The Practical Realization of the Milhaud Proposals (1934/1935) By Ulrich von Beckerath, 1882-1969 [Taken from Peace Plans #9, compiled by John Zube] An essay on the theory and practice of the monetary freedom required to make the market really free. "Proposals so simple, leaving the economic foundations undisturbed, and appealing so little to force! Certain current symptoms suggest that the world is beginning to get weary of violent solutions, that is, that part of the world which has come to know by experience wars, revolutions, blockades, hunger and trade depressions, and which has come to suspect that all these are somehow associated with defects in our monetary system." U. v. Beckerath, on p. 63. Published first in English, German and French by the Annals of Collective Economy, now re-named Annals of Public and Cooperative Economy, in 1934 and secondly in: "Ending the Unemployment and Trade Crisis", edited by Edgard Milhaud, London, Williams & Norgate Ltd., 1935. Permission for this reprint has been obtained from the present Director of the Annals of Public and Cooperative Economy, Prof. Paul Lambert. The only condition he imposed for the reprint of the money reform articles of U. von Beckerath, Walter Zander and Heinrich Rittershausen, published in the Annals, either by me or later by other publishers is that the Annals are mentioned as source, including the year of appearance. Present address of Annals of Public and Cooperative Economy: Liege, 45, quai de Rome, Belgium. The secretary of the Annals in Genf, Frau G. Calame, Acacias 7, 1227 Genf 24, Switzerland, can supply the volumes required for reprinting. Permission was furthermore obtained from Ernest Benn Ltd., Bouverie House Fleet Street, London E.C. 4, acting for Williams & Norgate, for the reprint of the English edition. Ulrich von Beckerath has transferred his literary rights to me. I welcome reprints. No charge! The English translation was made by G. Spiller, London. Ulrich von Beckerath told me that he is not fully satisfied with this translation. He always tried to be a perfectionist in his written expression. I have there from, with Beckerath's consent, tried to somehow improve this translation, attempting to achieve an as literal one as I could but I do not feel sure that I have not introduced some new mistakes thereby. My English still leaves much to be desired. I would welcome a better translation and hope that this reprint will help to bring it about. For technical reasons the numerous italics in the original could not be reproduced. Some of them were indicated in the original PEACE PLANS issue by spacing and have now been italicized. "Il n'a jamais été de progrès sociaux que seux conçus par un individu lucide et voulus par un individu énergique.'' "There has never been social progress than that conceived by a lucid individual and willed by an energetic individual." - H. L. Follin in: "Paroles d'un voyant" 4 CONTENTS (1) PUBLIC REACTION TO THE MILHAUD PROPOSALS . 5 (2) POINTS DIFFERENTIATING THE MILHAUD REFORM PROPOSALS FROM THOSE OF OTHERS. 6 (3) THE MILHAUD PROPOSALS AS AN INTEGRAL WHOLE 6 (4) A BASIC FLAW IN OUR ECONOMIC SYSTEM. 7 A) The True Nature of a Money Debt. 7 B) Security in Cash Payments and in Non-Cash Settlements. 10 (5) THE MILHAUD PROPOSALS AS A BASIS FOR A NEW SYSTEM OF PECUNIARY SETTLEMENTS 10 A) The Prevailing Money Monopoly as a Cause of Money Shortage and there from of the Trade Depression. 10 B) Exchange of Commodities without Goods Warrants. 13 C) Exchange e of Commodities with Goods Warrants . 14 D) The Placing of Orders as a Factor in the Goods Warrants System 16 E) Short Term Validity of the Goods Warrants 21 F) An Improvement in the Civil Law as a Result of the Milhaud Proposals and as a First Step towards a Social Reform. 22 (6) THE REALIZATION OF THE FUNDAMENTAL CONCEPTIONS UNDERLYING THE MILHAUD PROPOSALS - SHOULD STATES NOT TAKE THE INITIATIVE . 24 A) Purchasing Certificates in External Trading on a Private Enterprise Basis . 24 B) Work Supply Banks As Private Institutions. 29 C) Technical. Details concerning the Issue of Goods Warrants by Work Supply Banks 34 a) Introduction. 34 b) Principles and Business Provisions regarding Loan Transactions of a Work Supply Bank in respect of Short Term Credits 35 I. Means of Payment. 35 II. Legal Form . 35 III. Guaranties for the Work Supply Bank in Loan Transactions . 35 IV. Usufruct Charges for Loaned Goods Warrants 36 V. Return of the Loaned Goods Warrants and Sundries 36 c) Rules 37 d) Principles & Provisions Governing the Obtaining of Credits through the Work Supply Bank 39 I. Nature of the Long-Term Credits Granted by the Work Supply Bank . 39 II. Capital Required for Long Term Credits, 39 III. Administration of Balances at the Work Supply Bank 40 IV. Notice of Withdrawal of Balances at the Work Supply Bank 40 V. Repayment of Long Term Credits. 41 D) Use of Goods Warrants to Finance Manufacturing Operations Occupying a Considerable Time 41 (7) OTHER ASPECTS. 46 A) Payment of Rent with Goods Warrants 46 B) Payment of Dividends with Goods Warrants 46 C) General Objections by "Practical Men 47 D) Issue of Goods Warrants and "Creation of Money" 48 E) Is a Homogeneous. Circulating Medium the Ideal 51 F) Security against Inflation of Means of Payment made of Paper 52 (8) CONCLUSION 57 For an alphabetical index see the end of PEACE PLANS No 11. 5 (1) PUBLIC REACTION TO THE MILHAUD PROPOSALS Nobody doubts that a practical proposal to re-employ the twenty-five million unemployed of today's world would be of no less (indeed of far greater) importance than was, in its time, the introduction of railways or telegraphs. Thus it is surprising that the Milhaud proposals have not been, on the whole, more warmly received and more closely examined. Apparently, a staunch partisan of the proposals has not yet appeared. On several occasions Milhaud has personally defended his program but without bringing about a positive resolution in his listeners or readers. It is true that our times are not propitious for a scrupulous examination of new social reform schemes. Probably all Governments have had submitted to them hundreds if not thousands of projects. It has been stated for instance, that during the last few years the German Government received some 50.600 proposals and the Reichsbank over a thousand during the first months after the 13 th. of July, 1931. In former days, too there was no shortage of projects. In his article "Property and Law" published 14/411848, Bastiat reports that by that date over 500 proposals for the organization of labor and as many for the organization of credit had been submitted to the French Government. Hence the first impression created by the Milhaud proposals was inevitable: "What! another reform project and actually one relating to monetary reform!" But he who is acquainted with even a small proportion of the hitherto published projects acts will be surprised that the Milhaud proposals do not include certain points which appear in well nigh all other proposals and which, according to current opinion, should on no account be omitted. Let us examine these points. (2) POINTS DIFFERENTIATING THE MILHAUD REFORM PROPOSALS FROM THOSE OF OTHERS The total number of post war proposals aiming at combating the general trade depression, either published or submitted to governments, exceeds almost certainly 100.000. The Milhaud proposals differ favorably from these by the following characteristics , among others: a) Milhaud desires to retain gold as the standard of value and only bans it as a means of payment. Thus creditors would receive gold values in the place of gold. Here already Milhaud stands almost alone. The view that the old standard has "failed" and should be there from abolished is held fairly generally to day. As a matter of fact; however, it is not the gold standard that has failed, but those to whom we entrusted it. Or, as Rittershausen contends in his Neubau des deutschen Kreditsystems (Reform of the German Credit System), it is not the gold that has deteriorated, but the bank directors. b) Milhaud proposes no re-distribution of the world's gold, Here again, Milhaud stands almost alone. Broadly speaking, the countries possessing little gold hold the countries owning much gold responsible for the economic crisis. Thus Milhaud belongs to the select few who do not share this prejudice. c) Milhaud does not call for an economic autarchy. This is very old-fashioned. We had all become accustomed to the idea that a "home" watch industry in Greenland and "home" tea plantations on the Alpine glaciers were just the thing and that an exchange of Greenland blubber oil, Swiss watches, and Chinese tea would throw out of employment Eskimos, coolies, and Swiss factory workers. Admittedly, these autarchists tend incidentally to demand a forcing of exports and a throttling of imports (although probably not one of them would voluntarily give up his morning coffee and his afternoon cigar, simply because they are imported goods). Milhaud is one of the few economists who fervently identify themselves with the old thesis: exports pay for imports and vice versa; credit and debit balances dwell only in men's imaginations and in defective trade statistics. 6 d) Milhaud belongs to the very small group of economists who hope to combat the depression first and foremost by reviving the consumer goods industries, that is, the industries producing articles in daily demand. Virtually all other economists ask that work should be found for the unemployed mainly or exclusively in the industries producing "durable" goods, among which are to be specially counted means of production and houses. Accordingly, the official measures in all countries to reduce unemployment have tried primarily to assist the production of "durable" goods. In boldly asserting that production is the servant of consumption, Milhaud also declines to call on his contemporaries to "return to the simplicity of their forefathers", so as to grapple successfully with the depression. Few only see the blatant contradiction of simultaneously stimulating sales and discouraging consumption. e) Milhaud submits no proposal for floating a Long Term loan. Practically all other reformers ask that the State should concentrate on raising a huge loan, preferably in the shape of an extra issue of paper money, and build houses therewith. f) It is true that Milhaud proposes a new means of payment; but neither does he demand that it should be a forced currency (forced rate of exchange) nor that it should be recognized as legal tender (i.e., compulsory acceptance and compulsory value in private dealings). The few who still share the classical view of a forced currency, namely that it is a specialty heinous form of despotism, may be almost counted on one's fingers. In Germany they are represented by the small group of the authors of the "Vier Gesetzentwuerfe" (Four Proposed Laws) (*) and further by the Sparerbund (League of Investors) among whose leaders Oberlandesgerichtspraesident Best and Justizrat Brink occupy a prominent place; in France, primarily by H. L. Follin; and in England, by Henry Meulen. g) Milhaud calls neither for a raising nor for a lowering of wages as a condition of reducing unemployment. He shows, however, that when his proposals shall have been put into effect, real wages will in all probability rise considerably. h) Nor does Milhaud demand an immediate reduction of overhead charges to permit a reduction in unemployment. But he does not overtook the fact that after the realization of his proposals, they will be probably decidedly lower, i) Milhaud does not stipulate as a preliminary the return of "confidence". He informs the skeptics that a number of persons, that is, the debtors of the issuing offices, chiefly shopkeepers would be obliged to accept the purchasing certificates, never mind whether general confidence existed or not. Expressed differently, Milhaud tells the timid, in effect: "Take your certificates to the shops and exchange them for commodities. In the very act, you will have rid yourself of your certificates and your mistrust." j) Milhaud deliberately concerns himself with a special problem and not with the social question as a whole; but he recognizes that once the monetary problem has been solved, the social question will have changed its character. It may be added that only then will its nature be clearly revealed to us. Hence Milhaud has little in common with his contemporaries. It is there from no wonder that he may, for some time yet, be scornfully treated as a "theorizer". It would also be in accord with a widespread custom if, before his contribution has come to be appreciated at its true value, critics shall have insisted that such and such; a thinker once proposed this or that part of his plan and such and such another thinker another other part, just as Bastiat was accused of plagiarizing Carey. However, the originator of a crucially important conception is not he who once gave expression to it without determinedly following it up, but he who successfully challenges therewith the world, even though his proposals, like all proposals whatever, may require to be modified in certain particulars. (3) THE MILHAUD PROPOSALS AS AN INTEGRAL WHOLE In the last resort, goods and services always exchange for goods and services. This principle has never been seriously disputed. It seems though that, apart from Milhaud, (*) These are: Dr. Gustav Ramin, Dr. Heinrich Rittershausen, Ulrich von Beckerath, Hans Meis, Walter Unger, Dr. Walter Zander, and Dr. Munzer. I do intend to reprint this plan; too. - J. Z. 7 few have attempted to found thereon an economic plan without at once falling into primitive barter or African tribal communism. At all events, among recent reformers of this class, Milhaud occupies now first place. The clear recognition of the fact that payment with Giralgeld (money other than legal tender cash, e.g. checks), which is already the common practice on the world market, need only be consistently developed in order to yield the advantages of both, a money and a barter economy, has enabled Milhaud to solve simultaneously two problems, seemingly far apart reviving external trade and finding work for the unemployed according to a coherent plan that might be realized from one day to another without causing any disturbance. In the center of Milhaud's system stands the idea of the purchasing certificate. It may be expressed in this way: in small denominations it serves as a means of payment internally; in large, externally. In the current system of payment, debtors must find purchasers for their goods or services, so as to satisfy their creditors with the proceeds of their sales. In Milhaud's purchasing certificate system, however, it is the business of creditors to find vendors in order to realize their assets. By means of the system of "production on orders placed", to be treated fully in the sequel, the possible inconveniences of payment by purchasing certificates might be so reduced that the creditors would not be worse of than they are today. But in principle, through the Milhaud plan, every debt becomes a debt which is not tendered but which has to be collected. Since everybody is in turn creditor and debtor and since this mutual relationship represents, indeed, the essential nature of economic activities, Milhaud's reform, abstract as it may seem at first sight and little as it may at first affect the general form of trading, is extraordinarily far reaching. Not one of the numerous "practical men" who daily, on the basis of their "experience" (which really represents a frog's perspective), put forward proposals, have hit upon this fundamental but simple inversion. This confirms a sapient remark made by the German Secretary of State, Feder, in a speech delivered on 28 March 1933: "He who desires to direct a country's economy, must not be engaged in it." Some of Milhaud's critics have thought that his arguments, which appear to them rather complicated, would fall if countries adopted another economic system. Manifestly, the other system they mean is Bolshevism. Here also, there is a self contained system aiming at the simultaneous solution of the two problems, that of unemployment and that of the protection of home industries; but this very system, in its diverse degenerate forms, has proved unequal to the task. In Russia numerous machines, and even whole factories, are lying idle, because for instance, a pair of missing screws worth a few dollars cannot be ordered from Pittsburgh, due to the Russian foreign exchange legislation. Even ten years after the proclamation of the dictatorship of the proletariat (which is in deeper servitude today than under the Czars), over a quarter of Russia's non-agricultural population was unemployed. The subsequent abolition of this unemployment recalls in many respects the increase of employment in ancient Egypt by the building of the pyramids undertaken by the Cheops and Chefren. Moreover, it should be noted that the Russian exchange legislation is in substance the same as that of "capitalistic" States and , in fact, altogether a product of what Marx called "vulgar economy" and which he combated. This "economy" dominates everything in Russia and if freedom of expression were not so restricted there, this could be proved out of Marx's writings even to those at present in the saddle in Russia. Happy Geneva, where these Annals appear, and where reason may speak without donning the cloak of authorities! (4) A BASIC FLAW IN OUR ECONOMIC SYSTEM A) The True Nature of a Money Debt In wholesale commerce, and especially in transactions on the exchanges, it frequently happens that a merchant undertakes to deliver goods by a certain date, without possessing them at the time. He hopes to be able to secure the goods by the date agreed 8 upon. These sales are called short or uncovered forward sales. The legislative provisions of all countries eye this type of transaction with suspicion. Frequently, in order to stop such sales, legislative enactments have prohibited all dealings in futures. Sometimes such forward bargains only have been permitted where the vendor reserves to himself the right to cancel the contract, on payment of a premium. But almost invariably legislative provisions limit the possibility for legal proceedings in the case of "futures" and, above all, uncovered dealings, if they are permitted at all to contracts among merchants. This limitation is justified, for if any other but a merchant, who knows his business completely, were frequently to sell goods not yet in his possession, but which he hopes to procure by a given date, he would inevitably sooner or later be entangled in supply difficulties and thereby would injure both himself and others. As far back as 1417, the Hansa thus prohibited "the sale of herrings before they are caught, of corn before it is grows, and of cloth before it is woven." (Roscher, Handel and Gewerbfleiss, paragr. 15.) Now it is one of the greatest peculiarities of our economic system, and one only quite recently discovered, that forward bargains and blank sales relating to the most important and commonest commodity, that of money, are not only not prohibited, but are actually favored by the laws of all countries. Economists have hitherto overlooked the fact that our entire credit system, as well as labor contracts, leases, and many other agreements of daily occurrence constitute in reality short sales of money. The very idea that money as such may be sold, appears foreign to our present day economic theories. It appears that in Europe attention was first drawn to this by Henry Meulen, in a profound work entitled "Industrial Justice through Banking Reform" ( London, Richard J. James, 1917). Meulen quotes an American author unknown in Europe, Colonel W. B. Greene (he died 1878), who in his "Mutual Banking" stated: "We must remember that when we sell anything for specie, we buy the specie; and when we buy anything with specie we sell the specie." This brief but pregnant remark throws a new light on our economic system, for Greene's observation refers manifestly not only to ordinary sales but to every agreement involving a money payment. This aspect merits a special examination. Who, before Greene and Meulen would have thought that in an employment contract the employer sells his employee blank and on credit gold or other legal tender? And yet this reflects closely the reality. Or who, before Greene or Meulen would have perceived that in an ordinary loan agreement the debtor sells the creditor blank and on credit gold or banknotes? And yet such is the fact. However once we recognize the nature of agreements based on future payments, namely that they are blank sales of money, we shall not be surprised that in such transactions those difficulties of delivery become apparent which are inevitable in the case of this type of sales. For clarity's sake let us apply the new knowledge we have here gained to a particular example. In 1929, the aggregate income of employed persons in Germany was around 43.000 million marks. What goes this signify? It means that the employing class had bound itself contractually to provide the employed class in the course of the year with over 40.000 million marks in gold or banknotes, although when the contract was concluded it did not possess the gold or banknotes involved. The employing class had sold gold or banknotes forward and blank, a transaction which in the case of cereals and almost all other goods is in most countries legally prohibited because of the associated risk of non-fulfillment. And yet goods, e.g., cereals, are more easily procurable than money. Indeed, the rule is that goods may be procured the more easily, the more difficult it is to procure ready money. ( Similar reflections will be found in Dr. G. Ramin's article on "Non-Cash Wage Payments" in the "Deutsche Bergwerkszeitung" (German Mining News) of 30 September 1931 and in the business report of the German Festmarkbank in Berlin of 31 December 1931.). All leases are, in fact, short sales of gold or banknotes of tenants to landlords. Every credit agreement constitutes such a sale: That many sales involve no cash payments, as in clearing and balancing transactions, leaves the legal basis of the prevailing 9 methods of settling accounts unaffected. In conformity with the legislation of all countries, creditors are entitled to refuse non-cash payments and to insist on receiving legal tender, that is, metallic or paper money; insofar as these represent legal tender. (The later applies probably to all countries save China.) We should probably not be far wrong in assuming that in Germany the aggregate total of all such time obligations during 1929 amounted to 100.000 million marks. That would correspond to two and a half times the aggregate income of employed persons. The amount does not appear excessive when we remember that the total turnover in Germany, inclusive of non-cash transactions, has certainly exceeded 1.000.000 million marks, whereof about half was negotiated by the Reichsbank. If we suppose 100,000 million marks as correct, then the amount per head of time transactions to be fulfilled within a year in Germany is about 1,500 marks. In other countries the amount may be approximately the same. If we now consider that the ready money circulating in Germany is not equal to 100 marks per head, we find that the total of time obligations during a year is over a dozen times greater than the value in which the time obligations are to be honored. Even the boldest and most experienced stock exchange speculator would deem it very hazardous to be burdened permanently with such time obligations. Strangely enough, the laws, the legal findings, and the public opinion of all countries regard such obligations in settlement of ordinary accounts as quite normal! And yet the probability that all time obligations will be honored, is certainty not greater than when twelve ball players stand far apart in a circle, throw the ball to one another, and expect that the ball will never be dropped. Even if we calculate the chance of a player throwing the ball correctly at 94%, there remains a probability greater than 50% that the ball will not pass round even once without a miss. By a different route than that followed by Greene and Meulen, Milhaud reaches practically the same conclusion as they do. He there from pleads that at least while the depression lasts, a creditor as regards (a) external trading and (b) wages contracts should not be entitled to payment in gold or in banknotes which are either convertible into gold or must be legally accepted as the equivalent of gold. Instead, Milhaud would entitle a creditor to such goods or services as the creditor would have normally bought with the gold or the banknotes. In practice, this means that a creditor would be only entitled to a settlement by clearing (to receive compensation) in the economically soundest way. Naturally, Milhaud would not forbid a debtor to settle foreign liabilities in gold or pay wages in banknotes when he possesses such means of payment. To begin with, creditors are to renounce voluntarily the right to be paid in legal tender, and later this right is perhaps to be regulated anew legislatively. The popular presentation of this line of thought is rendered somewhat difficult by the circumstance that workers are conceived as creditors and employers as debtors, a conception alien to popular thought. The common conception is rather that of regarding "workers" as "poor debtors" and "employers" as "rich creditors". Naturally, science cannot compromise with popular misconceptions. Moreover, the difficult insight that an economy based entirely on clearing, involves in reality a return to pure barter, even though the inconveniences of primitive barter are avoided, makes it hard to render a popular presentation of the case. The older political economy did not elucidate this aspect; but an excellent discussion of the subject to which the reader is referred, will be found on p. 121 of Lexis' 'Volkswirtschaftslehre" (Political Economy), in the chapter headed "Theoretisch moegliche Ausschaltung des Barverkehrs" (Theoretically Possible Exclusion of Cash Settlements). The purchasing certificates proposed by Milhaud, which, in a very imperfect form, circulate among the American unemployed, is, in fact, a clearing note, i. e., an Instrument for conducting business on a non-cash basis, as we shall see later on. A closely related question requires now examination, namely whether we are faced by a blank forward sale of means of payment when somebody, for example, buys goods and promises payment after three months in Milhaud's purchasing certificates. The case may seem identical with that where payment in gold or notes of the central bank is promised. 10 But in reality there is the following difference. Whether someone promises to pay with a certain product or a purchasing certificate which he would redeem with it, is manifestly indifferent. But when two owners of goods combine and say: "Each of us undertakes to accept the purchasing certificates of the other up to a certain amount", the legal position of the creditor of each of the two owners of goods is obviously strengthened and not weakened and no additional time risk is involved. When, moreover, the two, in order to simplify the legal position do not place their individual names on the certificates, but the name of the association they have formed, the position of the creditor is once more strengthened rather than weakened This is precisely the case when an owner of goods promises to pay in Milhaud's purchasing certificates. In effect, he only promises to pay with his own goods although he virtually adds: "My business friends, forming the X bank, do also place their goods and services at your disposal". The larger the number of the bank's clients, the greater is the choice of goods for the creditor and the more he is in the position of a creditor who receives gold or at least legal tender. B) Security in Cash Payments & in Non-Cash Settlements To judge by general experience, the losses incurred in non-cash transactions represent only an insignificant fraction of those which take place in cash operations: they are practically non-existent. The only real danger involved in non-cash transactions arises when creditors suddenly refuse to accept non-cash payments and demand ready money. This suggests the advisability of generalizing as far as possible non-cash settlements and limiting the right of creditors to demand cash. Unfortunately, this suggestion is not as self-evident as it seems, for it has occurred to few economists only and to even fewer "practical men". In his work "Money", Jevons reports that the leading London bankers declined to have anything to do with the Clearing House long after it was instituted (see p. 264 of the 1923 edition) and that in his day (in 1875, that is exactly a hundred years after the establishment of the London Clearing House) both the Liverpool merchants and the Liverpool banks would have nothing to do with clearing transactions, and insisted on receiving cash payments (p. 280). The intellectual barrenness of "practical men" in all economic and generally also in political matters has often been noted by thinkers. The Bible is already remarkably clear on this point (Jesus Sirach, ch. 38/39). Adam Smith, in the chapter "Commercial System" of his classic work, comments severely on the economic views of merchants. And Rudolf von Mosch, an unjustly forgotten German social reformer, wrote in the 'eighties: "If professional associations were a natural breeding ground for far seeing reform projects, we should have today no lack of these, for almost all professions have heir special associations, periodicals, and congresses. What reform projects have these brought to light? Virtually none." ("Materialien zu einem Katechismus der Sozialreform (Materials for a Catechism on Social Reform), Berlin, 1888, p. 413. (I am still seeking a copy of this book now! - J.Z., 21.11.01.) (5) THE MILHAUD PROPOSALS AS A BASIS FOR A NEW SYSTEM OF PECUNIARY SETTLEMENTS A) The Prevailing Money Monopoly as a Cause of Money Shortage and there from of the Trade Depression Milhaud repeatedly states that he only proposes an emergency measure and that he has no objection to the disappearance of the purchasing certificates in external trading and the goods warrants in internal trading once "normal" conditions have returned. But Milhaud is assuredly more fully aware than any one else that such an extension 11 of exchange transactions without State money is in reality the beginning of a new system of settling accounts indeed the beginning of a new economic order. The retention of the purchasing certificates and the goods warrants would be irreconcilable with the present economic system The most fundamental mark of this after all not very old economic order of ours is the State's money monopoly. Purchasing certificates in external trading and goods warrants in internal trading would break this monopoly. Once Milhaud's means of payment have been introduced, the supply of money would no longer be dependent on the discretion of the few who are entrusted with supervising the monopoly, for the supply of money would be regulated by the needs of the general economic life. In fact, any individual so long as he efficiently conducts his business, would be able to determine himself the measure of his monetary supply, just as he determines his supply or air and water. We live today in a state of society which is no longer even "capitalistic" and where fewer than a hundred people dictate how much the world is to produce, how much of its products it may consume, what proportion of the social product may be retained within a country, and what proportion may be exported. In addition, those few scores of human beings also influence decisively such conditions of exchange and production, as, for example, commercial treaties and credit supply, and they exercise that influence in all cases as far as their sense of duty prompts them to. Who are these individuals? They are not Rathenau's "four hundred". Their day has long passed, Some have become insolvent; a few are even in prison; and perhaps every one of those whom Rathenau knew, has lost in power and wealth during these years of depression. Who, then, rules the world today? In the first place, the heads of the central banks; then a few trade ministers and politicians and, apparently, a few writers whom the former consult all of them loyal, brave, honest, and even cultured individuals, who are held in high esteem and who, in sharp contrast with the ruling classes of the pre-war times, enjoy the confidence of over nine-tenths of the population. The only reproach sometimes leveled against them publicly, is that they make too little use of the authority they possess. Accordingly, day by day proposals are being made to place some as yet free domain under their dictatorship; today wage contracts tomorrow, the choice of a profession on leaving school; and next, the entire literature of economics. This tendency is not restricted to one country; t is to be found in Japan and America, in the Russian colossus and in the dwarf countries created by the War. China alone appears to form a notable exception, so far. The opinion prevailing in almost all countries since the War that the State may rightfully claim a monopoly for all means of payment, not only for money, has become more emphatic with the development of the depression. Even noted scholars have asserted that the remnants of private money, as, for instance, check money, were partly responsible for the depression, and that these also should be there from taken over by the treasury. This widespread prejudice, that as many means of payment as possible should be monopolized by the State, has a