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Title: Involuntary Idleness
Author: Hugo Bilgram
Date: 1889
Language: en
Topics: economics, labor, Libertarian Labyrinth
Source: Retrieved 2011-12-07 from https://web.archive.org/web/20111207231000/http://libertarian-labyrinth.org/bilgram/involuntaryidleness.pdf

Hugo Bilgram

Involuntary Idleness

PREFACE.

While engaged in the preparation of a treatise upon the subject of

Social Rights and their relation to the distribution of wealth, the

author had an opportunity to present some of the conclusions to which

his studies have led at the meeting of the American Economic Association

in Philadelphia, and on December 29, 1888, read a paper on “Involuntary

Idleness.”

The Association having given but a brief abstract of the paper in the

report of their proceedings, the author has been prevailed upon to

publish the entire paper, and he is persuaded that its importance as a

contribution to economic thought will be recognized by such students as

regard the modern presentation of the science of Political Economy to be

in many respects entirely unsatisfactory.

INTRODUCTION.

In order that the reader may more readily follow the line of argument

developed in these pages, the following synopsis is presented.

The aim of the treatise is to search for the cause of the lack of

employment, which is obviously due to the observed fact that the supply

of commodities and services exceeds the demand, although reason dictates

that supply and demand “in general should be precisely equal. The factor

destroying this natural equation is looked for among the conditions that

regulate the distribution of wealth, —i.e., its division into Rent,

Interest, and Wages.

The arguments evolved by the discussion of the Rent question, which of

late has excited much public interest, being unable to account for the

apparent surfeit of all kinds of raw materials, the topic of rent is

eliminated by assuming all local advantages to be equal.

At first an examination is made of the relation of capital to the

productivity of labor, and that of interest on capital to the

remuneration for labor, showing that high interest tends to reduce the

productivity of, as well as the remuneration for, labor. Low wages being

also concomitant with a scarcity of employment, it is inferred that a

close relation exists between the economic cause of involuntary idleness

and the law of interest.

Following this clue, the two separate meanings of the ambiguous word

“Capital” are compared, showing that money, which can never be used in

the act of production, cannot be capital when that term is used in its

concrete sense; and since capital is capable of producing a profit only

when the same is used productively, the fact that interest is paid for

money-loans, when that which is loaned cannot be used productively, must

be traced to an independent cause. The usual argument that with money

actual capital can be purchased is rejected, because money and capital

would not be interchangeable if their economic properties were not

homogeneous. This compels the search for a property inherent in money

that can account for the willingness of borrowers to pay interest on

money-loans.

It is then shown that interest on money-loans is paid because money

affords special advantages as a medium of exchange, and the value of

this property of money is traced to its ultimate utility, or, in other

words, to the increment of productivity which the last addendum to the

volume of money affords by facilitating the division of labor.

Returning to the question of interest on actual capital,—i.e., the

excess of “value produced over the cost of production,—the question as

to what determines the value of a product leads to 1 the assertion that

capital-profit must be due to an advantage which the producer possesses

over the marginal producer. This is found to be due to the interest

payable by the marginal producer on money-loans.

An ideal separation of the financial from the industrial world reveals a

tendency of the industrial class to drift into bankruptcy by force of

conditions over which they have no. control. Those who are at the verge

of bankruptcy being the marginal producers, others who are free of debt

will reap a profit corresponding to the interest payable by the marginal

producers on debts equal to the value of the capital they employ; hence

the rate of capital-profit will tend to become equal to the rate of

interest payable on money-loans, and the power of money to command

interest, instead of being the result, is in reality the cause of

capital-profit.

The inability of the debtor class to meet their obligations increases

the risk of business investments, and the accumulation of money in the

hands of the financial class depriving the channels of commerce of the

needed medium of exchange, a stagnation of business will ensue, which

readily accounts for the accumulation of all kinds of products in the

hands of the producers and for the consequent dearth of employment. The

losses sustained by the lenders of money involve a separation of

interest into two branches, risk-«premium and interest proper, and

considering that the risk premiums equal the sum total of all

relinquished debts, the law of interest is evolved by an analysis of the

monetary circulation between the debtors and creditors.

This analysis leads to the inference that an expansion of the volume of

money, by extending the issue of credit-money, will prevent business

stagnation and involuntary idleness.

The objections usually urged against credit-money are considered and

found untenable, the claim that interest naturally accrues to capital is

disputed at each successive stand-point, and in the concluding remarks

an explanation is given of the present excess of supply over the demand

of commodities and services, confirming the conclusion that the

correction of this abnormal state is contingent upon the financial

measure suggested.

INVOLUNTARY IDLENESS.

In studying the past as well as the present drift of popular thought on

political and economic questions, there is found not only a striking

divergence of opinions, but on every hand doctrines are met that bear

the unmistakable stamp of anomalous reasoning.

It is popular to attribute dull times and the consequent distress of the

producers to an alleged overproduction of things, for the want of which

people suffer. The immigration of those who are willing to add to our

wealth by work and accept a small remuneration in return is considered

detrimental to our well-being. The introduction of labor-saving

machinery is contested by workmen in Spite of the saving of time and

labor. International commerce is considered harmful to that country

which receives more than it gives.

But in whatever form these self-contradictions appear, they evidently

arise from the existence of an ever-present fear that there is not

enough work to do, and that enforced idleness may inflict its miseries

upon those who in the struggle for existence fail to secure their share

of the work. Yet our experience, which indicates that the supply of

services as well as of commodities does exceed the. effective demand for

the same, is in direct conflict with rational thought. Whatever is

offered in the market for sale is ostensibly offered with the

expectation of obtaining something else in return, either directly or

through the medium of exchange. Each supply of a commodity, each offer

of a service, implies a demand for some other valuable thing or service.

