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Title: Mutual Banking Author: WB Greene Date: 1850 Language: en Topics: banking, money, mutual banking, credit Source: Retrieved on Sept 01, 2012 from http://www.the-portal.org/mutual_banking.htm
Preface.
A Short Sketch of the Author of this Essay on Mutual Banking.
WILLIAM B. Greene (1797–1877) was a prominent figure among the
Massachusetts idealists during the middle of the nineteenth century. He
was more than six feet high, slender, somewhat high-shouldered, but with
an erectness brought from West point, where he had been a cadet though
not a graduate. He had served in the Indian wars in Florida, and his
whole bearing was military and defiantly self-assertive.
“Greene became a Unitarian preacher and retired to a small country
parish. He was a member of the Massachusetts Constitutional Convention,
of 1853; later he left the ministry and went to Paris until the Civil
War recalled him. Offering his services to Governor Andrew, he was made
colonel of the First Massachusetts Heavy Artillery.”
In 1849 he wrote a series of newspaper articles, which were afterwards
published as a pamphlet under the name of Mutual Banking. They have been
pronounced “the best exposition of finance ever written in the English
language during that period”. In the following pages this pamphlet
appears somewhat reduced from the original. The reader is cautioned that
Greene’s use of the word “usury” designates not only the excess of
interest permitted by law, but all interest whatsoever.
When the last edition of Greene’s Mutual Banking was printed in 1895,
several plans of currency reform had just been proposed by the three
political parties, of. that time in U. S. A. and in the preface the
question was asked of the leaders of those parties (which other
followers of Proudhon had asked before). “Why is not the credit of a
bank’s customers as good a basis for currency as that of the bank
itself?” This question has been partly answered by that provision of the
Federal Reserve Act of 1913 by which Federal Reserve Currency can be
issued in exchange for the re-discounted notes of the customers of
member banks. “This is a distinct step forward, as it supplies the
machinery for expanding mercantile credit, directly, and gives rise to,
a hope that in future, a move would be made to decrease the cost of this
credit.
The reader is requested to read the scheme and constitution of
Proudhon’s Bank of Exchange and People’s Bank. Unfortunately these banks
could not function because Proudhon was sent to gaol in connection with
the defamation of President Bonaparte. We intend to publish these in
future along with a short biography of Proudhon who is the originator of
the Mutualistic idea.
Publishers
Publishers Note.
Industrial as well as Banking Joint Stock Companies are the biggest
props of the capitalistic system based as it is on the profit incentive.
The state controls the economic life of the people through the power of
issuing currency and credit. To understand rightly how capitalistic
government, in order to suit, its own interest, increases and decreases
the prices of commodities by the withdrawal and the issuing of currency,
this book will be very helpful. In these days we have seen how inflation
in currency has hit the consumers and profitted the bankers and the
industrialists and given scope for blackmarketeering. The stabilisation
of prices of articles of day to day use not only creates confidence in
business circles but it also provides no chance for exploiters and
blackmarketeers to take undue advantage of real or artificial scarcity
of goods. Nobody .will hoard goods when there are no chances of undue
fluctuations and instability of prices and thus leading to profits
either way.
Besides our bankers, on account of the facility to create credit not
only with their own money but with that of their creditors and debtors
squeeze high rates of interest from needy parties which are generally
desirous of increasing production. If anyone carefully looks into the
balance sheets of banking concerns it will be found that banks are
making greater profits than industrial concerns. The banks get deposits
at the rate of one or two percent interest and charge their customers
from five to eight percent. Due to their big turnover they make
exorbitant profits. We have seen that some of the deposit banks in U. S.
A. and U. K. have made enormous profits in prewar times from 50% to 150%
or over.
The object of the mutualist bank is to advance money on sound personal
guarantee on their future earning or production, even without the
mortgage of property at the rate of one percent interest per annum. This
amount of interest covers the whole expenditure of the establishment and
leaves something to be carried forward to reserve funds. Besides, loans
on low interest would give impetus to honest industry and it will also
help to increase employment by creating efficient demand. It is very
difficult in these days to borrow money from banks on high interest for
honest and enterprising concerns; even on pawning the securities or
estates and so what to talk of owners of small workshops and craftsmen,
who have very little of fluid capital and hardly sufficient capital to
pledge securities. In order to give some idea of how a mutualist bank,
giving loans on nominal interest of one percent can be successfully run
we have undertaken to publish this book. We hope that it will be widely
read and we have priced it low, so that it will be within easy means of
students of economics and small producers to purchase a copy.
MUTUAL BANKING
I
VALUE
let us first explain the difference between legal value and actual value
]. It is evident, that, if every bank-bill in the country should
suddenly be destroyed, no actual value would be destroyed, except
perhaps to the extent of the value of so much waste paper. The holders
of the bills would lose their money, but the banks would gain the same
amount, because they would no longer be liable to be called upon to
redeem their bills in specie. Legal value is the legal claim which one
man has upon property in the hands of another. No matter how much legal
value you destroy, you cannot by that process banish a single dollar’s
worth of actual value, though you may do a great injustice to
individuals. But if you destroy the silver dollars in the banks, you
inflict a great loss on the community; for an importation of specie
would have to be made to meet the exigencies of the currency, and this
importation would have to be paid for in goods and commodities which are
of actual value. When a ship goes down at sea with her cargo on board,
so much actual value is lost. But, on the other hand, when an owner
loses his ship in some unfortunate speculation, so that the ownership
passes from his hands into the hands of some other person, there may be
no loss of actual value, as in the case of shipwreck, for the loss may
be a mere change of ownership.
The national debt of England exceeds $4,000,000,000. If there were
enough gold sovereigns in the world to pay this debt, and these
sovereigns should be laid beside each other, touching each other, and in
a straight line, the line thus formed would be much more than long
enough to furnish a belt of gold extending around the earth. Yet all
this debt is mere legal value. If all the obligations by which this debt
is held were destroyed, the holders of the debt would become poorer by
the amount of legal value destroyed; but those who are bound by the
obligations (the tax-paying people of England) would gain to the same
amount. Destroy all this legal value, and England would be as rich after
the destruction as it’ was’ before; because no actual value would have
been affected. The destruction of the legal value would merely cause a
vast change in the ownership of property; making some classes richer,
and, of course, others poorer to precisely the same extent; but if you
should destroy actual value to the amount of this debt you would destroy
about thirteen times as much actual value (machinery, houses,
improvements, products, etc.) as exist at present in the state of
Massachusetts. The sudden destruction of $4,000,000,000 worth of actual
value would turn the British Islands into a desert.
A Parasite City.
Suppose 5,000 men to own $30,000 each; suppose these men to move, with
their families, to some desolate place in the state, where there is no
opportunity for the profitable pursuit of the occupations either of
commerce, agriculture, or manufacturing! The united capital of these
5,000 men would be $150,000,000. Suppose, now, this capital to be safely
invested in different parts of the state; suppose these men to be, each
of them, heads of families, comprising, on an average, five persons each
this would give us, in all, 25,000 individuals. A servant to each family
would give us 5,000 persons more, and these added to the above number
would give us 30,000 in all. Suppose, now, that 5,000
mechanics—shoemakers, bakers, butchers, etc.—should settle with their
families in the neighborhood of these capitalists, in order to avail
themselves of their custom. Allowing five to a family, as before, we
have 25,000 to add to the above number. We have, therefore, in all, a
city of 55,000 individuals, established in the most desolate part of the
state. The people in the rest of the state would have to pay to the
capitalists of this city six per cent on $150,000,000 every year; for
these capitalists have, by the supposition, this amount out at interest
on bond and mortgage, or other wise. The yearly interest on
$150,000,000, at six per cent, is- $9,000,000. These wealthy individuals
may do no useful work whatever, and, nevertheless, they levy a tax of
$9,000,000 per annum on the industry of the state. The tax would be paid
in this way. Some money would be brought to the new city, and much
produce; the produce would be sold for money to the capitalists, and
with the money thus obtained, added to the other, the debtors would pay
the interest due the capitalists would have their choice of the best the
state produces, and the mechanics of the city, who receive money from
the capitalists, the next choice. Now, how would all this be looked upon
by the people of the commonwealth? There would be a general rejoicing
over the excellent market for produce which had grown up in so
unexpected a place, and the people would suppose the existence of this
city of financial horse-leeches to be one of the main pillars of the
prosperity of the state.
Each of these capitalists would receive yearly $1,800, the interest on $
30,000, on which to live. Suppose he lives on $900, the half of his
income, and lays the other half by to portion off his children as they
come to marriageable age, that they may start also with $30,000 capital,
even as he did. This $900 which he lays by every year would have to be
invested. The men of business, the men of talent, in the state, would
see it well invested for him. Some intelligent man would discover that a
new railroad, canal, or other public work was needed; he would survey
the ground, draw a plan’ of the work, and make an estimate of the
expenses; then he would go to this new city and interest the capitalists
in the matter. The capitalists would furnish money, the people of the
state would furnish labor; the people would dig the dirt, hew the wood,
and draw the water. The intelligent man who devised the plan would
receive a salary for superintending the work, the people would receive
day’s wages, and the capitalists would own the whole; for did they not
furnish the money that paid for the construction? Taking a scientific
view of the matter, we may suppose the capitalists not to work at all;
for the mere fact of their controlling the money would insure all the
results. We suppose them, therefore, not to work at all; we suppose them
to receive, each of them, $1,800 a year; we suppose them to live on
one-half of this, or $900, and to lay up the other half for their
children. We suppose new-married couples to spring up, in their proper
season, out of these families, and that these new couples start, also,
each with a capital of $30,000. We ask now, is there no danger of this
new city’s absorbing unto itself the greater portion of the wealth of
the state?
There is no city in this commonwealth that comes fully up to this ideal
of a fainéant and parasite city; but there is no city in the state in
which this ideal is not more or less completely embodied.
II
THE CURRENCY
Gold and silver are peculiarly adapted to act as a circulating medium.
They are: 1. Admitted by common consent to serve for that purpose. 2.
They contain within themselves actual intrinsic value, equivalent to the
sum for which they circulate, as security against the withdrawal of this
consent, or of the public estimation. 3. They lose less by the wear and
tear and by the effect of time, than almost any other commodities; and,
4. They are divisible into all and any of the fractional parts into
which value may be, or necessarily is, divided. There is no occasion to
notice particularly in this place the many other advantages possessed by
the precious metals. But we must remember that when we exchange any
thing for specie we barter one commodity for another. By the adoption of
a circulating medium we have facilitated barter, but we have not done
away with it — we have not destroyed it. Specie is a valuable commodity
and its adoption by society as a medium of exchange does not destroy its
character as a purchasable and salable article. Let Peter own a horse;
let James own a cow and a pig; let James’s cow and pig, taken together,
be worth precisely as much as Peter’s horse; let Peter and James desire
to make an exchange; now, what shall prevent them from making the
exchange by direct barter? Again, let Peter own the horse; let James own
the cow; and let John own the pig. Peter cannot exchange his horse for
the cow, because he would lose by the transaction; neither — and for the
same reason — can he exchange it for the pig. The division of the horse
would result in the destruction of its value. The hide, it is true,
possesses an intrinsic value; and a dead horse makes excellent manure
for a grapevine; nevertheless, the division of the horse results in the
destruction of its value as a living animal. But if Peter barters his
horse with Paul for an equivalent in wheat, what shall prevent him from
so dividing his wheat as to qualify himself to offer to James an
equivalent for his cow and to John an equivalent for his pig? If peter
trades thus with James and John the transaction is still barter, though
the wheat serves as currency and obviates the difficulty in making
change. Now, if Paul has gold and silver to dispose of instead of wheat,
the gold and silver are still commodities possessing intrinsic value,
and every exchange which Paul makes of these for other commodities is
always a transaction in barter. There is a great deal of mystification
connected with the subject of the currency; but if we remember that,
when we sell anything for specie, we buy the specie, and that when we
buy anything ‘with specie, we sell the specie — our ideas will grow
wonderfully clear.
