism.” Here I only want to add that the certainty of obtaining a market at regular prices will to such a degree eliminate the risks of business that practically the product will not even be demanded as a basis of security. The productive power—i.e., personal security—will largely take the place of the lien or pawn, as it already does with the German Raiffeisen banks, whose losses are absolutely insignificant. (See under “Banking,” Chapter VI.)

Over-production in reality Under-consumption

I have shown how our so-called over-production is in reality only an under-consumption. The insufficient purchasing power of the workers narrows the market for their product, and, of course, for their labour, anxious to bring forth this product. This narrowing of their market must, on the other side, reduce their purchasing power for the product of their labour; and thus cause and effect react on each other in the disastrous way with which our eyes are, unfortunately, so familiar.

It is mostly due to socialist writers that this real cause of a restricted production has been more and more recognised, and that the spell has been destroyed which was thrown over this problem by the false theories of celebrated economists of the Adam Smith, Malthus, and Stuart Mill type; an artificial veil which more than anything else has hindered an earlier penetration of the seeming mystery.

Wage Fund Fallacy

The question is too important not to justify my entering a little closer into this part of the subject. In Chapter II, of Book IV of his Inquiry into the Nature and Causes of the Wealth of Nations, Adam Smith resumes in the following sentences what he explained more elaborately in Chapter II, of Book II.:

“The general industry of the society can never exceed what the capital of the society can employ. As the number of workmen that can be kept in employment by any particular person must bear a certain proportion to his capital, so the number of those that can be continually employed by all the members of a great society, must bear a certain proportion to the whole capital of that society and can never exceed that proportion. No regulation of commerce can increase the quantity of industry in any society beyond what its capital can maintain. It can only divert a part of it into a direction into which it might otherwise not have gone, and it is by no means certain that this artificial direction is likely to be more advantageous to the society than that into which it would have gone of its own accord.”

The Effect of a Scientific Paper Currency 205

This wage fund idea is also the foundation of John Stuart Mill’s  Principles of Political Economy; it is likewise at the bottom of Ricardo’s fallacies, and of hundreds who followed these beacon lights into the eddies of a disastrous shipwreck.

I use these last words with full deliberation, as an expression of my firm opinion that these teachings have helped more than any other cause to retard our advance by obscuring the real problem, and thus preventing its earlier solution. I hope that before I have done with the present chapter the reader will share my conviction.

As there is plenty of land, if freed from monopoly, to supply food and raw materials; and as, besides, the unemployed workers are fed anyhow, as paupers, we can only take Smith’s Capital in the sense of tools, if we reserve money and credit for special consideration.

Absence of Tools not responsible for Want of Employment

To begin with, I think it cannot be proved that the employment of workers ever depended on the amount of tools possessed by the society of which they formed a part. There is not a single case found in the history of nations, of men being unemployed merely because they could not procure tools of production; though there certainly are plenty of cases where there was too much work through the imperfection of such tools. If the old Egyptians had had our modern machinery, a fraction only of the hundreds of thousands employed in constructing those gigantic stone monuments, which so eloquently speak of their waste of human labour would have been employed on this work, or more work of the same kind would have been produced. It is not the lack of perfect tools, but the very efficiency of our modern machinery, which is directly responsible for the want of employment our workers complain of, whatever the indirect cause may prove to be.

Superior Tools need not render inferior Ones worthless

But it may be replied that wherever more perfect tools are generally used, inferior tools practically become worthless, because competition by means of their use has become impossible; and that, in this sense, Smith and his followers were in the right. My answer is that:

1. Men provided with inferior tools have mutually supplied each other, and are supplying each other with the necessaries of life, without being in the least interfered with by others who use better implements. Even in some of our most civilised European countries communities are met with, especially in mountain districts not yet opened by railroads, where the people live comparatively well, and where scarcity of employment is as good as unknown, though their tools and processes of production belong to a period lying at least a century behind us. It is true that when our modern implements intrude into their mountain solitudes the just named scourge of modern times begins to show its face. During one of my tramps in the Bavarian mountain districts I entered into conversation with a peasant. We talked of the railroad, which was going to be built through the section, and which had just reached its confines. “Formerly the peasant carried the gentleman, now the gentleman carries the peasant,” was his criticism, which, in a few words, contains a deep meaning. He wanted to tell me that before the railway comes the peasant drives the travellers, and thus makes money, enabling him to purchase things he wants. Now the capitalists of the city carry the peasant on their railway; and instead of making money through the use of his carriage and horses, the peasant himself has to buy a railroad ticket if he wants to travel, as he had to sell his conveyances for want of customers. His income has gone, his expenses have increased. All this is true, but if these people are fully employed and make a good living as long as they are only using their primitive tools, and if, as soon as modern improvements arrive, the same troubles and difficulties as to employment arise which obtain in more civilised parts, this can certainly not be ascribed to the want of capital; rather to an intrusion of too much capital.

2. In fact, a

Want of Tool Capital never needed to exist

as long as our world has been inhabited by man. When the pierced bone was used as a needle, a curved stick as a plough, a sling as an implement of the chase and as a means of defence, as many pierced bones, crooked sticks and slings were produced as the workers wanted. And in our time, when the sewing-machine has taken the place of the bone needle, the steam plough that of the stick, and the Mauser or Martini rifle, the Crupp gun and Maxim that of the sling—sewing-machine makers, instead of finding the least difficulty in supplying any amount of machines required, are only too anxious to obtain more orders; and were a machine needed for every man, woman, and child in the universe, it could be forthcoming in a comparatively short time. Nor have I ever heard that steam ploughs and other implements could not be supplied in any quantity needed; unless there was a sudden unexpected pressure, soon relieved by increased facilities for production. The same holds good in regard to arms arid any other thing produced by human hands. There is not a single article against which the cry of “Over-production” has not been repeatedly raised.

Over-production shows an Excess of Capital

This complaint certainly does not show a deficiency in machinery, but that the supply of goods exceeds the demand, and the demand falls because the workers do not receive wages corresponding to the increased efficiency of the machines. Our means of production, defective as they are to a certain extent—principally because we cannot let them have full play for fear of the consequences—supply at least ten times as much per day’s work as the more primitive tools of two centuries ago; but it is clear that with these facilities there can only be work for all if consumption also increases ten-fold. This it can only do if either the wages of the workers have their purchasing power ten-fold increased, or—if this is not done—that the comparatively few people to whom the bulk of the purchasing power belongs consume the produce in their turn. As wages have by no means increased to anything like the proportion mentioned, and as the number of people who obtain the lion’s share of the product is by far too insignificant to enable them to consume the surplus, there can only be one result: the reduction of the number of hands employed in production. If the waste in distribution, through the unnecessarily large number of middlemen, the waste through militarism and its consequences, destructive wars, the waste through devil Alcohol, through circumlocution offices, through strikes and other restrictions in production brought about by labour unions, through flunkeyism, etc., were not there to tap off part of the superfluous blood, our social body would long ago have been subjected to a stroke of apoplexy.

Want of employment, as we know it, is not the product of too little capital (instruments of production), but of too much— of capital too abundant for our existing distribution of wealth and it is not more of this wealth or of wealth-creating power we want just now, but a more equal distribution.

The new Money, by taking out of the Way the worst Obstacle

in this direction, will increase consumption accordingly. The increasing consumption must necessarily give a freer rein to our productive power, and call forth from latency into actual existence immense quantities of wealth. This wealth, in its turn, by serving as a security for a money credit, supplies its producers with the means of changing wealth into purchasing power—into money. There can be no danger of producing too much wealth under such conditions: where demand keeps pace with supply, and where accordingly prices do not fall. A fall would, however, result from a non-consumption of part of the newly created wealth—consumption in the sense of use, for, to keep the economic machinery moving, it matters not whether the product of labour is consumed in the form of bread and meat or of railroad locomotives, canals, and school-houses. Such an under-consumption now results from the use made by our rich of their incomes. By not spending, but merely exchanging them for the purchase of credit instruments which they do not put to the same use as the former owners—to procure money representatives in the way just seen—they restrict the market and press down prices. But under the new system, when prices fall new money appears in the market, eagerly demanded by those who handed their own money to their rich creditors. The debtor class will be able to obtain this new money on reasonable terms, because the products of their labour then supply sufficient security through the removal of the danger now presented by a fall in prices, and thus the withdrawal of money or money representatives by the creditor class will cease to do any harm. The effect which the changed conditions have on the interest rate, how they will reduce the interest tribute paid by the producers to the capitalists, and thus bring about a better distribution of wealth, will be shown later on. The new relation this will bring about between labour and its employers, and the effect it will have on the purchasing power of the masses, will then also be treated. The proof will then be furnished that the new money is bound to immensely increase production, for which a ready inland market is found through an equally increasing consumption. But even without taking into consideration the effect of the new currency on the interest rate, it will be possible to realise our independence of foreign markets through the possibility of an indefinitely extensible home consumption, and thus to face that great bugbear in the way of paper money, the international market, to treat of the effect a scientific paper currency produces on international trade. This we shall now discuss.

(b) International Intercourse

Part played by Gold

Many who concede the superiority of a good paper money over gold coins cannot see how gold can be dispensed with in international trade. It seems to be of the greatest importance to possess one special merchandise, which through the fact that it can be coined into money at certain rates in our principal commercial countries, is at once saleable at a fixed price everywhere. Wherever free coinage of gold exists—which, as we have seen, means that anybody can bring gold to the mint and demand its coinage at certain rates—gold is practically money, even in the bullion state; and all those countries where this is the case preserve an almost invariable exchange rate in their mutual relations. The variation of such foreign exchanges can, as a rule, never exceed the cost of sending gold from one to another; of course, including insurance and the interest loss.[3] The question will therefore have to be discussed how a paper currency whose value in the home market[4] remains unchanged will compare with gold as a means of international intercourse.

Gold unnecessary internationally if Commodities are paid for with Commodities

This task would be very much simplified if I could acknowledge the principle that in the long run goods are always paid for with goods, a principle which forms the foundation of the free trade school, for in this case I should simply be able to restrict the part played by gold in international exchanges to that of a temporary regulation of accounts, just as useless internationally as it is nationally. There, as here, clearing-houses could keep accounts carrying over temporary balances for a time, certain that very soon shipments of goods or rendering of services (freighting, for instance) would finally settle the accounts. However, even my disbelief in the great free trade axiom would not make me accept the services gold performs in international trade as a reason for abstaining from the introduction of a scientific paper currency. We poor human beings often have to decide for the lesser evil, and if gold harms us more in the home trade than it benefits us in international intercourse, its doom should be sealed.

