UNEMPLOYMENT AS A PROBLEM OF TURNOVER CREDITS
AND
THE SUPPLY OF MEANS OF PAYMENT
Banks Of Issue And Banknotes As Means For Organizing Mutual Turnover
1. Need For An Organization Linking Production And Consumption.
… a firm and regular organized relation between production and consumption must be established.
2. Bill Transactions
Let us leave for a moment our modern and all too complicated environment and examine the simple economic life on a small island. Everybody produces and everybody exchanges his goods for those products of other producers, which he requires.
How can one best explain money and credit transactions under such simple conditions? We need merely assume that EVERYTHING IS FIRST PAID FOR WITH BILLS. Thus, through the sale of my products, I acquired a CLAIM FOR THE SALES PRICE, an ASSET IN MONEY. The thus acquired asset is here, as in the modern economy, the NATURAL MEANS OF PAYMENT OF THE INDIVIDUAL, which, in principle, suffices everywhere:
When I buy my own requirements from various suppliers, then I have to give these suppliers only BILLS by which I CEDE to them this claim. The suppliers, in turn, can now use the claim, which belongs now to them, in order to pay for THAT which they had bought. If the bills are made to fall due at the day of the most important annual fair, then they need only be CLEARED when due, precisely as is done now on the Exchange settlement days. Thus all payment transactions could be settled. Should some traders have bought MORE than they had received for their own products, then the small remaining balances had to be paid in CASH, e. g., in coins, which usually did not make any difficulties. It is clear that this method of payment, which existed for centuries, served best for the exchange of goods. Moreover, it could NOT be DISTURBED BY FOREIGN INFLUENCES, unless a shortage of paper or ink arose.
3. The Transition To The Modern Credit System
This type of economy presupposed that everybody associated in this payment community, was known to the other members and thus had a certain amount of CREDIT.
4. The Scottish Banknote As The Basis For The Classical System of Note-Issuing Banks
From 1695 onwards the SCOTTISH NOTE-ISSUING BANKS created the BANKNOTE and thereby established the modern money and credit system. THEY CONVERTED the bills made out in uneven and much too large amounts into TYPIFIED PIECES, let us say of 10, 20, 50, 100 RM (or Francs, Pounds or Pesos) and ADDED THEIR OWN SIGNATURE. Thus they INSURED them in order to eliminate the credit risk. These banknotes were, so to speak, "CUT UP BILLS".
5. The Deferred Proceeds From Sales As The Basis For Turnover Credits
Let us look, first of all, somewhat closer at HOW the SCOTTISH BANKNOTES GET INTO CIRCULATION and, what is almost still more important, HOW THEY RETURN FROM CIRCULATION.
The manufacturer, who delivers the bill to the bank, almost always sells ON CREDIT. The wholesaler, supplied by him, PASSES THIS CREDIT ON to the retailer. Thus is made possible the GOODS STORAGE at the retailers, which has become economically indispensable and without which neither the selection of goods nor their continuous supply are possible.
While the manufacturer receives only bills when selling his goods, bills which fall due in, e.g., 2 months, he has IMMEDIATELY to pay the WAGES for the labour spent on the products, to his labourers. THIS TIME INTERVAL IS ALSO BRIDGED BY THE SCOTTISH NOTE-ISSUING BANK.
It replaces the later due bills with IMMEDIATELY DUE ONES and with this "DISCOUNTING" it supplies a further extremely valuable service in addition to the "TYPIFICATION" and the "GUARANTY" which were already spoken of.
6. The Turnover Credit
The bank which discounts the customers' bills handed in by the manufacturer, and which thus converts an inconvenient means of exchange into a convenient one, does also grant CREDIT as it simultaneously discounts, i.e., supplies IMMEDIATELY DUE SECURITIES for those which are NOT YET DUE. It gives the credit exclusively in its own notes.
This credit is a pure goods and turnover credit since it serves not for a loan on stocks, for speculation or other purposes, but, exclusively, for facilitating the sale of goods on short terms, i.e., for bridging the transport and sales period. Genuine turnover credit is only granted on the proceeds of goods already sold.
7. The Turnover Credit Business Of Banks
While circulating, the banknotes, thus put into trading, represent the equivalent to the products sold by the manufacturer but which have not yet got into the hands of the ultimate consumer.
… the circulation period of the sold goods BEGINS approximately when the corresponding wages are paid and it ENDS through the transfer of the goods into the hands of the ultimate consumers, exactly AT THE POINT where the notes in the pockets of the wage earners are spent and begin their reflux.
IT IS THUS THE TASK OF SUCH A BANK TO GRANT THE BILL CREDIT FOR JUST AS MANY DAYS AS THE NOTES USUALLY REMAIN IN THE POCKETS OF THE WAGE EARNERS (which depends on the distribution of the household budget expenditures over the whole wage period), PROLONGED BY THE PERIOD REQUIRED FOR THE REFLUX OF THE NOTES FROM THE STOREKEEPER TO THE BANK.
Should the wholesaler, or any other link in the chain, feel inclined to temporarily invest the money received, then the maturing of the bills will prevent him from obstructing the rapid reflux of the notes.
8. The Redemption Of The Banknotes Issued
With what means, therefore, does this ideal turnover credit bank redeem its banknotes?
Not by keeping a gold treasure in readiness, like a goldsmith's bank which issues gold deposit certificates in the speculative hope that the bearers will hold on to the notes for a long time (Bank of England) - but, simply, through a kind of WITHDRAWAL WHILE RETURNING THE BILLS OF EXCHANGE RECEIVED. This withdrawal is nothing but the reversal of the exchange act which was first undertaken.