very serious aspect. Indeed, when we examine its results, it suggests a comparison with witchcraft in the Middle Ages. The new money oligarchy has sprung out of this prejudice, just as the fear of witches gave rise to an oligarchy of omnipotent inquisitors. The old money aristocracy of the Rothschilds, the Morgans and the Vanderbilts has been quite eclipsed by the new oligarchy and places itself at the latter 's disposal, as readily as the man in the street. We have not, perhaps, sufficiently realized as yet that in no previous economic crisis had the worlds monetary supply depended on so few people as today and been controlled so exclusively by doctrinaire State interests. Neither has it as yet been examined whether this very circumstance involves the danger of the trade depression becoming permanent. And it has yet to be shown that the "forces of self recovery" that were active in former crises, were not connected with the free circulation of gold coins, the existence of private banks of issue, and other long forgotten facilities. Some thinkers have justly compared money with language and said that what language is to human intercourse money is to the exchange of products. (Roscher quotes Hamann, Adam Mueller, and Schmitthenner.) If the comparison is valid, he who monopolizes the circulating medium is armed with a similar power as the individual who may have 12 succeeded in monopolizing language and brought men to the pass that they can only convey important information to one another through him. It seems that a few primitive tribes ruled by Shamans are not far removed from this to us almost incredible condition. According to Caesar, the Druids possessed such a monopoly among the Gauls. Along with these may be classed the law in the old kingdom of Sardinia which ordained that the lower classes were prohibited from learning to read and write. And what is the reason that a monstrous monopoly such as that of money is today defended by almost all writers and without exception by all "practical men"? May a future sociology explain it! However, the origins of the modern view of money and of State predominance are not very recent. Herbert Spencer, who is almost forgotten today, prophesied already decades ago what was in store for us. ("The Coming Slavery", first printed in April 1884 in the Contemporary Review ), and prior to him Bastiat raised his voice against the already powerful worship of the State in his day. ("L'etat" The State in "Sophismes Economiques".) In vain! The State monopoly of money is one of the basic demands of Communism. Already the Communist Manifesto of 1847 stated clearly under point 5 of its program: "Centralization of credit in the hands of the State, by means of a national bank with State capital and an exclusive monopoly." In an edition of the Manifesto intended for Germany, which appeared before the Revolution of 1848, we read under point 10: "The private banks will be superseded by a State bank whose notes will be legal tender. . " The communist demands have been meanwhile realized almost in all countries, partly by the communists themselves, as in Russia, and partly by their enemies, who honestly believed that they thereby combated Communism. One thing is certain, namely that the communist monetary conception has triumphed even where all communist literature is prohibited. There is scarcely a parallel to be found in world history of an idea having so completely triumphed and having been accepted by rulers and ruled alike as a self evident proposition. Only in China where in 1853 the Government granted full freedom for the issue of notes (Ku Sui Lu, "Die Form bankmaessiger Transaktionen im Inneren Chinas" (The Form of Banking Transactions in the Interior of China), Hamburg, 1926) (Can anyone supply me with a copy - J.Z., 20.11.01.) and where full and judicious use is made of this freedom do demands for a monetary monopoly not yet dominate most men's minds entirely. (If monetary freedom was legalized for as long in China and if full and judicious use had been made of it there, why then were conditions in China not greatly improved? Why is that great experiment not sufficiently recorded and remembered now, while Red China experienced up to 200 million unemployed? I suspect that considerable restrictions did remain and that at least customs and traditions hindered the full development of monetary freedom there. Meulen once asserted that goods warrants, not redeemable in English pounds or in gold could be freely issued in England. But were they, ever, to any considerable extent? Meulen himself was not interested in this monetary freedom option - and almost all other Englishmen were and are even less! The "tael" standard, a copper weight, privately agreed upon in Chinese contracts, was a safeguard against paper money inflation by the government. - I have still to get Dr. Walter Zander's article on this. Beckerath said, somewhere, that it was published in Shanghai newspaper, in 1935, if I remember right. By that time also, a Shanghai power plant was supposedly issuing its own electricity money for the payment of bills to it. But, were sufficient private and competing exchange media issued? I doubt that very much. Who knows and can supply references? That a few merchants made some private payment and clearing arrangements does not suffice to revolutionize the whole monetary sphere, e.g. the payment of wages, rents and daily consumer purchases. For me it was very significant that even after the invention of nail-making machines, around 1800, the manual production of nails, in supposedly first and highly industrialized England, went on, to some extent, up to ca. 1900, although there was no law against using machines for this purpose. As slowly are significant inventions introduced in many cases! Glass was invented about 14 times. There were xyz discoverers of America before Columbus! There has not been a rush to adopt either the very economical microfiche or the ridiculously cheap CD-ROMs for libertarian publishing or any sort of stampede for the many free banking texts that I offer on microfiche, towards complete publishing on this subject. - J. Z., 20.11.01.) Milhaud is among the very few who venture to doubt the excellence of a planned economy (economie dirigée) largely influenced by the Central Banks. Just like Bastiat one of his spiritual predecessors he recognizes that when once external trading is free, statism would soon be reduced to its natural limits. It is true that Milhaud nowhere expressly states this. But he must pardon his friends if they regard him as a logical thinker, who could not have failed to notice such an evident inference. Even the American unemployed, in tentatively, primitively and inadequately organizing an exchange of services not based on legal tender, felt that they were creating a new economic order and were not afraid to state a this openly. (Report concerning the Natural Development Association in Salt Lake City, Utah, by Murray E. King, Annals; 1933, No. 2. pp 257-261.) Milhaud's appeal to Governments and Central Banks calling on them to introduce the new system of exchange, is nevertheless tactically correct. Today only Governments and the Central Banks can take the first step in the direction of relaxing the present system of economic tutelage. Permission to utilize purchasing certificates in external trading presupposes such a relaxation, even if at first sight this permission seems to imply an extension of the planned economy. Milhaud is one of the very first who has deliberately dissociated the unemployment problem from the problem of the distribution of the social product and thereby declared that the former may be solved within the framework of the present imperfect social order. This penetrating thought can only be compared with that which "the age of enlightenment" of over a century ago reached in the matter of epidemics. Men recognized then that pestilence and cholera were not at all to be attributed to human nature as such, not to be regarded as problems to be solved by greater piety and by pilgrimages. They were problems relating to water, soap, and the destruction of vermin that is, problems to be solved by purely technical measures, without the need of changing human nature itself. 13 (5) B) Exchange of Commodities without Goods Warrants Many American unemployed, who helped themselves by resorting to barter, imagined that they were treading an entirely new road. It is, however, precisely in America, where primitive barter, as once practiced on the Congo, is no novelty. In paragr. 116 of his "Grundlagen der National Oekonomik" (Foundations of Political Economy ) Roscher remarks on this point: "In some parts of the United States barter was still widely prevalent near the close of the eighteenth century. For instance, in Vermont the doctor bartered his medicines for a horse, the printer his newspapers for corn, butter etc. (Ebeling, Geschichte and Erdbeschreibung History and Geography II. p 537.) In Maryland, the Assembly had fixed the reciprocal value of tobacco, pork, corn and wheat, (Ebeling, V, p. 435ff; Douglas, Summary of the British Settlements in North America 1760, V., pp 2, 359.) As late as 1815, lads ran through the streets of Corrientes, shouting: "Salt for candles, tobacco for bread!" etc . In paragr. 134 Roscher mentions that in 1843, in the Western States of America, farmers bartered 2 pounds of raw wool for 1 pound of woolen yarn and 4 bushels of wheat for 3 bushels of flour. Moreover, in 1618 there was in Virginia a forced rate of exchange for tobacco! (Paragr. 119.) During the inflation period in Germany barter was common among dealers, e.g., the provision dealer bartered his foodstuffs for shoes. However, history makes it plain that primitive barter transactions are quickly abandoned and forgotten when even a bad money, in whatever form, circulates for a few years in a sufficient quantity. Hence the barter trading of the American unemployed today, without its extension through a system of goods warrants in accordance with Milhaud's principles, cannot lead to a new economic order. Economic history will consider such trading as a curiosity, as it considers the Virginia edict of 1618 regarding a forced rate of exchange for tobacco. However, that the goods warrant by itself is not sufficient for effecting frictionless exchange of unordered goods (He added later: "for which there is no strong daily demand" The Ed.) is shown by the history of the barter banks in France, England and Germany. (Roscher, paragr. 75; Helene Simon, "Robert Owen", Jena 1905, p. 250.) In the United States these highly informative facts seem as yet quite unknown. It should be also noted that Adam Smith by no means overlooked the possibility of a return to barter in the case of a shortage of money. In the chapter headed: "Of the Principle of the Commercial or Mercantile System" of his "Wealth of Nations", he remarks on this point: "If money is wanted, barter will supply its place, though with a good deal of inconvenience. Buying and selling upon credit, and the different dealers compensating their credits with one another, once a month, or once a year, will supply it with less inconvenience. A well regulated paper money will supply it not only without any inconvenience, but in some cases with some advantages." (Bk. IV/1) It is sure that this passage clashes with another, which is far better known and has often been quoted, a passage which became of decisive importance for the monetary doctrine of the 150 years that followed Smith. Unfortunately, it is held to represent Adam Smiths real opinion regarding the replacement of gold and silver by paper money. In the chapter "Of Money" he writes: "The whole paper money of every kind which can easily circulate in any country, never can exceed the value of the gold and silver, of which it supplies the place, or which (the commerce being supposed the same) would circulate there if there was no paper money. ." (p 331) The qualification "the commerce being supposed the same does", not neutralize the mistake here made by Adam Smith. According to this the whole turnover of a country nights if necessary, be mediated with gold and silver, a state of things from which our time is as far removed as were the Middle Ages or any other epoch. In truth, not all the world's gold and silver could serve as medium for the entire turnover of one country, like Germany, where the Reichsbank and the Post together have, even in bad years, a turnover far exceeding 500.000 million marks. 14 Yet the passage, whereof we have quoted the first portion, has influenced the monetary legislation of all countries down to our time. In all probability, the passage was written much before the one we cited first, although in the work the two passages are placed only a few pages apart. (5) C) Exchange of Commodities with Goods Warrants In an economy based on the division of labor, a frequent exchange of immediately consumable goods for such as are not immediately consumable, is natural and almost normal. In primitive barter, however, the goods exchanged are almost always such as are immediately required. That was so in ancient times and is so in our day, In thinking of the barter associations called into being by the United States unemployed, one is tempted to recall the basic biogenetic law, according to which the new born progeny, from the moment of its conception, passes through the stages that marked the evolution of its kind. Thus in inter commerce, peoples who only knew barter, rarely acquired by barter except what they needed for immediate use. Roscher, in his Grundlagen, etc. paragr, 118, mentions in this connection the Goahiro Indians of modern times and the Livonians of the twelfth century. Similar tendencies were explicably observable when barter transactions were first resorted to among the United States unemployed. Thus the transactions were limited to bartering what was immediately and urgently necessary for life. Soon, however, the unemployed discovered that the hours of labor, which they bartered for urgent necessities, could not possibly be employed in their entirety on the production of such consumable goods. At the same time they recognized that barter might continue provided the claims of those who were prepared to wait for delivery could be protected. The introduction of goods warrants solved the difficulty. This meant a decisive progress. Primitive barter signifies a return to an older economic order, whereas barter by means of goods warrants is undoubtedly the beginning of a new order. A complete theory of the goods warrant similar to that of Long Term credits, has yet to be elaborated by our economists. It is certain, however, that the goods warrant by itself is not enough to ensure in all cases a frictionless exchange of unordered goods. A goods warrant can only circulate at par if someone is ready to accept it at its face value at any time and offers there from an equivalent which is in urgent and general demand. The railway, for instance, is such an acceptor. The subject has been for the first time examined in Dr. W. Zander's "Eisenbahngeld und Arbeitslosigkeit" (Railway Money and Unemployment), which appeared in Berlin in July 1933 and has been reproduced in the Annals. Zander has dealt so ably with the practical aspect of railway money that a general theory of the goods warrant might be easily deduced there from. The German Reich Railway fully bears out Zander's reflections, seeing that during the inflation period, and particularly during the transition time 1923/24, it issued scrip. According to the Statistisches Jahrbuch fuer das Deutsche Reich (Statistical Year Book for the German Empire), 44 th annual issue, p, 313, there was in circulation on 31 December 1923 railway scrip to the value of about 251 million gold marks. Oeser, the Minister to whom this initiative was due, probably saved thereby the German economy from grave convulsions. Germany's entire monetary circulation on 31 December 1923 was 2,273,6 million Reichsmarks, of which there from only 11% was in railway scrip, It might be thought that the absence of so small a proportion of the whole would have entailed no serious consequences and should have been there from dispensed with for the sake of maintaining uniformity in the circulating medium. But it is far from true that economic difficulties wax and wane in direct ratio with the supply of money. Indeed, as has frequently been remarked, money may rightly be conceived as the blood of the body economic. Just as a diminution, by one-tenth of the normally required quantity of blood in the body does not weaken it by one-tenth but by far more, so a seemingly trivial deflation may very seriously affect our economy. Contrariwise, a seemingly trivial increase in the 15 available means of payment at a critical juncture, may suffice to produce an economic recovery. John De Watt Warner's "The Currency Famine of 1893" (published in the periodical "Sound Currency" at New York, 15/2/1895) offers a striking illustration of this. The quantity of gold, silver, and paper then circulating in the Union was about 1,700 million dollars, a very considerable amount. But when in August 1893 the "famine" broke out, even millionaires at the seaside sometimes could not scrape together the few dollars required for a return ticket to New York. At that time business saved itself a fact not remembered today by also resorting to a kind of goods warrant, of which altogether about 80 million dollars' worth were issued. That amount constituted only about 5% of the money in circulation; but this small addition sufficed to keep the economy going and especially to pay wages with. Without these 80 million dollars of goods warrants, looting would have probably ensued. The security offered for the goods warrants varied considerably. Almost everywhere, however, banks, shops and factories accepted the goods warrants at their face value in settlement, and publicly undertook to do this. Banks and factories were likewise the issuers. Warner's study written with keen insight and containing highly interesting particulars, would be well worth reprinting in order to wrest the facts from oblivion. Even more remarkable than the effect of the United States goods warrants of 1893 was that of the Prussian Loan Banknotes of 1848, which we shall discuss in the sequel. Milhaud is fully aware that there must be an acceptor for the goods warrants, who will accept them at all times at par and who offers as an equivalent something that is in general demand. Milhaud proposes to anchor his purchasing certificates in taxation. This proposal merits close consideration. Suppose that unemployment riots endangered the existence of a government and the latter had only the choice between being swept away or making within twenty-four hours a serious and for everyone unmistakable beginning with the abolition of unemployment. The Government could not proceed otherwise than by supplying the unemployed with some form of goods warrants, e.g., as a loan to employers to cover wage payments, perhaps even as loans to the unemployed themselves, and to ensure the parity of the goods warrants by validating them for tax payments, as Milhaud suggests. The tax basis is a security available at any time even when the Government machinery is no longer intact. In the hour of danger the government might inform the municipalities by wireless that they are authorized to establish Work Supply Banks (as Milhaud proposes) and that all tax obligations may be discharged with the goods warrants issued by these banks (but that the forced currency only applies to government pay offices). Most probably, the impending danger would be averted through this, and days and perhaps weeks might be gained during which the technical arrangements could be perfected. The menaced Government would be hailed as a social savior and, as a result, its authority would be more firmly grounded than that of any possible communist dictatorship could ever be. How different, for instance, would have been the recent history of Cuba and Spain if the overthrown or even murdered rulers had been acquainted with Milhaud's proposals! When will the great reformer arise in these countries, who will make it clear to the masses that today believe only in the most brutal force, that an association of 100 workers, capable of intelligently applying the system of goods warrants, would be a greater menace to capitalism than all the world's bomb-throwers combined! The declarations of the governments now in power in all countries and of the parties that oppose them, demonstrate however that they do not view the unemployment problem as a problem of means of payment. In these circumstances, it is unlikely that such governments would provide a tax basis for the goods warrants created through the self help of the unemployed. It will be necessary there from to dispense provisionally with such a foundation. Thus the idea suggests itself naturally that as large a number as possible, especially of workers, should undertake to accept the goods warrants. Of course, we class as workers those unemployed at present, those working short time, as well as those still fully employed but who may any day lose their employment. It may possibly also be found that the undertaking of the workers to accept the goods warrants cannot be executed without 16 guaranteeing the sale of the goods, payable by means of goods warrants, through the previous placing of orders. (5) D) The Placing of Orders as a Factor in the Goods Warrants System When, a century ago, Robert Owen founded his exchange bank, many of his followers recognized that rendering the workers independent of the money market was not enough, and that to a larger extent than heretofore employment must be linked to orders placed. (Helen Simon, "Robert Owen", p, 230.) Owen himself does not appear to have stressed this and rather regarded as an essential the replacement of gold as a standard of value by the working hour. The emphasis by English workers in 1833, on the placing of orders as one element of a new economic order, showed great insight, and it is a pity that the economists of that period entirely ignored this point in the labor program. The fact that today production is rarely based on orders and is mostly for the market is, of course not the sole cause of the marketing crisis. It is, however a conditio sine qua non of every such crisis. The hitherto attempted explanations of these crises appear to have done scant justice to this aspect. The primary characteristic of a crisis is that the population cannot repurchase its own product. But the fact that production is not for firm orders, but for the market, also explains why sometimes the population is not willing to re-purchase its product. Such reserve on the part of purchasers is far from uncommon. Nor is it in doubt that this reserve often results in the same individuals who at first refuse to buy; producing the conditions whereby they can no longer afford to buy. (Goods warrants promising merely redemption in goods and services that are in daily demand and, moreover, with a time limit for their validity of no more than e.g. 3 months, are unlikely to be hoarded. Even if they were hoarded, new goods and service warrants could be issued on the same basis to make up for any currency shortage. Thus, I do not believe that in the sphere of wage and salary payment means there is much need for a system of placing orders. Orders for larger purchases, a car or furniture or a holiday, for instance, are another matter. - J.Z., 21.11.01.) These interrelations seem to have been but little studied hitherto. Yet a closer examination would be well worthwhile, although it is evident that not every marketing crisis has been started by a strike of purchasers. A fact, however, may be mentioned, one which Irving Fisher was perhaps the first to stress In economic literature falling prices are frequently confused with low prices and rising prices with high ones. In conformity with this, it is commonly contended that low prices stimulate consumption and that, in an undisturbed market, this would be there from conducive to a natural trade recovery. But whilst low prices stimulate buying more than high prices, falling prices invariably discourage buying. So long as prices are falling and this may continue for years - everybody postpones buying in the hope that tomorrow's prices will be lower still. Hence only when prices are thought to have become stabilized or a tendency for prices to rise has set in does buying become "normal". Thus not only is production for markets a precondition of every sales crisis, but consumption through markets also tends to aggravate, and not to cure, an oncoming depression. (Here one should consider that under freedom to issue alternative and optional exchange media a deflationary tendency could not be large and could not persist for long. Thus prices would NOT tend to become falling ones, due to potential buyers postponing as much as they can any further purchases. The more the goods warrant system is applied the less would orders be required for the turnover of daily needed consumer goods and services. A relatively rapid "consumption through markets" could be assured through the limited validity period for goods and service warrants. They stream back before they become invalid - and achieve corresponding sales for their issuers. In later years B. did not stress the "order system" very much. At when he wrote the above, he seems to have been still in love with it. - Later on, he stressed much more that only goods and services already sold , at least by the producers or suppliers to wholesalers, not goods and services to be still produced in a somewhat distant future, should form the basis for the issue of exchange media. With this he had in mind e.g. the "shop foundation" or the readiness to supply of petrol stations, railway and bus services, the services of tradesmen, professionals, of power plants, water works, insurance services etc. - Naturally, one can equate an insurance contract or a water or electricity supply contract also as a placed order. - While still living in Berlin, and on a miniature scale, I tried to negotiate a regular fruit supply contract with a green grocer, promising to purchase monthly at least DM 30 worth of fruits and vegetables from him, and asking for a small discount on this firm order. He was good natured but a bit thick-headed and not amenable to arguments, so the discount was refused - but I continued my regular purchases from him, whereupon on x-mas I received, unexpectedly, a large basket of free fruit, with a comment like: There is your discount! - Here and now my second son has had an account for many years with a large hardware store, at which he is a regular customer, while building 3 houses. Thus he does not have to pay cash for each item but gets a regular monthly bill for all his month's purchases, with a considerable discount. This comes also relatively close to an order system. - J.Z., 21.11.01.) Hence there is much to be said for the demand of the English workers in 1833, that production should be governed more by orders placed and less by market considerations. Call up in imagination Thuenen's famous "isolated State". If in that State all production were governed by orders placed and every party ordering were solvent, no sales crisis could occur in that State. This is obvious from the following considerations which, however, call for a brief analysis of the concept of "solvency". Let us assume that our isolated State possesses one or more well-managed banks of issue; that these banks are authorized or indeed bound to make advances in notes on orders placed, most especially for wage payments and other production costs to be paid in cash. We should then observe a complete correspondence between the circulation of money and that of goods. Expressed differently, solvency would be general and follow from the system of production on, orders placed. Artisans manufacturers, laborers, farmers and others, would produce commodities and bring them to this country's sales establishments where they would lie waiting for the purchasers. Then the employees would present themselves a second time at the shops, but this time as buyers. They would buy the goods they had ordered, pay for 17 them in notes, and take them home. With the notes they had received the shopkeeper would then pay their wholesalers: and with their own profits they would also make purchases, i.e., they would get rid of their notes in other shops. In their turn, the wholesalers would pay their manufacturers or farmers with the notes they had received and also indulge in purchases with their business gains. But the manufacturers, farmers, and other producers are precisely those persons who received the notes in the shape of advances from the bank of issue. They are now in a position to repay these advances, and this also in notes. The repayments having been made, the banks would destroy the returned notes and thus the circulating process would be at an end. It is true that the country would have then no saleable goods and no circulation media; but the process of production might be at once resumed. What has been stated here regarding an isolated State, holds very largely of the non-isolated State, but proportionately less the smaller and the less isolated a territory is, However even such a small territorial unit as Belgium, for instance, would probably benefit by the system. If Belgium possessed a few banks of issue that granted advances in notes on orders from "average customers", this might secure for every Belgian willing to labor 4 or 5 hours' work daily, That would be possible, even though Belgium, more than any other country, is intimately bound up with the world economy. The 4 or 5 hours would naturally only produce a mere subsistence wage and many workers would have, there from, also to undertake jobs for which they were not trained. For a time there would be only "work of Belgians for Belgians", and not work for the world market. To the degree, however, that business circles outside Belgium could be induced to join the system, production could provide correspondingly more than a bare subsistence wage. With a view to properly appreciating the effects of the system of placing orders, we shall make the following supposition: The textile workers of the isolated State are to be dismissed because of lack of employment in the textile industry. They decide to create employment for themselves by each ordering textiles to the value of one month's wages and this in the shops where they regularly deal. The aggregate wages for the month amount to (say) 100 million. The shops there from, receive orders to this amount. The shops work with a margin (say) of 20 million. Their orders to the wholesalers are there from only for 80 million. Suppose that the wholesalers' margin is 30 million. Thus the textile industry will then inform the textile workers that here is work, but only for half their number; the other half will not be required. After the workers have recovered from their surprise at the disappointing results of the orders they placed, they will change their tactics. In placing their orders at the shops, they will say: "We are placing orders for 100 million; but only on condition that you place orders for the same amount, You may order for 80 million from the wholesalers, but you must also place orders for another 20 million. Moreover, you must somehow arrange that those who receive your orders proceed similarly and produce satisfactory evidence of having done this. We demand that the full amount of our orders be passed on and that your orders shall entail at last labor orders amounting to 100 million." By deliberately choosing with whom to deal, a people can effect greater social changes than by the bloodiest revolution. If the workers proceeded in this way, they wilt probably not entirety succeed in securing a full 100 million worth of labor to the textile industry But the labor market as a whole would benefit by 100 million, and not a few of the textile workers would find employment in other industries. The guaranteeing of the orders placed, both as regards a) the disposal of the ordered goods, and b) the passing on of the orders, so that the total amount involved in the orders should be felt as a demand on the labor market, represents an important economic function. Decades will no doubt elapse before this system is so developed, as are today the installment payments system (hire purchase), the discounting of bills, or mortgage loans. A beginning might be most conveniently made by those factory workers whose employers are engaged in mass production and have large and efficient offices. The orders of these workers could be entered on set forms. E.g., the 18 orders might be accepted by the workers' cooperative societies, a procedure which would greatly allay the workers' apprehensions. Most of the cooperatives, too, have order forms, supervision, etc., and their members readily fall in with such arrangements. Suppose a worker orders a suit of clothes at a store, say either in the textile department of his cooperative society or at another sales establishment. His order form might read as follows: Firm accepting the order Nature of order as to kind Least price to be paid by the person ordering Statement as to desired installment rate Employer's address, branch of enterprise; etc. Other particulars Declaration of person ordering: "I undertake to accept this order form when receiving payments due to me, up to the amount of (insert sum) agreed upon under 3) in lieu of ready money". Should the worker not call for the ordered goods, the firm that received the order would forward the order form to his employer who, when the next wage payment falls due, would place it into the