Relative Unimportance of international Trade

What is international trade even now when compared with national trade? It will play a ridiculously insignificant part when the full effects of scientific paper currency are produced in the home trade, effects which, as we have seen and shall yet see more clearly later on, must consist in an immense increase of production and consumption. Look at the state of things our business world actually presents to our eyes! It reminds me of a party sitting round a table on which a tureen is placed containing not half enough soup for all the guests. There they sit, trying with all their power to ladle some of the soup into their own plates, and being in each other’s way, they spill most of the scanty victual, so that not even that modicum is obtained which a fair division would have given. It even seems that the mere feat of spilling some soup which a neighbour just managed to secure gives them satisfaction akin to that of having filled their own plate. And all this time there is a full tureen of soup on a little table behind each guest, more than sufficient to satisfy his appetite; but though he occasionally sups a spoonful or two from his own tureen, as a rule he wholly neglects this personal supply, and concentrates his attention on the tureen of the common table. Crazy, these folks, are they not? Fit for a lunatic asylum? Certainly, but are we not doing exactly the same thing in regard to our two trade tureens: the home trade and the international one? There is no country in the world whose citizens would not be better customers for its products than any foreign or colonial market whatever, if their purchasing power were kept at the level of their productive power; and yet, instead of tenderly nursing this purchasing power by just laws, we use up our whole strength in the attempt to conquer foreign markets, be it even by means of costly wars, as in China at this very moment. If the powers engaged in the unjust work of forcing a nation— which wants to be left alone—to fling wide open its doors to outsiders would employ the means thus wasted and the human activity thus worse than thrown away, to organise production and distribution in their own countries on a better basis, the turnover thereby obtained would far exceed any sales ever expected in the Chinese markets. Wars and waste by customhouses and frontier spying are the methods by which they spill the contents of the few spoonfuls they succeed in ladling out of the foreign tureen, which at the best contains not one-tenth enough food for them all, while they would only have to turn round towards their own tureen, labelled “home trade,” to eat with comfort and satisfaction as much as they choose. One single shilling a working day more purchasing power given to 40 million Britishers would mean an additional home consumption of 600 million pounds sterling a-year, or almost twice as much as the total amount of British exports.

I cannot refrain from quoting Miss Mara De Bernardi, the talented daughter of G. B. De Bernardi, the founder of the American Labour Exchanges, oh the folly of looking for foreign markets while the demands of our home consumers are unsatisfied:

“Tramping the highways and byways of the nations, shelter-less, cold, shivering to-day under the blasts of a premature winter, doomed to bleak and comfortless nights beside the grudging fire of some discarded railroad tie, or, at best, to the shelter of some farmer’s friendly surplus of hay, from Maine to California, and from Washington to the land of southern flowers, wanders the countless market for America’s wood and coal, and lumber and brick and stone—the homeless, houseless waif of over-production. A humbled petitioner at the kitchen doors of the generous housewives of the land, with manhood crushed and dying beneath the awful Juggernaut of beggary, stands the numberless market for America’s wheat and corn and boundless stores of food—the hunger-haunted victims of over-production. In their wretched rags, their cold, pinched faces, blue and strained, the tattered children of the land shiveringly proffer their claims to Dixie’s cotton yield—the ill-clad victims of the nation’s surplus stores. And they weary the pavements of our streets with their endless, aimless passing to and fro, and harass the very peace of the nation with their ceaseless importunities for the making and the taking of the surplus of the world. And sometimes, when the struggle for human existence grows too great, some reckless, heartsick victim of too much unused clothes and food and shelter in the world drifts off to meet the everlasting bounty and abundance of the hereafter, down some icy river, or on some outgoing ocean tide—a market lost to the over-production of the world by the crime of that world’s own folly and neglect; a market which neither the sacrifice of human liberty nor the shedding of human blood was required to conserve, but which only the kindness and simple justice of a common humanity would have held inalienable; a market which could proffer not idle, useless, cruel gold, but honest toil for honest toil; a market which relieves alike the victim of over-production and the victim of over-work. A market for our surplus in China? It is praying for recognition, and dying of neglect at our nation’s very doors.”

Commodities often are not paid for with Commodities

Unfortunately, things are not so simple as the scholar at his desk decrees, and the facts of practical life show us that goods are not paid for with goods even in the long run. There is such a thing as Debt in this world, and we have seen that its payment usually has to be made in money which in our present international financial relations means Gold. Now, of course, it may be said that gold is as much a merchandise as any other, and payment in gold would not at all invalidate the principle that commodities are always paid for with commodities. But gold is as little obtainable for international debts as for national ones, and its representatives must take the place of the real article. That this is actually the case is known by all who derive their knowledge from the facts of every-day life and not from dusty volumes of mere theorists. Of course, the money representatives accepted internationally do not include some of those mostly used internally, such as banknotes and cheques, for these are of no use where they do not circulate as currency.

Importations paid with Tribute Claims

Only interest-bearing titles are accepted, such as bills of exchange, mortgages, and principally Government and other public bonds. Besides these methods of paying for goods where goods are not accepted in return, titles of land, houses, mines, factories, and other industrial enterprises in some form or other—usually stock of limited companies—must serve to balance the accounts. The argument has been advanced that debt has to be paid some day, with the inference that this only means a postponement of the final exportation of goods to pay for them, but this is not necessarily the case; the creditors and investors may be, and mostly are, quite satisfied to draw their yearly interest or dividends, leaving the debt itself standing. Even the interest may not be demanded for a time, but may be capitalised, and thus, through the force of compounding, further increase the debt. That this is actually the case is proved by the fact that England is said to be the world’s creditor to the amount of over 2,500 million pounds sterling, if we include those investments which cannot be directly called a loan, but practically are so to all ends and purposes. Whether an English capitalist holds a mortgage on American or colonial lands, the interest on which has to be remitted to him, or whether he is the owner of the land and receives his remittance under the title of rent, makes practically no difference, just as little as if his income is derived from the interest coupons of American and colonial bonds, or from dividends of coal mines. In either case he forces the American and colonial workers to pay him a tribute in money or its equivalent, as the result of some title held by him. When we describe the process by saying: The English exporter of goods to the United States or colonies to a certain extent took tribute claims instead of goods in payment, we have best generalised the nature of the process. If goods were always paid for with goods, where would the tribute claims come from? The fact that we usually express the matter differently, that we speak of English capital invested in the United States, does not in the least alter the real process. The capital, which England supplied was not money, for gold as a rule came from America and the colonies to England, and not vice versa. The international gold export and import balances have generally shown a decided preponderance of American and colonial exports to England over English exports to America and the colonies. What England really sent was merchandise, for which less merchandise came in return. And if the trans-marine countries now export more goods to England than they obtain from that country, it may not at all mean that at last they are repaying the surplus they formerly received by the excess of their shipments, but simply that these countries pay with goods the whole or part of their interest debt to England, while the debt remains as it stood, or, as is really the case—as far as the colonies are concerned—the total of tribute claims has increased during the course of years through compound interest, or the unearned increment on land and other natural resources connected with land; in other words, on monopoly values.

Favourable Balances always best

American free-traders, like Louis Post, in the Public, may be quite correct in asserting that the Union does not get anything in return for its excess of exports over imports, and thus does not obtain any increase of national wealth by the favourable balance of trade of which its protectionists are so proud; and yet his opinions are entirely erroneous if they tend to the conclusion that his country reaps no advantage from its favourable balance. It reaps as much advantage as any debtor who pays the interest on his debt or part of it, instead of allowing it to accumulate. If the Union’s balance of trade should have continued to be a passive one, this would simply have resulted in a further increase of the tribute she owes to England and other countries; and if England had an active balance of trade instead of a passive one, it would only mean that instead of spending part or the whole of its tribute dues—now said to exceed 100 million pounds a year—it would act like a miser who grows richer all the time through the non-consumption of his wealth.

Error of Adam Smith

By correcting a gross error so prevalent in the free trade press, I do not thereby declare against the principle of free trade and become an advocate of protective tariffs. I shall have a few words to say about this question farther on; at this juncture I simply assert that a favourable or active balance of trade is better than an unfavourable or passive one. Though this seems a mere truism, it has been hotly disputed, even by such a man as Adam Smith, The great Scotchman had the misfortune of many a general, who, in the ardour of pursuit, ventures too far and is in turn defeated. In fighting the errors of mercantilism he also attacked its truths, and thus himself fell into a much greater error than the one he fought. He justly denied that wealth consists only in money or in gold and silver; he denied that the precious metals represent the most precious part of wealth. He saw clearly that we might dispense with gold and silver more easily than with iron or copper; that we might even, live without the two precious metals; while we cannot exist without food, clothing and shelter. But here his perception of the real nature of the problem ended. In Book IV, Chapter I, he says: “Though goods do not always draw money so readily as money draws goods, in the long run they draw it more necessarily than even it draws them. Goods can serve many other purposes besides purchasing money, but money can serve no other purpose besides purchasing goods. Money therefore necessarily runs after goods, but goods do not always or necessarily run after money. The man who buys does not always mean to sell again; whereas he who sells always means to buy again. The one may frequently have done the whole, but the other can never have done more than one-half of his business. It is not for its own sake that men desire money, but for the sake of what they can purchase with it.”

Even a learned professor cannot be absolutely blind to the facts of every-day life, and I hardly believe that Smith could have made such statements if he had lived a hundred years later. In the twentieth century it is easy even for a university professor to point out the absolute incompatibility of such theories with the facts of real life. An immense increase of productive power has been the signature of the hundred and twenty-five years that have passed since Adam Smith wrote these sentences in his mother’s house at Kirkcaldy, in the quiet study of the scholar, carefully shut off from any intercourse with the outside world; and our folly in making a scarce yellow metal our exclusive legal tender money has brought about a wild chase of goods after money, while the kind of investments favoured by our rich money owners clearly shows that money can do other work besides buying goods. To comprehend this, even if he had lived in our time, would have presented some difficulty to him. The author of the Theory of Moral Sentiments would indeed have found it hard to understand the motives, which can actuate our Rothschilds, Rockefellers, Westminsters, etc., in their accumulations of millions. They can never expect to use the money for the purchase of goods, for the greatest imaginable extravagance cannot conceive of such expenditure. They consume only a fraction of their income, and use the balance to add to their wealth; not in the form of tangible products of labour, which would be equivalent to consumption as far as the goods-purchasing use of the money goes, but of tribute claims in the shape of land titles, mortgages, bonds, etc.—mere strings to which the world’s money is attached, to be pulled in at the will of the string-holders. But whatever the motives may be, the fact remains that immense amounts of money or money claims are thus used for “other purposes besides purchasing goods,” amounts exceeding by far the whole money stock of the world. And the well-known consequences of this fact are that everywhere goods of all kinds go a-begging in vain for money, while money haughtily refuses to buy goods.

