A PERFECT MONEY AND ITS EFFECTS

New Zealand Illustrated Magazine, 1 August 1901, Page 835

A PERFECT MONEY AND ITS EFFECTS

By Michael Fluescheim

What is a perfect money ?

market in such a way that the average

A money can only be perfect if its supply prices of merchandise do not vary. We always corresponds to the demand of the must always bear in mind that money is not

only a measure of value for merchandise, but that merchandise is at the same time a measure of value for money. Whether prices fall or rise through a scarcity or superabundance of money, or through a cheapening or increase in cost of production is absolutely immaterial, just as it is indifferent whether John is considered taller than Bill, or whether Bill is spoken of as being smaller than John. A perfect money has an unchangeable standard of value, that is, its market price always preserves the same relations to the average market price of merchandise, by which we mean all kinds of goods and services offered in the marketI need not point out specially how important such an unchangeable standard must be in all kinds of business transactions. Wherever two men make a contract, part or the whole of which is to be performed at any future date, it is very essential that the value of the object contracted for should not change in the meantime, for in that case one of the parties is injured. A man, engaged to do a certain work for certain wages at a time when these wages bought more goods than he can get while he is performing his contract, will be a loser, and the loss in the purchasing power of his wages may seriously injure him. A farmer who borrowed money on a mortgage, when 1,000 bushels of wheat would have fetched the money he owed? finds his debt doubled without any fault of his if, through a price fall in wheat, or what amounts to the same, through au appreciation of money, he has to sell 2,000 bushels of wheat at the time when his mortgage becomes due. Uncertainty is brought into all kinds of business relations where the money standard is continually changing.

Now, there are two kinds of money . money which has a selling value in the market independent of its money quality, and money which has no such independent value, which, the moment it ceases to be money, loses its value entirely. A new sovereign just issued from the mint, and which, therefore, has not undergone any abrasion, is of equal value, whether it is passed off as money or whether it is sold as

bullion, because it weighs 123.374 troy grains of standard' gold, which can be sold in the metal market for one pound sterling, because the English mint is forced to coin a sovereign for every 123.374 troy grains of standard gold (an alloy consisting of eleven parts of gold and one of copper) brought in for the purpose. This is called free coinage.

A dollar note of the American confederacyis an example of the absolute absence of mercantile value in money of the second class after its demonetization. Between the two kinds of money here described there is a hybrid, a money which has a certain merchandise value that does not reach its money value. To thisclass belongs our present silver money It is token money printed on an expensive material, and, for all that, can be forged much more easily than paper mone y which, being almost costless, is in every sense preferable. Token money is the only money which can be made to preserve a fixed standard of value. This seems a strange assertion in face of the well-known experiences made with different kinds of historic token moneys, such as the French assignats, Law's paper money, American greenbacks and Confederate notes, and hundreds of similar cases ; but I did not say that token money is the money which preserves a fixed standard of value, but " which can be made to preserve it." That this can be done is easily proved. To preserve money at a fixed standard of value means, as we have seen, that its value keeps at par with the average prices of merchandise? or in other words, that the average prices of merchandise keep unchanged. This can only be attained by issuing more money when prices show a tendency to fall, and to withdraw money when there is the likelihood of a rise, because prices and money quantity stand in an inverse relation.* That these conditions can only be fulfilled with a token money printed on- a material obtained in any quantity, and at any time, is clear, also that

* This law, which is usually called the quantitytheory, must not be taken too literally, however, as rapidity of circulation and height of the credit building erected on the money stock exercise an important influence.

gold, or even silver, are not such materials, for, though labour can at any time increase the stock of paper according to the demands of the market, it cannot do so in the case of the precious metals. They can be cornered, and thus prices can be kept down, because not enough mo.ney can be issued for want of the raw material.