worker's wage envelope. After that, here is no doubt that the order will be honored. The system can here only be barely sketched. A detailed description would fill a volume, not because the system is complicated (which it is not) but because it is widely applicable and because the parthes ordering might escape through many loopholes unless the legal basis is comprehensive and carefully elaborated. For all intents, there is noting novel in the principle of placing orders and in the reflux of paper money through the execution of an order. The old private banks of issue, first and foremost the Scotch, habitually applied it, though not always in a form clearly recognizable by us. Frequently the additional securities were the real ones. That the "reflux principle" and also the mutual responsibility of clients of a bank of issue as a" payment partnership" were already clearly realized by Adam Smith, follows from the chapter "Of Money", in his "Wealth of Nations", particularly from the paragraph commencing with the words, "Whoever has a credit of this kind ." (Vol. I, p. 329 of the World Classics edition.) Formerly, the poorer sections of society were not included among "persons ordering", partly because their intellectual status was too low and partly because their requirements involved only a bare subsistence standard and there from could be calculated and ascertained long in advance. The regularity in sales, which may be secured as regards the well to do classes by the system of placing orders was assured, without such a system, for the poorer sections of society in the eighteenth century by their wretched standard of life as well as, frequently, by their dependence on certain shops. Bendixen, probably the last exponent of the principle of the old bank of issue, states definitely: "Only sold goods can form the basis for the creation of money." ("Wesen des Geldes" "Nature of Money", 3rd edition, p. 83.) Whether a monopoly, such as that of a railway, justifies the issue of paper money without a precedent sale of the monopolized goods (or services), Bendixen did not inquire into, because his subject, that of the German Reichsbank, did not suggest the problem. The gap has, however been filled by Zander's "Eisenbahngeld." There is for us here no tangible difference between "sold" and "ordered". One difference as against the teachings of the old bank of issue theory is, expressed b the fact that we propose here, the inclusion of the poorer sections of society among hose who deliberately apply the principle and desire to become its upholders. Surely, it does not argue an overwrought optimism that the poorer sections of society should 19 gradually come to understand that he who orders goods and takes care that the order is passed on uncurtailed, orders opportunity to work and that he who orders his own livelihood, creates a demand on the labor market exactly equal to producing this livelihood, We thus place orders and secure work for others; but others also place orders and secure thus work for us, We become indebted to the extent of the orders we place, and we acquire assets to the extent that we receive orders. We pay with our assets, and it is the business of the bank so to break up and standardize the assets by means of goods warrants that they can serve as means of payment. We are bound to accept the bank's goods warrants to the extent of our indebtedness The person ordering frees himself from his indebtedness by calling at the shop for the goods he ordered and handing over therefor the goods warrants which he had to accept in lieu of money. Instead of a cover in specie, as demanded by an old prejudice, the goods in the shops serve as redemption fund. The forced currency, which modern prejudice insists on, is replaced, on the one hand, by the indebtedness created by the order placed and the undertaking on the other hand, to allow one's own debt to count against oneself in clearing It ought to be one of the tasks of economists to convey these at first somewhat abstract sounding maxims to the poorer sections of society by means of explanations and illustrations in the same way as they did this for our manufacturers and merchants some decades back. Without an alliance with science, the poorer sections of society are lost They believe they have a program and even attempt to realize it by sanguinary revolutions. What kind of program do they possess, on closer examination? For over a century they have put forward the same demands over & over again, demands that are vague, have no concrete content, and seem to be "practical" only because they are divorced' from "theory", i.e. from deeper insight, Consider, for instance, the reform program of the French Confédération Générale du Travail (General Confederation of Workers), published in "L'Oeuvre" of 22/2/1934: Integration of the workless in the process of production by generally reducing the hours of work. (This assumes as self evident that e. g., unemployed watch makers and musicians would immediately find work if the working hours of farm laborers and of bricklayers were reduced.) Stimulation of industrial activity by starting extensive public works. (This assumes as self evident that the money spent on this, if left in the hands of the tax payers would not create employment. Minimum wages for every industry. (This assumes as self evident that every industry can bear such mechanical regulation.) Fixing of remunerative prices for agricultural products. (This assumes as self-evident that consumers can be compelled to pay the prices prescribed by the police, as house owners for instance may be compelled to keep the streets clean.) Nationalization of credit and supervision of the banks. (Where the State is to find the means to grant credits, is left to the reader's imagination. And of what use will the banks be, once credit is nationalized?) Strict supervision of key industries by the representatives of the people and of the wage earners. (What the representatives are to supervise is prudently left unsaid.) Introduction in the constitutional apparatus of an economic organ armed with powers permitting it to coordinate production and consumption and to supervise all economic activities. (This inevitably calls to mind the edict of Napoleon I., of 24/11/1807, according to which his minister was ordered to remove within one month all economic distress in France! That Chancellor Bruening possessed this authority and Roosevelt still wields it, should induce the C.G.T. to start thinking!) Administrative and fiscal reforms. (That this demand is very original, not even the C.G.T. would contend.) Anyone acquainted with the history of French socialism, will find that the above quoted program is far less advanced as regards positive content than some social programs of French workers a century ago. That uninstructed workers and unemployed 20 should consider the above demands as constituting a program is pardonable but not that their leaders should have formulated it. Since the above eight demands are not the outcome of reflection but of the want of it, it is not surprising that they should have sprung up everywhere and sporadically during the last few decades. Especially during recent years has it frequently happened that the lower classes have revolted, have had recourse to brute force, and have proclaimed some one or several of the above demands. Often the revolt is suppressed, and what do the victors do then? Equally unreflective as the vanquished, but feeling that something has to be done, they proclaim the same "program" only couched in different terms. No reforms follow, just because the program has no factual basis and is only the expression of a pious wish. Nobody has more clearly recognized the great, even immediate danger for the workers, particularly in our age, resulting from the indefiniteness of their programs, than H. L. Follin, one of France's acutest thinkers. His "Paroles d'un voyant", it is true, appeared only in 1934 (published by Riviére in Paris), but was in existence before the German Revolution of 1933, a revolution which Follin regarded as inevitable because the German Left was without a program. He writes: "It is rendering a disservice to the masses to provide them with vague formulas which they wrongly interpret and which create in them the illusion that the formulas represent the reality which they do not understand. This pseudo science, this tendency to be satisfied with mere phrases and to speak loosely, this aversion against the degree of intense thinking required to recognize which kind of reality corresponds to every word, these are scourges of our times and the press bears the main responsibility for them." Potent forces are at work preparing the same fate for French socialism which has befallen during the last few years Russian socialism (Bolshevism is not Socialism), Italian socialism, that of the Balkan countries and of Austria. One of the few bulwarks against these forces is the C.G.T. But the present situation really calls for something else than programs of the above type. In the conditions of today this something else must be a movement which has for its aim the immediate realization of the principles enunciated by Milhaud. The next step for the C.G.T. should be there from, to set up study committees in all localities where it has influence. The committees should seek to come to an agreement with the employers of the district concerning the carrying into effect of the Milhaud proposals, and this not in general terms, but precisely in the locality concerned. If only one of these series of negotiations were to be crowned with success, the C.G.T. would have won for France, and not only for France, a second battle of Valmy, although not against an external enemy, a battle on the evening of which Goethe uttered his memorable words: "Today and here starts a new epoch in world history, and you can all say that you were present at it." Nobody will grudge the C.G.T. such a victory, if indeed it intends to deserve it. Between the indefiniteness of the political programs of the past and the many wars, and the indefiniteness of the social programs of the past and the many bloody revolutions there is an intimate connection. When once the workers instead of erecting barricades, go to the shops and discuss with the shopkeepers the question of becoming customers and of placing orders for large quantities of goods at agreed prices, one of the incidental results would be to realize an old ideal, that of stabilizing the price level. Whilst it is true that, considered purely arithmetically the stabilization would not be quite perfect, it would go far enough to be satisfactory for all practical purposes This stabilization would even then ensue if the part ordering were allowed, against a payment of forfeit money, corresponding to a "call" in wholesale or stock exchange business, to withdraw its order. (To accord the same concession to producers, in exchange for a premium, would be just and practicable as mistakes in calculation could be thereby compensated.) The stabilization of the price level through the placing of orders would be probably much greater than that attained by any of the hitherto proposed index currency systems. The stabilization would be also greater 21 because it would affect not only the average price, as the index currency attempts to, but individual prices. Furthermore, the placing of orders would relieve many owners of goods of the necessity of snatching daily from one another their customers, and this would reduce sales costs. According to statistics relating to American department stores, the sales costs frequently amount to about half of what the purchaser pays, in not a few cases even more. The system of placing orders will there from considerably reduce the price level without any one suffering hereby. For simplicity's sake it is here assumed that the total production of a country is based on orders received. In practice, however, there is no need to go so far. The sale of many goods and services proceeds with great regularity and almost automatically. It does this without the placing of orders as reliably as with them. For example, no population today could dispense with the railway services, and a large proportion of railway "goods", that is, of transport mileage, could be sold without any orders received. Practical experience might eventually show that the placing of orders for about one-tenth of a country's production would suffice to abolish all unemployment. But this possibility should not prevent us to apply the system of placing orders as widely as practicable, at first. Nor should it be overlooked that whilst an institution such as a railway, is not dependent on orders received by it, the orders it places for rolling stock, etc., and which it pays for with railway money, indirectly increase its own turnover, as Zander has shown in his "Eisenbahngeld.". (5) E) Short Term Validity of the Goods Warrants Since the goods financed by means of goods warrants are as a rule only moderately durable, it must somehow be prevented that perhaps 5 years after production somebody presents a goods-warrant and claims delivery of the goods ordered. Milhaud has recognized this danger and demands there from that the goods warrants should be valid for a stated period only. This aspect gave rise to a prolonged discussion. (See: Annals, Nos. 1 and 2, 1933.) It was, however, generally recognized that the time restriction of the goods warrants counters one danger, which, although slight, is greater than zero. It was also pointed out by some that the restriction might cause inconvenience to those who accept the warrants shortly before they expire. It might have been added that many people, without being money hoarders, are bound to accumulate means of payment for certain dates, e .g., employers and mortgage debtors. By such a time restriction, these might be moved to refuse acceptance of this paper money in order to be certain to avoid the possibility of missing the due date. Our remarks in the preceding section have for instance, hinted that the time validity of the goods warrants might be limited otherwise than by rendering them valueless after a stated time. This, as we have seen , might be accomplished by definitely prescribing their passage from the issuing center to the worker and thence back to the issuing center, and this by means of two contracts - a. Engagement contract, wherein the worker undertakes to accept the goods warrants in lieu of ready money, b. Loan contract wherein the employer undertakes to accept them in his capacity as debtor. These contracts would guarantee the prescribed passage. If this were done, the format limitation of the time validity indicated through a corresponding notice on the goods warrants, might be dispensed with. This does not assert that in all circumstances the method of a definite time limit, after which the goods warrants become valueless, is inferior to the restriction enforced by the contractual method of ordering. Both methods should be tested and even from time to time re-tested. In fact, the time limit proposed by Milhaud is considerably longer than would be as a rule the time limit under the "bespoke system". Any serious inconveniences, there from, are not to be anticipated in the realization of 22 Milhaud's proposal. Moreover, Milhaud has noted that the system of goods warrants operates the more smoothly the more the placing of orders appears as an element therein. (Annals 1933, No. 2, pp. 182, 227.) That the fine (to be discussed later) imposed by the bank when a payment is not made in goods warrants but in other monetary tokens, will greatly accelerate the reflux of goods warrants, is evident. Another arrangement will produce a similar effect, namely the possibility of investing the goods warrants and profiting by the interest received. Since Milhaud has himself stressed the difference between saving and hoarding (Annals, 1933, No. 2, p. 180), it is manifest that few would think of hoarding the warrants if they could open a savings account with them. The instance when people would hoard them would not be more frequent than where somebody buys a railway ticket and deliberately, out of stupidity or spite, refrains from using it. (5) F ) An Improvement in the Civil Law as a Result of the Milhaud Proposals and as a First Step towards a Social Reform The concept "crisis" is of a highly subjective character. During the years 1927 to 1929, which present themselves today in a rosy light, most people were under the impression that there was but a slight diminution of the crisis over that of the immediately preceding years. There were still great numbers of wholly and partially unemployed many difficulties in discharging liabilities, much spare tonnage, masses of unsaleable goods, and a continuous stream of new proposals for grappling with the depression. It was hoped that 1930 would see the beginning of a real recovery. A proposal, such as Milhaud's, would have, there from, been also appropriate in 1927 and would certainly not have been rejected on the ground that all was well economically and that there was nothing amiss as regards monetary matters. If we are right in this respect, it follows that the realization of Milhaud's proposals should not be made dependent on, for instance, some official body declaring that we are passing through a crisis or that the crisis is over. Indeed, we may reasonably surmise that if in the "prosperous" years 1927 to 1929, the part of the business world then already entangled in difficulties, had been allowed to help itself by applying Milhaud's system, the economic crisis would never have assumed its present magnitude and very likely would never have developed. This suggests that the essence of the Milhaud proposals should be regarded as of permanent application. What then is their essence? The official compensation office for external trading? The center issuing purchasing certificates with a view to paying for relief works? These proposals are of decided value, but their essence is surely the abrogation of the right of creditors (whether vendors of goods or workers) to demand payment in legal tender. This essence is of a negative nature. That which remains as the sole means for satisfying creditors, namely a) direct payment with goods or goods warrants, or b) balancing (clearing) on a monetary basis, may be realized in a variety of ways. Once it is recognized that the right of creditors to demand gold or legal tender is a main cause of the depression and that the abrogation of this right if only on a voluntary basis and for a limited period, perhaps even not in all domains, would offer an effective means for ending the depression, the idea suggests itself that the said right of creditors should be altogether abrogated by an amendment of the Civil Law, replacing it by the right of creditors to be paid by clearing in a form as favorable as possible to them but economically tolerable to the community, This would only involve a logical development of the legislation on time bargains existing in many countries; pursuant to which such bargains are only protected legally where the debtor is permitted to withdraw from them on the payment of forfeit money or a premium. In fact, such forfeit money sales are frequently not even legally protected or 23 only on condition that they are concluded among members of the stock exchange. That we are here only contemplating a consistent development of the existing legislation concerned with dealings in "futures" will be manifest from the preceding considerations. For countries like England or the United States such an amendment of the Civil Law depriving forward sales of gold and banknotes of legal protection, would not represent anything novel, for non-cash payments, that is payments by means of a clearing operation, have been common there for many decades, even among the masses. The proposed reform would legalize a custom; that is all. A modest beginning might be made with bills and checks in that such bonds also might be made subject by the drawer to the general bill or the check legislation ,wherein the text only states that the drawer will accept them in payment in lieu of money, but that the holder is not entitled to have them redeemed in money. It is true that recent international arrangements on bill and check legislation are not favorable to such a solution but they do not exclude it. To submit here detailed legislative proposals on the subject would exceed the scope of this paper. It may be remarked, however, that the legislation suggested takes up the problem where, more than 1500 years ago, it was left by Marcus Aurelius, one of the greatest statesmen of all times and countries. It was Marcus Aurelius who first introduced the clearing principle in Civil Law (Heilfron, Roemische Rechtsgeschichte, History of Roman Law, p 521.) Before his day, only a quite exceptional and limited use had been made of this principle. It is highly significant that the next king who after Marcus Aurelius, merited to be called a philosopher on the throne, namely Frederick the Great, also recognized the economic importance of the principle. If article 6 of his "Reglement der Koeniglichen Giro and Lehn Banko", of 17 June 1765, had been seriously put into force, which was not the case, the settlement of payments by clearing would have at that early date become almost generally established in Prussia. Furthermore, the "Allgemeines Landrecht" (Civil Code ), drawn up in Frederick's reign, pays close attention to clearing and devotes to it 77 paragraphs, whereto have to be added 37 paragraphs concerning the union of the rights of creditor and debtor in one person (Confusio ). The German Civil Law today is satisfied with 10 meager paragraphs and the Napoleonic Code, which recent legislation has unfortunately followed, with 13 paragraphs only. One of these, paragr. 1290, is so badly drafted that French courts do not apply it. The effect of the Civil Law on conditions of employment has so far been left practically unexamined. Probably the only volume that has appeared on the subject is Rittershausen's "Reform der Muendelsicherheits Bestimmungen, zugleich ein Beitrag zum Erwerbslosen Problem" (Reform of the Provisions concerning Trustee Investments, representing also a contribution to the Unemployment Problem", Jena, 1929, which contains valuable suggestions. That a clearing house curtails the business possibilities of the central banks of issue and even offers the chance of escaping from their tutelage altogether, has naturally been observed by their partisans. Owing to this, e.g., the Russian currency legislation of 1930 has refused cooperatives the right to accept checks without permission of the Russian Central Bank. In 1933 another country went even further and declared all agreements null and void where a creditor of banks and akin institutions renounces his right to demand payment in ready money. Such a provision, if creditors as a body were to exercise their full rights thereunder, could in a few hours bring stark ruin to the most flourishing national economy. Today the advocates of goods warrants have still to fight for the right to issue them, The coming ages will stand for the opposite view of obliging every economic domain to issue as many of its own goods warrants as are necessary to prevent a disturbance in the monetary circulation of other economic domains. Indeed every individual will be bound to dispose of his assets through a clearing bank which issues goods warrants. Others' balances or means of payment issued by others, would thus be permitted to be used only if the own balances, or the means of payment issued by the debtor himself, proved inadequate. For Germany, for instance, such a reform would involve the amendment or abrogation of the following legislative provisions: paragr. 39 of the Banking Act, which was imposed on Germany by the Dawes Plan; par. 115 of the "Gewer beordnung" (Trade Regulations), whereby workers are entitled to demand 24 payment in ready money; paragr. 32 of the Cooperative Societies' Act; and the Bruening Dietrich Legislation concerning emergency money, with its later supplements. In an economy not inconvenienced by a money monopoly and regulated by a system of production based on orders placed, the demand for labor will always equal the supply, probably even equal all the labor which can be supplied in it. Such an economy will have no unemployment problem; but, on the contrary, it will be always concerned with the problem of how to reduce the burden of labor by means of machinery and by every other kind of social advance. The champions of the monopoly of the central banks of issue will one day stand before the bar of world history, as in English history the opponents of William Dockwray, who, in 1680, to the common benefit, introduced the penny post, but who also amidst the applause of the obscurantists, was compelled by the Duke of York, who held the postal monopoly, to renounce his project. England had accordingly to wait another century and a half before this reform was realized. (Macaulay, "State of England in 1685", History, vol. I.) Or there is the case of the opponents of mechanically propelled conveyances a century ago, an age which only knew steam vehicles but these of a decidedly practical character. By an Act of Parliament, which provide that for the "protection of the public" a man with a red flag must walk in front of every steam vehicle, social development was arrested for many decades. (6) THE REALIZATION OF THE FUNDAMENTAL CONCEPTIONS UNDERLYING THE MILHAUD PROPOSALS, SHOULD STATES NOT TAKE THE INITIATIVE A) Purchasing Certificates in External Trading on a Private Enterprise Basis As Milhaud has shown, the great shrinkage in world trade had two principal causes, of which the second was the immediate consequence of the first: 1. the right of creditors to demand payment in gold; 2. the restrictive foreign exchange laws, of which perhaps a thousand have been issued during the last three years. The foreign exchange laws have introduced confusion not only in trade but in men's ideas. They had a legitimate purpose, namely to restrict the right of creditors to demand payment in gold. But the method whereby the foreign exchange laws of all countries are seeking to attain this end, will probably create a similar impression on our descendants as the anti-sorcery legislation of our ancestors. One basic defect of perhaps all these laws is that they fail to distinguish a) claims arising out of Short Term deposits utilized for Long Term investments, the deposits thus becoming "frozen" b) claims which cannot be met because they call for payment in gold and the debtor possesses only goods; c) claims which cannot be met because they call for payment in notes of a central bank of issue or may be demanded in such notes whilst the central bank of issue will not or cannot place such notes at the debtors disposal, although he holds goods that are in demand. With regard to a), Rittershausen has dealt with it luminously and comprehensively, in his work "Neubau des deutschen Kreditsystems" (Reform of the German Credit System, Berlin, 1932. It suffices there from to refer the reader to this work, b) is the central theme of Milhaud's plan. (And c) is Beckerath's main theme, seeing that few have any longer a chance to get their government paper redeemed by the government in a gold weight value that was originally promised. Now one can get its paper only replaced by it or any of the banks it has permitted, in other government paper money of the same nominal value, on the "principle" of "Mark equals Mark" or "Dollar equals Dollar", which is quite untrue for Marks or Dollars that were issued years earlier. The abstract paper money "standard" of the government is like a very elastic rubber band that over the years or decades becomes more and more stretched - until it finally breaks altogether. Imagine, by analogy, the weight, length and volume "standards" being made smaller all the time! How many or how few years will pass before e.g. $ 10 will be the lowest note or coin issued? On what remains of a free gold market, all government currencies have gone down greatly over the last few decades, interrupted by some temporary gains, due to deflationary policies by a government or by a temporary slowing down of a rapid inflation that forced many to seek refuge in gold, or by sudden sales of some of the gold hoards that governments had accumulated. - J.Z., 21.11.01.) 25 In some countries, as in Austria, the trouble began with bank depositors giving notice of withdrawal of their Short Term deposits. The banks, however, were not in a position to pay because they had not invested this money in liquid securities. This mistake was not admitted and many bluntly declared: the gold standard has failed! Since then agreements have been reached with all the creditors so that now the deposits are or can be repaid in proportion as money is received from the banks debtors. The present situation is there from such that now foreign creditors in every country could be satisfied with Milhaud purchasing certificates. Three years ago this would not have been the case. At that time, when an extraordinary large part of their total deposits was claimed at short notice, the banks could not have repaid in gold, banknotes, or, purchasing certificates. However, not only concerning the bank crisis of 1931 and its consequences, but quite generally at present, there are views in circulation regarding currency and foreign exchange which will probably amaze posterity, but which must be allowed for, if we desire to induce the worlds actual rulers to cooperate in reforming the present monetary system and organization of settling accounts. One of these views is that the export of banknotes may occasion a marked fall in their exchange value abroad, with the result that there would be 'naturally" an inflation at home. It was most probably for this reason that Milhaud proposed to cover the purchasing certificates with banknotes, but did not enter into a discussion as regards whether the banknotes themselves might or might not be as well remitted abroad. Since the banknotes of almost all countries have become inconvertible today and since their value rests only on the possibility of utilizing them internally, a banknote taken abroad has exactly the same effect as a purchasing certificate. Some of the results aimed at by Milhaud might be there from also attained if the export of banknotes were freely allowed. Such a proposal, however would encounter such a bias among governments, bankers economic periodicals, and the public generally, that it would not have any chance to succeed. In this connection it might be useful to inquire how one could proceed if there were no laws regarding foreign exchange, or at least tolerable ones, as, for instance, in China England, and Peru. These countries, too, have every reason to apply some precautions for preventing a sudden big demand of gold to which their reserves might not be equal. The question thus suggested is whether in these instances also governmental compensation offices and, as Milhaud recommends, the covering of purchasing certificates by banknotes, would be advisable. Experience with compensation offices has not been encouraging so far. Almost everywhere where such offices have been established, they have obstructed rather than facilitated trade and have tended, for one reason or another, to hinder obvious possibilities of compensation. They mostly argue: "Compensation does not bring foreign exchange! It also favors imports, whilst the country's interests demand a diminution in imports and an increase of exports". Thus during recent months the obstruction of compensations on the part of the Rumanian Compensation Office has been widely commented on . Moreover, to cite one more example: When a French group proposed to finance in Latvia the project of the Duna power works (which had long been under consideration) and to accept payment in timber, other groups succeeded in preventing this compensation by having recourse to the simple and naive argument that their volume of trade would be thereby reduced. The objection frequently heard that compensation brings no foreign exchange merits special attention. It confirms the experience of ages that authorities do not easily alter their views. Hence, whilst in almost all countries payments in gold are suspended and gold coins are scarcely obtainable anywhere, and whilst there from all foreign exchange represents for external creditors only purchasing certificates and most foreign exchange is less than that, the attitude of the authorities towards foreign exchange is still the same as in 1913, when they were convertible into gold, The authorities have thus far continued to act on their old views, naturally supported (to tell the truth) by at least nine-tenths of the country's "practical men". What is to be done? All things considered, the most practicable course to follow might be this: The traders of the different countries where no, or at least no extravagant, foreign 26 exchange legislation exists should organize for their own convenience a private clearing center. As soon as this center yielded satisfactory results, attention should be drawn to its methods and the advantages it offers explained. Thus, moved by the pressure of a public opinion, enlightened by the logic of experience, the authorities might possibly be induced to revoke the foreign exchange legislation insofar as it prohibits clearing transactions of the Milhaud type. In the meantime the names and addresses of those suppliers would be noted who are prepared to deliver raw materials against purchasing certificates, i.e., either against governmentally guaranteed purchasing certificates, as proposed by Milhaud, or against such as are