The Disadvantages of a Specie Currency
The governments of the different nations have made gold and .silver a
legal tender in the payment of debts. Does this legislation change the
nature of the transactions where gold and silver are exchanged for other
desirable commodities? Not at all. Does it transform the exchange into
something other than barter? By no means. But the exchangeable value of
any article depends upon its utility, and the difficulty of obtaining
it. Now, the legislatures, by making the precious metals a legal tender,
enhance their utility in a remarkable manner. It is not their absolute
utility, indeed, that is enhanced, but their relative utility in the
transactions of trade. As soon as gold and silver are adopted as the
legal tender, they are invested with an altogether new utility. By means
of this new utility, whoever monopolizes the gold and silver of any
country — and the currency, as we shall soon discover, is more easily
monopolized than any other commodity — obtains control thenceforth over
the business of that country; for no man can pay his debts without the
permission of the party who monopolizes the article of legal tender.
Thus, since the courts recognize nothing as money in the payment of
debts except the article of legal tender, this party is enabled to levy
a tax on all transactions except such as take place without the
intervention of credit.
When a man is obliged to barter his commodity for money, in order to
have money to barter for such other commodities as he may desire, he at
once becomes subject to the impositions which moneyed men know how to
practice on one who wants and must have money for the commodity he
offers for sale. When a man is called upon suddenly to raise money to
pay a debt, the case is still harder. Men — whose property far exceeds
the amount of their debts in value — men who have much more owing to
them than they owe to other — are daily distressed for the want of
money; for the want of that intervening medium, which, even when it is
obtained in sufficient quantity for the present purposes, acts only as a
mere instrument of exchange.
By adopting the precious metals as the legal tender in the payment of
debts, society confers a new value upon them, which new value is not
inherent in the metals themselves. This new value becomes a marketable
commodity. Thus gold and silver become a marketable commodity as (quoad)
a medium of exchange. This ought not so to be. This new value has no
natural measure, because it is not a natural, but a social value. This
hew social value is inestimable, it is incommensurable with any . other
known value whatever. Thus money, instead of retaining its proper
relative position, becomes a superior species of commodity — superior
not in degree, but in kind. Thus money becomes the absolute king and the
demigod of commodities
]. Hence follow great social and political evils. The medium of exchange
was not established for the purpose of creating a new, inestimable,
marketable commodity, but for the single end or purpose of facilitating
exchanges. Society established gold and silver as an instrument to
mediate between marketable commodities; but what new instrument shall it
create to mediate between the old marketable commodities, and the new
commodity which it has itself called into being? And if it succeed in
creating such new instrument, what mediator can it find for this new
instrument itself, etc.? Here the gulf yawns! No bridge save that of
usury has been thrown, as yet, over this gulf. Our exposition is
evidently on the brink of the infinite series; we are marching rapidly
forward to the abyss of absurdity. The logicians know well what the
sudden appearance of the infinite series in an investigation signifies;
it signifies the recognition of a phenomenon and the assigning to it of
a mere concomitant, to stand to it in the place of cause. The phenomenon
we here recognize is circulation or exchange, and we ignore its cause,
for we endeavor to account for it by the movement of specie; which
movement is neither circulation nor the cause of circulation. But more
of this hereafter; Let us return to the subject with which we are more
immediately concerned; noting, meanwhile, that a specie currency is an
absurdity.
The Evils of a Specie Currency — Usury
Society established gold and silver as a circulating medium, in order
that exchanges of commodities might be facilitated; but society made a
mistake in so doing; for by this very act it gave to a certain class of
men the power of saying what exchanges shall, and what exchanges shall
not, be facilitated by means of this very circulating medium. The
monopolizers of the precious metals have an undue power over the
community; they can say whether money shall, or shall not, be permitted
to exercise its legitimate functions. These men have a veto on the
action of money, and therefore on exchanges of commodity; and they will
not take off their, veto until they have received usury, or, as it is
more politely termed, interest on their money. Here is the great
objection to the present currency. Behold the manner in which the
absurdity inherent in a specie currency — or, what is still worse, in a
currency of paper based upon specie — manifests itself in actual
operation! The mediating value which society hoped would facilitate
exchanges becomes an absolute marketable commodity, itself transcending
all reach of mediation. The great natural difficulty which originally
stood, in the way of exchanges is now the private property of a class,
and this class cultivates this difficulty, and make money out of it,
even as a farmer cultivates his farm and makes money by his labor. But
there is a difference between the farmer and the usurer; for the farmer
benefits the community as well as himself, while every dollar made by
the usurer is a dollar taken from the pocket of some other individual,
since the usurer cultivates nothing but an actual obstruction.
You cannot monopolize corn, iron and other commodities as you can money,
for to do so you would be obliged to stipulate in your sales that
payment shall be made to you in those commodities. What a commotion
would exist in the community if a company of capitalists should attempt
permanently to monopolize all the corn! But money, by the nature of the
case, since it is the only legal tender, is alwaysmonopolized. This fact
is the foundation of the right of society to; limit the rate of
interest.
We conclude, therefore, that gold and silver do not furnish a perfect
medium of circulation; that they do not furnish facilities for the
exchange of all commodities. Gold and silver have a value as money; a
value which is artificial, and created unintentionally by the act of
society establishing the precious metals as a legal tender. This new
artificial value overrides all intrinsic actual values, and suffers no
mediation between itself and them. Now, money, so far forth as it is
mere money, ought to have no value; and the objection to the use of the
precious metals as currency is that, as soon as they are adopted by
society as a legal tender, there is superadded to their natural value
this new, artificial and unnatural value. Gold and silver cannot
facilitate the purchase of his new value which is added to themselves;
“a mediator is not a mediator of one.” Usury is the characteristic fact
of the present system of civilization; and usury depends for its
existence upon this super-added, social, unnatural value, which is given
artificially to the material of the circulating medium. Destroy the
value of this material as money(not its utility or availability in
exchange) and you destroy the possibility of usury. Can this be done so
long as this material is gold or silver? No.
Whatever is adopted as the medium of exchange should be free from the
above-named objections. It should serve the: purpose of facilitating all
exchanges; it should have no value as money; it should be of such a
nature as to permit nothing marketable, nothing that can be bought or
sold, to transcend the sphere of its mediation. It should exist in such
quantity as to effect all exchanges which may be desirable. It should be
co-existent in time and place with such property as is destined for the
market. It should be sufficiently abundant and easy of acquirement to
answer all the legitimate purposes of money. It should be capable of
being expanded to any extent that may be demanded by the wants of the
community; for if the currency be not sufficiently abundant it retards
instead of facilitating exchanges. On the other hand, this medium of
exchange should be sufficiently difficult of acquirement to keep it
within just limits.
Can a currency be devised which shall fulfill all these conditions? Can
a currency be adopted which shall keep money always just plenty enough,
without suffering it ever to become too plenty? Can such a currency be
established on a firm, scientific foundation, so that we may know
beforehand that it will work well from the very first moment of its
establishment? Can a species of money be found which shall possess every
quality which it is desirable that money should have, while it possesses
no quality which it is desirable that money should not have? To all
these questions we answer, emphatically, Yes!
III
THE CURRENCY: ITS EVILS AND THEIR REMEDY
Bank-bills are doubly guaranteed. On one side, there is the capital of
the bank, which is liable for the redemption of the bills in
circulation; on the other side are the notes of the debtors of the bank,
which notes are (or ought to be, if the bank officers exercise due
caution and discretion) a sufficient guaranty for all the bills; for no
bills are issued by any bank, except upon notes whereby some responsible
person is bound to restore to the bank, after a certain lapse of time,
money to the amount borne on the face of the bills. If the notes given
by the receivers of the bills are good, than the bills themselves are
also good. If we reflect a moment upon these facts, we shall see that a
bank of discount and circulation is in reality, two banks in one. There
is one bank which does business on the specie capital really paid in;
there is another and a very different bank, which does business by
issuing bills in exchange for “notes whereby the receivers of the bills
give security that there shall be paid back, by a certain time, money to
the amount of the bills issued. Let us now investigate the nature of’
these two different banks.
The Business of Banking
Peter goes into the banking business with one dollar capital, and
immediately issues bills to the amount of one dollar and twenty-five
cents. Let us say that he issues five bills, each of which is to
circulate for the amount of twenty-five cents. lames comes to the bank
with four of Peter’s bills, and says: “Here are four, of your new
twenty-five cent notes which purport to be payable on demand, and I will
thank you to give me a silver dollar for them” Peter redeems the bills
and in so doing pays out his whole capital. Afterward comes John, with
the fifth note, and makes a demand similar to that lately made by James.
Peter answers, slowly and hesitatingly: “I regret — exceedingly — the
force of present circumstances; but — I — just paid — out my whole
capital — to James. I am — under — the painful necessity — of requesting
you — to wait a little longer for your money.” John at once becomes
indignant and says: “Your bills state on their face that you will pay
twenty-five cents upon each one of them whenever they are presented. I
present one now. Give me the money, therefore, without more words, for
my business is urgent this morning.” Peter answers: “I shall be in a
condition to redeem my bills by the day after tomorrow; but for the
meanwhile, my regard for the interest of the public forces me
unwillingly to suspend specie payments.” “Suspend specie payments!” says
John. “What other kind of payment, under Heaven, could you suspend? You
agree to pay specie; for specie is the only legal tender and when you
don’t pay that, you don’t pay anything. When you don’t pay that you
break. Why don’t you own up at once? But while I am about it I will give
you a piece of my mind; this extra note which you have issued beyond
your capital is a vain phantom, a hollow humbug and a fraud. And as for
your bank, you would better take in your sign; for you have broken.”
“These be very bitter words,” as said the hostess of the Boar’s Head
Tavern at Eastcheap.
John is right. Peter’s capital is all gone and the note for twenty-five
cents, which professes to represent specie in Peter’s vaults, represent
the tangibility of an empty vision, the shadow of a vacuum. But which
bank is it that is broken? Is it the bank that does business on a specie
capital, or the bank which does business on the notes of the debtors to
the bank? Evidently it is the bank that does business on the specie
capital that is broken; it is the specie-paying bank that has ceased to
exist.
John understands this very well notwithstanding his violent language a
moment since, he knows that his is the only bill which Peter has in
circulation, and that Peter owes, consequently, only twenty-five cents;
he knows also that the bank has owing to it one dollar and twenty-five
cents. Peter owes twenty-five cents and has owing to him a dollar and
twenty-five cents. John feels, therefore, perfectly safe. What is John’s
security? Is it the specie capital? Not at all. James has taken the
whole of that He has for his security the; debts which are owing to the
bank. Peter’s bank begins now to be placed in sound, philosophical
condition. At first he promised to pay one dollar and twenty-five cents
in specie, while he actually possessed only one dollar with which to;
meet the demands that might be, made upon him. How could he have made a
more unreasonable promise, even if he had tried? Now that he has
suspended specie payments, he has escaped from the unphilosophical
situation in which he so rashly placed himself. Peter’s bank is still in
operation — it is by no means broken; his bills are good, guaranteed,
and worthy of considerable confidence; only his bank is now a simple and
not a complex bank, being no longer two banks in one, for the
specie-paying element has vanished in infinite darkness.
Currency
And here we may notice that Peter has solved, after a rough manner
indeed, one of the most difficult questions in political economy. His
bill for twenty-five cents is currency, and yet it is not based upon
specie, nor directly connected in any way with specie. We would request
the reader to be patient with us and not make up his mind in regard to
our statement until he has read to the end of the chapter; it shall not
be very long. Light breaks on us here, which we would endeavor to impart
to the reader. The security for the bill is legal value, the security in
actual value having been carried away by James — that is, the security
for the bill is the legal claim which the bank has upon the property of
its debtors. We see, therefore, that legal value maybe made a basis for
the issue of notes to serve as currency; we see, therefore, the faint
indication of a means whereby we may perhaps emancipate ourselves from
the bondage of hard money, and the worse bondage of paper which pretends
to be a representative of hard money.