The average prices of merchandise are found by what has been called the Tabular standard. Of course, a perfect tabular standard can only be obtained by not contenting ourselves with finding the average price- of all merchandise of any importance, but by also assigning to each merchandise that influence on the average which its quantity warrants. For instance, let us say, we wish to find the average price variations of silk, cotton, and wool, when silk has gone down ten per cent. below what we have adopted as the normal price of the list, cotton twenty per cent., and wool sixty per cent. In this case, the average price of the three would be thirty per cent., but if the whole turnover of the period we investigate has been for silk 100 units, for cotton 300 units, and for wool 600 units of the whole turnover of 1,000 units, it would be incorrect to allow each article the same influence on the average where their real influence on the money market is so different. A correct table would multiply the 100 silk units by ten = 1,000, the 300 cotton units by twenty = 6,000, and the 600 cotton units by sixty = 36,000. Adding the three items and dividing by 1,000. we obtain forty-three per cent, as the average price variations in a market that dealt only in these three kinds of merchandise.

There is no difficulty in the way of obtaining such statistics ; in fact, our New Zealand Year Book gives us already part of the figures we require. The difficulty up to this has only consisted in the preposterous application which its projectors have wanted to make of the excellent device. As Jevons, for instance, proposes in "Money," all contracts are to be continually modified according to the variations of the tabular

standard. Thus, if A gives B a P.N. for £100 due in six months, he will only have to pay £93 10s in case the standard has gone down 6.5 per cent, within that period. Wages, salaries, rents, mortgages, dofomid payments of any kind, would thus liavo to undergo continual modifications, according to this system. It is an idea very characteristic of a college professor, a man so absorbed in his book learning that ho loses all contact with overyday life. Great as the inconvenience of money standard variations may be, who would not rather submit to them than to such impossible operations ? What is stranger still is that the simplest and most practical application of tho principle was lying so near that Jevons and Co. actually stepped on it, so that, as Henry George once said, " If it had been a dog, it would have bitten them." All that is required is to conform tho issue of paper money to the results of the tabular standard, i.e., to issue more money when prices fall, to call in money when prices rise, and at once a perfect money is found, the standard of which remains absolutely unchanged, so that there is no need of altoring the money amount of contracts. *

But the effect produced by such a money goes far beyond a mere preservation of a level standard ; it would revolutionise our whole system of production and distribution : it would supply the most powerful weapon for the attainment of social justitio and general prosperity. To understand this, we have first to see how business is dono ut the present time. If we limit the term Money to legal tender, giving the name of Currency to every other means of exchange, which is not legal tender, we find that the business of this world is mostly done by the lntter in its different forms, so ably described by my predecessor in this symposium.

As is often the case with world revolutionising inventions or discoveries, this n*w application of the tabular standard has bet- n proposed at about the same period by two parties who evidently knew nothing of each other. Alfred Bussel Wallace, the great English scientist, proposed it in the " Clarion" end of 1898, after Silvio Gesell, of Buenos Ayres, had done so in a German book published 1897, and evidently unknown to Wallace.

We might generalize this currency under the appellation of money representatives or money promises. It is essential to keep in view the important distinction between legal tender and these money representatives or promises, for it is by the consideration of just this very distinction tbnt we shall be able to explain the present ominous state of affairs. For all these money representatives and promises, with which at least 99 per cent, of the world's business is done, are liable in the last resort to a demand for payment in real legal tender money, of which only one pound sterling exists for every thirty pounds thus due. Our business is really done iv a °redit building thirty times as high as the money basis. This tells all. It explains the permanent financial crisis, temporarily degenerating into a financial panic, and the growing difficulty of supply meeting demand. Both are practically unlimited. Not only could we, were we allowed, produce many times as much wealth as we actually produce, but we also would like to consume much more than we are actually doing. We can neither do the one nor the other because money — the blood of the social body — is not abundant enough to perform its work of keeping up circulation sufficiently active to provide all parts of the body with the nutriment required for the untrammeled development of the organism. This state of things is responsible for the unequal positions taken up in our intercourse by merchandise, i.e., by labour aud its products on the one side and by money on the other. Merchandise is running after money, is making extraordinary efforts to exchange itself for money, while King Money haughtily selects whosoever can afford 'to accept the often ignominous conditions he imposes, strong in his monopoly based on a scarcity, artifically increased -by speculating^ money dealers. Need I describe the state of things we all are so familiar with : the daily hurry and worry of millions to obtain the means to prolong existence by finding somebody with money, or its substitute, ready to buy their labour or its produce, often vainly offered in the market,' when in fact what