guaranteed privately. This list of suppliers would then constitute a perpetual contradiction of the strange idea developed since the war in some countries, that raw materials can only be obtained in return for foreign exchange and that "naturally" one would have to export before one could obtain the foreign exchange "required" for imports. Private clearing would also eliminate a danger which has been hitherto rarely discussed. That the claim of creditors to be paid in gold should be replaced by a claim to be paid in goods or services is beyond doubt for every judicious thinker who has followed Milhaud's arguments. And similar arguments prove that the right to demand payment in the inconvertible notes of a central bank of issue or in other forms of legal tender should be also limited to the extent that its fulfillment is possible. In fact, it is fairly evident that dependence on the stock of banknotes of a single country involves a much greater risk for debtors than the possibility of utilizing stocks of gold abroad, in an emergency, even at much sacrifice. It is as if in a restaurant many persons are to eat at a given table. This is possible when each at any moment may trespass with his arm or his plate on his neighbor's domain. But if each is strictly confined to his few square inches of space (say) by partitions, nobody will be able to move properly, the bringing and removal of dishes will be rendered much more difficult, and the guests will have much less choice. The theory, it is true, widely prevails that the central bank of issue of every country is able to satisfy all "legitimate" monetary requirements. Havenstein, a former President of the Reichsbank, based on this theory, which he regarded as a self-evident truth, his demand before the Bank Enquiry Commission, on 15 October 1908 that German banknotes should be legal tender. Experience however has demonstrated that the theory is mistaken, although naturally the assertion of the central banks of issue of all countries, to the effect that a demand for means of payment not satisfied by them is not a "legitimate" demand, can neither be proved nor disproved by purely logical methods. The risk that a debtor may be obliged to remit means of payment that are simply nonexistent can only be avoided if the contract itself allows them, if necessary, to compensate. Such permission would presuppose a corresponding form of bonds in external trading. This could be realized in sundry ways. It would be simplest if the bond ceased to read: "On such and such a date I undertake to pay to X., or to his order, the following amount: ." and if, instead, it read: "From such and such a date onwards I undertake to accept this bond in payments of such and such an amount due to me, in lieu of ready money; but I also reserve to myself the right to pay the holder, instead, in legal tender up to the amount stated", or: "On such and such a date I undertake to pay at my option, either to X., or to his order such and such an amount or, as an alternative I undertake to accept this bond in payments due to me at the, increased amount of in lieu of ready money. From the date mentioned onward, every holder of this bond is entitled to learn from me how he may realize the bond against me." This makes it clear that the problem of satisfying foreign creditors not with gold but with goods is of exactly the same nature as the problem of paying internal debts not with gold but with goods. Hence the measures just proposed resemble those concerned with finding work for the workless, as in Milhaud's plan. 27 The next step to be taken to facilitate for foreign creditors the use of bonds bearing a text such as that suggested above would be that several traders should combine, each of them accepting the bond of any of the others up to the amount of his own debt. This procedure is also capable of improvement, in that the associations of traders might agree to exchange a bond for suitably divided and standardized bonds that are not made out to a given individual but to the association and its debtors. Such a procedure would closely correspond to that resorted to in the discounting of bills by the old Scotch banks of issue; only that in our case the bank would not bind itself to pay in specie. Today the procedure of the old Scotch banks is almost forgotten, but old works expound it and no explanation need there from be furnished here. It seems that traders in China, where private banks of issue are still lawful, are beginning to favor such a solution. If this be the case, the next step would be for Chinese merchants to seek to arrange that the inconvertible notes of the private banks of issue should be accepted as foreign exchange in as many countries as possible or to induce the central banks of issue formally to declare that the notes are not foreign exchange but may be quite freely negotiated. This last remark is not, as might be thought, superfluous. According to certain legal provisions existing in some countries, means of payment not recognized as foreign exchange, are not, on this ground alone, necessarily allowed to circulate freely. On a superficial view, the solution here proposed might seem diametrically opposed to Milhaud's. Milhaud covers his purchasing certificates with banknotes which are deposited at the compensation offices. Here, on the contrary it is suggested to issue a kind of inconvertible banknotes which are covered or exchangeable at the banks by purchasing certificates made out to the order of a given firm. The difference between the two proposals is, however, relatively unimportant and is concerned with the formally juridical aspect rather than with the concrete side. A more detailed examination, which must be waived here, would prove this, but that everybody can readily undertake for himself. We have referred to China. That country is possibly destined to initiate a reorganization of world trade. Its population equals that of Europe and its civilization is not inferior to that of Europe and certainly not to that of America. Difficulties arising from variations in monetary standards, which represent for Europeans and Americans insurmountable mental impediments do not exist for the Chinese merchant. From earliest youth he is accustomed to think in multiple currencies that constantly vary in their interrelations. For centuries copper and silver currencies have peaceably coexisted in China. At the same time the Chinese merchant is quite familiar with the diverse foreign gold and paper currencies. Occasional attempts by Chinese Governments to interfere in monetary matters, have hitherto been regularly answered by their edicts being ignored and, at the worst by buying off the "Marshall" responsible for the issue of such an edict. In times of deflation, merchants have recourse to their own notes and goods warrants, and in times of inflation they know how to calculate in stable values. China's monetary arrangements have repeatedly served as models to other nations. When in 1770 the clearing bank of Hamburg was reorganized, Sonnin, a master builder, advised that it would be best to follow the example set by Chinese traders and his advice was accepted. The New York Act of 1829 concerning the protection of note owners, was directly suggested by the prevailing practice of the Hong merchants of Canton, as is expressly stated in the reasons adduced for the Act by Governor Van Buren. Chinese traders have thus far successfully resisted the introduction of foreign exchange legislation and the control of external trading. Even lines of thought such as have been first pressed home on Europeans by Milhaud, find themselves realized in China. For instance, the merchants of Newchwang were shrewd enough so to organize the imports into their city with the aid of their banks that payments were made in goods and not in specie. H. B. Morse, in "The Gilds of China" (1932, pp. 60-61), says on this subject: "One method of regulating the trade at the port in the interest of the gild members is peculiar to Newchwang and, in describing it, it is necessary to use the past tense, since the influx of foreign interests and the general introduction of foreign banknotes since 1900, and more especially since 1905, has worked a great change, 28 and probably relaxed the grasp of the gild on the trade of the port. A merchant setting imports nominally for cash, was, unless he was willing to submit to a discount of from one to five per cent, according to the market rate, compelled to accept payment in 'transfer money' i.e., by check giving him a credit at a bank. Specie too, was attracted to the banks in this town by the offer of a premium ranging from 0.2 to as much as 6 per cent., and could be withdrawn only on quarter day, four times a year. Withdrawal was discouraged by crediting the account quarterly with premium, if not withdrawn at the same rate as if deposited. During the deposit while the money could not be withdrawn, checks could be drawn against it for "transfer" to the account of another, not necessarily at the same bank, Exports, too could be bought only with "transfer" money and al quotations for drafts on other places were in terms of transfer money except for copper coinage, e, there never was money in Newchwang outside the banks; members of the gild and aliens were driven to take, in goods for exports, the proceeds of sale of their imports, and always through the agency of members of the gild. No one had cash to offer, except at heavy cost; and no one was in a position to act independently, even if the Great Gild had been as weak as it was strong, and if it could be imagined as permitting what, in fact it never did permit." The economic history of Europe offers a pendant to this. Roscher mentions that in the Middle Ages in the north German town Bardowiek it was decreed that peasants selling provisions in Bardowiek were bound to purchase fish in the town to the amount of their takings. It would be worth the while of historians to unearth further examples of how formerly some communities adopted measures to prevent external traders throwing their monetary affairs into confusion. The weakness of the Newchwang system was that it forced the same merchants who had sent goods to Newchwang, to purchase goods from Newchwang. Now normally the trade balance of a locality is only established in a very circuitous manner, as illustrated by Milhaud in a number of examples. (Adam Smith also touches on this aspect in several passages of his "Wealth of Nations", e.g., in the last paragraph of book 4, chapter III. In the case of Newchwang, it would have been perhaps more natural for English merchants to have shipped thereto iron ware and American cotton goods, and for the compensation to have taken place through an importation of goods from Manchuria (of which Newchwang was the port) to Japan and for Japan to have settled then with England and America. But Newchwang represents but one example of the capacity of Chinese merchants to trade even where there is a shortage of money. A merchant class accustomed to grapple with so many and great difficulties, appears destined to play a leading part in the coming world economy. The almost exclusively used method today of paying for imports in the currency of the importing country and not in that of the exporting country, is by no means traditional. This method was only invented during the post war period. It seems that it did not begin to be general until after 1921, when by an Act of 24 December 1920 German firms were prohibited from making out invoices in marks without the express authorization of the Reichsbank. Shortly before, German exporters had shipped machinery to America calculated the price in marks and when, after the expiry of the agreed time limit, payment was tendered in marks, these just sufficed for buying a few nails! The decree was there from reasonable and justified. The German example. was then imitated by other inflationist countries, and that too was natural. But when the currencies concerned had been stabilized, the mode of invoicing should have changed. In 1913, for instance, no Austrian manufacturer exporting to Turkey would have invoiced otherwise than in Austrian crowns. In the pre-war methods of payment this almost meant the evolution of the bill of exchange, which the Turkish importer accepted, into a purchasing certificate negotiable in Austria. The idea that the balance of payment of countries is adjusted by gold shipments is only a prejudice to be found in textbooks. (Liefmann should be credited with having first directed attention to this.) Gold shipments were rare and not extensive in pre-war days and were intended almost exclusively for supplying the gold industries. It is also doubtful whether the statistics of gold shipments were accurate. As Locke rightly says, legal provisions relating to gold exports, to their announcement, etc., are to gold what a fence is to a cuckoo. 29 The Treaty of Versailles has contributed its full share to disseminate false notions concerning payment in foreign exchange. Article 262 imposed on Germany the obligation, at the option of the creditors, to provide gold dollars, gold francs, gold pounds, or gold lire, payable in the capitals of the currency countries concerned, This Article thus presupposed as self-evident that it only depended on Germany's good will to provide these means of payment regardless of the volume of its trade with those countries. Relief would obviously have been afforded by admitting means of payment also promising a certain gold value but valid in Germany only, e.g. dollar bills of German firms, which they were obliged to accept on maturity, precisely as if they had been legal tender; but this relief was never granted, neither was it, however definitely claimed. The monetary views were equally confused on both sides. One of the most far reaching effects of the Milhaud proposals will probably be that thereby the understanding of the real nature of international means of payment has been deepened, so that in future no one will be willing to undertake or exact monetary liabilities which can only be met by a happy chance. (6) B) Work Supply Banks as Private Institutions For the exploitation of waterfalls, coal deposits, wind power, yes even of the sun's heat and of the tide, banks and other private enterprises exist, but for the utilization of unused labor power companies have yet to be formed if we leave aside Owen's National Association of the United Trades of Great Britain and Ireland to Employ the Unemployed and to Educate the Children of the Working Classes established in 1833, (Helene Simon, Robert Owen, p 229.) This circumstance will amaze our decedents probably as much as we marvel at our predecessors, who for thousands of years preferred to rub millstones against each other rather than to let this be done by brook or wind. As Milhaud has shown, such companies may be formed in connection with the system of goods warrants and the only question is who will take the initiative, if the State and its central bank of issue should somehow not be available for this purpose. That it is indifferent for the system who issues the warrants, Mr. Mahaim also clearly recognized. (Annals, 1933 no. 2 p. 214.) The retail trades would be the most appropriate. Big stores, such as those of Wertheim, Thetz, Lafayette, Woolworth etc., could, apart from legal impediments, undoubtedly make the following stipulation to their suppliers: "Payment will be in good warrants which all our departments will accept in lieu of ready money." Even the remuneration of the employees might be in goods warrants. If a store took then the precaution to utilize at once every banknote received for the purchase of goods warrants in general circulation, so that a constant additional demand is created for them, the Goods warrants would certainly always stand at par in the locality where they were issued and the store would thus contribute to the improvement of the supply of circulating mediums and would thereby increase the number of employed persons. It may be estimated that the general monetary circulation could easily absorb the goods warrants of a department store at least to the amount of its weekly turnover, probably considerably beyond. What would be feasible for a big store, would be even more easy for an association of small shops, because such an association would offer the public the advantage of spatially well distributed accepting centers. According to Chatters (Annals, 1933, no. 2, p. 324) such an experiment was actually tried in Evanston, Ill. Particulars on the subject would be most desirable. Goods warrants issued by sales establishments would be no novelty for Germany and Austria. During the inflation period many businesses issued goods warrants having a gold basis, which found ready acceptance. In the case both of small shops and of big stores the problem of supervising the issue of goods warrants would naturally arise. Some center or bank could easily undertake this function, placing its visa on the warrants, and reporting frequently, at least once weekly, on its activities. These visaed warrants would assure the public that they may at any time be readily exchanged for goods or services in daily demand, 30 or, as Rittershausen has well expressed it, that they have an adequate shop foundation (Ladenfundation). In practice, a simple form of supervision is available, in that the bank might loan the goods warrants to the stores and shops and arrange with them that they should not issue their own warrants, e.g., warrants ordered by them from printing offices. The goods warrants cashed by the shops would be daily, or at least weekly, remitted to the bank for cancellation. Fresh goods warrants would be obtainable from the bank daily or weekly. Formally this manner of control would be equivalent to a credit transaction between the band and the retail firms and that to the amount involved in the loaned goods warrants. The bank, too, would take proceedings against borrowers who had not returned the warrants within the specified period. This might be most suitably effected juridically, by suing the borrower for the payment of an amount equal to the illegally retained warrants, but permitting, naturally, as an alternative, the return of these warrants. This juridical form is not so new or peculiar, as might seem at first. The old Scotch banks of issue, of which a luminous account will be found in Adam Smith's "Wealth of Nations", were on the whole organized on this principle, only that the envious English Legislators compelled the banks to redeem their notes (the goods warrants of past days) at any time in metallic currency. (On this subject, see the aforementioned work by Meulen, which throws a completely new light on these relationships.) A great many of the experiences then made in Scotland and subsequently in the United States might be taken into account today in connection with the issue of goods warrants by banks on behalf of retail firms, although the old Scotch and later, the American banks of issue counted among their customers not only traders but predominantly farmers. Retail dealers would also be specially adapted for making a beginning with the issue of goods warrants, because their stocks constitute the real working capital of every country, be it in China or in Europe. Each banknote, even if issued by a central bank having a very large gold reserve, would be at once at a discount if the department stores and the shops refused to accept them. Indeed in present circumstances, banknotes really must be considered as warrants on the stocks accumulated in sales establishments. Every system of goods warrants must somehow allow for this and every center issuing goods warrants will have to come to some agreement with stores and shops. Today, unfortunately, sales establishments would not count in the matter of large scale issues of goods warrants, at least not in Europe. The reason lies mainly in the extreme dependence of retail firms on the existing banks and thus indirectly on the central banks of issue which naturally will not allow any issue of goods warrants, if they can help it, There are also psychological impediments which shall not be considered here, though. The inclusion of the majority of stores and shops in the circulation of goods warrants will only be accomplished by making it clear to them that they have the option either of accepting goods warrants or of losing their customers and further, that the system of goods warrants would render them independent of the banks. It is to be hoped however, that some of the retail firms not dependent on banks, particularly smaller ones, may act as pioneers in this connection. Next to retail firms, their suppliers that is manufacturers, artisans and other employers, even if they do not work directly for the retail trades would be suited to promote the goods warrants system. Otherwise expressed an employers' bank would be almost as appropriate for issuing goods warrants (and there from for acting as a works supply bank) as a bank of retail firms. (Jevons, in chapter XXII of his "Money", speaks of a very interesting proposal on this subject made by James Hertz. Unfortunately, Hertz's " "check Bank" indulged in quite other operations than those contemplated by its founder and broke up as a result of a few check forgeries.) To appreciate the influence of a bank of issue, it has to be remembered that almost all private banks of issue in Germany and in most other European countries, with the exception of Great Britain, were first and foremost employers' banks. The old bank reports make this plain, The experiences of those banks might still serve as guides today. But the old private banks of issue, like those of Scotland were seriously restricted in their operations by the legislation of that period, which is still in 31 force (in Prussia, by the normative provisions of September 1848) demanding that any one presenting a note should at any time be entitled to receive the equivalent in metallic currency, a stipulation the senselessness and danger of which has been exposed by no one more convincingly than by Henry Meulen. In this connection it may be remarked that Adam Smith only insisted on the convertibility of the notes because he regarded it as a substitute for the supervision of banks of issue. To supervise a bank of issue effectively, he considered impossible. In this he went too far. (See the last paragraph of the chapter "Of Money", in his "Wealth of Nations".) Unfortunately, the great mass of employers, and more particularly our captains of industry, are no more likely to act as pioneers than the owners of big stores. They, too, are directly or indirect dependent on the central banks and, beyond this, they are hampered by views which their predecessors of a century ago did not hold. This becomes obvious when we remember that the private banks of issue of those days were established by the employing class. In this essay we cannot further discuss this point. However, there might be one way of inducing large concerns to issue goods warrants. In the "Annals" (1933, no. 2), Prof. Graham has pointed to it and the American unemployed have had it several times under consideration. The shutdown factories might be leased by the dismissed workers and be run on their account under the leadership of persons conversant with the system of goods warrants. The legal form of a cooperative society would be also probably the most appropriate here The factories revived in this manner could then even establish their own banks for the issue of goods warrants. The social effect of such action would be decidedly far reaching and would not be limited to finding employment for a certain number of jobless. It would be, on the contrary, very important that the wage system with its rigid and frequent payments to workers, to be made in legal tender, should be superseded by an elastic partnership system. Here the experience of the Italian farm laborers might be profitably utilized who, some thirty or forty years ago, leased the large estates from the bankrupt estate owners and thereby immensely improved their position. (Preyer, "Die Arbeits and Pachtgenossenschaften Italiens" (The Italian labor and Lease Co operatives), Jena, 1913.) It is worthwhile mentioning that these cooperators first assigned a political meaning to the word "fascio". In addition to acquiring leases, factories might be purchased with goods warrants and this by installment payments. Monthly installments over a period of about 15 years might be appropriate. (The purchasing price being say 1 million dollars, the monthly interest rate on the remaining debts and the amortization period 15 years, there would have to be monthly payments of 8,439 dollars.) The present moment is particularly auspicious for such purchases, since purchase prices owing to the depression, are phenomenally low. To judge by a remark made by Schaeffle ("Quintessenz des Sozialismus", 22nd. edition, p. 18), such proposals had been already put forward some decades ago. Here we cannot discuss them in detail. What sort of an issuing center would an "Immediate Action Program" call for? If we accept the experience of the American emergency associations of the unemployed, as reported in the Annals (1933, no. 2), and also remember that it accords with the orderly course of social progress when not those most affected by a social evil, but quite other persons, ponder over remedies and indicate the road to be taken, we shall necessarily think of issuing centers which are not very unlike those of the American emergency associations. In America real estate agents, doctors, upper class women, officials, scholars, and many others have interested themselves in the unemployed. They themselves were unaffected by the wave of unemployment. It was they who created the associations. And almost everywhere it is they who do most of the thinking in the emergency associations. They represent the new nobility which has been in the process of formation during the last few decades and which has to assert itself against the ruling oligarchies as well as against those whom these rule, against governments and parties. However, to organize the exchange of goods and services among the unemployed in such a manner that one portion of the unemployed works immediately for the other, is most difficult and calls for business talent of a special order. It would be safer and 32 much more convenient if the organizers started with themselves and thus amassed relevant experiences. To express this differently, the goods warrants system should be, to begin with, developed among those who are not directly dependent thereon. Trivial mistakes, inevitably in the beginning, could easily be rectified by those who are not without economic reserves. On the other hand, where such reserves do not exist, the most trifling error may ruin an undertaking. A few house owners of a block of houses might possibly initiate the movement. They might say: "We have work to give out, repairs and the like. Payment will be made in goods warrants of the association we have formed. We shall accept these warrants for rent payments in lieu of ready money." It is surely probable that some artisans will undertake the work on the stated conditions. Next, we may imagine a doctor in the same block of houses. He places orders to be paid in goods warrants and accepts these warrants in payment for his services. In a fairly large block of houses a doctor is generally kept busy if the inhabitants are able to pay. A solicitor, a bookseller, a provision dealer, follow. The provision dealer may play here a particularly important and profitable part as a "re-insurer". He may say to the landlord, the doctor, and all the others: "I am willing to accept your warrants in lieu of payment in ready money, if you undertake to make correspondingly large purchases at my establishment. If, for example, the landlord buys of me 50 dollars worth of goods monthly, I will accept warrants for at least that amount and so with all the others." When a tenant intends to pay his rent amounting to 10 dollars, he will certainly first go to the provision dealer and ask him, "Have you 10 dollars worth of goods warrants to dispose of? I am prepared to buy them of you at a discount of say 1%." Possibly the dealer will exhibit a notice in his shop: "The goods warrants of the X association may be obtained here at 99%." Although the dealer had accepted them in payment at 100 %, he would willingly dispose of them at 99%. The increased turnover would easily indemnify him for that 1%. In the above cases the discount does not arise in the ordinary course of making payments but only immediately before the reflux. At that point it is innocuous. Indeed, its indirect effect would be to raise the sum of employment in the block. It offers all the advantages of Silvio Gesell's "depreciating money" without carrying with it any of its catastrophic drawbacks. At its inception, the association would make some mistakes; but after a few weeks it would function smoothly. As soon as this had happened, it would become known and its goods warrants would not only be accepted in that block, but also in the vicinity, thus enabling the provision dealer not only to negotiate them but to utilize them for making direct payments. The association would correspondingly extent its local range and soon it would start paying the workers in the immediate neighborhood with goods warrants. Modeling themselves on this association, other associations would be established and the system would thus spread. Since by means of the new system landlords, doctors and others would be able to dispose forthwith of a portion of their future incomes, they would, in accordance with an uncontested commercial principle, be so placed as if their incomes had slightly grown. Moreover, when the first announcement appears, inviting applications for jobs to be paid in goods warrants, most probably, at first, not those would come forward who were well supplied with orders for work and could count on receiving payment in legal tender, but others who had little or no work at hand. An increase in purchasing power, on the one hand would coincide with the employment of fallow-lying labor power on the other. Such would be the initial effect, although, to begin with, actual success would be of far smaller importance than the setting up of an efficient organization. It might be even easier to open an issuing center to the country than in town. If farmers were placed in a position to expend in the form of goods warrants about half of what they have ready any given day in the way of produce or services, their purchasing power today, when the rural parts are destitute of means of payment, would increase by the full amount of the goods warrants issued. It is true that within a few days the warrants would flow back to them to be converted into milk, butter, vegetables, and the like; but the real object would have been attained the farmer would obtain industrial articles (principally from producers in the locality) and would 33 pay for them with his own. It is also worth mentioning that the sale of agricultural products thus effected would be quite regular and not disturbed by distant or foreign competition. An interference with these regular sales would be only conceivable where foreign farmers, before they have disposed of their produce, order the industrial products of the locality where they desire to market. But such endeavors would be frustrated by the prohibitive duties at present imposed by all Governments. All countries have experience with credit cooperatives. This legal form would be best suited for the new associations. The goods warrants would be passed on by the cooperative bodies in the form of credits to the landlord, the doctor, the farmer and others, because this ensures the most effective form of control. Care must, of course, be taken that no one shall issue more goods warrants than he can redeem with his own goods or services. Details on this will be found in a later portion of this paper. The form of a credit coop cooperative has the decided advantage that no working capital needs to be raised before business operations commence All other legal forms, and especially those most advantageous in business, postulate in conformity with the legislation of perhaps all countries, the existence of working capital (mostly in the form of legal tender) before an undertaking is started. Many objections however may be raised against the legal form of cooperatives and it is just those who are familiar with the cooperative movement, who will have their doubts. It should be remembered, too, that an expert like Meulen does not recommend the cooperative form for note issuing banks and stresses the superiority of undertakings managed by single persons, basing himself on the experience of the old Scotch banks of issue. Add to which that in some countries a veritable detestation is felt in wide circles for any organization not governed by the leadership principle. Unfortunately, there exist as yet no leaders in the sphere of banks issuing goods warrants; these have yet to be trained. This again, can scarcely be attempted outside a cooperative where every member risks losing part of his savings when mistakes are made and there from closely watches the management and compels it to report at frequent intervals. The discussions that take place on this account, impress on an ever larger number of cooperators the principle, and some of them who come to grasp it, may become eventually leaders of this movement. A beginning might be made by the cooperative issuing a special type of shares which, in case of losses, are liable before others and bring there from greater returns. Subscribers to these shares might also be entitled to greater influence in the management. To