Let the reader not be alarmed. We abominate banks that suspend specie
payment as much as he does. The run of our argument leads us through
this desolate valley; but we shall soon emerge into the clear day.
We may notice in considering a bank that has suspended specie
payments: 1. The bank officers, who are servants of the stockholders; 2.
The bills which are issued by the bank officers, and which circulate in
the community as money; and 3. The notes of the debtors of the bank,
binding these debtors, which notes, deposited in the safe, are security
for the bills issued. Let us now take for illustration, a non-specie
paying bank that shall be “perfect alter its kind;” that is a bank,
whose capital shall be, in actualvalue, literally=0. Suppose there are
100 stockholders; suppose $100,000 worth of bills to be in circulation
and that $100,000 legal value is secured to the bank by notes given by
the bank’s debtors. These stockholders will be remarkable individuals,
doing business after a very singular fashion. For example: The
stockholders own stock in this bank; but as the whole joint stock equals
zero, each stockholder” evidently owns only the one hundredth part of
nothing a species of property that counts much or little, according to
the skillfulness with which it is administered. The stockholders,
through the agency of the bank officers, issue their paper, bearing no
interest; exchanging; it for other paper, furnished by those who receive
the bills, bearing interest at the rate of six per cent per annum. The
paper received by the bank binds the debtor to the bank to pay interest;
while the paper issued by the bank puts it under ho obligation to pay
any interest at all. Thus the stockholders doing business with no
capital whatever, make six per cent per annum on a pretended $100,000 of
actual value which does not exist! Yet, meanwhile, these stockholders’
furnish the community with an available currency. This fact ought always
to be borne in mind. Non-specie-paying banks, of course make dividends.
During the suspension of 1837 and 1838, all the banks of Pennsylvania
made dividends, although it was prohibited in the charters of most of
them. After the suspension which took place in Philadelphia in October,
1839, most of the banks of that city resolved not to declare dividends
until the pleasure of the legislature could be known. By an act
authorizing the continuance of the suspension until the 15^(th) of
January, 1841, permission was granted to make dividends, contrary to
every principle of justice and equity. We do not know why we speak
especially of the Pennsylvania banks in this connection; as we have yet
to hear of the first bank, either in Pennsylvania or in any other State
that has had the delicacy to suspend the declaration of dividends merely
because it suspended specie payments.
The Mutual Bank
Our non-specie-paying bank being in the interesting position described,
let us inquire whether it is not in the process of bringing forth
something which shall, be entirely different from itself. We ask first,
why a non-specie-paying bank should be permitted to make dividends. Its
bills are perfectly good, whether the bank, have any capital or not,
provided the officers exercise due discretion in discounting notes; and
it is evident that the stockholders have no right to ask to be paid for
the use of their capital, since the capital in question ought to be
specie, which they confess, by suspending specie payments, that they do
not furnish. But if no dividends are to be declared, what are we to do
with the immense amount of interest-money that: will accumulate in the
bank. Our answer to this question is so simple that we are almost
ashamed to state it. Justice requires that all the interest-money
accumulated — so much only excepted as is required to pay the expenses
of the institution and the average of loss by bad debts — should be paid
back to the borrowers in the proportion of the business which they have
individually done with the bank. But since it would be by no means easy,
practically, to thus pay the extra interest-money back, it would be
better for the bank to turn the difficulty by lending its money at
precisely that rate of interest and no more, say one per cent per annum,
which would suffice to pay the expenses of the institution, Including
the average loss by bad debts. A bank of this character would be a
Mutual Bank. This is not the institution we advocate and of which we
propose to submit a plan to the reader; but it will serve in this place
for the purposes of illustration. A bank that suspends specie payments
may present two evident advantages to the community — first, it may
furnish a currency; second, it may loan out its bills at one per cent
interest per annum. That such a bank may furnish currency is proved by
abundant experience, for suspending banks go right on with their
business, and that their money circulates well is proved by the fact
that such banks have hitherto seldom failed to declare good dividends.
That they may loan their money at one per cent interest per annum is
shown by the fact that the old banks do not pay more than one per cent
per annum for their expenses, including losses by bad debts, and that
the guaranty of the new bills consists in the excellence of the notes
furnished by the borrower, so that, if there is anything to be paid for
this guaranty it ought to be paid to the borrower himself, and not to
any other person. We will not prolong this exposition, since a
multiplicity of words would serve only to darken the subject. We invite
the reader to reflect for himself upon the matter and to form his own
conclusions. We repeat that we do not advocate a bank of the nature here
described, since we conceive that such an institution would be eminently
unsafe and dangerous, and for a hundred reasons among which may be
conferred the inordinate power that would be conferred on the bank’s
officers; but, as we said before, it may serve for illustration. Neither
do we propose this plan as a theoretical solution of the difficulties
noticed in the preceding chapters as inseparable from the existing
currency. We reserve our own plan, and shall submit it to the reader in
Chapter V.
IV
MUTUAL CREDIT
In the title-page of a book on money and Banking
], published at Cincinnati, the name of William Beck appears, not as
author, but as publisher; yet there is internal evidence in the book
sufficient to prove that Mr. Beck is the author.
Mr. Beck’s Bank
Mr. Beck’s plan for a Mutual Bank consists in a simple generalization of
the system of credit in account that is well described in the following
extract from J. Stuart Mill’s Political Economy:
“A mode of making credit answer the purposes of money, by which, when
carried far enough, money may be very completely superseded, consists in
making payments by checks. The custom of keeping the spare cash reserved
for immediate use or against contingent demands, in the hands of a
banker and making all payments, except small ones, by orders on bankers,
is in this country spreading to a continually larger portion of the
public. If the person making the payment and the person receiving it
kept their money with the same banker, the payment, would take place
without any intervention of money, by the mere transfer of its amount in
the bankers books from the credit of the payer to that of the receiver.
If all persons in London kept their cash at the same banker’s and made
all their payments by means of checks, no money would be required or
used for. any transactions, beginning .and terminating in London. This
ideal limit is almost, attained in fact, so far as regards transactions
between dealers. It is chiefly in the retail transactions between
dealers and consumers, and in the payment of wages, that money, or
bank-notes now pass, and then only when the amounts are small.”
“Money,” says Mr. Beck, “follows in the track of claim. Its progress is
the discharge and satisfaction of claim. The payment of money is
effectually the discharge of the debtor; but it is not equally effectual
in satisfaction of the creditor. Though it releases the debtor, it still
leaves the creditor to seek the real object of his desire. It does not
put him in possession of it, but of something which enables him to
obtain it. He must exchange this money by purchase for the article he
wants before that object is attained. In payment of debts, it passes
from, claimant to claimant, discharging and paying claims as it goes.
Money follows claim; both continually revolving through all classes of
society in repeated and perpetual circles, constantly returning to
.their several stations, drawn thither by operations of industry or
business.
“In this possession of money every one has his turn. It comes to him in
the shape of payment for his sales or his industry and passes from him
in the shape of payment or expenditure, again to return at its proper
time and on a .proper occasion to serve the same purposes as before.
“Now, I contend, that as the progress of money lies in a circular route,
a certain system of account may be made to supply its place, where its
track and extent, can, in that circle, be included and distinguished.
“By a circle, I mean that range of society which includes the whole
circulating movement of money, with the accompanying causes and effects
of its progress; viz, claims, debts and payments; so that, if we wish to
trace its path, every point of that path will be contained within it.
Such is the great circle of society. This contains the whole body of
debtors and the whole body of creditors. It contains all the debtors to
the creditors and all the creditors to the debtors. All would be
included in the jurisdiction of a power that by any possibility could
preside over the whole. Creditors are sellers; debtors are buyers. But
no man continually sells without sometimes buying, nor does any man
continually buy without sometimes selling. The creditor who receives
money from his debtor, again expends this money upon others, who
thereby, in their turns, become creditors and receive their money back
again. All these movements are within the range of the one circle of
society. Now, it is evident that if an account were kept by a presiding
power, the goods which any person receives, being of equal value, would
pay for those which he had previously delivered; would replace him in
his original assets and cancel the obligation to him without the aid of
money. Hence, after the whole process, it would seem that the
intermediate passage and return of money were superfluous. If the
dealings are not directly backward and forward — that is, between one
creditor and his debtor and back again from the same debtor to the same
creditor — the effect will be the same; for as this whole circle
includes every creditor, every debtor and in fact every individual in
that society, so it contains every account to which the claims of any
creditor would apply, and every account to which the same creditor would
be indebted. The agency of the presiding power would render it pro
forma, the representative to every creditor of his individual debtor;
and to every debtor, the representative of his individual creditor. It
would form a common center for all claims by every creditor on his
debtor. It would form the channel for the discharge of his debts and the
receipt of his claims. It would show the state of his account with
society, and the balance, if in his favor, would be available as so much
cash.
“This is what is meant by a circle. Such is the great circle of society,
the only one which is complete and perfect, and such are the advantages
contained in it.
“Hence the plan I propose is adapted to this circle, to exhibit the
revolving track of money within it; to contain the several points of its
progress; and, at each of these points, to perform its duty and supply
its place by the revolution of debits and credits in account, instead of
the revolutions of the actual material money.”
There are many practical processes by which the business-world make
credit perform the functions of money, among which may be especially
noticed — first, that by credit in account; and second, that by bills of
exchange. Mr. Beck thought out a Mutual Bank” by generalizing credit in
account; Proudhon, by generalizing the bill of exchange.
Bills of Exchange
Let it be supposed that there are ten shoe-manufacturers in Lynn, who
sell their shoes to ten shopkeepers in Boston; let it be supposed, also,
that there are ten wholesale grocers in Boston who furnish goods to ten
retail grocers in Lynn. If the value of the shoes equals the value of
the groceries, the ten retail grocers in Lynn would have no occasion to
send money to Boston to pay their indebtedness to the wholesale grocers;
neither would the ten shopkeepers in Boston have occasion to send money
to Lynn to discharge their debt to the ten shoe manufacturers; for the
Lynn retail grocers might pay the money to the Lynn shoe-manufacturers;
these shoe-manufacturers writing to the Boston shopkeepers, who are
their debtors, requesting them to pay the Boston wholesale grocers, who
are the creditors of the Lynn retail grocers. It is very possible that
the transactions of all these persons with each other might be settled
in this way without the transmission of any money either from Boston to
Lynn, or from Lynn to Boston. The transfer of debts in the process here
indicated gives rise to what are called, in mercantile language, drafts,
or bills of exchange; though regular bills of exchange are seldom) drawn
in this country, except against foreign account. A bill of Exchange
reads generally somewhat as follows:
“To Mr. E.F. — days after sight, on this, my first bill of exchange
(second and third of the same date and tenor not paid), pay to A, B.,
without further advice from me; — dollars, value received, and charge
the same to account of your obedient servant, C. D,”
This form evidently implies that the bill is made out in triplicates.
The bill must also, of course, be dated, A. draft is a bill, of exchange
drawn up with the omission of some of the solemnity and particularity of
the regular bill.
Bills of exchange are useful not only for the payment of debts at
distant places without transportation of the precious metals, but also
as a means by which a debt due from one person may be made available for
obtaining credit from another. It is usual in every trade to give a
certain length of credit for goods bought — ninety days, six months,
eight months; or a longer time, as may be determined by the convenience
of the parties, or by the custom of the particular trade and place. If a
man has sold goods to another on six months’ credit, he may draw a bill
upon his debtor, payable in six months, get his bill discounted at the
bank and thus qualify himself to purchase such things as he may require
in his business, without waiting for the six months to expire. But bills
of exchange do more than this. They not only obviate, upon occasions,
the necessity for ready money; they not only enable a man to command
ready money before the debts due to him arrive at maturity; they often
actually take place and perform the functions of money itself.
V
THE CIRCULATION OF MUTUAL MONEY
Petition for a General Mutual Banking Law
To the Honorable the Senate and House of Representatives of the
Commonwealth of Massachusetts:
This prayer of your petitioners humbly showeth that the farmers,
mechanics and other actual producers, whose names are hereunto
subscribed, believe the present organization of the currency to be
unjust and oppressive. They, therefore, respectfully request your
honorable body to republicanize gold, silver and bank-bills, by the
enactment of a General Mutual Banking Law.