Fatal Influence of Adam Smith

My poor fellow-citizens, you hard-working farmers, manufacturers, traders, professional men, I know you are too busy ever to peep info books like that here spoken of; but do not make light of this matter, for this Wealth of Nations has done, and is doing, you more harm than you can possibly imagine. It has dominated economic thought for many decades, and its influence on our economists—and, through them, on our statesmen—must not be under-estimated even at this date; though the halo which once surrounded it has somewhat paled in the light of modern facts. It even now forms the stock-in-trade of those verbose scribblers who try to impose by great names and well-sounding phrases where facts and logic refuse their support when they try to prove to you that black is white and white black. What a consoling theory for you to learn that

“Money necessarily runs after Goods, but Goods do not always necessarily run after Money.”

when the bank calls for the immediate payment of your overdraft! Try what the manager will say when you refer him to this gospel of Smith and his disciples that “money necessarily runs after goods,” and that you will be sure to pay him as soon as your share of this money overtakes your share of goods! And even if he should consent to wait because you still own some land which you can pawn, interest has a very unpleasant habit of cumulating, so that the day will come when the original amount which you borrowed has doubled, and when you have to part with the last piece of land you had secured as a place for a home. What does it matter? Console yourself; some day or other money necessarily runs after goods! Meanwhile, you see the money owner quietly lend this money out on best security at usury rates and “join house to house, lay field to field, till there be no place, that they may be placed alone in the midst of the earth.” “Woe to them,” says Isaiah; but woe unto you, too, the victims of this system which continually increases a purchasing power that is not at all exercised in the way decreed by the philosopher from his study chair; not even indirectly, for it is merely used to further cripple the usurer’s victims, to force them to bring most of the money they would like to buy goods with to the usurer, who again employs this money in the same nefarious fashion as before. Certainly the mercantilists were wrong when they ascribed to gold and silver special qualities which they do not possess, but they were absolutely in the right when they found a great difference between money, i.e., those kinds of merchandise to which the money monopoly had been given, and other commodities. Their experience of every-day life taught them that a man who sells less goods than he buys, and thus spends money, is not so thrifty as the man who sells more than he buys, and consequently saves money. Granted that the former may seem better off for the time if his stock of goods is worth more than the money paid for them, but goods are subject to all kinds of depreciations. They may be eaten by rats and vermin; they may be destroyed or injured by water, fire, storms, earthquakes, or men; they may be stolen, they may rust or get out of fashion. Business depressions may reduce their selling prices. New inventions may render them worthless, and storage expenses may be so heavy as to finally double their cost price. The money which, according to Smith, should be necessarily running after them, according to every-day life gradually doubles itself through compound interest, whereas the goods become valueless. While all the forces of Nature and society will diminish the latter, every day in the calendar will increase the other. The money deficit continually grows, the goods which are supposed to represent the deficit continually decrease in value. On the other hand, the man who sells more than he buys puts money aside on which he obtains interest, and thus he can quietly wait for the period at which the very want of this money will throw goods into the market at reduced prices, when he will proceed to make up his stock of goods. Which of the two will have the more valuable stock of goods in the end? And does the case change in the least where a number of men are substituted for the individuals whose transactions have just been investigated, when we look at the facts presented by the. trade of nations? A nation which exports more goods than it imports, and thus obtains a money balance, can invest this money for the purchase of goods when a suitable time arrives; and, as in the case of England, that time may be put off so long that the mere interest due on the money will buy more goods than the original capital balance amounted to.

Interest forgotten

Smith seems to have entirely left out of account that there is such a thing as “Interest” in this world when he uttered the wonderful wisdom above quoted. In real transactions, however, this simple factor has completely proved the folly of running into debt where no absolute certainty exists that the advantage accruing to the debtor is at least as great as the interest he has to pay figures up to; and in general, as we shall yet see in the chapter on “Interest,” this advantage lies with the secured interest-getter. The mercantilists have thus been completely upheld by the universal opinion of the whole business world—except those of its members who studied books on political economy of the Smith pattern—in standing up for the most favourable balance of trade obtainable.

Effect of unfavourable Trade Balances

What the contrary means is best illustrated by Portugal’s history during the last two centuries, as told by Friedrich List in his Das Nationale System der Politischen Oekonomie. I translate from the fifth chapter of the first book. List’s quotations from English sources are thus twice translated, so that the text may slightly differ from the original, which is not at my disposal:

“‘When Count Erceira became Minister of Portugal, in 1681, he conceived the plan of erecting woollen factories to thus work up the country’s own raw material and to supply the mother country, as well as her colonies, with her own manufactures. For this purpose, artisans were imported from England, and in consequence of the support given them, woollen factories began to flourish so quickly that already, after three years, the import of foreign woollens could be prohibited. From this time forth Portugal supplied herself and her colonies with her own manufactures, made from the local raw material, and, according to the testimonial of English writers, prospered thereby exceedingly.’ (British Merchant, Vol. III., p. 69.)

“… But in the year 1703, after the death of Count Erceira, the celebrated English Minister, Methuen, succeeded in convincing the Portuguese Government that Portugal would gain very much if England permitted the import of Portuguese wines at a duty amounting to one-third less than that of other nations, for which Portugal would permit the importation of English woollens at the duty of 23% which existed previous to 1684. Immediately after the ratification of the treaty of commerce Portugal was inundated with English manufactures, and the first consequence of this inundation was the sudden and complete ruin of the Portuguese factories, a success similar to that of the later Eden treaty with France, and that of the cessation of the Continental system in Germany.

“According to Anderson’s testimony, Englishmen were already at that time very experienced in the art of declaring their goods under their value, so that practically they only paid one-half of the duties fixed by the tariff. (Anderson, Vol. III., p. 67:)

” ‘After the prohibition was levied’ (says the British Merchant), ‘we carried away so much of their silver, that they kept very little for their necessary occasions. Then we went for their gold.’ (Vol. III., p. 267.)

“This business they continued until recent times; they exported the precious metals which the Portuguese received from their colonies and carried a great part of it to East India and China, where they exchanged them against merchandise which they sold on the European Continent for raw materials. The yearly importation of Portugal from England exceeded the export to the amount of one million pounds sterling. This favourable balance of trade forced down the rate of exchange to the disadvantage of Portugal 15%. ‘We gain a more considerable balance of trade from Portugal than from any other country’ (says the editor of the British Merchant in his dedicatory memorial to Sir Paul Methuen, son of the celebrated Minister). ‘We have increased our importation of money from there to one and a half million pounds sterling, while formerly it only amounted to half a million.’ (British Merchant,Vol. III., pp. 15, 20, 33, 38, no, 253, 254.)”

The inevitable consequence of this drain of Portugal’s precious metals and money was the institution of an inconvertible paper money which, whatever services it rendered to internal trade, could not pay the yearly debt resulting from the annual deficit of the trade, balance-sheet, and other means of payment had to be found. Then began the usual cycle of mortgages on Portuguese land handed over to British capitalists; of Portuguese Government bonds emigrating to England; of the dominion of British capital in Portugal—capital imported in the shape of woollen goods, for which no wine was taken in payment, and accumulating in the usual way through compound interest, until one of the richest countries had become one of the poorest, until finally national bankruptcy, more or less veiled, had to alleviate the intolerable burden.

Adam Smith and Trade Balances

Adam Smith could see no disadvantage to Portugal and no advantage to England resulting from these conditions, and it is highly interesting to ascertain by what kind of logic such contradictory facts could be made to coincide with the preconceived theory of deductive reasoning. He thinks that there can be no advantage in thus obtaining gold and silver from Portugal, for “the more gold we import from one country, the less we must necessarily import from all others. The effectual demand for gold, like that for any other commodity, is in every country limited to a certain quantity. If nine-tenths of this quantity are imported from one country, there remains a tenth only to be imported from all others. The more gold, besides, that is annually imported from some particular countries, over and above what is requisite for plate and for coin, the more must necessarily be exported to some others; and the more that most insignificant object of modern policy, the balance of trade, appears to be in our favour with some particular countries, the more it must necessarily appear to be against us with many others.” (Book IV., Chap. VI.)

So many words, so many errors! Certainly Smith could not know 125 years ago that England, in the year 1901, has become the world’s creditor and capitalist to the amount of something like 2,500 million pounds sterling, merely through lending out her gold and silver, after having received it, or without at all receiving it; by letting the debts accrue which become due to her in consequence of her active balance sheets. He could not know this, nor did he know how affairs stood in his own time. He had the courage to write a book on political economy, without ever having been in active business life; without knowing more of it than a student can learn at his desk. Henry Thomas Buckle, in his History of Civilisation in England (Vol. I, p. 249), says: “The Wealth of Nations is entirely deductive, since in it Smith generalises the laws of wealth, not from the phenomena of wealth, nor from statistical statements, but from the phenomena of selfishness, thus making a deductive application of one set of mental principles to the whole set of economic facts. The illustrations with which his great book abounds are no part of the real argument; they are subsequent to the conception. …” However, even Adam Smith knew that money can be lent out at usury internationally as well as nationally, and that there is such a thing as land purchased with gold, which land yields rent to its owner, whether that owner lives in England or in Portugal; also that there are really cases of continually favourable and continually unfavourable balances.

A False Premise

The worst trick in his speculations on international trade was played on him by the wonderful discovery he had made that “the general industry of a society can never exceed what the Capital of the society can employ,” which we had already a chance of admiring in the first part of this chapter. Upon this false premise his whole ideas of trade policy have been built up, and it is no wonder that the conclusions thus drawn from a false major are absolute nonsense. If it were true that a society could not increase its industry beyond fixed limits, it would be quite correct to conclude that the introduction of any new industry must correspondingly hamper one already existing, and that therefore the industries for which the country is best adapted are preferable to those of a more exotic nature. No use, consequently, to protect any industry, for what cannot maintain itself without such artificial methods had better make room for what is more congenial to the soil. As I have shown, the assumed fact does not exist; there is practically no limit to the extension of a society’s industry. On the contrary, the more industries a nation possesses, the more industries it will have room for. If spinning flourishes, weaving succeeds; and if both have reached a certain development, the manufacture of spinning and weaving machinery will pay, which in its turn gives an opening to foundries; these to iron and coal mines, etc.