permit this development, the cooperatives should not be too large. In the case of the American Building and Loan Associations (which have 10 million members and should there from, as a social force, be judged from a quite different viewpoint than the building cooperatives of Central Europe), it has been found decidedly practical to grant credits only to persons who do not reside at more than 25 miles distance from the cooperative offices. Many Building and Loan Associations limit the distance to 10 miles, to their manifest advantage. Only where such a restriction is in force can the management really know its clients. From this principle it follows that the issue of goods warrants cannot be entrusted to a huge center, but that, on the contrary, hundreds or even thousands of issuing centers are required. Clearing centers, resembling a Central Cooperative Finance Department, would, however, be necessary, and, in the end, a great Clearing center, which, however, would in no way be concerned itself with issuing goods warrants. This development would be a analogous to that of the old American and Scotch banks of issue. According to Carey (Principles of Political Economy), there existed in 1852 in Rhode Island one bank of issue for every 2,000 inhabitants and, in 1850, in Pennsylvania, one for every 40.000. Carey estimates the population of all the New England States at that time at 3,2 million and the number of banks of issue in those States at 491. This means one bank of issue for roughly every 6,500 inhabitants. Adam Smith reports similar conditions in Scotland. In 1845 Scotland still possessed 19 banks of issue for 2,7 million inhabitants, or roughly, one bank of issue for every 140.000 inhabitants. Such a ratio might also be practicable for Central Europe. The largest Scotch bank of issue in 1845 (the year when English legislation placed further restrictions on the Scottish banks) was the British Linen Company, which was 34 entitled to issue up to L 438,024 in notes. (Kerr, History of Banking in Scotland.) If such a bank, operating in Scotland, the classic center once of private paper money and after an experience of many decades, had in circulation less than this modest sum, this suggests that for the time being and perhaps for many years to come, the contemplated institution should not go farther and that in case of an increase in turnover, they should preferably increase the number of banks issuing goods warrants. Here the following remark may be in place: A recent development in monetary theory, wherewith even so renowned a scholar as Irving Fisher sympathizes, demands that circulating money should steadily depreciate in order not to allow its circulating speed to fall below the necessary minimum. In German speaking countries, this development is known as the "Schwundgeld Theorie" (theory of deprecating money) and is associated with the name of Silvio Gesell (Chatters, in Annals, 1933, No. 2, calls such money "stamped scrip". Apparently the same idea made its way in America independently of Gesell.) Gesell proposed a weekly depreciation of 0,1 %. But the paper money issued by the old Scotch banks circulated at least 100 times as rapidly as would depreciating money. Why? Because whilst the Scotch paper money had a strong reflux, depreciating money has almost none. With the old Prussian private banks of issue, a note completed within less than three weeks its circuit from the bank to the public and back to the bank. The Scotch banks of issue and even more so the old German private banks of issue, provided for the reflux of their notes to the banks by only granting such persons advances in notes who had already sold certain goods but had had to wait for payment to be made. The notes passed rapidly from the vendor of the goods to the purchaser; the latter paid for the goods with the notes; and the vendor then returned the notes to the bank. Today it might suffice that the reflux should be guaranteed by orders placed, instead of by deliveries already made. This, however does not preclude the goods warrants bank from engaging in all the operations formerly customary for private banks of issue. (For Europe, the suppression of these banks was a misfortune, only comparable with one of the great plagues in the Middle Ages.) (6) C) Technical Details concerning the Issue of Goods Warrants by Work Supply Banks a) Introduction For such a bank the legal form of a credit cooperative would possess some advantages. First, model rules for such bodies exist probably in all countries. These model rules could be easily adapted. The cooperative would have further to formulate provisions for the loan of goods warrants as well as settle the conditions for granting Long Term credits and for obtaining the capital required for the latter. In addition, service regulations and forms would have to be drafted which allowed for the fact that these cooperative credits are granted in goods warrants and not in ready money. Such a detailed treatment, of course, cannot be attempted in the framework of this paper. Here we shall only furnish: a) a series of those provisions not found in present day model rules; b) a series of principles and business provisions governing the loans made in goods warrants; c) the same for Long Term credits. The inclusion of Long Term credits within the scope of the banks will be discussed in a separate section. From a strictly juridical viewpoint the principles and the provisions should have been separated. However, in view of the novelty of the subject, it may be permitted to present the legal basis in a form resembling the legislation of a century and a half back, where both the motivation and the executive provisions were placed in the text of the law. Why we speak here not of interest but of usufruct charges, will be explained in another section. 35 (6) C) b) Principles and Business Provisions regarding Loan Transactions of a Work Supply Bank in respect of Short Term Credits I. Means of Payment a) In connection with loans. The Work Supply Bank shall only engage in loan transactions involving the lending of its own goods warrants b) In connection with repayments. If the borrower, instead of returning the goods warrants, remits other means of payment, the Bank shall be entitled to demand the same premium which it levies when, in opening an account, not goods warrants are paid in but other means of payment, but at least 2% of the amount not paid in goods warrants. II. Legal Form The legal form for loaning gads warrants shall be the cash loan. At the same time that he borrows the goods warrants, the borrower shall take over, besides the shares he holds as a member, others, and at least such a number that the total amount of the additional shares shall equal the total amount of the loaned goods warrants. The amortization of the borrower's debt shall be done in the following way: All goods warrants that the borrower returns which are in excess of the usufruct charges, shall be credited at their nominal value as payment for his shares. When a share is fully paid up, it shall be considered balanced against the proportional part of the debt. III. Guarantees for the Work Supply Bank in Loan Transactions The following shall be the Bank's guarantees: (a) Pledged shares. (See II.) (b) Sureties. It must be reasonably shown that the goods warrants of the Bank could be realized as well against the guarantor as against the borrower. (c) The pledging of the borrower's stocks of goods ready for sale. (d) Other usual banking and unencumbered guarantees. (e) Bills, first and foremost the borrowers bills on customers. When the amount of these customer bills pledged by the borrower is smaller than the borrower's debt, the borrower shall tender promissory notes of his own for the difference. Such notes shall be inadmissible as guarantees so long as the type of business carried on by the borrower suggests that he is in possession of customer bills. Claims on the borrower's customers that are not covered by bills, may be accepted as security by the Bank if, additionally, other adequate securities are deposited. (f) Loans shall not be granted to persons or firms whose business or residence is more than 25 kilometers distant from the Bank's premises. (g) During the Bank's first financial year the loans to single persons or single firms may not exceed 5 %, and in the succeeding years 3 %, of the total loans granted or definitely expected to be granted, at the time. (h) For payments due to him, every borrower shall be obliged to accept instead of money the goods warrants of the Bank at their face value, and this at least up to the amount of the remaining debt. As far as practicable, he shall place the same obligation on his debtors. This obligation shall hold also when the payment of the remaining debt may be discharged in several installments. If a borrower, in 36 accepting goods warrants in payment values these at less than other means of payment of the same nominal amount, or if, in accepting such payments, he does not grant the same advantageous terms as with other means of payment, he shall be liable to a fine for breach of contract. The fine shall amount to one quarter of the remaining debt at the time the fine was incurred, at least to 50 marks. The Bank shall also reserve to itself the right of claiming indemnity. (i) The Bank shall not pay to any borrower goods warrants amounting to more than 10.000 marks. When several loans are granted, the total debt contracted by a single person or a single firm may not exceed the said sum. (k) The loaning of goods warrants shall be subject to the borrower proving that he has placed orders among the customers of the Bank at least to the extent of the loan applied for. The dates fixed for the delivery of goods or services shall not be longer than those corresponding to the repayment dates of the sums borrowed. After due consideration, the Bank may agree that the orders shall not be placed with the Bank's customers, but with the debtors of those customers or with the debtors of those debtors. In each separate case the Bank shall so determine the special loan conditions that most probably the loaned goods warrants shall facilitate the fulfillment of the obligations of one of the Banks obligors, thus augmenting the security of the Bank. Employers shall only be entitled to pay the wages of their employees with those goods warrants if they can prove that the employees have undertaken to buy from the Bank's customers. This shall be ascertained by an examination of delivery books or in some other satisfactory way. IV. Usufruct Charges for Loaned Goods Warrants The borrower shall pay a usufruct fee for the goods warrants loaned by him. For the sake of simplicity the fee shall be calculated in fractions of the initial amount that is, regardless of the progressive reduction in the debt. On the other hand, the installments on the shares shall yield such interest as the Bank shall determine from time to time, The payment of the usufruct charges shall be in weekly installments, provided that no other arrangement shall have been made. The usufruct charges shall include: a) a contribution to the costs of administration; b) a contribution to the reserve fund serving to cover losses; c) a contribution exclusively intended to induce the debtor to pay off his debt as rapidly as possible, with payments greater than the minimum installments fixed in the loan provisions. These payments shall also be credited to the borrower's shares. If the borrower should fall into arrears with his contractual payments to the Bank, he shall pay in addition to the usufruct charges, interest on arrears in accordance with the conditions made known by the Bank from time to time. Should the contributions provided for under a) and b) be insufficient the Bank shall have recourse to special assessments. These are to be apportioned at the time of their being fixed in the ratio of the remaining debt of each borrower. The Bank shall determine the particulars from time to time. . V. Return of the Loaned Goods Warrants and Sundries a) The Borrower shall return the loaned goods warrants in weekly installments. I t is not necessary that the numbers and the parceling of the loaned and of the returned goods warrants should agree. The Bank shall not pass into circulation the goods warrants cashed in the course of the, day, unless it be a question of a simple exchange or surrender at its counters. On the contrary the Bank shall cancel the goods warrants cashed in the course of a day, at latest on the day following and shall show this in its returns. When the Bank receives legal tender, it shall utilize it preferentially for withdrawing its own goods warrants from circulation. On this matter, also, the Bank shall report regularly. (This, too me, seems too much like a redemption promise in legal tender, to the extent that legal tender is available for this. On the other hand, this Bank should certainly try to give value to its notes in every way it can and to avoid paying itself for goods and services with legal tender, as much as it can. It should pay with its goods warrants whenever possible. So what could it do with any legal tender notes received? It could and must pay with it those expenses that it is still obliged to pay in legal tender, e.g. any taxes. If there remains any excess amount of legal tender, then this should be primarily used to buy up goods warrants WHENEVER they are suffering a discount in local circulation. As long as they are still at par the purchase of them would not increase their value further, as a rule. An above par value of the goods warrants may only occur e.g. when it is expected that the legal tender paper money will depreciate fast. Perhaps a small legal tender reserve could be kept for the purpose of restoring discounted goods warrants to their par value. Most likely a better method for removing such a discount fast would be the publication by the bank of the addresses and offers of all those of its debtors who are under contractual obligation to it to accept the goods warrants at par from anyone. Moreover, while its goods warrants suffer a discount, further issues of them should be stopped. - Any legal tender not needed by the Bank should, as B. suggests, be used to buy up its goods warrants. - J.Z., 21.11.01.) 37 b) The number of the repayment installments shall in general not exceed 13 so as to ensure that after the lapse of three months the loaned goods warrants shall have been returned. The Bank may fix the installment rate in such a manner that for amortization and usufruct payments altogether combined identical amounts shall be payable week by week. c) More favorable return conditions, more particularly return periods exceeding three months, the Bank may only grant when and insofar as its available assets shall permit. In no case may the time limit for a loan granted by the Bank exceed the length of notices governing the calling-in of the Banks outstanding assets. d) The borrower shall be entitled without previous notice, to return more goods warrants than he had undertaken to return in conformity with the loan contract or the business provisions. The borrower may also return simultaneously the whole of the goods warrants covering the amount of the remaining debt. e) Should the borrower not fulfill the obligations incumbent on him, the Bank may, without giving notice, demand the return of all outstanding goods warrants. f) Until the borrower has returned all the goods warrants he has loaned, he shall only transact business with any other bank with the express consent of the Work Supply Bank. Such business shall comprise all credit or current account transactions with a banker a financial enterprise, or a loan agent. The particulars of the business transactions between the Bank and the borrower shall not be deemed business secrets. h) By accepting the goods warrants, the borrower agrees that any eventual modifications of the general business provisions or the rules shall be also binding on him and this retrospectively, including modifications entailing more onerous terms for him, i) When a member shall have formally applied for the loan of goods warrants but has not within a week after submitting the proposal, offered guarantees satisfactory to the dank, his application shall be deemed as not submitted. j) The Bank may stipulate that all transactions with it shall be conducted on set forms. k) Expenses incurred through examining the guaranties offered by the borrower, as well as through inquiries, objections etc., on the part of the borrower, may be debited to him by the Bank which, at its discretion, may demand of him an advance on account of costs. Correspondence not accompanied by the business fee fixed from time to time or at least by return postage, need not be answered by the Bank. l) The Bank may stipulate that the borrower shall take out the insurance for his person and his property required for protecting the Bank against loss. The Bank shall also be entitled to take out itself such insurances and to claim the associated costs from the borrower. m) The Bank shall be entitled to demand of the borrower proof that he promptly pays his taxes. n) The domicile of the Work Supply Bank shall be its place of jurisdiction. (6) C) c) Rules Inasmuch as in all countries the cooperative federations have elaborated model rules for credit cooperatives, which are as a whole appropriate for our purposes, we shall only indicate the few modifications required in the customary rules. For Germany the rules reprinted annually in the "Deutscher Bankbeamten Kalender"(German Bank Officials' Calendar) are quite serviceable and the subjoined provisions relate to these rules. Paragr. 1: The cooperative shall be called : Work Supply Bank at . Paragr. 2: 1. The working capital of the Work Supply Bank shall consist of the assets of the cooperative. This shall be formed of payments for shares, transfers to the Bank 38 assets, and reserve funds. Payments shall be made by surrendering the goods warrants of the Bank. Alternatively, when other means of payment are used for paying in, a premium in favor of the Bank shall be paid as stipulated. 2. The Bank shall be entitled to issue goods warrants, bearing the following text: xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx This goods warrant entitles the holder to present it in payment for (at face value to all the customers of the Bank in lieu of money. On inquiry at the counters of the Bank, the holder will be informed of the customers bound to accept the goods warrants. Those concerned are also referred to the notices posted up in sales establishments regarding the acceptance of goods warrants. No. of the goods warrant and series:          Date of issue:           Signature: xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx The goods warrants, like money, shall be issued in certain denominations. The Bank shall make known from time to time the denominations and text of the goods warrants, more particularly after modifications have been made. Paragr. 47 The settling of accounts with retired members shall be on the basis of the annual financial statement. A member's balance shall be paid out or cleared to those who have retired or to their heirs subject to the Banks liquid assets and financial position. The retired member shall be bound to accept the Banks goods warrants in lieu of ready money. If the total assets do not suffice for meeting the Bank's liabilities, the retired member must, subject to the decision of the Governing Board, either pay his share of the deficiency of the Bank or wait for the payment of the sum owing to him. The particulars, especially as regards the rotation in waiting, the Governing Board shall decide in each case at their discretion. Payments to a member of less than 50 marks a month may in any case be made, regardless of the general stipulations. Paragr. 50 Each members share shall be 150 marks. Installments towards this of at least 1 mark a month shall be permissible. The entrance fee shall be 3 marks. All payments shall be made in goods warrants issued by the Bank Should other forms of money be paid in, a premium fixed by the Governing Board, shall be payable. Paragr. 58 Subject to the Banks business provisions, members and non-members may have accounts at the Bank. In accord with its business provisions, the Bank shall grant its members amortization loans by placing at their disposal goods warrants in accordance with its business provisions The Bank shall be, moreover, entitled to transact every type of banking business conducive to providing work for its members. Paragr. 60 No Loan may be granted to members of the Supervisory Board of the Governing Board, or to employees of the Bank, not in cash; nor in goods warrants, nor in goods, nor in any other form. Paragr. 63 No. 4. In addition to the customary profit and loss account, a set statement of the total turnover of the Bank shall be issued, even if the turnover has led neither to a profit not to a loss. (Remark: This type of statement, which is not usual in 39 continental Europe, is regularly issued as an appendix by English and American cooperative building societies and affords a greatly superior survey of the management of the undertaking. For instance, an exchange of one security for another without altering the assets is not shown to the customary profit and loss accounts, but in the surveys headed "The money we received" and "The money we spent" of the American Building and Loan Associations and the English Building Societies, whose arrangements are in every way exemplary.) Paragr. 76 Modifications of the rules and provisions maybe decided on with retrospective effect, (6) C) d) Principles and Provisions Governing the Obtaining of Long Term Credits through the Work Supply Bank I. Nature of the Long Term Credits Granted by the Work Supply Bank Pursuant to these provisions a credit shall be deemed Long Term where the borrower is not bound to recognize the Bank's goods warrants against himself at all times at least up to the amount of his remaining debt. On the contrary, in respect of long term credits, the borrower shall be only bound to accept the goods warrants for (at least) the amount of the next installment due inclusive of amortization and usufruct charges. Inasmuch, however as the Bank holds out to every holder of goods warrants the prospect that in exchange for these warrants he may obtain from the Bank's customers goods or services as if he paid in cash, it follows that in the case of the grant of a Long Term credit, another person than the borrower must undertake, at the request of any holder, to exchange the Bank's goods warrants for goods or services. The Bank shall only and to such extent, grant Long Term credits, as persons other than the borrower shall declare themselves prepared to stand security for him with their goods and services and as, besides, these goods and services are in daily demand. Nor may there exist an obstacle to the ready disposal of the goods warrants e.g., the business premises of the persons concerned shall not be situated at such a distance as to impede the ready disposal of the goods warrants. II. Capital Required for Long Term Credits A. The Work Supply Bank is not concerned with acquiring legal tender through acceptance of deposits in order to lend it to borrowers, It should confine itself, on the whole, to cooperating in the disposal of goods and services which are to be utilized for Long Term credits. Individuals, who shall place at the disposal of the Bank goods and services which would enable the Bank to grant Long Term credits to others, shall be in the legal position of depositors or bond holders conforming to these principles and provisions. B. Those willing to place goods or services at the disposal of the Bank with a view to enabling the Bank to grant Long Term credits, shall comply with the subjoined provisions 1. The Individuals concerned, hereinafter called the owners, undertake to count against themselves, in lieu of cash, a certain minimum number of the Bank's goods warrants. The owners, following the Bank's instructions, must cancelled the goods warrants accepted and surrender them daily to the Bank. The Bank shall credit the owners with the goods warrants surrendered, Such goods warrants, if not cancelled by their owners shall be devalued by the Bank. 2. In order to offer the holders of the goods warrants full assurance that they may use them to pay the owners at any time, as if they represented cash, the owners 40 must give the same undertaking as if they owed the Bank the amount they intended to guarantee The Bank shall demand from the owners the surrender of goods warrants guaranteed by the owners within a specified time or in fixed installments, unless the owners can show cause why a longer delay should be granted them for surrender without prejudicially affecting the legitimate interests of the holders of the goods warrants. 3. If an owner will only declare himself ready towards the Bank or other persons to accept the Bank's goods warrants in lieu of cash, but will not undertake any other obligations, he shall not acquire thereby a credit al the Bank or any other right against it, Nor may the Bank, on the basis of such declarations, agree to loan goods warrants to other persons. On the other hand, the opening of a credit account at the Bank for persons who surrender to the Bank its' goods warrants, shall be even admissible when the presenter does not place at the disposal of the Bank any goods or services and makes no declaration concerning the acceptance of goods warrants in payments made to him. On the strength of the balance in question, the goods may grant Long Term Loans. III. Administration of Balances at the Work Supply Bank In return for the balances created at the Bank by means of the surrendered goods warrants, the Bank shall provide either pass books or Bank bonds, as desired. The special revisions made known from time to time by the Bank shall apply here. The balances shall bear interest, but the Bank shall not undertake to fix any interest rate in advance. Pass books and Bank bonds shall be transferable without the consent of the Bank. But the Bank shall be entitled, although not bound, to demand proof of the rights of the presenter to such books and bonds. IV. Notice of Withdrawal of Balances at the Work Supply Bank A. The Payment of called in amounts may, at the discretion of the Bank, be either in goods warrants, or in ordinary means of payment received by the Bank. B. The Bank shall be entitled at any time, even without the consent of the balance holder or bond holder, to repay balances, either in goods warrants or in ordinary means of payment received by the Bank when, and to the extent that, the Bank receives payment from its debtors for which it can find no other investment. The Bank shall determine such balances by drawings or otherwise, ensuring a uniform and fair treatment of the balance holders and of the bond holders, even if only, one interested party makes such a demand. C. No balance holder or bond holder shall be entitled to demand repayment at a given date. Nor may the Bank, in disregard of these provisions, undertake to repay a balance at a given date or within a specified period. D. If the amount of the balances withdrawn by their holders exceed the Bank's liquid assets, the Bank shall announce special provisions concerning repayment: either by arranging the repayments in the order the notices were received or by deciding on pro rata payments on all balances called in. In any event, the Bank shall determine a smaller amount, one which it can pay each month to any withdrawing member, apart from the order of the notices of withdrawal, e.g., 50 marks. E. As long as a balance holder or bond holder shall not have received the amount he has called in, allowing for the period during which it cannot be called in, the Bank shall not be entitled to grant fresh long term loans except when, simultaneously, new goods and services shall have been placed at the Bank's disposal for a long-term period. F. In no case may the Bank pay recalled balances in goods warrants if the immediate exchange of these goods warrants for goods or services within the Bank's group of customers is not assured. 41 G. For the rest, the arrangements concerning the calling in of balances shall be subject to announcements made by the Bank from time to time. If not otherwise stated, each balance and Bank bond shall be deemed as not recallable for at least six months. V. Repayment of Long Term Credits A. The arrangements made for the repayment of Short Term credits shall apply to Long Term credits, at least insofar as they have not been modified by these provisions or through the loan contract. B. Only amortization credits shall be granted. C. The payment of the several amortization installments may be made by the surrender of pass books, writing-off of pass books, or surrender of Bank bonds. Should the Bank so decide, any advance repayment of Long Term credits must be made in this manner. The Bank is authorized to refuse other modes of advance repayments. (6) D) Use of Goods Warrants to Finance Manufacturing Operations Occupying a Considerable Time The problem of employing the unemployed encounters almost always one serious obstacle. To remove this sundry proposals have been put forward from time to time. One effect of re-employing the workless is to increase output. Now the chief cause of unemployment resides precisely in the excessive number of articles produced. There appears hence the danger that the remedy may actually aggravate the evil. What, then, is to be done? (The cause for a build-up of unsold consumer goods is not simply that too many of them were produced. They were produced for a market that was supposed to be free enough to buy these goods. However, not enough of them could be sold under monetary despotism, to those who would have liked to purchase them if they had the purchasing power to do so, that is, mainly by the unemployed and under-employed. The so-called "over-production" represents largely merely "under-consumption." However, if all become suddenly fully employed, because of monetary freedom, and were to add, among other things, more produce, then they could not, between them, rapidly use up all accumulated stocks from the time when the exchange of ready for sale labor for ready for sale consumer goods was blocked or made too difficult by monetary despotism and also the current production. One can consume only so much bread, milk and meat, in the average, per day and cannot fully make up for past days of hunger. So some of these accumulated consumables ought to utilized not to produce more food stuffs but should rather be used up by those producing additional and long-term capital goods. - J. Z., 22.11.01.) One way out would be for the unemployed only to undertake work for one another. In fact, many of the American Emergency Associations have hit on this device. (Annals, 1933, no. 2.) Some economists have also favored this method. It may be that the Industrial Homes of the Salvation Army, which have now flourished for decades, are based on this principle and were remarkably successful, have suggested it to Americans. Nor are English Workers unacquainted with this principle. (S. and B. Webb, "History of Trade Unionism", p. 353 of the German edition.) To prevent the products of the Emergency Associations overloading the market, many Americans have held that these Associations should form as far as possible a self contained market. To ensure such economic autarchy, it has been proposed to set up as the measure of value for the Associations, not gold, but the hours worked. In similar circumstances Robert Owen already made an analogous proposal. However, the Associations might retain gold as the standard of value within their domain, if they adopted the principles underlying Milhaud's plan. This is of decided importance since the true ideal is not that the Associations should become self contained, but the exact contrary. Indeed, even its partisans regard economic autarchy only as a necessary evil. As the reports in the Annals' show, the attempted exclusion from the labor market of the workers employed by these Associations and of their products from the world market, has met with great and apparently insurmountable obstacles. This is natural. A re-employed unemployed is no longer an unemployed and differs in no respect from a worker who has never been out of work. To treat these two categories of workers differently is only feasible for a few days. There is a much better way, namely to offer the (accumulated - J.Z.) goods rendered unmarketable by (during. - J.Z.) the trade depression, in the form of a Long Term credit, i.e., to offer a credit covering at least a few weeks or even a few years. The unemployed might then be also occupied with producing articles whose manufacture absorbs some time or payment for which cannot be expected immediately, as is regularly the case with house building and agricultural improvements and very frequently with the manufacture of ponderous machinery. Should it prove practicable to utilize the at present unmarketable goods for financing such objects, many of the workless could be employed in their production without disturbing the general capital market (or the market for food stuffs - J.Z.), affecting normal thrift or placing a burden on tax payers. In this mode of financing, Milhaud's goods warrants would prove useful, as will be shown in the sequel. These warrants would be of no service if their purchasing power were restricted to the goods manufactured by the (formerly J. Z.) jobless in Long Term production or confined to payments for the use of these goods. 