A law, embracing the, following provisions, would be eminently
satisfactory to your petitioners:
1. The inhabitants or any portion of the inhabitants, of any town or
city in the Commonwealth, may organize themselves into a Mutual Banking
Company.
2. Any person may become a member of the Mutual Banking Company of any
particular town, by pledging real estate situated in that town, or in
its immediate neighborhood; to the Mutual Bank of that town.
3. The Mutual. Bank of any town may issue paper-money to circulate as
currency among persons willing to employ it as such.
4. Every member of a Mutual Banking Company shall bind himself, and be
bound, in due legal form, on admission, to receive in payment of debts,
at par, and from all persons, the bills issued, and to be issued, by the
particular Mutual Bank to which he may belong; but no member shall be
obliged to recieve, or have in possession, bills of said Mutual Bank to
an amount exceeding the whole value of .the property pledged by him.
5. Any member may borrow the paper money of the bank to which he
belongs, on his own note running to maturity (without indorsement), to
an amount not to exceed one-half of the value of the property pledged by
him.
6. The rate of interest at which said money shall be loaned by the bank,
shall be determined by, and shall, if possible, just meet and cover the
bare expenses of the institution.
7. No money shall be loaned by the bank to persons who do not become
members of the company by pledging real estate to the bank.
8. Any member, by paying his debts to the Mutual Bank to which he
belongs, may have his property released from pledge, and be himself
released from all obligations to said Mutual Bank, and to holders of the
Mutual-Bank money, as such.
9. No Mutual Bank shall receive other than Mutual-Bank paper money in
payment of debts due to it, except at a discount of one-half of one per
cent.
10. The Mutual Banks of the several counties in the Commonwealth shall
be authorized to enter into such arrangements with each other as. shall
enable them to recieve each other’s bills in payments of debts; so that,
for example, a Fitchburg man may pay his debts to the Barre Bank in
Oxford-money, or in such other Worcester county money as may suit his
convenience.
Remarks
Let A, B, G, D and E take a mortgage upon real estate owned by F, to
cover a value of, say, $600; in consideration of which mortgage, let A,
B, C, D and E, who are timber dealers, hardware merchants, carpenters,
masons, painters, etc., furnish planks, boards, shingles, nails, hinges,
leeks, carpenters and masons’ labor, etc., to the value of $600, to E,
who is building a house. Let the mortgage have six months to run. A, B,
C, D and E are perfectly safe; for either F pays at the end of the six
months, and then the whole transaction is closed; or F does not pay, and
then they sell the real estate mortgaged by him, which is worth much
more than $600, and pay themselves, thus closing the transaction. This
transaction, generalized, gives the Mutual Bank, and furnishes a
currency based upon products and services, entirely independent of hard
money, or paper based on hard money. For A,.B, C, D and E may give to F,
instead of boards, nails, shingles, etc., 600 certificates of his
mortgage, said certificates being receivable by them for services and
products, each one in lieu of a silver dollar; each certificate being,
therefore, in all purchases from them, equivalent to a one dollar bill.
If A, B, C, D and E agree to receive these certificates, each one in
lieu of a silver dollar, for the redemption of the mortgage; if,
moreover, they agree to receive them, each one in lieu of a silver
dollar, from whomsoever it may be, in all payments — then A, B, C, D and
E are a banking company that issues mutual money; and as they never
issue money except upon a mortgage of property of double the value of
the money issued, their transactions are always absolutely safe, and
their money is always absolutely good.
Any community that embraces members of all trades and professions may
totally abolish the use of hard money, and of paper based on hard money,
substituting mutual money in its stead; and they may always substitute
mutual money in the stead of hard money and bank bills, to the precise
extent of their ability to live within themselves on their own
resources.
The Rate of Interest
As interest money charged by Mutual Banks covers nothing but the
expenses of the institutions, such banks may lend money, at a rate of
less than one percent per annum, to persons offering good security.
Advantages of Mutual Banking
It may be asked, “What advantage does mutual banking hold out to
individuals who have no real estate to offer in pledge?” We answer this
question by another: What advantage do the existing banks hold out to
individuals who desire to borrow, but are unable to offer adequate
security? If we knew of a plan whereby, through an act of the
legislature, every member of the community might be made rich, we would
destroy this petition and draw up another embodying that plan.
Meanwhile, we affirm that no system was ever devised so beneficial to
the poor as the system of mutual banking; for if a man having nothing to
offer in pledge, has a friend who is a farmer, or other holder of real
estate, and that friend is willing to furnish security for him, he can
borrow money at the mutual bank at a rate of 1 per cent interest a year;
whereas, if he should borrow at the existing banks, he would be obliged
to pay 6 per cent. Again, as mutual banking will make money exceedingly
plenty, it will cause a rise in the rate of wages, thus benefiting the
man who has no property but his bodily strength; and it will not cause a
proportionate increase in the price of the necessaries of life: for the
price of provisions, etc., depends on supply and demand; and mutual
banking operates, not directly oh supply and demand, but to the
diminution of the rate of interest on the medium of exchange.
But certain mechanics and farmers say, “We borrow no money, and
therefore pay no interest. How, then, does this thing concern us?”
Hearken, my friends! let us reason together. I have an impression on my
mind that it is precisely the class who have no dealings with, the
banks, and derive no; advantages from them, that ultimately pay all the
interest money that, is paid. When a manufacturer borrows money to carry
on his business, he counts the interest he pays as a part of his
expenses, and therefore adds the amount of interest to the price of his
goods. The consumer who buys the goods pays the interest when he pays
for the goods; and who is the consumer, if not the mechanic and the
farmer? If a manufacturer could borrow money at 1 per cent, he could
afford to undersell all his competitors, to the manifest advantage of
the farmer and mechanic. The manufacturer would neither gain nor lose;
the farmer and mechanic, who have no dealings with the bank, would gain
the whole difference; and the bank — which, were it not for the
competition of the Mutual Bank, would have loaned the money at 6 per
cent interest — would lose the whole difference. It is the indirect
relation of the bank to the farmer and mechanic, and not its direct
relation to the manufacturer and merchant, that enables it to make
money. When foreign competition prevents the manufacturer from keeping
up the price of his goods, the farmer and mechanic, who are consumers,
do not pay the interest money: but still the interest is paid by the
class that derive no benefit from the banks; for, in this case, the
manufacturer will save himself from loss by cutting down the wages of
his workmen who are producers. Wages fluctuate, rising and falling
(other things being equal) as the rate of interest falls or rises. If
the farmer, mechanic and operative are not interested in the matter of
banking, we know not who is.
Mutual Money is Generally Competent to Force its Own Way Into General
Circulation
Let us suppose the Mutual Bank to be at first established in a single
town, and its circulation to be confined within the limits of that town.
The trader who sells the produce of that town, in the city and buys
there such commodities — tea, coffee, sugar, calico, etc. — as are
required for the consumption of his neighbors, sells and buys on credit.
He does not pay the farmer cash for his produce; he does not sell that
produce for cash in the city; neither does he buy his groceries, etc.,
for cash from the city merchant: but he buys of the farmer at, say,
eight months credit; and he sells to the city, merchant at, say, six
months credit. He finds, moreover, as a general thing, that the exports
of the town which pass through his hands very nearly balance the imports
that he brings into the town for sale; so that, in reality, the exports
— butter, cheese, pork, beef, eggs, etc. — pay for the imports — coffee,
sugar, etc. And how, indeed, could it be otherwise? It is not to be
supposed that the town has silver mines and a mint; and, if the people
pay for their imports in money, it will be because they have become
enabled so to do by selling their produce for money. It follows,
therefore, that the people in a country town do not make the money,
whereby they pay for store goods, off each other, but that they make it
by selling their produce out of the town. There are, therefore, two
kinds of trading going on at the same time in the town — one, trade of
the inhabitants with each other; and another of the inhabitants, through
the store, with individuals living out of town. And these two kinds of
trade are perfectly distinct from each other. The mutual money would
serve all the purposes of the internal trade; leaving the hard money,
and paper based on hard money, to serve exclusively for the purposes of
trade that reaches out of the town. The mutual money will not prevent a
single dollar of hard money, or paper based on hard money, from coming
into the town; for such hard money comes into the town, not in
consequence of exchanges made between the inhabitants themselves, but in
consequence of produce sold abroad
]. So long as produce is sold out of the town, so long will the
inhabitants be able to buy commodities that are produced out of the
town; and they will be able to make purchases to the precise extent that
they are able to make sales. The mutual money will therefore prove to
them an unmixed benefit; it will be entirely independent of the old
money, and will open to them a new trade entirely independent of the old
trade. So far as it can be made available, it will unquestionably prove
itself to be a good thing; and, where it cannot be made available, the
inhabitants will only be deprived of a benefit that they could not have
enjoyed — mutual money or no mutual money. Besides, the comparative cost
of the mutual money is almost nothing; for it can be issued to any
amount on good security, at the mere cost of printing, and the expense
of looking after the safety of the mortgages. If the mutual money should
happen, at any particular time, not to be issued to any great extent, it
would not be as though an immense mass of value was remaining idle; for
interest on the mutual money is precisely 0. The mutual money is not
itself actual value, but a mere medium for the exchange of actual values
— a mere medium for the facilitation of barter.
We have remarked, that when the trader, who does the out-of-town
business of the inhabitants, buys coffee, sugar, etc., he does not pay
cash for them, but buys them at, say, six months credit. Now, the
existing system of credit causes, by: its very nature, periodical crises
in commercial affairs. When one of these crises occurs, the trader will
say to the city merchant, “I owe you so much for groceries; but I have
no money, for times are hard: I will give you, however, my note for the
debt.” Now, we leave it to the reader, would not the city merchant
prefer to take the mutual money of the town to which the trader belongs,
money that holds real estate and produce in that town, rather than the
private note of a trader who may fail within a week?
If, under the existing system, all transactions were settled on the spot
in cash, things might be different; but as almost all transactions are
conducted on the credit system, and as the credit system necessarily
involves periodical commercial crises, the mutual money will find very
little difficulty in ultimately forcing itself into general circulation.
The Mutual Bank is like the stone cut from the mountain without hands,
for let it be once established in a single village, no matter how
obscure, it will grow till it covers the whole earth. Nevertheless, it
would be better to obviate all difficulty by starting the Mutual Bank on
a sufficiently extensive scale at the very beginning.
The Measure of Value
The bill of a Mutual Bank is not a standard of value, since it is itself
measured and determined in value by the silver dollar. If the dollar
rises in value, the bill of the Mutual Bank rises also, since it is
receivable in lieu of a silver dollar. The bills of a Mutual Bank are
not standards of value, but mere instruments of exchange; and as the
value of mutual money is determined, not by the demand and supply of
mutual money, but by the demand and supply of the precious metals, the
Mutual Bank may issue bills to any extent, and those bills will not be
liable to any depreciation from excess of supply. And, for like reasons,
mutual money will not be liable to rise in value if it happens at any
time to be scarce in the market. The issues of mutual money are
therefore susceptible of any contraction or expansion which may be
necessary to meet the wants of the community, and such contraction or
expansion cannot by any possibility be attended with any evil
consequences whatever: for the silver dollar, which is the standard of
value, will remain throughout at the natural valuation determined for it
by the general demand and supply of gold and silver throughout the whole
world.
The bills of Mutual Banks act merely as a medium of exchange: they do
not and cannot pretend to be measures or standards of value. The medium
of exchange is one thing; the measure of value is another; and the
standard of value still another. The dollar is the measure of value.
Silver and gold, at a certain degree of fineness, are the standard of
value. The bill of a Mutual Bank is a bill of exchange, drawn by all the
members of the mutual banking company upon themselves, indorsed and
accepted by themselves, payable at sight, but only in services and
products. The members of the company bind themselves to recieve their
own money at par; that is, in lieu of as many silver dollars as are
denoted by the denomination on the face of the bill. Services and
products are to be estimated in dollars, and exchanged for each other
without the intervention of specie
].