Unfortunately, authority plays a very pernicious part in public opinion. Carlyle’s “thirty millions, mostly fools,” are too much in the habit of following some men with great names like sheep running behind their leader, or we would be farther advanced. The first work urgently required before a sound building can be erected is to clear out of the way the old ruins. No headway can be made unless the work done by certain men of great renown is valued at its real worth, unless we fully recognise in which way these theory-mongers have managed to stultify themselves and the trusting public, which, though it does not understand their reasoning, estimates their depth by their abstruseness. It is taken in so much easier through the mutual support these philosophers give one another, through the flocking together of these

Birds of a Feather.

Here we have some wonderful theories on our present topic, hatched, in support of Smith’s nonsense, by David Ricardo, a man who, though a speculator at the Exchange, had never any practical experience of mercantile business; which another theorist and deductive reasoner, John Stuart Mill, and still others of the same guild, are so delighted with that they debit the nonsense as if it were based on observations of real facts, and not merely on pure baseless inventions concocted at the scholar’s desk. Adam Smith’s deductively found theories about international trade, culminating in Jean Baptiste Say’s proclamation that commodities are paid for with commodities, had so delighted the imaginative Ricardo that he set to work to substantiate this assumption, even in the extreme instance of one country producing everything—without exception—cheaper than another country, as, for example, may occur with Japan. If that country, with its low wages, continues to progress in industrial development as it has done during the last three decades, there may soon be hardly any article which cannot be produced more cheaply there than anywhere else in the world.

Ricardo’s Reasoning,

by me applied to the case of Japan and New Zealand, runs on the following lines: Suppose that Japan requires for the production of a certain quantity of iron a year’s work of 80 men, which we call 80 units, while New Zealand needs the work of 120 men for one year, or 120 units, to produce the same quantity. For woollens, the same quantity for which we require 100 units Japan only requires 90. Still, thinks Ricardo—and Stuart Mill, etc., with him—though both articles are cheaper in Japan than in New Zealand, it would pay Japan to export iron to New Zealand, and to import woollens from New Zealand, because, in that case, she would obtain for a quantity of iron, which cost her only 80 units, as much of the woollens as 120 units can manufacture in New Zealand. As 100 units of New Zealand woollens are worth 90 in Japan, 120 are worth 108, and so Japan would obtain 108 units of wool for an outlay of 80 units. She would, therefore, find a considerable profit in the transaction, though the imported woollens are actually dearer in New Zealand than in Japan. Also, New Zealand would benefit, for the iron which she paid with 108 units of woollens would have cost 120 units if produced in New Zealand, and by spending the labour on woollen production more iron was produced with the same quantity of labour than if she had produced both the iron and the woollens.

Even the deductive reasoning evolved at the scholar’s desk has its limits where the opposing facts are too clear and simple; and thus Ricardo could not quite blind himself to the obvious inference that in a case like the one here given, Japan need not at all take the dearer woollens, but might insist upon cash payment, and thus be still better off than if she paid herself in woollens. But the theory has to be maintained at any cost, in spite of the obstreperous facts, and so a new theory has to be invented to buttress up the other.

Quantity Theory called in

The quantity theory in its rawest form—in which form, as I have shown, it is absolutely false—has to be called in, and thus the following reasoning is arrived at by the great theorist. Japan actually begins by shipping iron and woollens to New Zealand, requiring to be paid in gold. This naturally produces a scarcity of money in New Zealand which lowers prices there; while the importation of so much money into Japan increases the money circulation, and consequently raises prices in that country, until finally not only it no more pays to export iron from Japan to New Zealand, but, on the contrary, woollens can now be imported from New Zealand to Japan, until the monetary balance is again brought to its level in both countries through the re-exportation of gold from Japan to New Zealand.

Wonderfully simple, is it not? I should gladly join in the hearty laugh of any practical businessman who reads these splendid elucubrations if the subject were not too serious altogether; for we must not forget that Ricardo does not stand alone in this reasoning. John Stuart Mill and many others walk in his footsteps. One of them, the American economist, Amasa Walker, finds in this fallacy the strongest argument against paper money.

“By substituting a money which derives its currency from the authority of Government for the money of the commercial world, a country loses in the very act of doing so all the benefit of the automatic distribution of money through the agency of price over the commercial world. We have seen that any excess in the money of the country above its distributive share of the money of the world makes that country a good country to sell to because prices there are high, and a bad country to buy from for the same reason; and that, in consequence, imports being increased and merchandise exports diminished, the excess of money which caused the temporary disturbance of prices passes easily and quickly off on settlement of the balance.

“The amount of paper money in a country is not to be regulated in this way … hence the regulation of such a money is not automatic. It has got to be done by hand … the paper has no outlet for foreign trade.”

And these are the men whose opinions are continually dinned into our ears wherever and whenever we touch the existing system. They are the evangelists whose gospel is preached by people who do not understand it, to others who have never given it a thought, but who accord their willing assent, even where their personal interest is not served by the teachings, for the same reasons which made the swindle of the two adventurers in Andersen’s

”The King and his New Clothes”

so successful. These men had engaged to spin and weave for the king a suit of clothing, which had the wonderful quality that only those could see the garments who were gifted and capable. In reality, the men made but a pretence of spinning and weaving, while their spindle and loom were empty; the money received for the expensive raw material they said they required being put into their pockets. The king wanted to know how the work progressed, and sent his ministers, who, though they did not see anything, gave glowing reports of the magnificent stuff, for not seeing it meant stupidity and incapacity. Finally the king himself went, and praised the artisans’ work, for the same reasons kept him from acknowledging that he really saw nothing. At last the clothing, which did not exist, was to be worn in a great procession of state, and the swindlers acted as if they clothed the king with the imaginary dress—which was much admired by everybody in town, as the wonderful qualities of the stuff had been made known, and consequently nobody wished to appear, less wise than the others who pretended to see the clothes. Only a child said: “But he has not got anything on!” and thereupon one after another whispered the same truth, not daring to tell it aloud, while the king gravely continued his march in the procession.

How often have I met with these ministers, this king, and this crowd; how rarely with the child! In concerts, where every listener was bored by certain classical music, and yet turned up his eyes with pretended admiration, not to be supposed ignorant and destitute of taste. In Italian galleries, before the pictures of old masters I have heard the loudly expressed admiration of men and women who really were bored by what they saw, for they did not like it half so well as any interesting chromo in a shop window. Books which nobody reads are praised in the same way, and for the same reason; and how can you expect Mr. Smith and Mr. Brown to doubt any statement backed by big names like those mentioned, when such action would merely advertise their own ignorance? Fortunately, I am not the only child in the crowd daring to say, “But I cannot see any clothes!” Fortunately, the spirit of investigation is gaining ground rapidly, for the contradictory facts have become too obtrusive to be longer hidden under any amount of fine phraseology.

Debt the ignored Result

After my reduction of the quantity theory to its true dimensions, after my specification of the part played by credit in circulation, and especially after my demonstration of the real nature of international settlements, I need not say much in the way of illustrating the astonishing theories and their justification here put before us. Any practical businessman knows that, in an illustration like the one just drawn, Japan would regularly send iron and woollens to New Zealand; and as we have no money to pay for the goods, if we cannot export goods in return, the result would merely be a further indebtedness of our country. Japan would make herself paid by accepting New Zealand bonds, mortgages, etc., and would gradually play the part towards us which England has been playing towards Portugal. We have seen that the loss of her silver and gold to England did not bring any remedy in the shape of sufficiently lower wages and prices in Portugal to enable that country to compete in woollen manufactures with England, or to send a correspondingly larger quantity of wine there. Nor did the gold and silver obtained by England increase the cost price of its manufactures so as to disable it from competing with Portugal. In Portugal an inconvertible paper currency took the place of its metal money, and gold rose to a premium; but competition with the English manufacturer did not become easier for that, as improved processes of manufacture, rendered possible through the larger turnover, made up for any losses English importers incurred through the Portuguese gold premium; in spite of its cheapening effect on the wine prices. Instead of English prices having risen through a larger stock of gold and silver, they had gone down, for the increase in England’s stock of precious metals had not kept pace with the demand resulting from the growth of its turnover, leaving entirely aside the fact that the imported gold and silver, as far as it could be spared, was at once paid out again in other markets, and finally invested in foreign bonds, land, and mortgages. England grew richer and better able to further improve her machinery and manufacturing facilities, so that woollens were made cheaper than ever before, while impoverished Portugal found still greater difficulties in competing with the powerful importer. We must not forget that it is impossible for the poor to establish a new industry, or even to keep up an existing one in an open market against a powerful competitor. The well-known dodge of under-selling—even if for a time the work has to be done at a loss, until the poorer competitor is ruined—has been regularly resorted to by the powerful American trade combines, so as to force resisting firms to come in or to close them up; and the same trick, as we shall see farther on, has often been used internationally by England.

After all, when we speak of Portugal as exporting and importing, it is not the country, but its manufacturers, farmers, and merchants who are meant, and it is the effect on their finances, which must first be taken into account. The country’s finances only suffered indirectly through its bonds going abroad, and through the decrease of the tax-paying power of the people. The interest of the bonds was payable in gold or silver, which had to be procured by the Government in a market from which the precious metals were disappearing. The premium, which had to be paid under such conditions to obtain the gold or silver had to be raised by additional taxation in a country already weakened in its resources through the decay of its industries. Finally, the interest of the national debt had to be paid by means of new loans raised abroad at increasingly unfavourable terms until, in the end, the national credit went down altogether. In short, as all States are largely indebted, the difference is this: A State with active financial balances is indebted to her own citizens, while the State with the passive balance becomes the debtor of foreigners. The former can gradually pay the debt by taxing the creditors; the latter has no such power, as we generally cannot tax the citizens of other countries. The experiment of levying a tax on the interest due abroad has been tried and found a bad policy, for such a breach of faith with creditors had to be dearly paid when new credits were needed. Where the tax is agreed upon from the beginning, it is simply added to the interest rate by the foreign creditor, and is thus paid by the domestic tax-payer.

New Zealand’s Case

We need not go so far as Portugal to see the effect of passive financial balance-sheets. I estimate New Zealand’s present debt abroad—if we add the debts of the State, the public bodies, and the private indebtedness to the people of other countries—at 90 million pounds sterling; costing us not less than 4 million pounds yearly interest. Our average excess of exports over imports during the last fourteen years was only about 21/3 million pounds a-year, so that our indebtedness increased at the rate of 12/3 million pounds a-year. The indebtedness is due to former passive trade balances, which, even so recently as 1873-1885, averaged £1,280,000 a-year.[5] The deficit of £16,600,000 accruing during these thirteen years—which, as the heaviest balances against us fall into the first years of the series, we may average to date from 1878—must have cost us at least 50 million pounds by this time, if we count interest at the rate of 5% only, which is altogether too low when we consider the influence on the average rate which the high interest paid by private borrowers during that period exercised. To this have to be added the older debts, much more increased through accumulation in consequence of the higher rate and longer period. Deducting on the other side the interest payments through favourable balances, we obtain another 40 million pounds to be added to the 50 millions, the whole 90 millions being the outcome of an excess of imports, with compound interest added.