they all really need is each other's product ? Each wants to be the other's customer, and they cannot meet without the permission of those who control the money stock of the country and the credit building erected on it, who alone have the right to dictate what money representatives shall be admitted and which refused. Not fchat I blame them, these capitalists and their bank mauagei'S, if they are ultra cautious, if they demand securities which only the few select can supply, the products of labour taking the last place among these securities, just because of the ever-present danger of their unsaleability, except at ruinous prices. During the panic of 1857 the principal staples fell twenty-seven per cent, in the London market within two weeks, and whenever goods have to be sold at any price to pay urgent debts, we need not even wait for a panic to see much greater price falls, which are nothing but the exorbitant price demanded for money. We must not forget the thirty promises for every single reality, and the scramble sure to follow in every case where a certain number of the paities holding those bills, mortgages, cheques, banknotes, etc., do not accept new bills, mortgages, cheques, and banknotes, but, for a time anyhow, want to see the real money, the gold sovereign, of which our New Zealand possesses only three millions against ninety millions she and her people are owing. Prices fall everywhere. At such a time factories worth fifty thousand pounds may realise five thousand, farms are sold with stock and inventory, the proceeds not even paying the mortgage, though only a fraction of the cost price has been borrowed upon them ; and because such times arrive occasionally, caution must be exercised even in normal periods. This is the picture we all are- familiar with, upon which I need not further enlarge.

And now to that offered under a reformed

money, under a paper money issued or restricted according to the necessities of the market indicated through the price thermometer. Prices fall if money is scarce, and low prices are the signal for a new issue

moHey. The new money which appears in the market buys the cheapened goods until prices return to their eld level. The prevision of this result will even render the isssue of new money unnecessary in many cases, for prices will not fall as long as credit, the real means of exchange, is easy, and credit only becomes disturbed when there is a danger that money will be scarce. This has best been shown by the English crisis of 1847 described by Tooke and Newmarch, when money was so scarce that one and a-quarter per cent, discount was paid from one day to another, which is at the rate of 450 per cent, a year. The panic disappeared through the mere permission given to the Bank of England to issue more notes. Money came forth from every depository, where it had been hidden, and not quite £400,000 of notes were really demanded.

The money owners' locking up of money will not have the least effect on the market where at once Government money will replace the hoarded money in the circulation. Under such conditions credit must be easy, the interest rate must sink, and whoever can offer good security can obtain loans of money which purchase goods in the market, and thus keep up prices. Whenever a temporary scarcity of money forces goods into the market, at falling prices money can easily be bon^owed to buy them, as it pays to buy where it is known that a fall of prices can only be temporary, as new money issues are sure to force these prices up again.

A very important element mast be kept in view : the kind of security demanded by banks and money lenders from borrowers. At present, mortgages on land (deposit of land title deeds) are the usual security given. Merchandise, as a rule, is not accepted as security, with the exception of current articles as wool, or butter, for which there is always a certain market, and even here the loans are given only for part of the value because of price fluctuations.

Under the new system, labour and its products, through attaining a certain average stability of price and saleability,

will be considered as a far better security, and credit will thus penetrate into circles from which it now keeps off, unless let in by the usurer's ruinous mediation. Production will thus largely increase, and the benefit of this increased production will reach the masses, instead of being confined to exclusive circles, able to produce the special securities demanded. Thus production will be followed by a corresponding consumption in the only market, which can never bo closed to us : the domestic market.