Mutual money, which neither is nor can be merchandise, escapes the law
of supply and demand, which is applicable to merchandise only.
The Regulator of Value
The utility of an article is one thing; its exchangeable value is
another; and the cost of its production is still another. But the amount
of labor expended in production, though not the measure, is, in the long
run, the regulator of value; for every new invention which abridges
labor, and enables an individual or company to offer an increased supply
of valuable articles in the market brings with it an increase of
competition. For, supposing that one dollar constitutes a fair day’s
wages, and that one man by a certain process can produce an article
valued in the market at one dollar in half a day’s labor, other men will
take advantage of the same process, and undersell the first man, in
order to get possession of the market. Thus, by the effect of
competition, the price of the article will probably be ultimately
reduced to fifty cents. Labor is the true regulator of value; for every
laboring man who comes into competition with others increases the supply
of the products of labor, and thus diminishes their value; while at the
same time, and because he is a living man, he increases the demand for
those products to precisely the same extent, and thus restores the
balance: for the laborer must be housed, clothed and subsisted by the
products of his labor. Thus the addition of a laboring man, or of any
number of laboring men, to the mass of producers, ought to have no
effect either upon the price of labor, or upon that of commodities;
since, if the laborer by his presence increases the productive power, he
at the same time increases the demand for consumption. We know that
things do not always fall out thus in practice; but the irregularity is
explained by the fact that the laborer, who ought himself to have the
produce of his labor, or its equivalent in exchange, has, by the present
false organization of credit, his wages abstracted from him. Want and
over production arise sometimes from mistakes in the direction of labor,
but generally from that false organization of credit which now obtains
throughout the civilized world. There is a market price of commodities,
depending on supply and demand, and a natural price, depending on the
cost of production; and the market price is in a state, of continual
oscillation, being sometimes above, and sometimes below, the natural
price: but in the long run, the average of a series of years being
taken, it coincides with it. It is probable that, under a. true
organization of credit, the natural price and market price would
coincide at every moment. Under the present system, there are no
articles whose market and natural prices coincide so nearly and so
constantly as those of the precious metals; and it is for this reason
that they have been adopted by the various nations as standards of
value.
When Adam Smith and Malthus
] say that labor is a measure of value, they speak, not of the labor
which an article cost, or ought to have cost, in its production, but of
the quantity of labor which the article may purchase or command. It is
very well, for those who mistake the philosophy of speculation on human
misfortune and necessities for social science, to assume for measure of
value the amount of labor which different commodities can command.
Considered from this point of view, the price of commodities is
regulated, not. in the labor expended in their production, but by the
distress and want of the laboring class. There is no device of the
political economists so infernal as the one which ranks labor as a
commodity, varying in value according to supply and demand. Neither is
there any device so unphilosophical; since the ratio of the supply of
labor to the demand for it is unvarying: for every producer is also a
consumer, and rightfully, to the precise extent of the amount of his
products; the laborer who saves up his wages being, so far as society is
concerned, and in the long run, a consumer of those wages. The supply
and demand for labor is virtually unvarying; and its price ought,
therefore, to be constant. Labor is said to be value, not because it is
itself merchandise, but because of the values it contains, as it were,
in solution, or, to use the correct metaphysical term, in potentia. The
value of labor is a figurative expression, and a fiction, like the
productiveness of capital. Labor, like liberty, love, ambition, genius,
is something vague and indeterminate in its nature, and is rendered
definite by its object only; misdirected labor produces no value. Labor
is said to be valuable, not because it can itself be valued, but because
the products of labor may be truly valuable. When we say, “John’s labor
is worth a dollar a day,” it is as though we said, “The daily product of
John’s labor is worth a dollar.” To speak of labor as merchandise is
treason; for such speech denies the true dignity of man, “who is the
king of the earth. Where labor is merchandise in fact (not by a mere
inaccuracy of language), there man is merchandise also, whether it be in
England or South Carolina.
VI
THE PROVINCIAL LAND BANK
“In the year 1714,” says Governor Hutchinson, in his History of
Massachusetts, a certain “party had projected a private bank; or,
rather, had taken up a project published in London in the year 1684; but
this not being generally known in America, a merchant of Boston was the
reputed father of it. There was nothing more in it than issuing bills of
credit, which all the members of the company promised to receive as
money, but at no certain value compared with silver and gold; and real
estate to a sufficient value was to be bound as a security that the
company should perform their engagements. They were soliciting the
sanction of the general court, and an act of government to incorporate
them. This party generally consisted of persons in difficult or involved
circumstances in trade; or such as were possessed of real estate, but
had little or no ready money at command; or men of no substance at all;
and we may well enough suppose the party to be very numerous. Some, no
doubt, joined them from mistaken principles, and an apprehension that it
was a scheme beneficial to the public; and some for party’s sake and
public applause.
“Three of the representatives from Boston — Mr. Cooke; Mr. Noyes, a
gentleman in great esteem with the inhabitants in general; and Mr. Payne
— were the supporters of the party. Mr. Hutchinson, the other (an
attempt to leave him out of the house not succeeding), was sent from the
House to the council, where his opposition would be of less consequence.
The Governor was no favorer of the scheme; but the lieutenant-governor —
a gentleman of no great fortune, and whose stipend from the government
was trifling — engaged in the cause with great zeal.
“A third party, though very opposite to the private bank, yet were no
enemies to bills of credit. They were in favor of loan bills from the
government to any of the inhabitants who would mortgage their estates as
a security for the repayment of the bills with interest in a term of
years: the interest to be paid annually, and applied to the support of
government. This was an easy way of paying public charges, which, no
doubt, they wondered that in so many ages the wisdom of other
governments had never discovered. The principal men of the Council were
in favor of it; and, it being thought by the first party the least of
two evils, they fell in with the scheme; and, after that, the country
was divided between the public and private bank. The House of
Representatives was nearly equally divided, but rather favorers of the
private bank, from the great influence of the Boston members in the
House, and a great number of persons of the town out of it. The
controversy had a universal spread, and divided towns, parishes, and
particular families.
“At length, after a long struggle, the party for the public bank
prevailed in the general court for a loan of £50, 000 in bills of
credit, which were put into the hands of trustees, and lent for five
years only, to any of the inhabitants, at five per cent interest,
one-fifth part of the principal to be paid annually. This lessened the
number of the party for the private bank; but it increased the zeal, and
raised a strong resentment in those that remained.” — (Thomas
Hutchinson: History of Massachusetts, vol. ii., p. 188.)
It is utterly inconceivable that any company of sane men should have
seriously proposed to issue paper money destitute of all fixed and
determinate value as compared with gold and silver, imagining that such
money would circulate as currency. If paper money has “no certain value
compared with silver and gold,” it has no certain value compared with
any commodity whatever; that is, it has no certain value at all: for,
since gold and silver have a determinate value as compared with
exchangeable commodities, all paper money that may be estimated in terms
of marketable commodities, may be estimated in terms of silver and gold.
Our author will permit us to suspect that his uncompromising hostility,
not only to the land-bank, but also to everything else of a democratic
tendency, blinded his eyes to the true nature of the institution he
describes. Our suspicion is strengthened when we read that the paper
money in question was to have a determinate value, since it was to have
been secured by a pledge of “real estate to a sufficient value.” The
projectors of the scheme probably intended that the members of the
company should redeem their bills from the bill-holders by receiving
them, in all payments, in lieu of determinate and specified amounts of
gold and silver; and such a method of redemption would have given the
bills “a certain value as compared with silver and gold.”
]
In view of this extract from Governor Hutchinson’s history, we abandon
all claims to novelty or originality as regards our own scheme for a
Mutual Bank. We think it very probable that our theory dates back to
“the project published in London in the year 1684:” but we affirm
nothing positively on this head, since we are altogether ignorant of the
details, not only of the provincial project, but also of the original
London plan. We have no information in regard; to these matters, except
that which is now submitted to the reader.
Our author says, on a subsequent page:
“In 1739, a great part of the Province was disposed to favor what was
called the land bank or manufactory scheme; which was begun, or rather
revived, in this year, and produced such great and lasting mischiefs,
that a particular relation of the rise, progress and overthrow of it may
be of use to discourage any attempts of the like nature in future ages.”
— (History of Massachusetts, vol. ii., p. 352)
It appears that after an interval of twenty-five years, the land-bank
scheme rose once again above the surface of the political and financial
waters. Governor Hutchinson says that this scheme produced “great and
lasting mischiefs” Let us see what these “mischiefs” were:
“The project of the bank of 1714 was revived. The projector of that bank
now put himself at the head of seven or eight hundred persons, some few
of rank and good estate, but generally of low condition among the
plebeians, and of small estate, and many of them perhaps insolvent. This
notable company were to give credit to £150,000 lawful money, to be
issued in bills; each person to mortgage a real estate in proportion to
the sums he subscribed and took out, or to give bond with two sureties;
but personal security was not to be taken for more than £100 from any
one person. Ten directors and a treasurer were to be chosen by the
company. Every subscriber or partner was to pay 3 per cent interest (per
annum) for the sum taken out, and 5 per cent of the principal
]; and he that did not pay bills might pay in the produce and
manufacture of the Province at such rates as the directors from time to
time should set: and they (the bills) should commonly pass in lawful
money. The pretense was, that, by thus furnishing a medium and
instrument of trade, not only the inhabitants in general would be better
able to procure the Province bills of credit for their taxes, but trade,
foreign and inland, would revive and flourish. The fate of the project
was thought to depend on the opinion which the general court should form
of it. It was necessary, therefore, to have a house of representatives
well disposed. Besides the 800 persons subscribers, the needy part of
the Province in general favored the scheme. One of their votes will go
as far in elections as one of the most opulent. The former are most
numerous; and it appeared that by far the majority of representatives
for 1740 were subscribers to or favorers of the scheme, and they have
ever since been distinguished by the name of the Land-Bank House.
“Men of estates and the principal merchants of the Province abhorred:
the project, and refused to receive the bills; but great numbers of
shopkeepers who had lived for a long time on the fraud of a depreciating
currency, and many small traders, gave credit to the bills. The
directors, it was said, by a vote of the company, became .traders
], and issued just such bills as they thought proper without any fund or
security for their ever being redeemed. They purchased every sort of
commodity, ever so much a drug, for the sake of pushing off their bills;
and, by one means or other, a large sum — perhaps fifty or sixty
thousand pounds — was floated. To lessen the temptation to receive the
bills, a company of merchants agreed to issue their notes, or bills,
redeemable in silver and gold at distant periods, much like the scheme
in 1733, and attended with no better effect. The governor exerted
himself to blast this fraudulent undertaking — the land-bank. Not only
such civil and military officers as were directors or partners, but all
who received or paid any of the bills were displaced. The governor
negatived the person chosen speaker of the House, being a director of
the bank; and afterwards negatived thirteen of the newly elected
counsellors, who were directors or partners in, or favorers of the
scheme. But all was insufficient to suppress it. Perhaps the major part
in number of the inhabitants of the Province openly or secretly, were
well-wishers of it. One of the directors afterwards acknowledged to me
that, although he entered into the company with a view to the public
interest, yet, when he found what power and influence they had in all
public concerns, he was convinced it was more than belonged to them,
more than they could make a good use of, and therefore unwarrantable.