Interest often makes the Cheapest Market the Dearest

Not only Smith, Ricardo, Mill, and their disciples, but pretty well all who discuss trade politics in our time, have taken little or no account of this multiplying power of interest. They do not realise that buying in the cheapest market, on credit, may finally prove to have been a buying in the very dearest market. What was bought fourteen years ago at 15 shillings on credit costs us to-day 30 shillings at 5% compound interest; and we certainly would have done better to buy at £1 in our own market. If, through our importation, a corresponding amount of our own labour had to remain idle, which, if put to work, would have produced the goods, and if we had to feed these men, anyhow, there is an effective loss of 30 shillings in a transaction which seemingly showed a profit or saving of 5 shillings. And when we consider that £1 left for 100 years at 5% compound interest figures up to £I40, we can easily see that no amount of saving in the purchase price can make up for the final loss caused through buying on credit where this could be avoided.

The Case would be different if Interest did not exist,

for then debt would only mean deferred payment in goods of some sort. The theory that commodities are paid for with commodities would be true. There need be no more fear of importation without a corresponding exportation. In fact, the longer this exportation is deferred the better for the debtor, who would have the free enjoyment of the imported wealth until such time as the importer chose to pay himself by exportation. Better still if he omitted this exportation altogether; it would mean that he made a gift of his wealth. All the stock arguments of free traders would then be as correct as now they are false. False, because they are building a correct principle on a false basis, forgetting that to obtain a positive figure out of a negative one we must multiply it by another negative. Interest is negative, free trade is positive: result of multiplication negative. Prevention of importation is negative, and its multiplication with the negative interest gives a positive result. Interest is a poison, so is protection, and the counter-poison may destroy the dangerous effects of the poison.

Employment of Local Labour the main Factor

I agree that the assumption of unemployed labour as an effect of importation is to a certain extent unwarranted. At the foundation of a colony it may, for instance, be considered a good policy to borrow capital, say in the shape of imported tools and machinery, because the workers are all employed on better paying work, and the saving due to the importation may be far greater than the interest on the debt amounts to. As soon, however, as a period is reached when workers are unemployed, or insufficiently employed, in consequence of the importation of goods which could as well have been made locally, the position changes. The fact that the article thus imported could not have been made as cheap in the colony can be given as a good reason for the importation only if it can be claimed that, in consequence of this importation, something else could be exported which has cost less labour, and by which the imported article was directly or indirectly paid for. In no case could an excess of importation be justified by such an argument; for this very excess, in the face of unemployed or insufficiently employed labour, means that we have borrowed abroad at interest, what our own unemployed could have produced at home. To see this more clearly, let us transfer the illustration from the trade between the collectivity of individuals of different countries to some single individuals of the same country.

The Case of John and Bill

John, a tailor, needs some chairs. If he were fully occupied at his trade he would act very unwisely in making these chairs himself. He is not skilled in such work, and it would demand ten times as much of his time as Bill, an experienced cabinetmaker, requires for the purpose. John would do much better to make a coat in the time, and buy chairs out of the proceeds, certain that the same labour time thus spent will buy more chairs than if he spent it on chair construction.

How would it be, however, if through a too limited demand for coats, John were only half employed? Would he not prove a better householder if he spent his idle time on chair-making than if he were to buy those commodities on credit or with his savings, sitting in his shop, and looking out of the window all the time? Now let us spin out the story a little farther, and let us assume that Bill, too, is only half employed, but sadly needs a coat. Would not Bill do better to make this coat by his own labour in his idle time, never mind how long this will take, than to run into debt for it, or pay out money saved for a rainy day? No doubt the most practical way for both would be to use their unemployed time to work for each other. John would make Bill’s coat in one-tenth of the time in which Bill could make it, and the same thing would happen in regard to Bill’s taking John’s place as a chair-maker. Certainly both parties would fare much better by such an exchange; and no doubt they would do this if feasible. But the two do not know each other, and barter between them is out of the question, as it practically is in the greater part of ordinary business affairs. John finds that his cheapest way of getting chairs is to buy them at the next furniture dealer’s, and Bill buys his coat in a department store. Both these middlemen—for some reason or other—have no use for the labour of the two artisans. Perhaps they can buy imported goods cheaper. Both artisans borrow money from a usurer to buy the things they want, or they run up a bill at the store. Would it not be far better for John and Bill if, in some way—let us say, for instance, by means of a prohibitive duty—they were prevented from buying the cheap goods? Never mind what the addition to the price might be; they would be better off if the goods were made locally, and if they thus obtained employment. What would it matter if Bill had to pay £5 for a coat which could have been imported for £1, and if John gave as much as £5 for the same chairs which could have been laid down in the country for £1 when the real result was simply that John made a coat in exchange against Bill’s chairs, and Bill made chairs in payment of John’s coat? In this case, the amount at which both commodities figured in the mutual accounts would prove absolutely indifferent. Anything was better than to have two willing workers sit idle in their shops that they might give employment to foreign workers. Under such conditions, even

An absurd Waste of Power

such as Adam Smith describes in the second chapter of Book IV, may prove the lesser of two evils.

“By means of glasses, hot-beds, and hot-walls, very good grapes can be raised in Scotland, and very good wine can be made of them at about thirty times the expense for which at least equally good can be brought from foreign countries. Would it be a reasonable law to prohibit the importation of all foreign wines merely to encourage the making of claret and Burgundy in Scotland?”

My answer is: If the foreign wine-producing countries will not accept British goods in payment for wine, while Scotch workers, in consequence of this refusal to accept the products of their labour in payment, cannot find any work to do, it would decidedly be better policy to set them to digging coal, making and laying steam-pipes, building and heating hot-houses, therein to raise grapes, than to reduce these willing workers to a pauper’s state, fed by the produce of other workers. The cheapest foreign wine for which we have to run into debt, through compound interest, will finally be the dearest we ever bought, and workers, who otherwise would have to be fed in idleness, can be looked at as working for nothing. Those who always speak of the consumer who ought to buy in the cheapest market forget that at least 95% of the population are first producers before they can be consumers, and that therefore the producer’s interest must be nearest to their hearts. Unfortunately, from the non-producing minority arise those whose position gives them the power of directing the nation’s policy.

I wish it to be understood that, so far, I have not in the least stood up for protection; the problem of tariff policy will be treated in the next chapter. Here I only had to show that buying in the cheapest market is not always the best policy; that this cheapest market may after all prove the dearest; that under any condition

Reciprocity of Trade

has to be aimed at. I know that the great Scotch professor treated this principle with utter contempt. In Part II. of the third chapter of Book IV. he says: “The sneaking arts of underling tradesmen are thus erected into political maxims for the conduct of a great empire; for it is the most underling tradesmen only who make it a rule to employ chiefly their own customers. A great trader purchases his goods always where they are cheapest and best, without regard to any little interest of this kind.” It would have been better for the world if Adam Smith had been either an underling tradesman or a great trader, before he set about writing on the business of such persons. Even the great trader would have told him that nothing is cheap which you have not the money to pay for; and that if buying in the cheapest market results in a corresponding loss of custom, he will not buy there. Unfortunately, a single great trader, as a rule, does not as certainly lose customers where he withholds his own custom as the “underling tradesmen” do, or much of this chapter might have been left unwritten. Usually an importer does not in the least care which nation proves the best customer of his own country when he gives his orders. He merely compares price-lists and qualities, and then orders his goods. In fact, he can hardly act differently, or the competition would swamp him. Nor is it his business to attend to such matters. His Government has to look out for measures, which prevent the community from running into a permanent and growing debt by its international trade.

Balance of Trade and Financial Balance

Not to be misunderstood, I must add a short explanation. Favourable, active, positive, or unfavourable, passive, negative balances of trade do not necessarily correspond with similar financial balances. A balance of trade may be active and the financial balance passive, as is the case in New Zealand at the present time; and the trade balance may be passive and the financial balance very active. England has long shown the most prominent example of such a country. Its imports exceed its exports considerably, but generally the deficit has not reached the amount due from other nations on interest, rent and profit account; while our poor colony, in spite of its favourable balance-sheets, runs deeper and deeper into debt because the interest debt due to England is much higher than the balance of trade in our favour. If our balance of trade were passive, or if our exports only just balanced our imports, we should simply incur yet greater indebtedness; and if England had a less passive balance or even an active one, she would become richer still. As I said before, she would act like a miser who does not spend his income, who increases it all the time by putting out his savings at interest.

Defective Balance-sheets, and still more Defective Conclusions

We must not leave out of sight, either, the fact that trade balance-sheets are very defective, that imports are often undervalued to save duties, and that the statistics of exports are very deficient. The prices realised in foreign markets differ, often materially, from those at which the goods figure in our export lists. Nor am I less familiar with the argument frequently advanced in our, free trade literature that the larger amount of imports shows a corresponding profit made by the importing country through getting more in return than it paid out. For instance, it is said that a manufacturer of country A ships a certain amount of cotton goods that cost him £1,000, which he sells in country B for £1,200 worth of ivory. This ivory fetches in A £1,500. The exports of A now figure at £1,000, and its imports at £1,500, which gives a passive balance of £500; but instead of running into debt for this amount, our manufacturer has actually made a profit of £500, and the country has £500 more of wealth than it had before, without owing a penny. Country B is better off, too; for the ivory there costs originally only £1,000, while the cotton goods bought very cheap at £1,200 sell for £1,500; so that actually country B is also £500 richer than it was before, and no debt has been incurred, though its imports figure at £1,500, while the exports were only £1,000.

People who reason like this are of the Adam Smith line of deductive philosophers, supremely superior to actual data, which they manipulate according to their pet theories. To begin with, exports do not figure, or, in a correct balance sheet, ought not to figure at cost price, but at selling price; and imports do not figure at selling price at home, but at their cost price abroad, with freight added or left out of account. Calculating in this manner, country A exported £1,200 worth of cotton goods and imported £1,200 worth of ivory, and country B imported £1,200 worth of cotton goods and exported £1,200 worth of ivory. The only item in this transaction, which may swell or diminish the financial balance in both cases is the freight, which is in favour of the country that earns it.