42 The above proposal to finance, by means of the goods warrants system, the production of such goods as, in present day terminology are styled "capital goods", should not be confused with the frequent demand that all unemployment schemes should be concerned with bringing once more, and at any cost, the capita[ goods industries into full operation, most particularly the building industry. The purpose of this proposal is that these industries, especially the building industry, should use up the stocks that are now encumbering the market: the surplus provisions and coal, implements, timber, and various other raw materials. That, it is held, would render it possible to begin producing fresh stocks. Those who press this demand and they are to be found in all parties, are so firmly convinced that they are right that they believe they can assume the responsibility for every mode of financing. Thus, a few weeks prior to the German Revolution of January 1933, the two Socialist parties called for an extension of building activity (house and road construction), until this industry had absorbed the last unemployed man. The required. funds were to be raised inter alia, by a compulsory loan. The Communists, indeed, favored the proposal, frequently repeated during the last decades, to finance the building schemes simply by assignats, their cover to be the houses constructed! The proposal here put forward is of a quite different nature, The goods warrants issued are not to be covered by the freshly produced capital goods. On the contrary, as cover should serve the immediately realizable stocks (mainly of consumer goods! - J. Z.) of those willing to provide Long Term credits by placing their stocks at others' disposal. (As long term investments. - J.Z.) To the extent that these stocks have been consumed the provisions eaten, the timber incorporated in buildings and the coal burnt the goods warrants, which mediated the transfer of the stocks, should be withdrawn from circulation and cancelled. This necessity follows from Milhaud's proposals. Milhaud has thus avoided the Scylla of swelling the monetary circulation with actually uncovered warrants as well as the Charybdis of confining the operation to classes of work for which Short Term credit suffices. If we are clear in our minds that the ultimate purpose of most "durable" goods is to satisfy somehow, daily requirements or even to serve recreational needs, we shall not doubt that a large scale demand for new "durable" goods, e .g. houses, ships, big machines, theatres, and the like, can only arise when a new great demand for consumer goods has appeared and when, as a consequence, the dwellings at present unlet are occupied, the laid up ships are sailing again, and the stocks of machinery have been disposed of. But this only becomes possible when the consumer goods industries are once more working at full capacity. It is true that even now the demand for new, "durable" goods is above zero, although the available, but unsold stocks greatly press on the market. The demand' is, indeed, large enough to make it worthwhile to cater for it. This means here: to apply from the beginning the goods warrants system to long-term credits as well. That there is a demand for such credits is a priori manifest. Nevertheless, we ought to wait for an effective demand and not like so many modern reformers, audaciously infer a priori where the Long Term credits ought to be directed to. We are as yet far removed from really knowing our economy. For the purpose of elucidating the difference between Short Term and long-term credits in goods warrants, we shall furnish two simple illustrations. During the present depression, a well off town would like to build a road which is badly needed, but for which there is no money available. Suppose its construction would. cost 1 million gold francs. Assume too, that in the town are to be found traders, farmers, and artisans who, because of the depression, are unable to sell, or only at a loss, roughly 1 million worth of goods and would there from be content to sell their goods on a long form credit basis. In return, they ask for a reasonable sales price and interest. Suppose, lastly, that the stocks consist of just such articles as the workers require during the period of construction, e.g., foodstuffs, clothing, domestic articles, and the like. In that case the procedure might be as follows: The town raises a loan of 1 million francs, in (say) 100 francs allotments, repayable perhaps in 48 quarterly installments at a quarterly interest rate of 1,5% on the remaining debt at any given time. 43 Amortisation tables, e.g. that of Spitzer-Foerster, will show that the town would have to find every quarter 29,375 francs for interest and redemption. The workmen and the suppliers are to be paid in goods warrants issued by the municipality. Thereupon the farmers, traders, and artisans declare that in payment for supplies they will accept the goods warrants in lieu of cash. And, on its part, the municipality declares: The subscriptions to the loan may be made with our goods warrants in lieu of ready money. We will begin work when the entire loan issue has been subscribed. The simple declaration of the farmers, traders and artisans that they are prepared to accept the goods warrants, should not of itself satisfy the municipality. Why not? Because the acceptance of the warrants in local shops and by the local farmers does not in and of itself ensure a reflux of the warrants. When the stocks of the value of 1 million francs have been delivered and the goods warrants are still circulating, depreciation becomes inevitable since after the sale of the stocks nobody will accept the warrants at their face value. Of course, there might be the possibility of paying with them the local taxes; but if the town is so small that it cannot repay the million out of its current revenue, it will not levy sufficient through taxation to afford every holder of goods warrants an opportunity to pay them in at once for taxes due or to find some one forthwith who has to pay taxes and would relieve him of the goods warrants. Only one possibility is hence left, namely that everyone who has accepted goods warrants should at once surrender them to the municipality and should receive a loan allotment for every 100 francs so surrendered. On its part, the municipality would cancel the goods warrants surrendered. Thus at any given time no more goods warrants would be in circulation than would be covered by goods and services. An observation may be in place here. Many supporters of the gold standard still entertain the antiquated notion that in order to secure a proper basis for banknotes or paper money generally, there should be the possibility of converting them into gold. However, gold may be replaced without any disadvantage by shop foundation ("Ladenfundation" as Rittershausen calls it) and a reflux. Indeed, Dr. R, Just already demonstrated, in 1921, in his "Die Inflation" (The Inflation) that' the "classical" form of gold cover is by no means certain not to produce inflationary effects, effects which cannot occur when there is a correctly computed reflux. (It is much more likely to produce deflationary effects, due to the fact that all transactions, in millions of goods and services, between thousands of millions of people, are then, ultimately, confined to going through the bottleneck of a single commodity, namely gold and its availability for the redemption of all exchange media. There is no sound reason why all exchanges should be so confined, especially when people are not only free to continue to use gold weight units as a standard for accounting, pricing and clearing purposes, but also free to choose any other value standard in their contracts and when they are free to utilize all kinds of exchange and clearing media, with all kinds of value standards, apart from those which are at any time redeemable, in gold metal, by the issuer, upon demand by the note holder. In gold-for-accounting or gold-value-clearing standards the value reckoning in gold weight units goes on while any redemption into gold metal is transferred from the issuers to the free gold market. Issuers and potential acceptors of such optional and market rated gold value currencies will watch whether, on a free gold market, these exchange media are rate at par with their nominal gold value - or close enough not to matter. Others will be widely refused, or not issued at all, in the interest of the issuer as well as the potential acceptor. Most "gold bugs" are blind to the gold standard option in form of gold value clearing or accounting, as well as to other sound and agreed upon value standard options that would exist under full monetary and financial freedom. Rothbard even considered any deviation from his kind of exclusive and forced currency, the 100% gold covered and redeemable gold dollar, to be dishonest! According to him all prices, wages and other payment contracts would simply have to adapt themselves the quantity of gold that has been accumulated and is made available for monetary purposes. He wrongly assumed that this adoption would, in every case, occur fast and accurate enough, without causing any friction and difficulties. Some assumption that, especially seeing the opposite effect of falling prices to that of fallen prices. There are still all too many wrong and unchecked premises in most "modern" and "scientific" monetary theories. Condemnation of an exclusive and forced paper money exchange medium and of an exclusive and forced paper money "value standard" is just not good enough when all one wants to do, as most "gold bugs do, is to replace them by an exclusive and forced gold coin or gold certificate exchange medium and an exclusive and compulsorily value standard that requires the 100% and any time redeemability of all exchange media, by their issues, in gold coins or gold bullion. - The deflationary results of such a "monetary policy", by the monetarily simple-minded, might be even more catastrophic than are those of the governmental money monopoly. It is not enough to ruthlessly prevent inflation and to assume that the adopted method, gold metal redeemability is the only rightful and sensible one, but the deflationary effects associated with any exclusive exchange medium must also be overcome by free competition in the supply of exchange media - and so must be the more or less justified distrust against gold weight units as the only value standard - by introducing free choice for value standards. This is, naturally, no argument at all against the establishment of the "classical gold standard currency" among those who believe in it and are thus prepared to practice it at their expense and risk only. Then they would not do any harm to the free and honest exchanges of others but simply make their own exchanges more limited and expensive - in transaction costs - than they need be. I believe that free competition in the monetary and financial sphere would rapidly reduce "the classical gold standard" to its practice among a small sect of true believers. - J.Z., 22.11.01.) Let us assume that, according to the calculations of the civil engineers, the construction of the road will occupy 5 months and that the monthly expenditure thereon is estimated at 200.000 francs. Then the obligations of the subscribers to the loan must be such that the municipality may count on a monthly reflux of 200.000 francs in goods warrants Thus the municipality may not issue warrants in excess of 200.000 francs monthly and the reflux must be assured under all circumstances. The subscribers to the loan must there from undertake to remit legal tender within the prescribed period if they are unsuccessful in securing goods warrants by the sale of their goods and services. That would enable the municipality to buy up the unreturned goods warrants with ready money. This of course, would involve a certain risk for the subscribers; but this risk may be reduced by anterior arrangements with the navvies (road construction workers) and the suppliers The municipality might further reduce this risk by permitting subscribers on payment of smart-money, to withdraw their subscriptions, This fine might be of the magnitude of the premiums customary in stock exchange transactions and be fixed at perhaps 5% of the part of the amount not paid up. The municipality should not experience any difficulty in finding "substitutes". Alternatively, permission to withdraw might be made dependent on the municipality finding a substitute. In addition to those who bind themselves to accept the goods warrants and to subscribe to the loan, other persons will almost certainly exist in the locality who will voluntarily subscribe to the loan. That would naturally facilitate the financing the road scheme. In Germany the financing of road construction by means of municipal goods warrants 44 was frequently discussed before the Revolution and, here and there, attempted. The mistake however was made not to ensure an adequate reflux, it being considered that the possibility of paying local taxes partly in goods warrants would suffice as a guaranty. The inevitable result promptly followed. The shopkeepers who accepted the goods warrants from the navvies could no dispose of them. The annual reflux provided for was, say, one-fifteenth only of the construction costs. Such a reflux might suffice to keep at par a loan bearing a low rate of interest, but not goods warrants that are not yielding interest. Our second illustration supposes that the traders, farmers, and artisans of a locality place their stocks at the disposal of a small factory on long-term conditions and in this make use of a Work Supply Bank, organized broadly on Milhaud's principles, as an intermediary. To comprehend this illustration properly we will at first assume that a single tradesman only is prepared to advance his stock and, provisionally, not through the Bank, either. Suppose that in a town a big store is in a precarious situation and holds considerable cable stocks of unsaleable goods. The following proposal is then submitted to the store by a master cabinet maker: "I intend to build in this town a small furniture factory and require for this purpose 100.000 dollars. Factory premises have to be built, machinery which I can obtain on credit has to be installed, etc. If, there from, you would grant me credit to the extent of 100.000 dollars worth in your goods warrants, both you and I would profit by this transaction. With the warrants I shall pay the bricklayers and fitters, as well as my own workmen for the first few weeks. This may not be very convenient for the parties concerned but since they have been without work, they will prefer full wages in goods warrants to a miserable unemployment allowance in ready money. Many of my suppliers are also willing to accept your goods warrants, since they prefer to sell their wares for such warrants to keep their wares unsold. By the grant of this credit in goods warrants you have the possibility of selling 100.000 dollars worth of your goods, which might otherwise deteriorate or have to be sold at a loss. The credit could be granted for 6 years, for which I would pay only 0,5% interest monthly during the first year, but from the second year onwards a supplementary sum, so that at the end of the six years period I should have repaid the whole of the credit granted. According to amortization tables this would involve an a aggregate monthly payment of 1.933, 8 dollars. The 100.000 dollars' credit granted me. I shall call on in installments of (say) 10.000 dollars a week. I must naturally have a guaranty that the store will not discriminate against individuals paying with goods warrants; also a guaranty that the store will, without delay, cancel the goods warrants returned to it, so as to prevent, as far as possible, their depreciation. Penalties for infringement must be fixed in case you do not fulfill, or fulfill only in part of your obligations. "We might also mutually help each other in raising the monthly installments of 1.933 28 dollars. I should post up a notice in my offices to the effect that I am prepared to accept in payment every month your goods warrants to the value of at least 1.933,28 dollars in lieu of cash. This would naturally increase, on the one hand, your options to make payments in goods warrants that is with your own goods - and, on the other, my chances of finding purchasers for my furniture would be improved thereby." Such transactions, where stores finance Long Term investments with their otherwise unsaleable stocks, are practicable under the goods warrants system. They should be attempted wherever, owing to stagnation in trade, Long Term credit is rare and dear. One condition is, however, that a big store is faced by a comparatively modestly situated debtor. In such an instance the aid of a bank might be dispensed with. Matters are different when a "big" debtor requires credit and there are only "small" dealers, artisans, and farmers ready to furnish it. Here the "small" ones should combine. That would be best achieved in the form of a bank with rules and business provisions such as were outlined in the last section. To ensure that the credit can be really paid, the several businessmen would have to undertake the same obligations 45 towards the bank, as the store had towards the furniture manufacturer. The business provisions governing Long Term credits, which were sketched in the preceding section, do justice to precisely this aspect. We must underline here an important point in those provisions When a trader desires to mobilize his stores by means of a Long Term credit granted by him and seeks the aid of a bank in this connection, it is not enough for him to inform the bank that he is prepared to accept the goods warrants in lieu of cash. On this one condition only, the bank cannot grant Long Term loans. It cannot do this because there would be no reflux of goods warrants, whilst such reflux is indispensable for maintaining their value at par. If, for example; in the case of the furniture manufacturer the bank advanced him 100.000 dollars and he or his workmen, purchased therewith 100.000 dollars worth of goods at the store, the direct cover for the goods warrants, seeing that the goods have been sold, would no longer exist. Hence the store, to prevent their depreciation, must surrender the goods warrants to the bank with a view to their being cancelled. If this is not done and if the store utilizes the warrants it accepted for making payments on its own behalf, e.g., for replenishing its stocks, it transfers thereby to the acceptor of the warrants a claim against the furniture manufacturer. The latter, however is only bound to a limited degree to accept the goods warrants. This becomes manifest if misgivings about the bank should arise and all the warrant holders should there from wish to exchange them rapidly for goods, only to find that goods can be obtained solely from those bound in the matter, which, in our illustration, would be the furniture dealer. This is not a remote contingency and is the more likely to occur the fewer the precautions the bank has taken against it, The precaution suggested here is the compulsory and prompt reflux of the warrants to the bank, or, expressed differently, the store's undertaking to surrender the accepted warrants to the bank. Hence the bank must insist that the store which, by placing its goods at the bank's disposal, has, as it were, subscribed to a loan raised by the bank, should fulfill all the obligations of a subscriber to a loan, the most important of which is the tendering of means of payment within a stated period. Should the store not surrender any goods warrants within the time specified, the bank must insist that the store shall pay the bank in cash wherewith the bank can then buy up a corresponding number of goods warrants. Should the store desire to avoid this risk, it must in advance conclude a contract with the furniture manufacturer regarding the purchase of its goods. In practice the procedure will be less cumbersome than appears from a theoretical exposition of the system; but even if the formalities associated with the application of the system should be deemed considerable, it ought to be remembered that they are trivial compared to the burdens imposed on everybody by the present depression. If trade recovery without sacrifices is feasible, it cannot, as intimated above, be secured without some additional trouble and effort in business dealings. It may happen that owners of goods difficult to market and not satisfying daily requirements are also desirous of placing their goods at the disposal of the bank, with a view to the bank granting Long Term credits e. g., jewelers, toy merchants, and others. But this would entail too great a risk for the bank. However the owners of such goods may easily overcome the difficulty by agreeing to accept in lieu of cash the bank bonds mentioned in the business provisions of the last section. According to the bank provisions here put forward, the owner of a bank bond may readily exchange it for goods warrants, mostly perhaps within a few days. The difference between the Short Term and the Long Term credits of a work supply bank is, as the preceding explanations have shown, a profound one. Indeed the differentiation between the two types of credit represents the fundamental theme of a science of banking. "The art of the banker consists in this: to be able to distinguish between a bill and a mortgage", was said by a banker well known in Berlin banking circles, who could actually tell whether a bill presented to him for discounting would in time be "frozen", i.e., be transformed into a mortgage, or not. The manager of a Work Supply Bank, operating the goods warrants system, must also be master of this art and should not be deterred from acquiring it by the great abstractness of its foundations. 46 (7) OTHER ASPECTS A) Payment of Rent with Goods Warrants The reports in the Annals (1933, no.2) suggest that the Emergency Associations of the American unemployed always experienced serious difficulties in paying rent by barter methods or by means of goods warrants. This is intelligible. A large proportion of the rents paid have to be passed on by the landlords to the mortgagees. In America these mortgagees are generally insurance companies, Building and Loan Associations, or mortgage debenture associations. Now, an insurance company, for instance, cannot accept goods warrants unless its employees or its insured agree to accept them. Propaganda would have there from also to extend to this class of creditors. Such propaganda would be by no means futile, for in large tracts of America the debtors of the insurance companies have officially declared a "payment strike". Hence the insured are risking to lose entirely a large part of what they paid in. Should they, however, be prepared to accept insured amounts in goods warrants, they may avoid losses. That which is true for the insured, also holds of the owners of the bonds of mortgage societies. It would be probably easiest to win over the Building and Loan Associations. In America these associations are as a rule small cooperatives confined to a single town whose members are largely without work today. Here might be the point of departure; but the unemployed should not make the altogether hopeless attempt to finance houses by means of goods warrants, in the hope of later paying their rents in goods warrants. (Annals, 1933, no. 2, p. 321,) The mortgage banks might aid in popularizing the idea by agreeing to accept interest payments in interest coupons. Every mortgage bond of over 100 dollars has actually attached to it a few interest coupons, say of 3 dollars each, which are every half year exchanged for cash at the counters of the mortgage bank. If, then, the interest coupons as such were paid in at the bank in lieu of cash, the bank need not later exchange these coupons for cash. The bank would even gain thereby, for normally it must obtain its money from a credit bank and pay interest itself when the payment falls due! For the owner of a mortgage bond, on the other hand, it might be highly advantageous to be able to utilize his interest coupons even prior to maturity in lieu of cash, especially for the payment of rent. As for the landlord, it is quite indifferent to him whether he is paid in interest coupons or in legal tender, if only the mortgage bank agrees to accept his interest coupons. According to the civil law of several countries, the mortgage banks must consent to a settlement such as is here proposed. But the respective legal provisions are little known; as indeed modern jurisprudence wholly neglects clearing operations. B) Payment of Dividends with Goods Warrants The surpluses of joint stock companies nowadays accumulate at the banks in the course of their financial year. After the General Meeting has passed a motion regarding the dividends, the shareholders come to be entitled to exchange at the bank their dividend warrants for legal tender. This, in the aggregate, involves large amounts. The German joint stock companies, for instance, paid in dividends during 1927 a good year, certainly about 800 million marks and a year later as much as 1.250 million marks. ("Statistisches Jahrbuch fuer das Deutsche Reich", 50th. year of issue, p. 367,) The banks, of course, grant Short Term loans out of the surplus accumulated during the year. When the time for paying the dividends arrives, the respective credits are called in, The latter is no trivial matter. Thus the commercial press has pointed out that the liquefying of the dividends of a leading joint stock company affects prejudicially the national economy and that in fixing its dividend rate the company should have regard to the difficulty of providing the dividends in liquid from. In such circumstances the goods warrants system would bring great relief. Not only would, 47 in all probability, its realization increase, considerably, the stability of the money market but it would enable share companies to declare higher dividends in goods warrants than they could pay in legal tender. The text of a dividend goods warrant might read: xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx During the period from . to . the . works will accept this warrant in lieu of legal tender for the amount of , in all payments due to be made to the said works.   After the last date mentioned, the dividend warrant can only be used for establishing a credit at the works. The provisions relating to calling in this credit and to interest payments will be fixed by the Board of Directors and announced from time to time, in accordance with the financial position of the works. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Suppose: a motor car factory has on its hands a large park of unsold cars. The factory is perhaps not in a position to pay a cash dividend just because it has so many unsold cars. The company could, though, perhaps without difficulty, pay a 5% dividend in goods warrants. That is, it would then pay its dividends in the form of cars. If several joint stock companies combined and declared that they severally agreed to accept one another's dividend goods warrants, these warrants would be negotiated with the less discount the greater the number of the companies concerned. One could also imagine that a bank might specialize in purchasing dividend goods warrants and setting them to the customers of the factories concerned. This would probably prove a paying proposition. Here, as in most other sections of this paper, legal obstacles to the application of the goods warrants system stem in various domains, have been left unconsidered. The economic aspect alone has been our concern. (7) C) General Objections by "Practical Men" Milhaud prefers to leave the elaboration of the technical details of his system to businessmen and, in the last resort, to the authorities. This is one of the few points on which I must contradict him. Never, since in the Middle Ages the guilds took over the government of cities (which led to appalling social, technical, and economic retrogression as Roscher has shown), has the world been ruled more decidedly by "practical men" than during these last few years. And in all countries today the influence of the authorities is such that, e.g., the American Senator Glass felt constrained to say of his country that he was not surprised that the United States recognized Russia but wondered that the Russian Government recognized the United States, seeing that his country was far more advanced in Bolshevism than Russia. A practical method of finding work, based on scientifically tested experience, has so far not emerged anywhere. This the opponents of the "theoretician" Milhaud should duly take into account. What the Governments in virtually all countries today consider as finding work, is nothing else than driving bakers, tailors and carpenters into unemployment through taxing their customers, in order to provide work for bricklayers, joiners, and navvies; Governments deprive one class of citizens of their purchasing power and confer it on another class. Persons who know no other way out and do even approve of this senseless system, should not be styled "practical men (although they have been engaged in this foolish pursuit for years), but, on the contrary, as men whose practices have failed to solve the task before them. The "Annals" (1933, no.' 2) report that in America over a million unemployed have resorted to bartering goods and services and have thus created work for themselves. They were not led by those who claimed to be "practical", but by men and women of all sections of society who approached the problem with an undoubtedly scientific open mind. 48 Workingmen collaborated and so did farmers, businessmen and officials, artists and doctors. An enlightened attorney general refrained from enforcing the laws of Colorado regarding emergency money. (Annals, 1933, No. 2, p. 290.) A municipality provided offices and did not protest against "the intrusion of busybodies into relief work", as would perhaps been the case in old Europe. A religions community contributed its protracted experiences with goods warrants (p.258 ), which were then intelligently applied. Others, after a few weeks' experience with primitive barter, concluded that some goods warrants system is indispensable (p 286). Here we see at work "practical men" in legitimate sense of the term, and it testifies to the scientific spirit of the American economists that they requested their Government to institute a careful inquiry into the practice of the diverse barter communities (p.263) and did not pretend that they knew all about if beforehand. The inquiry would serve a real purpose, for as regards what is truly of importance in the American barter movement namely its juridical position, we know almost nothing, and this is to be deplored. (7) D) Issue of Goods Warrants and "Creation of Money" If a goods warrant issued in Denver by a small association and circulating freely in that town at par, should stray to New Orleans, it would hardly be accepted there save at a discount. Here we are not concerned with such instances, but exclusively with the instance where the goods warrant is discounted in its place of issue. What are the possible causes of such a discount? To answer this question, we must be clear as to how discount may be avoided. If the centers issuing the goods warrants hold marketable goods, e.g., foodstuffs, then in no locality doing a fair amount of business would the discount last longer than a day. Suppose that in such a locality the market rate of the goods warrants had dropped from a dollar to 90 cents. In such case everybody, requiring foodstuffs would naturally secure a dollar goods warrant for 90 cents and tender the warrant to its issuer, the provision dealer, in payment of 1 dollar's worth of goods. The purchaser thus easily saves 10 cents. Even uneducated housewives would soon discover the possible gain and hence, within a few hours, the warrants together with their discount would have passed out of circulation and returned to the issuing center. If speculation were the cause of the drop in the market rate, the speculator who acquired the warrants at par and passed them on cheaply, made a bad bargain. He only benefited the purchasers of foodstuffs. Hence speculators are powerless against a system with whose warrants goods and services in daily demand may be acquired at any time. That the demand should also be defensible from the moral viewpoint, is not at all necessary. There are people, especially in England the United States, who look askance at those who frequent restaurants and theatres. Nevertheless goods warrants accepted in lieu of money in restaurants and theatres are well covered because there is a constant demand for what these institutions offer. From the above considerations it follows what may entail a discount on goods warrants in the locality wherein they are issued, namely if they cannot be at any time exchanged for goods or services in daily demand: The American unemployed who want to finance house building with goods warrants (see Annals, 1933, no. 2.), should ponder this. It s true that they have on their side popular prejudice whereto governments even have frequently succumbed, according to which a house or a block of land offers better security for credits including the credits granted by banks of issue than the goods stored in them. The kind of security, however, which is decisive in ordinary credit operations plays a subsidiary part in goods warrant credits, as compared with a quite different kind of security which, in its turn, is not common in ordinary credit operations, namely the assurance that the goods warrants may be at any time exchanged for goods or services. Indeed, the issue of goods warrants does not, economically speaking, properly represent a credit operation, even if for the moment it cannot dispense with the legal form governing such an operation. To remind the readers continuously of this fact, their issue has, where practicable, been characterized as a loan, subject to a usufruct charge (locatio, louage, hire) 49 and not as the raising of an interest yielding loan in warrants (that is, no mutuum, emprunt advance). In reality, goods warrants are more closely related to theatre tickets, cloak room counters, or railway tickets than to a gold certificate such as used to circulate in the United States and were really money. That is, the technical aspect in goods warrants preponderates over the monetary aspect. Hence, economically speaking, the issue of goods warrants should be regarded less as the grant of a loan than an issue of counters, travel tickets etc., which have also to be returned if they are to serve their purpose, without their owner being properly a debtor. An excellent name for banknotes, which did justice to the economic-technical aspect in them, was that invented in Sweden in 1661, namely "transport notes" (Transport Zettel). (Roscher.) The recognition of the true nature of goods warrants introduced into the general monetary circulation, involved new tasks for legislatures. Legislation, from that of Rome to that of modern times, has hitherto not looked upon goods warrants as a juridical fact sui generis. Consequently, the present, really unsuitable legislation must be, for better or worse, applied to goods warrants. The most appropriate, in the circumstances, is our loan legislation, although, economically, the issue goods warrants does not represent the grant of a loan. Goods warrants are likely to have a history similar to insurance. For centuries the insurance of (say) ships was arranged by the insured selling his ship to the insurance company for perhaps 1.000 gold pieces, and at the same time arranging for its repurchase at 1.100 gold pieces, should it safely arrive. This indirectly created a premium of 100 gold pieces. Traders there from made the best of the concepts "purchase" and "sale", until, later, insurance came to be regarded as a legal institution sui generis and was eventually governed by its own suitable legislation. To furnish a further example a from a different legislative domain: The English cooperative building societies (which have thus far financed the building of a quarter of all dwellings in England) were legislatively only specially provided for in 1836, after they had been placed in the Act of 1793 under "friendly societies" and previously even under "common law societies". When special legislation for goods warrants comes to be introduced (which our time is certainty not capable of doing), it will be useful to remember the old banks of issue. Goods warrants are private notes but without the senseless undertaking of the banks of issue to exchange them at all times for precious metals. Our legislators also have hitherto misapprehended the nature of banks of issue. Their viewpoint was that of Heilfron, as expressed in his (none the less highly valuable) work "Geld, Bank and Boersenrecht" (Monetary, Banking, and Stock Exchange Law), 2nd, edition, p. 36. There he formulated the prevailing conception as follows: "The privilege of issuing notes furnishes the bank concerned with the possibility of securing for itself capital by the issue of banknotes, for the delivery of which it has to pay no interest to the seller." But no privilege, however extensive, with the exception of a forced currency, can "secure capital" to a bank of issue. It can only permit existing capital, which cannot be transferred as a whole, to be transferred piecemeal, in accordance with the denominations of the notes, or to speak more correctly, to aid in transferring them. The economic effect is nevertheless so great that it makes the impression of a "creation out of nothing". (See Bendixen's excellent chapter "The Creation of Money", in "Geld and Kapital" (Money and Capital), 2nd. edition, p. 47.) Many people today still believe in the feasibility of economically creating something out of nothing, and it is there from not strange when they demand that the exercise of such a far reaching and dangerous power should be strictly reserved for the State, just as among the ancient Romans, the exercise of magic in which men then generally believed - was a State privilege. Indeed, during these last few years a new expression has been coined to express this power, strictly, reserved to the State, of creating capital out of nothing in the legal form of credit money: "Kredithoheit des Staates" (Credit Sovereignty of the State), whereby the parties concerned by no means intend to describe the prosaic power to raise forced loans, in emergencies, but rather the right to resort to this mysterious power of "creation". 