Many of the more sensible, discreet persons of the Province saw a
general confusion at hand. The authority of the Parliament to control
all public and private persons and proceedings in the Colonies was at
that day questioned by nobody. Application was therefore made to
Parliament for an act to suppress the company; which, notwithstanding
the opposition made by their agent, was very easily obtained, and
therein it was declared that the act of the Sixth of King George I,
chapter xviii, did, does and shall extend to the Colonies and
plantations of America. It was said the act of George I, when it was
passed, had no relation to America; but another act, twenty years after,
gave it force, even from the passing it, which it never could have had
without. This was said to be an instance of the transcendent power of
Parliament. Although the company was dissolved, yet the act of
Parliament gave the possessors of the bills a right of action against
every partner or director for the sums expressed, with interest. The
company was in a maze. At a general meeting, some, it is said, were for
running all hazards, although the act subjected them to a proemunire;
but the directors had more prudence, and advised them to declare that
they considered themselves dissolved, and meet only to consult upon some
method of redeeming their bills of the possessors, which every man
engaged to endeavor in proportion to his interest, and to pay in to the
directors, or some of them, to burn or destroy. Had the company issued
their bills at the value expressed on the face of them, they would have
had no reason to complain at being obliged to redeem them at the same
rate, but as this was not the case in general, and many of the
possessors of the bills had acquired them for half their value, as
expressed, equity could not be done; and, so far as respected the
company, perhaps, the Parliament was not very anxious; the loss they
sustained being but a just penalty for their unwarrantable undertaking,
if it had been properly applied. Had not the Parliament interposed, the
Province would have been in the utmost confusion, and the authority of
government entirely in the Land-Bank Company.” — (p.353)
The “mischiefs”’ occasioned by this land-bank seems to have been
political, rather than economic, for our author nowhere affirms that the
bill-holders, not members of the company, lost anything, by the
institution. We would remark that there are certain “mischiefs” which
are regarded not without indulgence by posterity. Governor Hutchinson
ought to have explained more in detail the nature of the evils he
complains of; and also to have told us why he, a declared enemy of
popular institutions, opposed the advocates of the bank so
uncompromisingly. Mutualism operates, by its very nature, to render
political government founded on arbitrary force, superfluous; that is,
it operates to the decentralization of the political power, and to the
transformation of the state, by substituting self-government in the,
stead of government ab extra. The Land-Bank of 1740, which embodied the
mutual principle, operated vigorously in opposition to the government.
Can we wonder that it had to be killed by an arbitrary stretch “of the
supreme power of Parliament,” and by an ex post facto law bearing
outrageously on the individual members of the company? For our part, we
admire the energy — the confidence in the principle of mutualism — of
those members who proposed to go on in spite of Parliament “although the
act subjected them to. a proemunire.” If they had gone on, they would
simply have anticipated the American Revolution by some thirty years.
But where is the warning to future ages? According to Governor
Hutchinson’s own statement, the fault of the bank was, that it would
have succeeded too well if it had had a fair trial; nay, that it would
have succeeded in spite of all obstacles had it not been for the
exertion of “the transcendent power of Parliament.” Where is the bank of
these degenerate days that has shown anything like the same power of
endurance? Some of the existing banks find it difficult to live with the
power of government exerted in their favor!
The attempt of the Land-Bank Company to republicanize gold and silver,
and to make all commodities circulate as ready money was, without
question, premature. But our author misapprehends the matter, mistaking
a transformation of the circulating medium for a mercantile scheme. The
“Vote of the company whereby the directors became traders,” was an act
for transforming the currency. We do not justify it altogether; for it
put the welfare of the cause at too great hazard; but it was,
nevertheless, not totally out of harmony with the general system. We
remark in conclusion, that the depreciation in the provincial currency
was occasioned, not by “land-bank,” that is, by mutual paper — which the
Parliament forced the issuers, by an arbitrary, vindictive, and
tyrannical law, to redeem with interest -but it was occasioned by
government paper, “professing to be ultimately redeemable in gold and
silver.”
] All arguments, therefore, against mutual money, derived from the
colonial currency, are foreign to the purpose.
The main objections against mutual banking are as follows: 1. It is a
novelty, and therefore a chimera of the inventor’s brain; 2. It is an
old story, borrowed from provincial history, and therefore of no
account!
How would you have us answer objections like these? Things new or old
may be either good or evil. Every financial scheme should stand or fall
by its own intrinsic merits, and not be judged from extraneous
considerations.
VII
MONEY
The most concise and expressive definition of the term “capital,” which
we have seen in the writings of the political economists, is the one
furnished by J. Stuart Mill, in his table of contents. He Says: “Capital
is wealth appropriated to reproductive employment.” There is, indeed, a
certain ambiguity attached to the word wealth; but let that pass; we
accept the definition. A tailor has $5 in money, which he proposes to
employ in his business. This money is unquestionably capital, since it
is wealth appropriated to reproductive employment: but it may be
expended in the purchase of cloth, in the payment of journeymen’s wages,
or in a hundred other ways; what kind of capital, then, is it? It is
evidently, disengaged capital. Let us say that the tailor takes his
money and expends it for cloth; this cloth is also devoted to
reproductive employment, and is therefore still capital; but what kind
of capital? Evidently, engaged capital. He makes this cloth into a coat;
which coat is more valuable than the cloth, since it is the result of
human labor bestowed upon the cloth. But the coat is no longer capital;
for it is no longer (so far, at least, as the occupation of the tailor
is concerned) capable of being appropriated to reproductive employment;
what is it, then? It is that for the creation of which the capital was
originally appropriated; it is product. The tailor takes this coat and
sells it in the market for $8; which dollars become to him a new
disengaged capital. The circle is complete; the coat becomes engaged
capital to the purchaser; and the money is disengaged capital, with
which the tailor may commence” another operation. Money is disengaged
capital, and disengaged capital is money. Capital passes, therefore,
through various forms; first it is disengaged capital, then it becomes
engaged capital, then it becomes product, afterwards it is transformed
again into disengaged capital, thus recommencing its circular progress.
The community is happy and prosperous when all professions of men easily
exchange with each other the products of their labor; that is, the
community is happy and prosperous when money circulates freely, and each
man is able with facility to transform his product into disengaged
capital, for with disengaged capital, or money, men may command such of
the products of labor as they desire, to the extent, at least, of the
purchasing power of their money.
The community is unhappy, unprosperous, miserable, when money is scarce,
when exchanges are effected with difficulty. For notice, that, in the
present state of the world, there is never real over-production to any
appreciable extent; for, whenever the baker has too much bread, there
are always laborers who could produce that of which the baker has too
little, and who are themselves in want of bread. It is when the tailor
and baker cannot exchange, that there is want and over-production on
both sides. Whatever, therefore, has power to withdraw the currency from
circulation, has power, also, to cause trade to stagnate; power to
overwhelm the community with misery; power to carry want, and its
correlative, over-production into every artisan’s house and workshop.
For the transformation of product into disengaged capital is one of the
regular steps of production, and whatever withdraws the disengaged
capital, or money, from circulation, at once renders this step
impossible, and thus puts a drag on all production.
There Are Various Kinds of Money
But all money is not the same money. There is one money of gold, another
of silver, another of brass, another of leather, and another of paper:
and there is a difference in the glory of these different kinds of
money. There is one money that is a commodity, having its exchangeable
value determined by .the law of supply and demand, which money may be
called (though somewhat barbarously) merchandise-money; as for instance,
gold, silver, brass, bank-bills, etc.; there is another money, which is
not a commodity, whose exchangeable value is altogether independent of
the law of supply and demand, and which may be called mutual money.
Mr. Edward Kellogg says: “Money becomes worthless whenever it ceases to
be capable of accumulating an income which can be exchanged for articles
of actual value. The value of money as much depends upon its power of
being loaned for an income, as the value of a farm depends upon its
natural power to produce.” And again: “Money is valuable in proportion
to its power to accumulate value by interest
].” Mr. Kellogg is mistaken. Money is a commodity in a twofold way, and
has therefore a twofold value and a twofold price — one value as an
article that can be exchanged for other commodities, and another value
as an article that can be loaned out at interest; one price which is
determined by the supply and demand of the precious metals, and another
price (the rate of interest) which is determined by the distress of the
borrowing community. Mr. Kellogg speaks as though this last value and
last price were the only ones deserving consideration; but this is by no
means the case, for this last value and price are so far from being
essential to the nature of money, that the Mutual Bank will one day
utterly abolish them. The natural value of the silver dollar depends
upon the demand and supply of the metal of which it is composed and not
upon its artificial power to accumulate value by interest. Legislation
has created usury; and the Mutual Bank can destroy it. Usury is a result
of the legislation which establishes a particular commodity as the sole
article of legal tender; and, when all commodities are made to be ready
money through the operation of Mutual Banking, usury will vanish.
Convertible Paper Money Renders the Standard of Value Uncertain
To show the effect of variations in the volume of the existing
circulating medium, not only on a foreign commerce, but also on the
private interests of each individual member of the community, we will,
at the risk of being tedious, have recourse to an illustration. Let us
suppose that the whole number of dollars (either in specie or
convertible paper) in circulation, at a particular time, is equal to Y;
and that the sum of all these dollars will buy a certain determinate
quantity of land, means of transportation, merchandise, etc., which may
be represented by x; for, if money may be taken as the measure and
standard of value for commodities, then conversely, commodities may be
taken as the standard and measure of value for money. Let us say,
therefore, that the whole mass of the circulating medium is equal to Y;
and that its value, estimated in terms of land, ships, houses,
merchandise, etc., is equal to x. If, now, the quantity of specie and
convertible paper we have supposed to be in circulation be suddenly
doubled, so that the whole mass becomes equal in volume to 2Y, the value
of the whole mass will undergo no change, but will still be equal to x,
neither more nor less. This is truly wonderful! Some young
mathematician, fresh from his algebra, will hasten to contradict us,”
and say that the value of the whole mass will be equal to 2x, or perhaps
to x divided by 2, but it is the young mathematician who is in error, as
may easily be made manifest. The multiplication of the whole number of
dollars by 2 causes money to be twice as easy to be obtained as it was
before. Such multiplication causes, therefore, each individual dollar to
fall to one-half its former value; and this for the simple reason that
the price of silver dollars, or their equivalents in convertible paper,
depends upon the ratio of the supply of such dollars to the demand for
them, and that every increase in the supply causes therefore a
proportionate decrease in the price. The variation in the volume does
not cause a variation .in the value of the volume, but causes a
variation in the price of the individual dollar. Again, if one-half the
money in circulation be suddenly withdrawn, so that the whole volume
shall, equal 1/2Y, the value of the new volume will be exactly equal to
x, for the reason that the difficulty in procuring money, will be
doubled, since, the supply will be; diminished one-half, causing each
individual dollar to rise to double its former value. The value of the
whole mass in circulation is independent of the variations of the
volume; for every increase in the volume causes a proportionate decrease
in the value, of the individual dollar, and every decrease in. the
volume causes proportionate increase in the value of the individual
dollar. If the mass of our existing circulating medium were increased a
hundred-fold, the multiplication would have no effect other than that of
reducing the value of the individual dollar to that of the existing
individual cent. If gold were as plenty as iron, it would command no
higher price than iron. If our money were composed of iron, we should be
obliged to hire an oxcart for the transportation of $100; and it would
be as difficult, under such conditions, to obtain a cartload of iron, as
it is now to obtain its value in our present currency.
A fall or rise in the price of money, and a rise or fall in the price of
all other commodities besides money, are precisely the same economical
phenomenon.
The effect of a change in the volume of the currency is therefore not a
change in the value of the whole volume, but. a change in the value of
the individual silver dollar, this change being indicated by a variation
in the price of commodities; a fall in the price of the silver dollar
being indicated by a rise in the price of commodities, and a rise in the
price of the dollar being indicated by a fall in the price of
commodities. “The value of money,” says J. Stuart Mill, other things
being the same, “varies inversely as its quantity; every increase of
quantity lowering its value, and every diminution raising it in a ratio
exactly equivalent. That an increase of the quantity of money raises
prices, and a diminution lowers them, is the most elementary proposition
in the theory of the currency; and, without it, we should have no key to
any of the others.”
Let us use this key for the purpose of unlocking the practical mysteries
attached to variations in the volume of the existing currency. The
Banks, since they exercise control over the volume of the currency by
means of the power they possess of increasing or diminishing, at
pleasure, the amount of paper money in circulation, exercise control
also over the value of every individual dollar in every private man’s
pocket. They make great issues, and money becomes plenty; that is to
say, every other commodity becomes dear. The capitalist sells what he
has to sell while prices are high. The banks draw in their issues, and
money becomes scarce; that is, all other commodities become cheap. The
community is distressed for money. Individuals are forced to sell
property to raise money to pay their debts, and to sell at a loss on
account of the state of the market. Then the capitalist buys what he
desires to buy while prices are low. These operations are the upper and
the nether millstones, between which the hopes of the people are ground
to powder.