Freights are often added to imports and deducted from exports. The great variety of ways in which the values of exports are calculated furnishes the principal cause why the totality of all imports in the world considerably exceeds the exports, which otherwise would be impossible, for if the exports of one country exceed its imports, the imports of another ought to correspondingly exceed its exports. Exports are often calculated at average prices not corresponding with the real figures; or at wholesale market prices, which, for the principal exports, closely correspond with the selling price abroad, minus commissions, interest and freight. The main reason, however, for the excess of export figures is found in the comparative reliability of import statistics, the result of forcing all imports through custom houses; while statistics of exports are usually very loosely handled, with very uncertain valuations.

The money spent in travelling abroad is an important item in the financial balance of rich countries on the passive side of the financial balance; that brought in by immigrants and tourists has to be added on the active side. (Six million pounds are spent yearly in Switzerland by tourists.) These are ABC matters which any businessman knows, but business men are not the raw material from which our officials who draw up the trade balance-sheets are made. Nor do businessmen, as a rule, write books on economics. This work is usually undertaken by scholars who know as little of practical business as Adam Smith did when he evolved his trade policy principles from his brain, undisturbed by the troublesome observation of real facts.

I have no wish to depreciate the merits of the great Scotch thinker, but he undertook an impossible task; for it is as impossible to do justice to economic subjects without practical business experience as to bake wheaten bread without any wheat. This is the reason also why Protection and Free Trade, by Henry George, though written in his best style, is the poorest of his books. As little as Smith had he ever been in business, and experiences which to a businessman have become flesh and blood are to men of this kind undigested raw materials or terra incognita. Most interesting in this respect is Chapter XIII. of George’s book, “Confusions arising from the Use of Money,” which ought to be styled:

“Confusions arising from the Ignorance of the Part Money plays in Business.”

Because a man who barters with another strikes the better bargain the more value he obtains in return for what he gives, George concludes that the more the value of her imports preponderates over that of her exports, the richer a nation must be. His reasoning, like that of all free traders, is based on the “commodities pay for commodities” fallacy, which assumes cases of barter where, in reality, purchase and sale, i.e. are money transactions, are carried on. Under the money system a nation’s imports, like an individual’s purchases, represent not income but expenditure, unless they are obtained as a gift; while exports are sales, and represent income instead of expenditure, if they are not given away gratis. In this way George is kept from realising the great difference involved in the use of money. The adoption of one scarce metal as legal tender, as the only commodity with which a man can free himself of a money debt in those countries which are generally kept in view when international trade is considered, has entirely changed the conditions. As I have already shown, market value is the only value, which economists have to deal with, and market value under barter is entirely different from market value realised in the market where goods are sold and bought for money.

 Merchandise Wealth and Money Wealth

This is entirely left out of sight by Adam Smith when he says, in the chapter last mentioned: “As a merchant who has a hundred and ten thousand pounds’ worth of wine in his cellar is a richer man than he who has only a hundred thousand pounds’ worth of tobacco in his warehouse, so is he likewise a richer man than he who has only a hundred thousand pounds of gold in his coffers.”

If the professor had asked the first bank manager he met to whom he would give the largest credit, the answer would have shown him how the wealth of his two men—that of the wine merchant and that of the man with the money-— is estimated by the official valuator of this department from the money market point of view. The man with the gold in his coffers would only require to transfer this gold to the vault of the bank for safe keeping, and could at once obtain permission to draw cheques to the full amount of the gold; while it is questionable whether a cautious bank manager would grant any overdraft at all to the man with the wine. At the most it would be a small fraction of the cost price of the wine, even if a lien were given on it. Experience has taught such men that the value of wine depends entirely on that of the man who owns it. If a person does not understand his business, he may spoil this wine through false treatment, so that it is not even worth as much as vinegar; or he may have misjudged his market, may have bought light wines when there is only a demand for strong ones. He may have a bad reputation in the trade, so that, even though the wine be genuine; buyers are afraid of its having been adulterated, and do not want it at any price. One of his employees, incensed at some bad treatment, may go into the cellar and open all the spigots, letting the wine run away. Or a financial crisis may force on general retrenchment, and wines become unsaleable for a time, or saleable only at a ruinous sacrifice. All these and many other considerations may prevail with the banker to refuse advances to the wine merchant, where the moneyed man is allowed to draw up to the full value of his gold.

Commercial crises preach the most eloquent lesson as to the difference between the value of merchandise and that of money by showing that, though the value of merchandise measures that of gold as much as the value of gold measures that of merchandise, there is a great difference between the two in the facility of realising the value. Professor Roscher reports five large spinning establishments in Manchester, valued at £212,000, which, in the crisis of 1841-42, were sold at £66,000. Facts of this order are not confined to commercial crises. I have met with different cases within my business experience, where in ordinary times even a smaller quota of the cost price has been obtained at forced sales. The mercantilists may have been less accomplished thinkers than the founder of the free trade school, the patron saint of Manchester; but they certainly were better businessmen. They knew that in international accounts the same principle obtains as in the dealings of private citizens, that, in both cases, it matters little how rich each party values himself, but very much how he can pay his way. A merchant may sell goods which have cost him only £10,000 for £12,000, and buy in exchange goods valued at £20,000 for only £18,000 and yet become a bankrupt when he is held up for the balance of £6,000 he owes, at a time when the goods he bought will not sell, or sell only at half their value. Even if longer credit is obtained so that he need not sell at a loss, interest has a nasty habit of increasing the debt until finally a gross profit may change into a net loss. That the same thing really happens in the trade of nations has already been shown. Our New Zealand has certainly done a paying business in her foreign trade. Our farmers had to spend much less labour on the production of the wool with which they paid for their fencing wire than if this labour had been directly applied to the manufacture of the wire; but for all that, the compound interest on the excess of imports, valuable as they were, and much as they increased the wealth of the country, may in the course of years raise the cost of the fencing wire beyond its value, and may prove that New Zealand has very expensive fences after all. And even if this were not the case, it is certain that if our creditors sold us out some day to recoup their money, the losses, which we should have to sustain on our assets would by far exceed our profits. If all our mortgagees called in their mortgages, whenever due, in consequence of a great money tightness or some other cause, our land, including the improvements, under the unfavourable market conditions thus created would certainly not fetch the amounts borrowed on it; so that the farmers would have to sacrifice everything else they own, and even then probably be unable to pay twenty shillings in the pound.

A favourable balance of trade must therefore be the most serious consideration of statesmen, except in the case of creditor countries like England and Holland, which have large interest dues partly or wholly accepted in merchandise from their debtors.

The real Balance to be considered is the Financial Balance

I repeat this for the purpose of cutting off shallow free-traders jokes like that of merchandise intended for importation, but burned at sea. Its destruction, it is said, diminishes imports, and thus procures a better balance of trade; ergo, it is better for a country if cargoes of this kind are lost than if they arrive in safety. Certainly in such a case the actual imports are lessened, but the financial balance remains the same as if the ship had arrived, for the goods have to be paid for if they run at the risk of the importing country, and if they do not, other goods will take their place; they are as if they never had left their home port.

Effect of Currency Reform on Balance

Having cleared the way to a thorough understanding that—in ordinary circumstances, and certainly as long as interest accumulations are likely to exceed any advantage enjoyed by the debtor—”keep out of debt” is good advice, whether given to an individual or to that congregation of individuals which we call a nation, we have now to investigate how far an improved currency can help in this direction. Later on we shall try to find what tariff policy is likely to prove most favourable for the purpose.

I shall first try to prove that the introduction of a paper currency cannot affect the country’s financial balance injuriously, provided there is no such inflation that the credit of the country is injured at home and abroad, and this is out of the question with a scientific paper currency as here contemplated.

Where exports exceed imports, if a gold balance is claimed by the country in question, it matters little what currency it may possess. If it has a gold currency, it will import as much gold as it needs, and no more; the balance will either be used to pay debts with, if it is a debtor country like New Zealand, or to be lent out, if it is a creditor country like England.

Where imports exceed exports, a creditor country pays the passive balance with its capital and interest dues abroad, and a debtor country runs farther into debt, never mind what currency either country may have. Should it insist on maintaining a gold currency, and consequently be compelled to reserve a certain gold stock, the debt incurred must increase faster than it could do in a country which uses paper currency, and which is thus at liberty to spend all its gold in paying for the excess of imports. In any case, the gold will not go abroad as money, but as a merchandise, as Jonathan Duncan, in the book already mentioned, correctly says:

“How, then, should we pay the balances on our foreign trade, since the money of the State and the money of commerce, not circulating beyond our own shores, would be confined to our domestic transactions? We should pay the balances on our foreign trade, as we now pay them, in gold, but with this difference: that we should pay them in gold as a commodity and not as money, and consequently at the market price of that metal, and not at the mint price. We buy the wines of France, the tallow of Russia, and the wheat of America at their respective market rates; and if foreigners want our gold, instead of our woollens or hardware, we are fools indeed if we pay them in a fixed price, when they charge us in a variable price. We are only going back to the double currency already described as in use in the old cities of Greece; and without wishing to be uncourteous, we prefer the wisdom of Lycurgus and Plato to that of Sir Robert Peel and Mr. Jones Loyd.”

Balances of different Countries

A cursory review of the balance-sheets of the different countries of the globe presents active and passive countries (countries with favourable and unfavourable balances) with gold currencies, and active and passive countries with paper money. I first give the gold currency countries, and add P for passive and A for active; after which I shall in the same way give a list of the paper countries. I take the trade balances of the beginning of the eighties as the latest I find just at hand. (Russia had still a paper currency at that time.)

(a) Gold Currency Countries

Great Britain P, Germany A (now passive), France P, United States A, Netherlands P, Belgium P, Switzerland P, Sweden P, Norway P, Denmark P, British North America P, West India A, Egypt A, Uruguay A, Paraguay P, New Zealand P (now active), Australasia, as a whole, now A, Ecuador A.

(b) Paper Currency Countries

Russia A, Austria A, Italy P, Spain P, Portugal P, Greece P, Turkey P, and the whole of South and Middle America (not including Ecuador, Uruguay, and Paraguay, which have maintained a gold currency) A.

Method of international Settlements

If present conditions did not change in such a case, our New Zealand, in passing from her gold currency to a scientific paper currency, would, as she now does, pay for her imports by means of her exports. (I hope I need not go into details to show how the exporter draws on England for the proceeds of his exports, and how the importer buys the draft directly or from the banks to pay for his imports.) The surplus of the export proceeds is paid in gold by the foreign countries, which gold, as a rule, does not come here, but is paid for the interest dues of our English creditors! As this surplus is not enough to pay for the whole of these dues, we have to borrow more gold on bonds and mortgages; and this would continue if nothing else changed, never mind what our currency may be. Our mortgage debtors and the treasuries of the State and the public bodies would have to find directly or indirectly (through taxation) the gold to pay their interest dues as they now do, either through exports or new gold debts.