For want of space, I can only indicate how this market becomes relatively more limited from year to year, how the gap between productive and purchasing power widens continually. The rich do not consume their incomes, and, as a rule, they invest their savings in good securities which pass into their hands from tlio.se of their debtors. But these securities, such as laud, bonds, etc., have been the credit basis upon which the debtors banked and drew cheques, upon which they were allowed to supply part of the currency building erected on tho puny gold stock. The rich who obtain tho ownership of these securities do not use them for the same purpose, as they need no credit. In this way one plank after another of the present credit building is torn away, and the building is correspondingly weakened. Its relative height is diminished, and the market suffers. I say " relative," because there may be no actual diminution, but a relative one has the same pernicious effect. Unless the available currency increases with pi'oductive power, a correspondingly growing amount of labour or labour's product must become unsaleable, our so-called " overproduction " increases, and prices fall to partly establish the level between supply and demand.

The new money, by securing an average price level, gives to labour's product, to merchandise, a security value it had not before, and by thus supplying a new basin of credit not liable to restriction through the rich monopolists, does away with the real cause of crisis, and thus frees trade from its worst enemy. As I said, I could

merely hint at this important subject, to which the book I have in hand will do more justice. Nor can Ido more than indicate the method of issuing the new money. That only the State ought to have this privilege is the inevitable result of the system which makes the issue independent of any special business experience, as it mathematically follows on the results of periodical statistics. Of course, there needs to be no pedantic waiting for the next tables where price variations are evident to any observer of the market. Temporary issues or restrictions might be made, the exact correction following upon the issue of the next tables. No doubt part of the issues would be made for the payment of public works, and the bulk would probably come out in the form of loans made to the people. That the rate of interest would be lowered to stimulate the demand for money when the market requires more money, and raised in case a restriction of circulation becomes temporarily necessary, is a matter needing no detailed explanation.

The question whether it may prove more advantageous to organise a State Bank or whether the giving of credits had- better be left to private banks will be discussed by the next contributor to this symposium. I will only mention that, even if the present banks should be allowed to continue their operations, they certainly ought not to retain the privilege of lending out money of other people left with them as a so-called free deposit. They ought to be compelled to keep legal tender paper in stock to the full amount of free deposits, the privilege of issuing banknotes being, of course, withdrawn. The community which lends them the legal tender paper at the market rate thus would obtain the interest from the lending out of free deposits, and the depositors would obtain a. better security. At present about seven or eight hundred thousand pounds gross profits are yearly made by our banks, mainly through lending out the money of one set of citizens to another.

As I understand that another contributor will discuss the question of foreign loans, I

merely limit myself to the observation that as far as our gold debts abroad are concerned, it makes no difference whether we have a gold or a paper currency. These debts, be they for our imports or for loans of any kind, will be paid, as they have always been paid in the past, by our exports, of which our gold forms a portion. The introduction of a legal tender paper money would only add to our exports the £3,000,000 of useless gold our colony possesses, four-fifths of which is peacefully slumbering in the vaults of our banks, which would pay a corresponding amount of our debt abroad. That this debt now goes on growing rapidly through the accumulating: power of compound interest is weil known. Our trade balance would at least have to reach £1,000,000 a year to cause a halt in the ominous process of drifting into national bankruptcy. Repayment could not begin before this amount is exceeded. I need not add that a currency which has the effect of so stimulating production in every department that many goods which now are imported could be produced in the couutoy, while more goods could be produced for exportation, would sooner attain this desirable result than one for the foundation of which we have to rely on the kindness, paid with usury interest, of Lombard Street. So it will easily be recognised that a scientific paper currency, far from retarding the satisfaction of our foreign creditors, would be the most efficient means towards the complete and early liquidation of our debts.

In conclusion, I only want to add that even a currency reform, though the most urgent progress required, cannot remedy the most serious of our economic evils as long as our existing land laws allow individuals to monopolise the unearned increment created by the community. But I have little doubt that currency reform by largely increasing this increment, and thus more strikingly showing the folly of the present state of things, and furthermore by strengthening our power of repurchasing the land from the nation, will become the most powerful ally of land nationalises.