The Evils of Convertible Paper Money
Paper professing to be convertible into silver and gold, by overstocking
the home-market with money, makes specie to be in less demand in this
country than it is abroad, and renders profitable an undue exportation
of gold and silver; thus occasioning a chronic drain of the precious
metals.
]
It increases the volume of the currency; and therefore decreases the
value of the individual silver dollar; thus causing an enhancement in
the price of all domestic commodities; giving an unnatural advantage in
our own markets to foreign manufacturers, who live in the enjoyment of a
more valuable currency and presenting irresistible inducements to our
own merchants to purchase abroad rather than at home.
It operates to give control over the currency to certain organized
bodies of men, enabling them to exercise partiality, and loan capital to
their relatives and favorites; thus encouraging incapacity, and
depressing merit; and therefore demoralizing the people who are led to
believe that legitimate business, which should be founded altogether
upon capital, industry and talent, partakes of the nature of court-favor
and gambling.
It operates to encourage unwise speculation; and, by furnishing
artificial facilities to rash, scheming and incompetent persons, induces
the burying of immense masses of capital in unremunerative enterprises.
It reduces the value of our own currency below the level of the value of
money throughout the world, rendering over-importation inevitable,
causing our markets to be overstocked with foreign goods, and thus
making the ordinary production of the country to present all the
calamitous effects of over-production.
It operates inevitably to involve the country and individuals doing
business in the country, in foreign debts. It operates also, by blinding
the people to the true nature of money, and encouraging them to raise
funds for the commencement and completion of hazardous enterprises by
the sale of scrip and bonds abroad, to mortgage the country, and the
produce of its industry, to foreign holders of obligations against us,
etc.
Advantages of a Mutual Currency
Mutual Banks would furnish an adequate currency; for whether money were
hard or easy, all legitimate paper would be discounted by them. At
present, banks draw in their issues when money is scarce (the very time
when a large issue is desirable), because they are afraid there will be
a run upon them for specie; but Mutual banks, having no fear of a run
upon them — as they have no metallic capital, and never pretend to pay
specie for their bills — can always discount good paper.
It may appear to some readers, notwithstanding the explanations already
given
], that we go altogether farther than we are warranted when we affirm
that the creation of an immense mass of mutual money would produce no
depreciation in the price of the silver dollar. The difficulty
experienced in understanding this matter results from incorrect notions
respecting the standard of value, the measure of value, and the nature
of money. This may be made evident by illustration. The yard is a
measure of length; and a piece of wood, or a rod of glass or metal, is a
corresponding standard of length. The yard, or measure, being ideal, is
unvarying; but all the standards we have mentioned contract or expand by
heat or cold, so that they vary (to an almost imperceptible degree,
perhaps,) at every moment. It is almost impossible to measure off a
yard, or any other given length, with mathematical accuracy. The measure
of value is the dollar; the standard of value, as fixed by law, is
silver or gold at a certain degree of fineness. Corn, land, or any other
merchantable commodity might serve as a standard of value, but silver
and gold form a more perfect standard, on account of their being less
liable to variation; and they have accordingly been adopted, by the
common consent of all nations, to serve as such. The dollar, as simple
measure of value has — like the yard, which is a measure of length — an
ideal existence only. In Naples, the ducat is the measure of value; but
the Neapolitans have no specific coin of that denomination. Now, it is
evident that the bill of a Mutual Bank is like a note of hand, or like
an ordinary bank bill, neither a measure, nor a standard of value. It is
(1) not a measure; for, unlike all measures, it has an actual, and not a
merely ideal existence. The bill of a Mutual Bank, being receivable in
lieu of a specified number of silver dollars, presupposes the existence
of the silver dollar as a measure of value, and .acknowledges itself as
amenable to that measure. The silver dollar differs from a bill of a
Mutual Bank receivable in lieu of a silver dollar, as the measure
differs from the thing measured. The bill of a Mutual Bank is (2) not a
standard of value, because it has in itself no intrinsic value, like
silver and gold; its value being legal, and not actual. A stick has
actual length, and therefore may serve as a standard of length; silver
has actual intrinsic value, and may therefore serve as a standard of
value; but the bill of a Mutual Bank, having a legal value only, and not
an actual one, cannot serve as a standard of value, but is referred, on
the contrary, to silver and gold as that standard, without which it
would itself be utterly unintelligible.
If ordinary bank bills represented specie actually existing in the
vaults of the banks, no mere issue or withdrawal of them could effect a
fall or rise in the value of money; for every issue of. a dollar-bill
would correspond to the locking up of a specie dollar in the bank’s
vaults; and every canceling of a dollar-bill would correspond to the
issue by the banks of a specie dollar. It is by the exercise of banking
privileges — that is, by the issue of bills purporting to be, but which
are not, convertible — that the banks effect a depreciation in the price
of the silver dollar. It is this fiction (by which legal value is
assimilated to, and becomes, to all business intents and purposes,
actual value) that enables bank-notes to depreciate the silver dollar.
Substitute verity in the place of fiction, either by permitting the
banks to issue no more paper than they have specie in their vaults, or
by effecting an entire divorce between bank-paper and its pretended
specie basis, and the power of paper to depreciate specie is at an end.
So long as the fiction is kept up, the silver dollar is depreciated, and
tends to emigrate for the purpose of traveling in foreign parts; but the
moment the fiction is destroyed, the power of paper over metal ceases.
By its intrinsic nature specie is merchandise, having its value
determined, as such, by supply and demand; but on the contrary,
paper-money is, by its intrinsic nature, not merchandise, but the means
whereby merchandise is exchanged, and as such ought always to be
commensurate in quantity with the amount of merchandise to be exchanged,
be that amount great or small. Mutual money is measured by specie, but
is in no way assimilated to it; and therefore its issue can have no
effect whatever to cause a rise or fall in the price of the precious
metals.
VIII
CREDIT
We are obliged to make a supposition by no means flattering to the
individual presented to the reader. Let us suppose, therefore, that some
miserable mortal, who is utterly devoid of any personal good quality to
recommend him, makes his advent on the stage of action, and demands
credit. Are there circumstances under which he can obtain it? Most
certainly. Though he possesses neither energy, morality nor business
capacity, yet if he owns a farm worth $2,000, which he is willing to
mortgage as security for $1,500 that he desires to borrow, he will be
considered as eminently deserving of credit. He is neither industrious,
punctual, capable, nor virtuous; but he owns a farm clear of debt worth
$2,000 and verily he shall raise the $1,500!
Personal credit is one .thing; real credit is another and a very
different thing. In one case, it is the man who receives credit; in the
other, it is the property, the thing. Personal credit is in the nature
of partnership; real credit is in the nature of a sale, with a reserved
right of repurchase under conditions. By personal credit, two men or
more are brought into voluntary mutual relations; by real credit, a
certain amount of fixed property is transformed, under certain
conditions and for a certain time, into circulating medium; that is, a
certain amount of engaged capital is temporarily transformed into
disengaged capital.
A young man goes to a capitalist saying: “If you will lend me $100, I
will go into a certain business, and make $1,500 in the course of the
present year; and my profits will thus enable me to pay you back the
money you lend me, and another $100 for the use of it. Indeed it is
nothing more than fair that I should pay you as much as I offer; for,
after all, there is a great risk in the business, and you do me a
greater favor than I do you.” The capitalist answers: “I cannot lend you
money on such terms; for the transaction would be illegal; nevertheless,
I am willing to help you all I can, if I can devise a way. What do you
say to my buying such rooms and machinery as you require, and letting
them to you on the terms you propose? For, though I cannot charge more
than 6 per cent on money loaned, I can let buildings, whose total value
is only $100, at a rate of $100 per annum, and violate no law. Or,
again, as I shall be obliged to furnish you with the raw material
consumed in your business, what do you say to our entering into a
partnership, so arranging the terms of agreement that the profits will
be divided in fact, as they would be in the case that I loaned you $100
at 100 per cent interest per annum?” The young man will probably permit
the capitalist to arrange the transaction in any form he pleases,
provided the money is actually forthcoming. If the usury laws speak any
intelligible language to the capitalist, it is this: “The legislature
does not intend that you shall lend money to any young man to help in
his business, where the insurance upon the money you trust in his hands,
and which is subjected to the risk of his transactions, amounts to more
than 6 per cent per annum on the amount loaned.” And, in this speach,
the deep wisdom of the legislature is manifested! Why six, rather than
five or seven? Why any restriction at all?
Now for the other side (for we have thus far spoken of the usury laws as
they bear on mere personal credit): lf a man borrows $1,500 on the
mortgage of a farm, worth, in the estimation of the creditor himself,
$2,000, why should he pay 6 per cent interest on the money borrowed?
What does this interest cover? Insurance? Not at all; for the money is
perfectly safe, as the security given is confessedly ample; the
insurance is 0. Does the interest cover the damage which the creditor
suffers by being kept but of his money for the time specified in the
contract? This cannot be the fact — for the damage is also 0 — since a
man who lends out money at interest, on perfect security, counts the
total amount of interest as clear gain, and would much prefer letting
the money at 1/2 per cent to permitting it to remain idle. The rate of
interest upon money lent on perfect security is commensurate, not with
the risk the creditor runs of losing his money — for that risk is 0; not
to the inconvenience to which the creditor is put by letting the money
go but of his hands — for that inconvenience is also 0
], since the creditor lends only such money as he himself does not wish
to use; but it is commensurate with the distress of the borrower. One
per cent per annum interest on money lent on perfect security is,
therefore, too high a rate; and all levying of interest-money on perfect
security is profoundly immoral
], since such interest-money is the fruit of the speculation of one man
upon the misfortune of another. Yet the legislature permits one citizen
to speculate upon the misfortune of another to the amount of
six-hundredths per annum of the extent to which he gets, him into his
power! This is the morality of the usury laws in their bearing on real
credit.
Legitimate Credit
All the questions connected with credit, the usury laws, etc. may be
forever set at rest by the establishment of Mutual Banks. Whoever goes
to the mutual bank, and offers real property in pledge, may always
obtain money for the Mutual Bank can issue money to any extent; and that
money will always be good, since it is all of it based on actual
property, that may be sold under the hammer. The interest will always be
at a less rate than 1 percent per annum, since it covers, not the
insurance of the money loaned, there being no such insurance required,
as the risk is 0; since it covers, not the damage which is done the bank
by keeping it out of its money, as that damage is also 0, the bank
having always an unlimited supply remaining on hand, so long as it has a
printing press and paper; since it covers, plainly and simply, the mere
expenses of the institution — clerk-hire, rent, paper, printing, etc.
And it is fair that such expenses should be paid under the form of a
rate of interest; for thus each one contributes to bear the expenses of
the bank, and in the precise proportion to the benefits he individually
experiences from it. Thus the interest, properly so called, is 0; and we
venture to predict that the Mutual Bank will one day give all the real
credit that will be given; for since this bank will give such at 0
percent interest per annum, it will be difficult for other institutions
to compete with it for any length of time. The day is coming when
everything that is bought will be paid for on the spot, and in mutual
money; when all payments will be made, all wages settled on the spot.
The Mutual Bank will never, of course, give personal credit; for it can
issue bills only on real credit. It cannot enter into partnership with
anybody; for, if it issues bills where there is no real guarantee
furnished for their repayment, it vitiates the currency, and renders
itself unstable. Personal credit will one day be given by individuals
only; that is, capitalists will one day enter into partnership with
enterprising and capable man who are without capital, and the profits
will be divided between the parties according as their contract of
partnership may run.
Whoever, in the times of Mutual Bank, has property, will have money
also; and the laborer who has no property will find it very easy to get
it; for every capitalist will seek to secure him as a partner. All
services will then be paid for in ready money; and the demand for labor
will be increased three, four, and five-fold.