Upon return of the banknotes, it surrenders the now paid for bill documents. IT EXCHANGES THE BANKNOTES INTO BILLS OF EXCHANGE. AFTER, PREVIOUSLY, HAVING CHANGED THE BILLS INTO NOTES, THAT IS, IT UNDERTAKES A RETURN DEAL.
Provided, it issues all notes in the indicated manner then it requires no gold reserve.
The note circulation is sound if the bank declares itself willing to accept its own notes in this way, in all payments to itself and at any time, and if, moreover, it takes care that continuously as many payments as possible are to be made to its cashiers - by granting SHORT term credits and credits exclusively upon sales proceeds and to sound debtors only.
The secret of the value of such free notes lies in the continuous DEMAND for them - because notes are continuously needed for making due payments to the bank.
9. The Note Credit As Exchange Or Conversion Credit
According to the admirable classical system, a turnover credit is thus merely an exchange or conversion credit in which inconvenient means of payment are transformed into convenient ones or claims from sales are transformed into claims against a bank.
10. The Source Of Turnover Credit
It is thus ALL NOTE HOLDERS TOGETHER who finance the whole goods turnover from the producer to the consumer. The note holders, between them, have in this always as much purchasing power as there are goods in transit and in the hands of the wholesalers and retailers. Through holding the notes, the note holders extend to the banks as much credit as is required for financing the passage of these goods.
11. Elasticity And Prevention Of Abuses
Always as much money is issued under this system as goods are produced and, continously, as much money is withdrawn from circulation as goods are consumed. It need never happen that goods in all spheres are simultaneously unsaleable due to there being not enough money around because any "increase of the quantity of money would bring the danger of inflation" etc. Here we can never have either a shortage or an excess of turnover credit because RISING SALES by manufacturers PRODUCE also additional bill material and additional amounts in banknotes, in the pockets of additionally employed labourers, during the payment period, and vice versa, - if only no serious technical mistakes are made.
ONLY A CREDIT TRANSFORMATION, NOT A CREDIT CREATION occurs. Apart from credit transformation there exists only the credit creation, which is ALWAYS inflationary.
12. Excluding The Danger Of Inflation Through The Principle Of A Free Market Rate For Means Of Payment, Thus Avoiding Compulsory Acceptance And Forced Value (Legal Tender).
This restriction to transformed credit requires effective safety measures so that it does not remain a mere idealistic principle with compliance being left to the good will and discretion of the banker. The Scottish system recognises the weakness of men and is distinguished from all other systems by technically excluding inflation through an organisational measure, i.e., THROUGH THE FREE MARKET RATE FOR BANKNOTES, which is the opposite of compulsory acceptance and forced currency (legal tender), both of which are not improvements but a "deterioration" of banknotes.
Once the bank issues TOO MANY banknotes, i.e., as soon as it makes advances upon other claims than for the purchase price claims from goods sales, or grants longer credit periods, it can no longer redeem the notes by re-exchanging them. Then it must try to pay with somehow obtained cash means, gold, foreign exchange etc., when the notes return. When this abuse reaches noticeable proportions, then the notes are depreciated (discounted) as the necessary demand for them is no longer achieved by sufficient maturities of bills. The notes of this bank depreciate by comparison with other sound means of payment in the country. They are then only reluctantly accepted and only at a discount at perhaps, 90 % or even 70 % of their nominal value.
13. Provision Of Employment Through Turnover Credit Or Through Investment Credit?
Time and again we meet the assertion that the provision of employment through sound exchange of consumer goods by means of credits would act inflationary. This question is, therefore, of decisive importance.
If one will not or cannot employ labourers through investments by means of latent capital formation then, obviously, one must achieve that the unemployed produce themselves those goods which they want to consume and, furthermore, that they are placed in a position where they can consume what they have produced. For this only sound banks and turnover credits are prime necessities.
14. The Concepts "Value Standard" And "Forced, Currency" (Legal Tender)
The VALUE STANDARD is no more than the legal declaration that the legal unit for measuring values is called this or that name, say Reichsmark or Peso, and is equal in value to so or so many grams of fine gold. The best parallel for this is the MEASURE OF LENGTH called the "metre", which is equal in length to a bar of platinum kept in a deep cellar in Paris. All metre measures the world over which are longer or shorter than this bar are wrong. They are not metres. Likewise, all Reichsmark notes which are worth less or more than the determined amount of gold, are wrong and are not Reichsmark. In this simple situation it seems inconceivable how an inflation is possible at all.
… INFLATION OF MONEY CAN ONLY OCCUR WHEN ONE CONCEDES CERTAIN PAPER MEANS OF PAYMENT THE LEGAL TENDER CHARACTERISTIC according to which they have still to be taken as 100 even if their value is only 90, i.e,. when money is given FORCED CURRENCY.
15. A Danger Of Inflation In Providing Employment Exists Only When There Is A Forced Currency
This principle cannot be stressed enough against the argument that inflation would threaten. All accessory means of payment which are not legal tender can, in case of abuse or over-issue, only ruin themselves but never the legal currency. The problem of a double currency can also no more arise among such free means of payment than with payment by cheques.
Value standard and means of payment should be sharply distinguished.
Gresham's Law applies only to the coexistence of two inconvertible forced currencies and not to means of payment with a free market rate.
A revival of the theory of a free market rate for means of payment appears, therefore, urgently necessary - in the interest of providing employment.
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