50 That which the inventors of "credit sovereignty" but dimly apprehended, is a fact clearly enunciated by Adam Smith: In the chapter "Of Money", in his "Wealth of Nations", he states: "A prince, who should enact that a certain proportion of his taxes should be paid in a paper money of a certain kind, might thereby give a value to this paper money, even though the term of its final discharge and redemption should depend altogether upon the will of the prince ." (p. 366 ) The banknotes of almost all countries represent actually such a paper money today and are, properly speaking; no longer banknotes whose value depends on their flowing back to the bank. As long as the intensity of the reflux to the bank is decisive for the value of a note, its legal nature is that of a goods warrant, as some economists, among them Bendixen, have rightly surmised. ("Das Wesen des Geldes" The Nature of Money, 3rd. edition, p. 77.) This recognition throws new light on the goods warrant as well as on properly supported banknotes; but it would lead us beyond the framework of this paper to enter into particulars on the subject. We may, however, mention that when once a banknote is regarded as a goods warrant, we can see why it should not be covered by frozen possessions, such as houses, since the holder of a goods warrant of a low denomination cannot possibly claim a house on this with it. (Apposite and by no means obsolete. remarks on this topic will be found in Roscher's "National Oekonomik des Handels und Gewerbfleisses.) The possibility of forthwith exchanging, at its face value, any goods warrant for goods or services in daily demand, regardless of its market rate at the time, is there from decisive for its circulating capacity. This point is so important that we shall illustrate it by a further example. Suppose a theatre that pays the actor's fees and other expenditure items in theatre tickets. This was not uncommon with West American itinerant theatre companies in olden days, about the time when the Pacific Railway was opened, and occurs even today here and there. The company arrives (say) in the morning in a small country town, where there are many theatre lovers, but where, as in Western America generally, there is a lack of ready money. In the circumstances, the actors help themselves and the inhabitants by making all sorts of purchases during the morning, for which they pay with, theatre-tickets. In the course of the day the tickets circulate in the locality and are eventually retained by those desirous of attending the performance. In the evening the theatre-goers present their tickets which are then clipped by the attendants. It might certainly happen that, for instance, no one accepted the dollar tickets at a higher rate than (say) 90 cents. It is nevertheless possible and even probable, that the tickets mediated many transactions, if only among business acquaintances. The baker, who was perhaps the first to receive a dollar bill from an actor, passes it on to his tailor, to whom he has long owed a dollar for a minor repair, and even adds 10 cents to induce the tailor to accept it. In his turn, the tailor pays his carpenter an outstanding account perhaps also adding 10 cents, and the carpenter retains the ticket because he had long looked forward to attending a theatrical performance. By the evening the tickets have undoubtedly reached those who desired to see the play, and by 9 p.m. the tickets, with their possible discounts, have disappeared from circulation The above example shows that an inflation through goods warrants to which subject we shall later return is impossible however ill-intentioned the theatrical manager might be. Suppose the company, instead of issuing tickets for 500 seats, which the playhouse accommodates, issued 5.000. Great crowds would swarm around the theatre booking office in the evening and the value of a dollar ticket among those at the rear of the queue would sink to a few cents. Many ticket holders would suffer because they could not get into the theatre. The general price level in the locality would, however, remain quite unaffected. All would be different, of course, if the tickets, like the historic greenbacks, were subject to general compulsory acceptance. Then the 4,500 people for whom there was no room in the theatre, would next morning make purchases with their tickets and the price level would necessarily rise in proportion. It is remarkable that in the whole post war literature on monetary questions the distinction is almost never drawn between means of payment with general compulsory acceptance and without. It is, on the 51 contrary, characteristic of this literature that it applies statements relating correctly to forced money (fiat or legal tender money) forthwith and uncritically to every kind of means of payment. A century and a half back such confusion would have been impossible, but in a few post war standard works the expression "forced currency" does not occur at all although they have much to say about inflation! (Very few, perhaps only one in a thousand, points out the connection between legal tender and inflation, which was formerly taken for granted. And the realization that Gresham's Law applies only to legal tender currency has also remained an insight of a few only. - J.Z., 22.11.01.) Our example teaches us a further lesson, namely the advantages of decentralization. If perchance all West American theatres had belonged to one big company and the sub-manager at Denver had issued too many tickets resulting in the tickets selling at a discount, the company might easily have come to argue mistakenly: "We are issuing too many tickets. At Denver they are already setting at a discount. We must there from everywhere reduce the number issued," This would quite unnecessarily deprive many people of the benefit of a theatrical performance and, equally unnecessarily the company would have its takings reduced. But if the theatres were not controlled by one company but by many, a theatre in Santa Fe would not reduce the number of its performances because there is a discount on theatre tickets at Denver. These reflections apply quite generally to paper currency, only that an understanding of the effects of a centrally organized paper money issue, possibly even with compulsory acceptance, is not as easy as an understanding of the finances of theatres and theatre trusts. But our example does suggest that the centralized issue of forced paper currency may well lead to inflation in one portion of the economy whilst another portion is at the same time severely suffering from deflation. The coexistence if inflation and deflation is, indeed, symptomatic of the economic life of all countries issuing, forced paper currency. (Already Adolf Wagner noted this in 1868 in his "Die russische Papierwaehrung" The Russian Paper Currency ? p. 13. In our time Dr. Rittershausen seems to have been the first to direct attention to this. ("Neubau des deutschen Kreditsystems", Reform of the German Credit System, Berlin 1932) The supply of a country with means of payment may also be compared to the supply of a large and hilly park with water, If the gardener is restricted to using only one large and fixed water pipe, then it is inevitable that the hills should remain dry and the valleys become swampy. Today the central banks of issue of all countries are by their very existence a comparably serious obstacle to finding work for the unemployed. They ought to disappear, not excepting the 250 years old Bank of England. Attention may also be called here to a very simple expedient wherewith, in times gone by some States protected the parity of their paper money even against small fluctuations common in normal circumstances, and which could be today also advantageously applied to goods warrants. This expedient consists in the issuer only accepting means of payment other than his own paper at a discount. It seems that this expedient was first introduced in Prussia after the Napoleonic wars. The Act of 7 April 1815 provided that half the taxes should be paid in Treasury warrants. For every thaler of Treasury warrants missing, even if paid in gold or silver, a fine of 2 groschen was imposed. The result was that, already in 1816, the Prussian Treasury Warrants stood a little above par on the German stock exchanges, although, seeing the political and economic conditions then prevailing, a discount would have seemed more likely. In the principles and business provisions for a Work Supply Bank suggested in a previous section, arrangements were also made for "smart money" ( a small penalty - J.Z.) when means of payment other than goods warrants were paid into the Bank. Historians may be also interested in the following observation. The Prussian Minister Von Stein was led to the issue of Treasury Warrants through reading in Adam Smith the passage above quoted: "When a prince . ." Stein's biography by Pertz contains detailed statements on this subject, which are particularly interesting for our time, but which cannot be discussed in this paper. (Rittershausen compiled still older legislation on tax foundation in 1945, when he expected most libraries to be destroyed: Die aeltere deutsche Gesetzgebung zum Staatspapiergeld (The Older German Legislation on State Paper Money), 29 pages, in PP 641. - J. Z., 22.11.01.) (7) E)Is a Homogeneous Circulating Medium the Ideal? Uniformity in monetary circulation is certainly advantageous but it must not be bought at too high a price. Germany, for example, possessed in 1870, over 30 private banks of issue. In addition, 2 railway companies and several States issued paper money. (This leads to the still unanswered question: To what extent did the then existing degree of monetary freedom in Germany contribute to its rapid industrialization - J.Z., 22.11.01.) 52 Altogether, about 120 different kinds of paper money are said to have been then in circulation. At the time it was also customary for interest coupons to circulate, for a while, as money. Complaints concerning the heterogeneity of the means of payment were frequent, particularly in the reports of chambers of commerce, where special attention was paid to them. When, later, the Reichs-banknotes became more and more the principal means of payment, satisfaction was universally expressed among traders. But the numerous centers supplying means of payment possessed a certain advantage recognized only by the few: monetary crises, such as we are experiencing in our age, were less frequent and at all evens not so catastrophic as today. Interest, even on Long Term loans seldom exceeded 4 %, and bills could sometimes be discounted at 2% at the private banks of issue. More particularly, money to pay wages with was easier to raise than today. Then the Reichsbank with its imposing privileges and the high denominations of its notes, of which the lowest was for 100 marks, was established. (This is forgotten today.) Parliamentarism, which was then only in its infancy in German, immediately revealed its worst side by passing paragr. 3 of the Bank Act, where the groundless prejudices of the few members who were esteemed experts in monetary matters, became authoritative for decades in the economic life in Germany. Fancy prohibiting notes under 100 marks to a country like Germany! Bismarck, who at the time was greatly preoccupied with foreign affairs, resisted for a few years the proposed innovations, with their tendency to unify and centralize monetary matters. Accordingly, the Reichsbank did not open its doors before 1876. Almost immediately afterwards a shortage in means of payment broke out, only comparable with that of today. In 1873 already, the crisis began with a terrible panic on the Stock Exchange, grew worse year by year, and apparently reached its climax in 1878, to judge by the number of forced public auctions. As many hold, the first good year thereafter was that of 1889. (Note by the Editor: The Bank Act mentioned here by the author was dated 14/3/1875. But already the Coinage Act of 9/7/1873 had prohibited the issue of notes of smaller denominations than 100 marks and would thus have been a factor in the crisis. ) America found itself in a similar predicament after the Civil War of 1861-1864. During that war the private banks of issue were paralyzed by an annual tax of 10% on their note circulation, an Act that, by the way, is still in force. The prevailing money shortage led in many localities to an open rebellion of the workers. An economy has only the choice between reconciling itself to a certain inconvenience due to the multiplicity of means of payment, with the advantage of being well supplied with money and work, and possessing a homogeneous legal tender and suffering from a shortage of money and work. Nor should we over estimate this inconvenience, as primarily only tourists and shopkeepers are affected thereby. But the latter emphatically prefer to sell much, for somewhat cumbersome means of payment, rather than to sell very little for uniform means of payment. Furthermore it is probably true that in 1869 one could travel through Germany, with its 120 kinds of means of payment, for 4 weeks, with less inconvenience pecuniarily than would be experienced in a 4 days' journey from London to Constantinople today, when the currency changes 7 or 8 times and this in a most inconvenient manner. (7) F) Security against Inflation of Paper Money In order to discover whether a means of payment has an inflationary tendency, attempts have been made during the post war period to ascertain whether the volume of goods produced and marketed fluctuated proportionally with the volume of paper money issued. If that appeared to be the case, the danger of an inflation was discounted. Milhaud had also to examine this criterion and was able to show that his purchasing certificates withstood that test. It may be noted, however, that owing to the uncertainty of the underlying facts (which are scarcely ever ascertainable statistically), the criterion itself is dubious. On the other hand, a far simpler criterion exists, one which has proved reliable for decades and even for centuries, namely the discount in a free market or, what amounts to the same thing, the price of bars of precious metal in the open market. 53 The attitude of Governments, of public opinion, of a large section of the scientific world, and above all of "practical men", towards an open market in precious metals distinguishes perhaps more definitely than any other mark our own age from the ages that have preceded it. Here is a subject for the sociologist! Fundamentally, this attitude is connected with the passing of traditionalism which for some decades has no longer dominated the governmental policies of most countries. A government influenced by traditions knows that however great the economic distress, inflation cannot provide resources which could not be secured more advantageously, more conveniently, and with greater justice in other ways and with less danger for the government. Such a government has learnt this from the bitter experience of its predecessors and its neighbors. Nor does it believe just because it has a tradition in "the altogether different and wholly unprecedented conditions" which the man without a tradition scents everywhere. It knows, on the contrary, that in every social order and at all times, the economic laws are just as immutable as the laws of nature of which they form an integral part. A government basing itself on traditions that are sufficiently old and embrace public life as a whole, forms with its people a natural alliance directed against the inflationists and coin debasers who have always existed and will always exist. In a country with such a government bad as it may otherwise be it is considered a primary right of the people to refuse to accept suspicious means of payment, paper ones especially. In a country so governed, science, which is the proper guardian of tradition, will not fail to brand the suppression of that popular right as despotic, indeed as an action which, in given circumstances, releases the individual from his duties as a subject. Verily, a Government which inflates is morally no better than that of some chiefs on the Congo who made raids on their subjects and sold them into slavery. We find it difficult today to realize the mentality of such a ruler, a ruler who protects the critics and the men of science when, alarmed by the imminence of an inflation they raise their voices in protest, and does not rather imprison them. A concrete illustration is perhaps in place here. Adolf Wagner, in his day one of the most esteemed economists and a professor at Dorpat, was able to publish in 1868 his work "Die russische Papierwaehrung" (The Russian Paper Currency) at Riga, that is on Russian soil, in which work he condemned in scathing terms forced currencies, without the government of Alexander II, the noble "czar liberator", exiling him to Siberia. Wagner states, on page 27: "From what precedes, we learn what a terrible financial power the issue of paper money may become in the hands of an unscrupulous Government. What by comparison, are the most exorbitant taxes and forced loans and the most extensive applications of force which a Government might possess for carrying these two measures into effect? A forced paper currency represents a far more powerful and yet far simpler screw for extorting the wealth desired since, through the medium of the processes of production, marketing and pricing that is, by means of the ordinary economic laws it places the wealth of the people at the disposal of the government, indeed playing it into its hands." Roscher cites this passage approvingly. Subsequently, Adolf Wagner settled in Prussia, a country often decried as despotically governed, but which has played a most honorable part in financial history and where certainly economic traditions ruled, traditions that were still powerful in Bismarck's time. Here it is not a question of the class prejudices entertained by the nobility, the church, etc., which the word "tradition" first suggests, but of something far more important. The world has perhaps known financial legislation as honest as that of Old Prussia, but not more honest. This is illustrated by the fact that the right of the people to refuse dubious paper money was recognized and this not only tacitly but expressly. Prussia's rulers knew that here was the real re-insurance of the State against inflation. Hence neither during the Revolution of 1848 did Prussia introduce compulsory acceptance for notes, nor a forced currency (as other governments did), nor was paper legal tender during the wars of 1864 1866, or 1870. Already on the occasion of the first issue of notes under Frederick the Great in 1766, the King pointed out both in the "Gesetzblatt" (Law Gazette) as well as in an edict addressed to the Supreme Court of Appeal that the acceptance of notes in private dealings was optional. After quite brief experiences of a forced 54 currency during the Napoleonic wars, an order of 7 September 1814 definitely revoked the forced nature of the currency. This was confirmed on 1 March 1815. When in 1846, new bank regulations appeared, paragr. 33 provided that the acceptance of notes should not be compulsory. In the coinage treaty of 1857, under pressure from Prussia, all German States even undertook not to introduce any inconvertible forced currency. The Act of 30 April 1874, which created the Reich Treasury Notes (Reichskassenscheine), expressly declared in paragr. 5 that they were not subject to compulsory acceptance. Similarly, paragr, 2 of the Bank Act of 875 provided that the Reich banknotes were not subject to compulsory acceptance in private dealings. Indeed, even the Rentenbank Act of 1923 rejected the compulsory acceptance of Rentenbank notes in private dealings. (State pay offices in Prussia and, later, in Germany generally were bound to accept them.) Havenstein, Schacht's predecessor, was responsible for the break with the old tradition. Havenstein put trough the Act of 1909, which made the acceptance of Reich banknotes compulsory, and the same Havenstein created later, with the aid of this Act and in conjunction with a war order of September 1914, the greatest inflation of all time! (During the preliminary discussions of this Act it was stated that the next war could not be conducted without legal tender. That view was accepted then and it is probably correct for an as senseless and vast war. Without resorting to the money printing presses - and the issue of government "insecurities", all governments, engaged in this extremely wasteful and bloody war, would have been bankrupt within a few weeks to months at most. As it was, legal tender enabled them to expropriate their subjects' incomes and to an extent that most of them did not understand and with this plunder or paper purchasing power - such paper money was aptly called 'requisitioning certificates', they were enabled to carry on this senseless war for all too many years. And it led directly and indirectly to the Soviet and the Nazi regimes as well. Under monetary freedom neither the German Great Inflation nor the Great Depression would have happened. - J. Z., 22.11.01.) Unfortunately, through the Dawes Acts of 1924, the compulsory acceptance was again ordained for German paper money and therewith Germany was deprived of its best criterion as to whether there was inflation or not. Here we may remark that cases of refusal to accept non-inflated paper money are markedly absent where there is no compulsory acceptance. During the German Bank Enquiry of 1908 only a single case of this kind could be definitely cited, a case which occurred in 1876 in Munich. (Protokolle der deutschen Bank Enquete von 1908, volume I, p. 192.) Old Prussia can also claim the honor of having on several occasions recognized in time certain social evils as due to deflation and to have neutralized them through the creation or tolerance of additional means of payment of a non-inflationary character. For example, in 1848, owing to a shortage of means of payment, a considerable proportion of the working classes could not be paid their wages and serious political and social dangers loomed ahead. Thereupon the Prussian Government, by the Act of 15 April 1848, established 13 loan offices with 11 subagencies; and these issued loan warrants. (See L. Feuchtwanger, "Die Darlehenskassen des deutschen Reichs" The Loan Offices of the German Reich, Berlin 1918.) These warrants were placed from the first on tax foundation, that is, every citizen was entitled to pay his taxes with these warrants taken a their nominal value, regardless of their market rate at the time being. Although altogether only about 7 million thalers were issued and the monetary circulation was there from scarcely raised by a hundredth part, the effect was most gratifying, and, on the whole, the workers received their wages. (Here should be noted that, contrary to a widespread prejudice, the workers constituted then almost as large a proportion of the total population as today.) The Prussian Government, however, was not content with the establishment of loan offices, and by its "Normative Provisions" (Normativ Bestimmungen) of 15 September 1848, permitted the establishment of private banks of issue. That by means of legally unenforced notes or loan office warrants (That is, in the absence of legal tender for them! - J.Z., 22.11.01.) an inflation might be engendered never occurred to any noted politician or writer of the time. Not even as Late as 1907, when a monetary crisis broke out, were the old traditions forgotten in Germany. Koch, then President of the Reichsbank, was not the kind of man to be misled by cries such as "crisis through speculation", and the like. He clearly recognized that the crisis was due to a shortage of means of payment and acted accordingly. First, he saw to it that Germany obtained the best check legislation in the world, where the clearing check received special attention. (Not to be confused with the English crossed check.) He then arranged for the introduction of the postal check system in Germany. After this he induced the Federal Council (Bundesrat) to increase the number of Reich Treasury Notes in smaller denominations. Already shortly before the depression, which he saw coming, he had carried his point that 20 and 50 mark banknotes should be issued, contrary to the old Bank Act which unwisely enough, permitted only the issue of banknotes of 100 marks and over. We see here how Koch, within the limits set for him, endeavored to multiply Germanies means of payment. He died in the beginning of 1908, all too soon for Germany. He was succeeded by Havenstein, and two years later Germany saw 55 introduced the compulsory acceptance of its paper money! It may not be amiss here to call attention to the following historical facts. Napoleon I. owed his authority at least as much to steadying the currency as to his victories. He never ceased repeating that under his rule there was no fear of a forced currency and won over thereby the working and the middle classes. In 1850, shortly before Napoleon III. had himself proclaimed emperor, he rescinded the forced legal tender for banknotes introduced in 1848 and made himself thereby popular among those who were afraid of inflation But on 11 August 1870, he permitted the re-establishment of the forced currency (a wholly superfluous measure, as events proved ). Three weeks later he had lost his throne and his liberty. What turn the history of Europe would have taken if William II. had opposed the forced legal tender introduced by the Act of 1909, it would be difficult to say. That through an edict in 1807, famous in the history of Prussia and directed against a forced currency, Frederick William III. not only saved the Prussian economy, but also his throne, appears certain. The policy of the German Government overthrown by the Revolution of January 1933, was also completely destitute of the realistic and traditional spirit that had formerly animated German monetary policy, Whilst on the rural markets, owing to the money shortage, tobacco had long been bartered for pigs and vegetables for soap, as in Africa, Chancellor Bruening, invested with dictatorial powers, deemed it expedient to intensify the general money shortage by an order of 6 October 1931 (Reichsgesetzblatt, S. 562). Thereby the Reich Minister of Finance was empowered to prohibit all economic self help involving the issue of emergency money, on pain of the severest penalties. This Minister, Dietrich, then issued the order of 30 October 1931 (Reichsgesetzblatt, p. 669) which was so flagrantly inconsistent with what the economic situation demanded, that it is here reproduced: Paragraph 1. "For the purpose of this Act and irrespective of whether the documents shall have been already declared emergency money by other legal ordinances, the following shall be deemed emergency money: 1. stamps, coins, warrants or other documents, made out for a sum of money and utilized in economic dealings as a substitute for money issued respectively by the Reich, the Reichsbank, the German Rentenbank, or a private bank of issue, even when the are made out in denominations in which money has not been issued; 2. checks or other orders intended or suitable for being used as means of payment in economic dealings and made out by filling in printed forms, when in these forms already at the time of their issue a defined or definable sum of money or a defined or definable quantity of fungible objects is indicated; equivalent to such checks or other orders shall be deemed all documents which in substance serve the same economic purpose, even when they do not satisfy the requirements of the Civil Law regarding checks and orders (e.g., compensation checks, rye orders); 3. documents made out in other calculating units than the money mentioned under no. 1, insofar as they are intended or suitable for use in economic dealings as a means of payment or exchange (e g., Waera warrants, building shares, barter slips). Paragraph 2. (1) Forbidden are: 1. the manufacture, issue, circulation, and acceptance of emergency money, 2. the manufacture, issue, circulation and acceptance of printed forms for checks and orders of the kind indicated in paragr. 1, no. 2, 3. the invitation to acquire emergency money and printed forms for checks and orders of the kind indicated in paragr. 1 no. 2, so far as the invitation is made publicly or through dissemination of writings or other statements, 4. declaration of readiness to accept emergency money, so far as this declaration is made publicly or through dissemination of writings or other statements. (2) From the prohibition, according to paragr. 1, shall b e exempted the passing on and the acceptance of emergency money, so far as these acts serve the purpose of withdrawing the emergency money from circulation. 56 Paragraph 3. (1) Emergency money of the kind indicated in paragr. 