As for credit of the kind that is idolized by the present generation,
credit which organizes society on feudal principles, confused credit,
the Mutual Bank will obliterate it from the face of the earth. Money
furnished under the existing system to individuals and corporations is
principally applied to speculative purposes, advantageous, perhaps, to
those individuals and corporations, if the speculations answer; but
generally disadvantageous to the community, whether they answer or
whether they fail. If they answer, they generally end in a monopoly of
trade, great or small, and in consequent high prices; if they fail, the
loss falls on the community. Under the existing system, there is little
safety for the merchant. The utmost degree of caution practicable in
business has never yet enabled a company or individual to proceed for
any long time without incurring bad debts.
The existing organization of credit is the daughter of hard money,
begotten upon it incestuously by that insufficiency of circulating
medium which results from laws making specie the sole legal tender. The
immediate consequences of confused credit are want of confidence, loss
of time, commercial frauds, fruitless and repeated applications for
payment, complicated with irregular and ruinous expenses. The ultimate
consequences are compositions, bad debts, expensive accommodation-loans,
lawsuits, insolvency, bankruptcy, seperation of classes, hostility,
hunger, extravagence, distress, riots, civil war, and, finally,
revolution. The natural consequences of mutual banking are, first of
all, the creation of order, and the definite establishment of due
organization in the social body; and ultimately, the cure of all the
evils which flow from the present incoherence and disruption in the
relations of production and commerce.
IX
MUTUAL BANK
The Mutual Bank.
The essential features of a Mutual Bank may be outlined as follows:
1. Mutual Banking Associations shall be formed to do a general banking
business and to issue Bank cheques for the use of their members,
2. Members of such associations shall, upon admission, bind themselves
in due form to receive the cheques issued by the association from all
persons, in all payments, at par.
3. The associations may issue their currency cheques as loans to their
members to circulate as money among them and such other persons as are
willing to receive it. These cheques will not be legal tender.
4. Any person may become a member of any association and may borrow the
money issued by the association, by giving his promissory note therefor,
and by pledging property or future production or pronotes to the
association to secure the payment of said note, or by having his loan
insured as hereinafter provided.
5. Loans may be made for an amount not exceeding one-half the assessed
value of the improvements situated upon the real estate pledged, or in
an amount not exceeding one-half the value of goods, chattels,
implements and machinery used in productive enterprises, or upon shares
of stock of such enterprises, and upon warehouse receipts. The period
for which loans shall run shall be determined by the marketability and
possible depreciation of the security offered.
6. Loans may also be discounted by the association, for those who have
no property to pledge, upon the payment of a sufficient premium to
insure the risk with an authorized insurance company.
7. The rate of interest shall always be zero. The charges for which said
money shall be loaned shall be determined by and shall just meet and
cover the losses sustained and the expenses of the association.
8. Members, by paying their debts to the association, shall have their
property released from pledge, and be themselves released from all
obligations to said association and to the holders of its money as such.
9. Wage workers who are willing to receive the money of the association
in the payment of their wages may deposit the same with the association
subject to check.
10. The money of the association shall be issued in denominations of
one, two, five, ten and twenty rupee bills; at least one-half of the
issue shall be in the first three denominations.
11. The check, draft, bill of exchange and travelers’ checks may be
adopted to facilitate exchanges between the various members of the
associations and between the associations themselves in specific part of
India only.
12. Associations may form clearing houses in a city where there is a
branch near the center of population. .
Offhand, there seems to be a risk connected with the acceptance by the
Mutual Bank of all kinds of property as security for loans. But, in
reality, the risk will be very slight. If a member of the Mutual Bank
should fail to redeem his note at maturity, the property he has pledged
will be sold for current money. The auctioneer pays to the Bank in the
amount of the note, which gold the Bank will then hold, in order to
redeem with it an equivalent amount of currency. The balance will be
paid to the debtor for his equity. Under our present system, with all
its uncertainty, a foreclosure will not take place once in five hundred
instances. Under the system just outlined it will happen even less
often. About two thousand rupees in gold coin is all that would be
needed to protect a lack of rupees in loans. And even this amount can be
dispensed with by insuring the risk with a reliable insurance company.
In general, the advantages of this Mutual Bank will be:
Mutual Bank cheques being secured credit, will take the place of
unsecured credit, and, in consequence, credit losses will be practically
eliminated. Usury and interest will cease, and only the costs of
issuing, securing, and carrying Mutual Bank notes will be charged,
amounting to less than one per cent.
Mutual Bank cheques, by their very nature, cannot depreciate. On this
account, and because there will always be enough Mutual Money for all
industrial and commercial needs (due to the flexibility of the issue),
there will be no more money panics.
As money will be easy to get under the Mutual Banking system, sound
enterprises will have no difficulty in getting financed. This will
eventually mean the disintegration of monopoly. It will also mean the
creation of many more jobs, and consequently competition among employers
for workers, resulting in increasingly better conditions of work land
pay, until at last the worker will receive the full product of his
labor.
Mutual Bank in Operation
Let it be assumed that the Mutual Bank has been established and offers
credit at the cost of operating the bank, which is about one per cent.
This will be the full rate charged on all loans. This rate comes into
competition with the rate charged by all other banks and all other money
lenders. The effect on the other banks will be felt very soon, because
no one is going to pay six or eight per cent for money when he can get
it for one per cent or less. One of two things must happen. The old
banks must either meet the cut and also lend money at that rate, or else
lose their customers who will go to the new bank, the new bank needs no
capital, as it does business entirely on the capital of its customers,
who are also its members; for every member virtually brings his own
capital to the Mutual Bank when he joins it.
The business the Mutual Bank can do is unlimited, and each new member
joining the Bank in creases the number of people who can do business
with each other on this new basis. The circle of exchange becomes wider
arid wider and it cannot be long before the whole comunities is impelled
by self interest to do business on this plan.
Once the Mutual Bank is operating, money will be available practically
without interest to, any responsible producer, so that his independence
will no longer depend upon the whim of the usurer, but upon his
determination and his ability in his line of work. There will be big
factories and small shops, and the demand for wage labor will be greater
than the supply, with the result that wages will soar until they
approach the full value of the work done. Due to the elimination of
interest, rent, and privileged profits, under Mutualism the cost of
commodities will be much lower and money therefore will have more buying
power, in addition to wages being higher. Is this not a condition worth
working for? Once the Mutual Bank is established, Mutual exchange will
permeate all society and demonstrate everywhere the benefits to be
derived by adhering to the cost principle, so that society may at last
move in the right direction.
For the inauguration and successful operation of the Mutual Bank, a
considerable number of representatives of diversified industries would
be essential. The organization of such a group must be the first task of
those who wish to put that phase of Mutualism into practice. The
co-operatives have such an aggregation already at hand, organized and
trained in associative effort. Here, then, a beginning can be made, if
such associations can be brought to perceive the immense benefits to all
society to be derived from this extension of their principles. These
associations have the psychological foundation and the mechanism for the
purpose. Mutualism offers them this opportunity and assures them of its
hearty co-operation.
The methods of approach for the credit group of organizations must, by
now, be self-evident. Money and insurance at cost, occupancy and use, as
essentials to land ownership; adherence to the law of equal liberty; and
voluntary association, no compulsion for the non-invasive individual —
all these are tenets of Mutualism which can never be emphasized too
strongly. All things which make for the maximum of individual liberty
compatible with equality of liberty are part of the Mutualist programme,
no matter from what quarter they, are tendered. And, per contra,
anything which limits the liberty of anyone below the point needed to
retain equality of liberty is a danger to the individual and therefore
to human society as a whole, and in consequence is rejected by
Mutualism. Liberty is the first need of man. For Liberty is, as Proudhon
so well stated, not the daughter but the mother of order.
1. The reader is requested to notice this distinction between actual and
legal value, as we shall have occasion to refer to it again.
2. Money is merchandise just like any other merchandise, precisely as
the trump is a card just like any other card.
3. Money and Banking, or Their Nature and Effects Considered; Together
With a Plan for the Universal Diffusion of Their Legitimate Benefits
Without Their Evils. By a Citizen of Ohio Cincinnati: Published by
William Beck, 1839; 16mo, 212pp
4. These remarks may be generalized, and applied to the commerce which
is carried on between nations.
5. “I now undertake to affirm positively, and without the least fear
that I can be answered, whatheretofore I have but suggested — that a
paper issued by the government, with the simple promise to receive it in
all its dues, leaving its creditors to take it or gold and silver at
their option, would, to the extent that it would circulate, form a
perfect paper circulation, which could not be abused by the government;
that it would be as steady and uniform in value as the metals
themselves; and that, if by possibility, it should depreciate, the loss
would fall, not on the people, but on the government itself,” etc. — J.
C. Calhoun: Speech in reply to Mr. Webster on the Sub-Treasury Bill,
March 22, 1838.
6. Malthus says (we quote the substance, and very possibly the exact
words, though we have not the book by us}: “If a man is born into a
world already occupied, and his family is not able to support him, or if
society has no demand for his labor, that man has no right to claim any
nourishment whatever; he is really one too many on the earth. At the
great banquet of nature there is no plate laid for him. Nature commands
him to take himself away; and she will by no means delay in putting her
own order into execution.”
7. “North Carolina, just after the Revolution, issued a large amount of
paper, which was made receivable in dues to her. It was also made a
legal tender; which, of course, was not obligatory after the adoption of
the Federal Constitution. A large amount, say between four and five
hundred thousand dollars, remained in circulation after that period, and
continued to circulate for more than twenty years, at par with gold and
silver during the whole time, with no other advantage than being
received in the revenue of the State, which was much less than one
hundred thousand dollars per annum.” — John C. Calhoun: Speech on the
bill authorizing an issue of treasury notes, Sept. 19, 1837.
8. Thus the whole principal would be paid up in twenty years.
9. See foregoing paragraph where it, is said that debts to the bank
might be paid in manufactures and produce.
10. “We are told that there is no instance of a government paper that
did not depreciate. In reply I affirm that there is none assuming the
form I propose (notes receivable by government in payment of dues) that
ever did depreciate. Whenever a paper receivable in the dues of
government had anything like a fair trial, it has succeeded. Instance
the case of North Carolina referred to in my opening remarks. The drafts
of the treasury at this moment with all their incumbrance, are nearly at
par with gold and silver; and I might add the instance alluded to by the
distinguished senator from Kentucky, in which he admits, that as soon as
the excess of the issues of the Commonwealth Bank of Kentucky were
reduced to the proper point, its notes rose to par. The case of Russia
might also be mentioned. In 1827 she had a fixed paper-circulation in
the form of bank-notes, but which were inconvertible, of upward of $
120,000,000, estimated in the metallic ruble, and which had for years
remained “without fluctuation; having nothing to sustain it but that it
was received in the dues of government, and that, too, with a revenue of
only about $ 90,000,000 annually,” — John C. Calhoun: Speech on his
amendment to separate the government from the banks, Oct. 3, 1837.
11. People who raise the cry of “cheap -money” fall into the same error;
money that circulates freely at par, whether interest-bearing or not, is
neither cheap or dear. — Editor.
12. Persons of little foresight rejoice in the high price of commodities
— that is, in the low price of plentifulnese of money — not reflecting
that, when money is too plently, the stream to enrich foreign lands. And
excessive supply of money causes a deceitful appearance of prosperity,
and favors temporarily a few manufacturers; traders and mechanics; but
it is always a source of unnumbered calamities to the whole country.
13. Perhaps on account of those explanations. As heat melts wax and
hardens clay, so the same general principles, as applied to merchandise
money and to mutual money give opposite results.
14. “If, however, the inconvenience is anything, the lender ought to be
indemnified; but such indemnification is not properly interest.
15. Perhaps, we ought rather to say, “would be profoundly immoral in a
more perfect social order.” We suppose that must be considered right, in
our present chaotic state, which is best on the whole, or which — taking
men’s passions as they are — is unavoidable.