Gold at a Premium

That the gold they have to borrow might be held at a premium, after gold is no more the basis of our currency, even in case of the scientific currency here proposed, does not at all change matters, for so would the gold proceeds of our exports be at a premium.

To make this clearer, let us take our trade of 1899, and let us give the figures under two suppositions: 1, under the present gold currency; 2, under a paper currency accompanied by a temporary gold premium of 25%, £100 gold being for a time worth £125 New Zealand paper money.

Under 1, our exports were, in round figures, 12 million pounds; our imports £8,700,000. Our interest and rent debts abroad, etc., were 4 millions, and we consequently had to borrow £700,000.

Under 2, our exports fetched 12 millions in gold, which would mean in our paper 15 millions. Our imports cost us £8,700,000 in gold, which would mean; £10,875,000 in our paper. This would leave us a surplus of £4,125,000 in paper, for which we should have to buy £3,300,000 of gold to pay our interest, etc., debts with, and a balance of £700,000 in gold is due as before.

In either case we have to borrow gold, and have an equally poor chance of ever paying it if it were not for the powerful effect which the introduction of a scientific currency must have on production, and thus on our balance of trade.

After having explained the influence exerted by our gold money on distribution, and consequently on production; after having shown the restrictions produced by forcing our whole trade through the narrow eye of our golden needle, I need not further dwell upon the hopeless case of a debtor country with a gold currency which suffers under a passive financial balance-sheet. On the other hand, I have already shown the favourable effects of a scientific paper currency, which we shall appreciate to their full extent only when we consider them in the chapters treating of Interest and Capitalism.

Favourable Effect of Gold Premium on Balance

One effect, which a paper currency may have on the balance of trade has yet to be considered. It is claimed that a paper currency, or even a silver currency—so long as silver is demonetised in most commercial countries —may bring about a restriction of imports and an increase of exports through a rise in the price of the former, due to the gold premium and the reduced cost of the latter; as, up to certain limits, a depreciation of a currency, when compared with gold money, may not imply a depreciation of its purchasing power for commodities and wages, whose prices might remain unaltered. J. Shield Nicholson (Professor of Political Economy at Edinburgh), speaking of America during the Civil War, in A Treatise on Money and Essays on Monetary Problems(pp. 159-60), says: “A premium of gold arose through special demands for it for war or export before general prices were affected, and for some time it continued at a higher level. That is, at first the notes became depreciated as regards gold, but not as regards commodities, and then not so much as regards commodities. Now, apply this illustration to India. Silver is there both the actual currency and the standard of value: it is in silver that the people are accustomed to think of values, and they look on gold simply as a commodity, like pearls or tiger skins. There is, from the Indian point of view, no more reason why a fall in the value of silver compared with gold, or, what is the same thing, a rise in the price of gold, should raise general prices than a rise in the price of pearls or tiger skins, or any other luxury. To the great mass of the mild Hindoos the depreciation of silver means simply a rise in the price of gold; it means that they will have to give more than before for ornaments made of that metal, for little ingots to put away in their hoards. But the depreciation of silver has in itself no more effect on the general level of prices in India than a fall in the price of the finer classes of notepaper would have had on the value of the greenbacks in America.”

Not that we could draw a general conclusion from the case of India, the masses of whose people do not depend on importation for the necessaries of life, and consequently are not affected by any rise of importing prices through the gold premium. But, as the case of the United States—quoted by Nicholson—shows, we can admit that, to a certain extent, the effect of a gold premium in silver or paper currency countries will not necessarily make itself felt in the prices of many commodities and of wages unless certain causes come into play—as, for instance, a general absence of belief in the stability of the Government or a degree of inflation which forces on the general conviction of an early demonetisation of the paper. Both causes were at work in the case of the first French Republic.

Effect of the Gold Premium in New Zealand

The same effects would also be produced in our country if our paper money fell below par with gold, the only eventuality we have to investigate—a rise above par being excluded as long as gold coins are also accepted as legal tender. Part of our country is practically little influenced by foreign prices, as far as the local consumption of some of the most important necessaries of life is concerned. The cost of transportation is too high, the perishability of certain goods is too great to allow foreign markets an appreciable influence there. Never mind what the export price may be, local consumption pays best. In so far as wages depend on the cost of living, there is no reason why these should be influenced in such sections by the fluctuations of foreign markets. To a certain extent, therefore, a gold premium will increase our exports and decrease our imports, leaving out of account the general effect on our prosperity and power of competing with the outside world which better money facilities would afford us.

In now proceeding to illustrate the

International Price Relations under a Scientific Currency

I specially confine myself to the effects likely to be produced in New Zealand under different contingencies; not only because this country, for different reasons, is most likely to take the lead in the introduction of a rational currency, but because it is for the present exceptionally dependent on international trade, so that conditions are much more unfavourable than in the United States, for instance, which are a world in themselves. We shall investigate the effect produced by the new currency under four conditions:

  1. A general appreciation of gold, marked by a fall of prices all round in the gold countries.
  2. A fall of the price of New Zealand exports in gold countries, while imports remain unchanged.
  3. A fall of the price of imports, while export prices remain unaltered.
  4. A rise in the price of imports, while exports remain stationary. (A fifth case of a rise in the price both of exports and imports may be left out of consideration as it only presents an intensification of 4.)

In the first case, no other effect will be produced but a rise in the price of gold in New Zealand. There will be a gold premium corresponding to the difference between our prices and those of the gold countries. If our prices have retained their average of 1,000—as they would with a scientific currency—while English and foreign prices went down to 800, gold will be at a premium of 25%. £800 merchandise bought or sold abroad being worth £1,000 here, £80 would be £100 or £100 equal to £125, which means that £100 of gold have to be paid with £125 of New Zealand paper money. Practically nothing would be changed. While before £100 of wool would buy £100 of fencing wire in London as well as here—leaving freights and commissions out of account for simplicity’s sake—under the changed conditions wool worth £100 here would only fetch £80 in London, while fencing bought with the £80 realised in London would bring £100 in New Zealand. Now, as before £100 in our money would be realised for the wool and paid for the wire.

  1. Wool and other exports of our country have gone down one-half in London, while the price of wire and other imports has remained stationary. As the price of our wool and other principal exports depends on the London market, a fall of our prices in such a case is inevitable, To obtain an easy calculation, let us suppose that our whole turnover is divided into three equal parts: (1) our exports amount to one-third of the whole; (2) our imports figure up to another third; and (3) our turnover in goods locally produced and consumed constitutes the balance. The last third, we suppose, to be divided into two equal parts; (1) raw materials and food stuffs such as we export, and (2) manufactures such as we import, leaving out of consideration that our local production and consumption contain many articles as good as never exported or imported, and assuming the exact conformation of local prices to foreign ones.

Under these conditions, a price fall of 50% in group 1: exports, would reduce the average price of the whole turnover one-third of 50%, or 162/3. Our tabular standard would consequently fall to 8331/3, with the immediate result that more money is issued until the old average of 1,000 has again been reached. As we can only change our own price level, and not that of the gold countries whose level is 8331/3, this would simply mean that the international means of exchange—gold—would rise to 20% premium for 8331/3:1,000=100:120. The outcome would be that the local price of exports, which always corresponds to the foreign price, reaches 50 plus 20%=60; the price of imports would rise to 120. As the last third of the turnover is supposed to consist of the same two parts, one-half would not go up beyond the foreign price of 60, under our assumption; and the other, as we leave freights and protective duties aside would not exceed the price of 120.

Our price tables would now figure as follows:


Exports, 331/3 % at 60 = 200
Imports, 331/3% at 120 = 400
Local products for local use 162/3% at 60 = 100
162/3% at 120  = 200

To reach 1,000, more money is issued, until we arrive at a gold premium of 331/3, with the result:

Exports, 331/3 % at 662/3 = 222.22
Imports, 331/3% at 1331/3 = 444.45
Local products for local use 331/3% 662/3 = 111,11
331/3% 1331/3  = 222,22

The relation of prices is now exactly the same as it would be under a gold currency, for a reduction in the price of exports of 50% in gold prices with unchanging prices of manufactures means that it requires twice the quantity of raw material and food stuffs to purchase a given quantity of manufactures as before, and to obtain 662/3, while 1331/3 has to be paid, means exactly the same thing.

I come now to

3. The prices of exports have remained stationary, and the prices of imports have gone down. There would be an increase of importation which forces down the general price level, and brings out more money, until prices all round have risen higher than those of the world’s market, with a corresponding gold premium which handicaps importations, while it gives a protection to the domestic manufacturer, and also stimulates the production of raw materials and food stuffs, so that the balance soon will be more favourable.

4. Prices of imports rise, while those of exports remain stationary. The higher prices of imports cannot force up those of domestic manufactures, because the average price standard is now raised, and a restriction of the money circulation takes place. As the unaltered foreign prices obtained for produce prevent these from going down, the whole of the price reduction resulting from the restriction falls on domestic manufactures, as it is not generally in our power to force down the price of imports. Thus domestic goods become cheaper than imports, and the latter decrease, to the benefit of our balance of trade and general prosperity. There would be no gold premium in this case, unless our unfavourable financial balance brought it on, in which case imports would be still more handicapped to the benefit of local manufactures.

 Restriction of Paper Circulation only meant in a Relative Sense

When I mention restriction, I wish it to be well understood that I use the word in a relative, not absolute, sense. In fact, a relative restriction does not in the least interfere with an absolute increase of the money circulation. Restriction in such a case signifies a lowering in the rate of increase. That an increase can take place without affecting the value of money is illustrated by the case of Brazil, given in the report of the Committee on Indian Currency, of 1893 (Par. 92):

“The case of Brazil is perhaps the most remarkable of all, as showing that a paper currency without a metallic basis, if the credit of the country is good, can be maintained at a high and fairly steady exchange; although it is absolutely inconvertible, and has been increased by the act of the Government out of all proportion to the growth of population and of its foreign trade. The case, it need hardly be said, is not quoted as a precedent, which is desirable to follow. The Brazilian standard is the mil reis, the par gold of which is 27d. A certain number were coined, but have long since left the country, and the currency is, and has since 1864 been, inconvertible paper. The inconvertible paper was more than doubled between 1865 and 1888, but the exchange was about the same at the two periods, and very little below par or 27d.”

When we come to the chapter on “Banking,” I shall try to show how little remarkable such a case is, and how far more than a doubling of our New Zealand money would have to take place before a depreciation of our currency would result, or even before the appreciation would stop.