1, nos. 1 and 3 and already issued prior to the coming into force of this order, the issuer - and emergency money of the kind indicated in paragr. 1 no, 2, and already issued prior to the coming into force of this order, the party indicated shall withdraw from circulation and destroy within a period not exceeding one month after this order shall have come into force. Emergency money issued prior to the coming into force of this order and which is not withdrawn from circulation within the time specified in the preceding sentence shall become invalid after the expiration of this period, insofar as it shall not have been declared invalid pursuant to other legal ordinances at an earlier point of time. Claims arising out of legal relations governing the issue and acceptance of emergency money, shall remain unaffected. (2) Emergency money issued after the coming into force of this order shall be deemed invalid. Paragraph 4. (1) Anyone contravening the provisions of paragr. 2, 3, shall, without prejudice to any proceedings taken pursuant to other provisions, be liable to a fine up to ten-thousand Reichsmarks, in lieu of which, in case of non-recovery, imprisonment up to six weeks may be imposed. (2) Emergency money, whereto the action described in paragr. 1 refers, shall be seized and withdrawn. The moulds and other requisites necessary for its production shall be liable to seizure and withdrawal. Their seizure and withdrawal shall be deemed lawful, even when the objects do not belong to the producer or to a participator. Paragraph 5. Claims against the Reich for indemnification are not established by this order. Paragraph 6. This order shall enter into force on the day of its publication. Berlin, 30 October 1931. The Minister of Finance. H. Dietrich That the Finance Minister should have prohibited the issue of Waera warrants, building shares and similar "means of payment", which were to be "covered" by houses, was natural, although no fresh legislation was required for this. But that he should have confused means of payment without a sufficient reflux with others like e.g. Milhaud"s goods warrants, illustrates the measure of economic insight possessed by that Government and explains why, under its rule, not even half the productive apparatus of Germany was profitably exploited, Nor did the Government of that day show the least trace of an understanding that unemployment is not a problem in dispensing charity but one of organizing the country socially, or, more correctly monetarily, and that hence the re-employment of the workless does not demand sacrifices of the people but only a little thought on the part of our highest official economic advisers, which, however, was unfortunately not forthcoming. What a difference between the reckless utterances of a Dietrich and others, and the words spoken by Adolf Hitler on 30 January 1934! "The German people" he said "comprise millions of honest workers who are unemployed although anxious to work. It comprises millions who are intellectually and manually highly proficient and trained. Its vast masses also yearn for higher ways of living and learning. And, lastly, its soil offers the possibility of increasing the quantity of foodstuffs and its raw materials that of augmenting its output of commodities. It is there from a problem of intelligence, will, and determination to reconcile this call for products with the possibility of producing them." In truth, the danger, even for the best intentioned and most resolute statesmen, the most determined to grapple with the scourge of unemployment, is that, being unsuspectingly prisoners of hallowed conceptions which appear unchallengeable, they overlook the dangers inherent in a forced currency and, at the same time, do not appreciate the ease of escaping an inflation by holding fast to a free exchange 57 rate and to a free market for precious metals. Indeed, they are, on the contrary, encouraged to believe that a free market impedes the reemployment of the jobless. A paper currency which no one is compelled to accept at par is, what English technicians call "foolproof" against inflation. Even blunders cannot produce an inflation, for when in the open market paper depreciates, the debtors of the issuing center immediately take advantage of this, secure depreciated paper money, and re-pay their debts therewith to the issuing center at par. Thus the depreciated paper money is withdrawn from circulation, and the issuing center and not the general economy suffers. Apparent exceptions only prove the rule. In 1931 and 1932, for instance, some municipalities in Silesia financed the construction of a few highways by issuing goods warrants to the laborers. At the same time they declined to accept these warrants, to an unlimited amount and at their face value, in payment of taxes. The sufferers were the shopkeepers who had accepted the warrants from the laborers at their face value, but themselves could not purchase anything with those warrants. To enact special legislation against this, as unfortunately happened, was quite unnecessary. The current legislation against fraud and that relating to municipal loans, would have entirely sufficed. In order to escape punishment, the issuers would have had to prove that they could not have foreseen the result. The following observations on compulsory acceptance are apposite in the above connection. The right to refuse suspicious means of payment must have for its complement the obligation of the public pay offices to accept at their face value State banknotes, State paper money, etc., even if these stand below par. But this protection against inflation may be considerably strengthened. It might, or rather should, be legislatively provided that the civil list of the head or heads of the State should be paid exclusively in paper money. Where Milhaud's goods warrants may be used for the payment of taxes, they should be allocated first and foremost to civil list payments. One could, indeed, proceed much further along this line and pay with these warrants all civil service salaries exceeding three times the average income. Thus the most intelligent section of the population would be induced to take an interest in preserving the parity of the circulating paper tokens and be inclined to keep a close watch over them. In such a case, too, the high salaries paid would arouse less envy and would be less exposed to reduction in times of unrest. The same simple device capable of preventing the inflation of State paper money, also rules out any inflation of the goods warrants proposed by Milhaud. Should anything happen that might lead to inflation in the case of a forced currency, the same cause, when there is a free market rate for paper money, would merely lead to a discount, compelling the issuing center to stop issuing further supplies of goods warrants. This would constitute a more effective barrier against excessive issues than any legislation or than any supervisory authority basing itself on statistics of production. No discount can be created, save when there is a market for the goods warrants. The establishment of such a market should be furthered in every way. The existing stock exchanges are perhaps not equal to the task of promoting a free trade in goods warrants. (And naturally, in purchasing certificates and international clearing certificates used for external trading. The German "Gutscheine" - goods warrants - unfortunately covers both. - The Editor). If this is the case some merchants or banks might undertake this functions and announce at very brief intervals the rates at which they are prepared to sell or buy the warrants. From a communist or even a popular viewpoint, the objection might be raised to this new type of money market that it would throw the gates wide open to speculation. But speculation, in the sense conceived here, could only be carried on through eliminating the market, be it by deceiving it or by placing it in fetters. Economic history affords no example in proof of the opposite contention. (8) CONCLUSIONS In all older text books on political economy a chapter will be found dealing with the cultural significance of metals and particularly of the precious metals as standards of value. Today the following reflections on the subject may not be unnecessary: 58 Culture does not consist in this that from every open window a loudspeaker should assail our ears, nor in that by means of a telephone we may rouse out of his sleep at dead of night some acquaintance living a thousand miles away for the purpose of conveying some unimportant information, but rather in that every one can live his own life that contracts supersede oppression, that exchange of services replaces slavery, free expression of opinion adulation and education mechanical training. (This holds also of the armed forces, on which subject such successful generals as the Prussian leaders of 1813, Scharnhorst and others, may be consulted.) That something so purely technical as the use of metals and especially the use of the precious metals as a standard of value, should have cultural effects at all, is not only forgotten in our day, but has apparently become quite incomprehensible. No wonder! By far the majority of individuals living today has never seen a gold coin let alone paid with it; not even silver coins, far the copper discs, with a slight cover of silver, which now circulate the world, over do not deserve to be called silver coins. People should make sure whether their children still understand the fairy tales in the Arabian Nights where almost on every page gold coins are referred to. But the last twenty years have seen so many more changes in monetary matters than the abolition of gold as a standard of value. The old ideal of a certain school of money theorists, according to which money should be wholly detached from every concrete content and built up as an entirety abstract unit, is realized today on the greater part of the globe. Our young people have only had experience of currency units of an abstract character and they have seen it pass that every government of every land, never mind what its platform, claims the right to "regulate" from time to time the currency unit, The legitimacy of this is not questioned by the press nor there from by the population; only its expediency is discussed. The terminology used in connection with currency changes has gradually become very tempting and misleading The expressions employed are as little understood by the people as is any obsolete ecclesiastical jargon, but this makes them sound authoritative. Moreover, phrases such as "protection of the people against foreign speculators", are judiciously interspersed and convey the impression that the incomprehensible portion of the statements finds in them somehow a logical justification which cannot be understood by the uninitiated Consequently, how are the men, and especially the young, of this generation to divine that the abolition of gold as the standard of value means that a cultural treasure of inestimable value has been thrown overboard? What facts are to suggest to them that they have become the slaves of narrow-minded financial bureaucrats and of certain conjunctural doctrinaires, priests of a science which as regards experiential content stands below that of the old augurs and astrologers (who also employed mathematics)? Why are the real conjunctural economists silent, seeing that they know by experience that trend curves cannot be extrapolated? What is to teach youth that the rehabilitation of gold as the standard of value would constitute the first step in their emancipation and that they will continue in a state of barbarism as long as the determination of values is left to the value astrologers? There is another obstacle to the return to gold as the standard of value. The present generation has clearly perceived a fatal error of the older generation, namely the error that gold and silver can never be universal means of payment or, expressed differently, that never will sufficient quantities of precious metals be at the disposal of mankind, to meet all monetary obligations. We have learnt that the whole civil law of pre-war days, insofar as it was founded on this conception, was based on a mistake, But inasmuch as in their development men have not yet reached the stage of having developed two brain cells for the two concepts "standard of value" and "means of payment", they are obliged to make shift with one brain cell for both concepts (as a future anatomy will optically demonstrate). Thus, in abolishing the precious metals as means of payment, they abolished them also as standards of value. Much Less have they reached the subtle conclusion that it might suffice to confer a forced rate on gold and allow a free market to all other currency values and to paper money. This would even have restored gold as a means of payment, although not as the universal one, and, of course restored it also as the standard of value. However, the pressure on the economic life through every creditor being entitled to 59 claim payment in gold, would have been removed. A proposal, such as that of Milhaud, to abolish gold only as a means of payment to which a creditor is entitled but to retain it as the standard of value and as a means of payment always permissible to a debtor, has there from immense cultural significance. Here we must also quote H. L. Follin, as one of the very few who have already visualized the problem. He states: "It is amazing to what extent human relations are ruffled and warped by diverse and so far autonomous institutions interfering in the name of the national interest with monetary matters and by imposing on money the double function of being the common denominator of values and the vehicle for their transmission." ("Paroles d'un voyant") No instance is known of an advanced culture, and above all of one which does not exclude the masses, which dispenses with the use of metals and first and foremost, with the use of the precious metals as the standard of value. Experience and reflections testify that men require a standard of value which is at the same time concrete and sufficiently stable, admitting thus a comparison of past with present values. For this purpose, as Chinas past and present indicate, even copper will do and is certainly a hundred times preferable to a forced currency. Without a concrete standard of value the past, and largely the future, of mankind become uninteresting, and a tradition, without which no culture can exist becomes impossible. Students of history might be inclined to cite in criticism of the above the highly cultured Homeric age; but that forms no exception. It has been noted that everywhere, centuries before coins were in general use, metals in the form of bars frequently also as rings or simple vessels were employed in commerce and helped compare values. (Concerning what precedes and follows, consult Roscher, "Grundlagen der National Oekonomik", par. 118 and 128.) Indeed, Adam Smiths view is by no means groundless that the payments in "cattle" frequently mentioned by Homer, unless referred to as "living", really were made in coins called "cattle". Coins showing heads of oxen - belonging, it is true, to post-Homeric times have frequently been found in Greece and Asia Minor. Statements in the Bible suggest that at least in the countries adjacent to Troy coins were used long before Homer. A tradition-less society, one which neither concerns itself consciously with past values nor thinks of bequeathing any to the coming generations, may freely dispense with a concrete standard of value, such as gold. (In such societies as on the Congo or in Greenland, Long Term credit is unknown. Their religions also place the creation of the world in the immediate past and prophesy the end of the world for the immediate future.) It is also noteworthy how so many semi cultivated or uncultivated but not uncivilized tribes, having no metallic currency, utilize in bartering the '"Makuta standard", a standard which is conceptually identical with our "index numbers standard". (Montesquieu's account of the Makuta standard in use among the Negroes of the African coast must have been regarded as sensational in his day and has never ceased to be referred to.) The index standard appears thus as a case of atavism rather than of real progress, although the idea of an index standard only developed among us in the nineteenth and twentieth centuries partly because of mathematical considerations. It may be, however, freely granted that works such as those of Irving Fisher ("The Purchasing Power of Money" and "The Making of Index Numbers") rank very highly, and have perhaps opened new horizons even to mathematicians. That the ancient Makuta standard, once probably world wide in distribution, has reappeared in our time and is reaching the masses e ,g., through the Freeland, Free Money Movement is significant. One is tempted to suppose that it belongs to the order of ideas inherited from the far off past, ideas which normally slumber in our sub-consciousness and do not dominate us but which, in certain abnormal circumstances, re-emerge, and this not seldom, in the form of fixed ideas. Such an abnormal circumstance (nowise only commercial, and very largely psychical in nature) is the complete disappearance of gold as a means of payment, whilst its stocks are greater than they ever were at any past epoch in world history. That after some centuries, namely after science had provided it with stable weights, the metallic currency has allowed men to forget the concept of an abstract standard of value and even the terms expressing it in common speech, has been one of its disadvantages. It is there from perhaps wholesome that mankind is 60 again being led to re-conceive that standard. For a long time now the weight units of gold and silver have been implicitly also regarded as value units. It is as if the concept of a meter had been confuses with the always inaccurate meter measures used in shops. However, that mistake was far less mischievous than the diametrically opposed one of the partisans of an index currency, who believe that gold must cease to be the standard of value because gold coins, in their way, are no more accurate than the meter and liter measures in shops. Furthermore, compared with the mistake of the index currency extremists, who desire to embody their Makuta in a special paper money, partly with "depreciation", that is by the weekly affixing of stamps, and partly without, the old mistake was very harmless. But the demand (frequently urged with almost religious fanaticism) that not only should all payments be effected with index money, but also credit transactions, that is the exchange of present values for future values, ranks the new Makuta below the old. The supporters of the new Makuta suffer markedly in a comparison with the Madingo Negroes and others, in that the latter were quite accustomed to separate the standard of value from means of payment and in that, among them, the fullest freedom reigned as regards the means of payment to be used. Not even the worst Negro despot, who sold his subjects into slavery, would have dared to establish a monopoly in means of payment. And yet the demand for such monopoly is specially characteristic of the index currency supporters of today. (Compare, e.g., the volume, "Absatzstockung and Arbeitslosigkeit and ihre Beseitigung - Sales Slump and Unemployment and their Removal, Berlin 1927, where on p. 22 we read: "The quantity of cash, of giro accounts and of banknotes may only be produced by the currency office. ." This volume is roughly the counterpart of Milhaud's volume on the subject. In brief and pregnant form it records the opinions of many modern anti-metallists, together with their pseudo proofs; conveying thus a knowledge of the system and of the mentality of the partisans of index money. ) Since the view is widely prevalent that the introduction of an index money would offer a practical solution of the means of payment problem and since this view already constitutes a serious obstacle to an unprejudiced examination of the Milhaud proposals and will, probably, be increasingly that in the future, we may here employ against it at least the argumentum ad hominem: how old in reality the concept of a pure goods currency is and also how the mentality of men living in a barbaric society was actually able to produce it. Montesquieu's account in his "Esprit des Lois", book XXII, chapter 8, occupies only about ten lines. Meanwhile much fuller accounts have been published relating to counting money of Negro tribes, whence we learn that Montesquieu correctly reported the facts and did not deserve Galiani's and Jevons' strictures. That the name for the counting money among the Madingos means "slave", indicates its origin, in, but does not prove, as Galiani presumed, that the Negroes did not possess an abstract standard of value. In South Africa e.g., in Loango the name of the money signified "piece of cotton"; yet the Loango Negroes also counted in entirety abstract units. In the "Geschichte der merkwuerdigsten Reisen" (History of the Most Remarkable Voyages), (von Ehrmann, Frankfurt a/M, 1794, 13th volume, pp. 326-327) will be found a careful statement concerning the value in "pieces" of all kinds of goods. On this subject the author quoted by v. Ehrmann, Abbé Proyart, states explicitly: "When it is said that a slave costs 30 pieces, this does not mean that it costs 30 pieces of stuff but 30 times an ideal value to which the name of 'piece' is attached. Thus a single piece of stuff is sometimes valued at two or three 'pieces', just as it sometimes requires several articles to form a single 'piece'". (Histoire de Loanga, Kakongo, et autres et Royaumes d'Afrique, Paris, 1819, first edition 1776, p. 116.) But counting with counting money does not imply a remote past, as many surmise. The 1879 edition of the "Muenz, Mass, and Gewichtsbuch" (Coin, Measure, and Weight Book) of Noback, still published the statement that at the mouth of the Niger it was a, general custom to calculate in value units called "slave", but that the value unit had nothing to do with actual slaves. A "counting slave" was valued then at 20,000 Kauri shells, a real one at 4.000 to 40,000. It would be interesting to discover whether eye witnesses of this type of calculating value are still living and to record their experiences. In Liberia 61 at that time the counting money was called "basket", quite in accord with the language of present day English cost of living index statisticians. According to Roscher Poehlmann, (loc. cit., par 118, note 7), similar counting units have been in use among numerous African, Asiatic, and even European peoples. Thus it would be difficult to doubt that money of this kind was generally known among 'semi-civilized peoples and in pre-historic times. In ancient China, too, there existed not only counting money as among the Negroes, but an index currency fluctuating with the price of cereals, but this was later suppressed. (Ku Sui Lu, loc. cit.) Counting money and, particularly, index numbers are most useful inventions, but the latter are useless for currency purposes. However, for Long Term debt contracts index numbers may be helpful. One should not, however, go too far in this respect and should there from fix an appropriate free limit within which the value fluctuations of gold as compared with the general price level would be ignored. (Perhaps the first 20%.) To calculate to too great a nicety would be like adjusting a bread knife with a micro-meter screw. How indifferent in practice even quite considerable fluctuations in the value of gold are in relation to goods, was convincingly shown by Jevons, "A Serious Fall in the Value of Gold" (1863), in the chapter headed "Is a Remedy Needful or Possible?" (Researches by Professor Rittershausen, who interviewed the often only minor clerks, who actually supplied the prices used for price index calculations, showed to him that this kind of input was quite unreliable. GIGO applied here, too. - J.Z., 22.11.01.) The concept of a standard of value is highly abstract, not less so than the concepts of space and time. The concept of a standard of value as such was first formed, which permitted bartering certain commodities for certain other commodities. Already at that stage the concept of an index currency arose out of a multiplicity of goods (Makuta). Later, the concept was formed of a stable metallic standard of value, which permitted not only the exchange of present possessions but also the exchange of present possessions for future ones. The evolution of the brain cells for the concept of the standard of value may have occupied thousands of years. However, far more abstract than the concept of the standard of value is that of means of payment. Its full comprehension becomes only possible at a very late evolutionary stage. . How much more primitive the concept of value is compared to that of means of payment, is already noticeable in animals. Dogs for instance, are certainly capable of making value distinctions within their diminutive canine world. (This is not surprising, seeing that they can form such abstract concepts as space and time.) But as regards anything relating to barter dogs have not the faintest conception, although the ideas of property, as well as of the acquisition of property even including the distinction between just and unjust are congenital in them, just as much as in human beings. The dependence of the degree of culture of a people on its system of means of payment (not of its civilization, but precisely of its culture) has as yet been scarcely examined, but was clear to Goethe, the founder of German culture. (Well, one of them! - J.Z., 22.11.01.) It is true that but few passages in his works refer to it but in those he is quite explicit. In chapter X of his appendix to the biography of Benvenuto Cellini, he probes the foundations of Florentine culture. He mentions expressly "exact housekeeping records, the magic language of bookkeeping by double entry, the fairy-like effects of bill-transactions", and so on. No one prior or subsequent to Goethe has seen in payment by means of bills an important cultural element . But Goethe went even further. The nature of non-cash transactions was clear to him and he considered the idea of sufficient importance to insist on it in his "Novelle", intended as something like a textbook on culture, where we read: "Let us ride through the town, the lady continued, across the market place where a great number of booths have assumed the form of a small town, of a camp, It is as if the wants and occupations of all the families of the surrounding district were, turned outward, concentrated here and brought into the daylight. The observant spectator sees here everything that man does or wants For a moment one imagines that money is unnecessary, that every transaction could be effected by barter, and so it is in essence." Since important ideas never occur to one person only, it is not surprising that after the invention of bills of exchange, several thinkers made the attempt to separate the function of the precious metals, and 62 particularly of gold as the standard of value, from their function as a means of payment. A history of these attempts cannot be furnished here. It may be noted, however, that Proudhon came near to solving the problem. Unfortunately, Proudhon misconceived the fundamental difference between an exchange of existing goods, on the one hand and an exchange of present for future goods on the other. He saw clearly that the first should be accomplished by means of some kind of purchasing certificate which need carry no interest higher than that required for meeting the administrative expenses of the issuing center; but he was not clear on the point that another kind of interest existed, one corresponding to the difference in value of present and future goods and which no monetary system can eliminate. Nor did he see that neither goods warrants nor any other paper money could be based on future goods. However, in the business provisions of his people's bank, Proudhon expressly provided for mortgage loans to be contracted with the goods warrants of his barter bank and intended thus also to reduce for mortgages the interest rate to the costs of administration entailed by the mortgage operations. His famous debate with Bastiat proceeded on this erroneous assumption. Bastiat spoke always of Long Term credit only and defended the interest charged for it with irrefutable arguments. Proudhon on his part, attacked these arguments with counter arguments which applied only to turnover credits. And Proudhon also greatly exaggerated the part played by the rate of interest in turnover credits. Whilst in mortgage credit 1% more or less is of great importance, first and foremost for rent payments, in turnover credit, as an easy calculation will show, even several per cent are of little consequence; in any case, compared to other trading expenses, they play an unimportant part. By his constant demand for "free credit", without seeing that this demand can be only realized in turnover credit, Proudhon did more harm than good to the notion of a real people's bank. Hence Proudhon cannot be considered as a precursor of Milhaud, who is entirely free from this misconception. One of Milhaud's genuine precursors though, seems to have been King Hammurabi. In his doctorate thesis, "Altbabylonische Marktpreise" (Market Prices in Ancient Babylon), (Kirchhain N .L., 1915, p. 6), Wilhelm Schwenzner writes as follows concerning par. 51 of Hammurabi's Civil Law: "Similar public-spirited intentions animated Hammurabi, when in par. 51 he provided that a debtor unable to repay a loan in money, might repay it in cereals and in sesame according to the value of the silver he had borrowed, together with the interest, pursuant to the royal ordinance." Hence Hammurabi recognized that the Civil Law should not confer on the creditor the right to demand payment in precious metal, solely because the value of his claim was fixed in metal. Hammurabi further recognized that in some way the proceeds of the debtor's labor (and not his possessions or his person) should be brought into direct relation with the creditor's claim. He there from declared that the debtor's labor product should become a subsidiary means of payment. (Those who broadly agree that the culture and the prosperity of a country are intimately associated with its monetary policy and its debt legislation will not lightly reject the suggestion that the greatness of ancient Babylon, which also had a capital like London, was the outcome of Hammurabi's legislative enactments.) Some two thousand years after Hammurabi, when his legislation had been long forgotten, Marcus Aurelius discovered the second possible method of how a debt, valued in precious metal, may be paid without remitting precious metal, namely by clearing. Unfortunately, however, he failed to permit the debtor to clear in those cases, where he did not owe anything to the creditor but to a third party. Whilst both solutions were incomplete, they were not erroneous. Almost two thousand years had to pass again before a correct solution of the problem was proposed - applicable both to external and internal trading that is, a solution not menacing the general economic life and capable of being put into practice. Milhaud, in a sense, combines the ideas of Hammurabi and of Marcus Aurelius. The debtor pays with his products and the creditor receives his payment by means of a clearing transaction and this is so arranged that he is not dependent on the product of the one debtor. Closely as other authors had approached the solution of the problem, something was lacking in all of them. 63 Most of them confused consumable goods with other goods. Some others failed to include external trading. Still others needlessly aimed at changing the standard of value. A fourth set believed that the creditor's claim to receive metallic gold should be satisfied, but that it might be postponed for a sufficiently long period. This group thus placed the necessary separation of means of payment and standard of value in the realm of time and not of concepts. In actual dealings much may be achieved in this way, as Henry Meulen showed in his reference to the old Scotch banks of issue and their option clause. This solution, however, cannot satisfy the present state of economic science. Placed as they are at the end of such a lengthy development, what is the prospect of the Milhaud proposals being soon realized? Proposals so simple, leaving the economic foundations undisturbed, and appealing so little to force. Certain current symptoms suggest that the world is beginning to get weary of violent solutions, that is, that part of the world which has come to know by experience wars, revolutions, blockades, hunger, and trade depressions, and which has come to suspect that all these are somehow associated with defects in our monetary system. On the other hand, of a large proportion of our youth, it is unfortunately true what Follin says in his "Paroles": A young generation is growing up threateningly. Whilst aware of the gross blunders of politicians, it ascribes them in the main, however, to the normal practices governing economic dealings, without observing that politicians have always obstructed and distorted those practices. Disdaining to probe the eternal foundations and laws of economic life, they believe in the existence of a 'modern economy' dominated by the conditions of the technical economic forms of their time. They fail to understand that this modern technique, in order to produce its full beneficial effects, should remain dominated by the economic laws true of all time." These words outline the task of the older people among us. ^Return to Top

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