I shall give a special chapter to the discussion of the much ventilated problem of our tariff policy, so as to find out whether we might not hasten the arrival of the happy time which will see us pay our way without running deeper into debt, by going in either for free trade or for protection.

A few concluding remarks are however, necessary before I can close the present chapter. The question will be asked whether

Our Colonies have the Power to make such far-reaching Changes

as those here proposed. The Coinage Act, 1870 (Imperial) consolidates the whole coinage law, and perpetuates Peel’s law of 1816-1819, establishing the gold standard. This law is applicable to all British possessions, including, of course, New Zealand, but it contains a provision (sec. 4), in the following words:

“Nothing contained in this Act shall prevent any paper currency which, under any Act or otherwise, is a legal tender from being a legal tender.”

So that there is nothing, even in that Act, to prevent New Zealand having its own legal tender currency, because the Act contemplates it. Till a colony has its own special currency, however, all its pecuniary contracts within the Empire are payable in sovereigns, unless there be an express stipulation to the contrary.

Another question I have sometimes met refers to the apparently strange fact that so many

Paper Money Countries make all possible Efforts to come back to a Gold Currency

Russia and Austria, for instance, while India, after first stopping free coinage for silver, is preparing for a gold coinage. I begin with India, by reprinting an article I contributed to the New Zealand Times of Wellington, in 1899, and which will be better understood when we refer to the quotation from J. Shield Nicholson (p. 245):

A Great Crime

The People of India in Danger.—One of the most horrible crimes is in contemplation, if the papers give us a correct report. The introduction of the gold standard is intended for India. A famine taking off fifty million people, an inundation devastating half the country, a pest decimating the population, would not be half as disastrous in their consequences as this dastardly outrage, if it should really be carried out. It would increase ten-fold the crushing load, which the usurer piles on the miserable ryots. Stopping the free coinage of the silver rupee had already fatal results, as any restriction of currency, of the life-blood of commerce, is bound to have. Making gold the exclusive tender for all payments, taxes included, would infinitely increase the sufferings of the Indian population. All the oppressive acts combined of their Moguls would not have hurt them so much as this one act of British legislation, if it should come to pass. If we ask how such things are possible, we have not far to seek. A little passage taken from Rudyard Kipling’s Story of the Gadbys speaks volumes;

” Doone. ‘I fancy I see myself taking a wife on these terms.’

“Makesy. ‘With the rupee at one and sixpence! The little Doones would be little Dehra Doones, with a fine Mussoorie accent to bring home for the holidays.’

“Doone. ‘Yes, it is an enchanting prospect. By the way, the rupee hasn’t done falling yet. The time will come when we shall think ourselves lucky if we only lose half our pay! ‘

“Curtiss. ‘Surely a third’s loss enough. Who gains by the arrangement? That’s what I want to know.’

“Blayne. ‘The silver question! I’m going to bed if you begin squabbling.'”

There you are. The pay of the dominant class loses in purchasing power at home or for home goods, and therefore silver must be demonetised. The ryot does not notice that the rupee is only one and sixpence (now one and fourpence). His rupees buy as much of the local products as before, and his wages do not increase, or anyhow, the difference in both is not very great. It is the dominant class that loses when taxes—though they weigh as heavily as before on the natives—have been considerably reduced when measured in English money, which means that the tribute taken by the conqueror does not yield as much as before. The law-giving caste sees only the tribute and its purchasing power at home. Salaries and pensions became more and more reduced as silver went down, and so silver has to go, gold has to take its place, never mind what the effects on the welfare of the people will be.

And not only the people of India; the effects will be felt all over the world, and worse in countries which are as poor in gold wealth as New Zealand. It is estimated that a gold currency in India would absorb one hundred million pounds sterling of gold. The estimate is certainly not exaggerated, for it only gives seven shillings and sixpence per head of population, whereas in England we can count about four pounds per head. It would estimate the Indian circulation of gold at only one-eleventh of the English, and it will hardly be less. Well, a hundred millions are over one-tenth of the present gold stock of the world, which is becoming more insufficient from year to year, because debts are increasing much faster than the gold stock does through mining and dredging. The result must be that our financial miseries will become much heavier, not only to the amount of one-tenth, as the arithmetical relation would seem to indicate, but in a much greater measure, because every pound of gold has to serve as a foundation for a credit money superstructure about twenty to thirty times as high.

Subtracting one-tenth of the base increases so much the over-weight of the superstructure that the overhanging part projects too far away from the centre, and the whole building comes down with a crash. Those parts of the building which are already most over-weighted will fall first, and for this reason the Indian currency question is of overpowering interest for New Zealand. In India it is a question between the governing and the lower classes. In the rest of the world it means the increasing domination of capital over labour.

The influential creditor classes and the salaried officials of the State are under the impression that they gain by currency appreciations, though the final effect of our gold mania must bring ruin to all classes by shaking the very foundations of society. And, let us ask.

Who are the Men whose Judgment usually prevails in such Matters?

The statesman? I do not wish to estimate him as low as Adam Smith did when he spoke of him as “that insidious and crafty animal, vulgarly called a statesman, or politician, whose councils are directed by the momentary fluctuations of affairs.” (Wealth of Nations, Book IV., Chapter II.) But I must agree with Buckle when he expresses his opinion of the rulers of a country: “Such men are at best only the creatures of the age, never its creators. Their measures are the result of social progress, not the cause of it.” (History of Civilisation, Vol. I., Chapter V.)

Under party government the statesmen are supposed to represent the opinion of their party, and in money questions the state of things which the historian Douglas found existing in the paper-money period of New England, and also in the French Revolution, still obtains all over the world. “Parties,” he said, “were no longer Whigs and Tories, but creditors and debtors.”

The bankers and financiers? My personal experience of this class—of whom I have known quite a number during my seven years of banking experience, some of them being near relations—has taught me that these very bankers and financiers are of all men in the world least capable of pronouncing a correct judgment on the great currency problem. They cannot see the forest for the trees. One of my uncles—the well-known chief of a renowned bank, whom the French Minister of Finance, Puyier-Quertier, called in council to have his advice as to the settlement of the German War indemnity—to the best of my knowledge, never read a single book on political economy. Of course, the knowledge of such practical specialists is often worth more than that of any professor, but only as far as their routine business goes. Any move outside, and they lose their way entirely. This would not matter so much if they suspected how little they really know of principles on which their whole life-work has been built up, and if they did not confidently pronounce as experts upon such questions. And the opinion of such men determines the fate of nations! Not that I blame them.

The Routine Groove

It is very likely that if I had continued in the banking line for the balance of my days, I should know just as little about banking as most of our bankers do. Routine would have done its usual task of excavating its deep groove into my brain roads, out of which my thoughts could just as little emerge as a cart can turn in some of our New Zealand clay-road ruts. It is much easier to make headway on never trodden soil than in such deep grooves. No wonder, therefore, that some of our most important inventions, discoveries, and reforms have been made by non-professionals. No tailor could ever have invented the sewing-machine. The idea of putting the slit of a needle near its point would never have occurred to men who, throughout their whole lives, threaded their little instrument at its other end. The teacher, Rowland Hill, forced through the penny postage against the opposition of England’s Postmaster General; and when we go through the whole history of the zone tariff in Hungary, Austria, and Russia, when we peruse the names of Brandon, Gait, Perrot, Vaile, Engel, and Hertzka, we do not find a single man who ever had anything to do with railroad administration or management. It was not a telegraphist, but a poor school teacher, who invented the telephone, and a professor who perfected it. Arkwright, a barber, not a spinner, invented the celebrated spinning-frame. I remember that when I saw glass-blowing for the first time, about thirty years ago, I asked the foreman why compressed hot air was not substituted for human lungs. He smilingly condescended to explain to the ignorant layman that only in this way could the necessary pressure be adjusted. Now the work is done by compressed air to a large extent, and if there had been only two men on whom the world had to depend for an improvement of the process—the experienced foreman who from boyhood had seen the work done in the old way, and the ignorant new-comer who never had seen it done at all, the chances were certainly in favour of the latter.

I need not add another word in reply to the conclusions drawn from the conversion of Russia, Austria, and India, unless it be a reference to the follow-my-leader habit of so many animals —

A dangerous Habit

if practised in the special domain we are prospecting in this chapter. If anywhere, “the devil takes the hindmost” risk applies here. Just as those nations which waited too long in parting with their silver, after Germany had begun to sell her own stock, had to, or will have to, submit to great losses, so when once the demonetisation of gold begins—as Gesell points out—the most conservative States will be the greatest sufferers. I am afraid that Britain will be the country most likely to find herself among the last gold-bugs. There is strong hope for New Zealand, though, if we are allowed to give a wider signification to the words pronounced by her Premier during the last sitting of the Parliament of 1900: “I am looking forward to using State paper, and that before very long, for paying State claims with.”


[1] Of course, I have no pretension of asserting that this is mathematically the case, for a great deal depends on the rapidity of the circulation. The same amount of currency can supply a much more extensive trade where telegraphs and railroads exist than where more primitive modes of communication obtain. But assuming an existing intensity of the circulating process as remaining unchanged for the time, my formula can safely be adopted.

[2] On the first intimation of a scarcity (of money) the rate rises, and they who must have money to pay the current expenses of large establishments, or to meet their outstanding obligations, are at the mercy of the lender. The captains of industry, and, through them, their labourers, are no longer the masters but the servants of capital.”— Robert Ellis Thompson, Political Economy (p. 152).

[3] I repeat here what I said in the last chapter: that without free coinage gold coins pass from money class 1 to class 2; because there are wiseacres who ascribe all our currency troubles to the abandonment of the coining monopoly by the crown under Charles II, in 1666, and to subsequent free coinage. Coinage monopoly can only keep English gold coins in class 1 if the State buys all the gold offered in the market at the fixed rate, i.e. £3 17s. 9d. per ounce, which produces absolutely the same effect as free coinage. If class 1 is to be abandoned, it is certainly better to enter at once class 3, which practically, by taking a cheaper money material, presents all the advantages of class 2 without its drawbacks. Unless coins are kept at parity with a fixed quantity of gold, the international exchange rate can no more be kept near par, and thus the only advantage of a gold currency is lost.

[4] “Home” market in the colonies is often used for the English market, while they say “local” market when they mean their own market. In the United States they mostly use the expression “domestic.” In this work “home,” “local,” and “domestic” market are used indiscriminately for the same idea, while “English” market is said where a colonial would speak of “home” market.

[5] If it is true that in 1901 a passive trade balance of 1 million pounds sterling is struck, this means a passive financial balance of 5 millions.