The more commodities one man makes and offers for sale or exchange, the

greater, it appears, should be the demand for other commodities. But

while there is every reason to assume that the total supply of

commodities and services in general should always equal the total

demand, we notice in reality the absence of such an equation, we know

that labor can become a drug in the market. The competition of those

unemployed, who are in search of work, produce the long-recognized

tendency of wages to a minimum of subsistence and give plausible pretext

to the doctrine of socialism. Tariff legislation, as well as that

regulating immigration, the time of labor, etc., and other laws designed

to regulate competition, testify in unmistakable terms that the fear of

competition, the dread of involuntary idleness, is not an empty phantom,

but a stern reality. Most painful is the effect of enforced idleness

when it manifests itself in industrial depressions, those social

calamities which the science of economics has so far failed to explain

satisfactorily.

The standard works on Political Economy, such as Ricardo’s, Mill’s,

etc., fail to reveal the cause of the manifest discrepancy between what

obviously should be and what really is. In fact, the method of those

writers in dealing with definitions and propositions is in marked

contrast with that adopted in the exact sciences. The use of ambiguous

terms has led to unwarranted and incorrect applications of otherwise

correct doctrines. Well-established propositions being sometimes

admitted and at other times unceremoniously ignored, contradictory

statements are not infrequently found, which impair the reliability of

the conclusions of those writers. But although they have in a measure

failed to dispel the confusion of popular views, there is no reason why

social phenomena should be more difficult to analyze than those of a

physical or chemical nature. It should therefore be possible to find, by

logical deduction, the fundamental cause of involuntary idleness, or the

factor which destroys the natural equation between the supply of, and

the demand for, commodities. And this can be found only among the

conditions that regulate the distribution of wealth and determine its

division into Rent, Interest, and Wages.

The thorough ventilation which the relation of Rent to the Social

Problem has received through the works of Ricardo and his followers,

especially Henry George, while showing that a lowering of the margin of

cultivation can account for a lowering of wages by a reduction of the

productivity of labor, has brought forth no clear explanation for the

excess of the supply of commodities and services. As long as there

exists any uncultivated land capable of affording a living to its

cultivator, the law of rent cannot account for enforced idleness. The

study of the economic causes which produce, as well as the laws which

regulate, capital-profit, or interest proper, have in the interim been

comparatively neglected. It is therefore not inappropriate to give more

thought to the relation which interest bears to wages. A rational

analysis requiring the exclusion of all matter foreign to this relation,

the question of rent should be eliminated by assuming for the time being

that all natural and local advantages were equal.

While nature furnishes the substance of all wealth, labor and capital

are the factors that give this substance value. The productivity of

labor depends, however, in a great measure upon the amount of capital

employed. If some one, desiring to produce certain commodities, could

have the assistance of, say, one hundred men, the productivity of their

labor would be very low if no auxiliary capital were applied. The use of

crude tools would decidedly increase the efficiency of their efforts,

and if more capital in the form of improved auxiliaries were added, the

productivity would be still greater. There is, however, a limit to this

increase of the productivity of a given number of men by the addition of

capital, because capital, when used productively, will deteriorate, and

a portion of the labor must be diverted for the purpose of restoring

this loss. As the amount of labor so diverted grows with the increase of

capital, it is evident that the productive power of labor will not keep

pace with the addition of capital, and that a point can be reached

beyond which a further increase of capital will have an adverse effect

and actually reduce the net productivity of those one hundred men. The

variation of their productivity due to an increase of capital can be

represented by a curve of the character shown in Fig. 1. (See plate at

end of volume.)

For reasons just stated this curve will decline after passing the apex

M, which represents the highest possible productivity of the stated

amount of labor. The contingency of a future progress in the methods of

production, which would affect the course of the curve, is of course not

considered.

Although the productivity is at a maximum when an amount of capital

equal to OC is employed, the employer will not find it to his advantage

to apply this amount, because of the interest-bearing power of capital.

Letting the distance CI represent the interest due to the capital OC,

this amount must be deducted from the value produced, leaving the value

IM, from which the employer must defray the cost of labor, the remainder

being his wages for the management of the business. By using an amount

of capital equal to OC, the interest would have amounted to Ci, and the

return to labor and management, iP, would exceed the quantity IM. The

most advantageous proportion of capital can be located in the diagram by

finding that point, P, at which the curve is parallel to the

interest-line OI, and it is the tact of successful business-men to

closely approach this point in their management. The point P bears the

same relation to capital as the point of diminishing returns does to

land.

If the rate of interest payable on the capital OC had been CI’, the high

rate would have caused the employer to apply capital more sparingly, and

our diagram would in fact indicate that the productivity C”P’, due to

the capital OC”, will give the best result. On the other hand, if the

producers could have abundant capital without interest, labor would be

employed most advantageously at its natural maximum of productivity.

The diagram clearly illustrates the separation of the value produced by

labor and capital into interest and wages, the remuneration of the

manager being considered wages. But while so far we can see no

indication as to what determines the rate of interest, it will be

perceived that as interest rises wages become less, for the productivity

of labor will be reduced by the more cautious use of capital, and,

besides, a greater proportion of that which has been produced will go to

capital as interest. The remuneration of all labor is represented by

i’P’ when interest is high, by iP when interest is low, and it would be

equal to CM if capital could be obtained without interest. This

proposition is true only for a state of persistency, when no secondary

factors intervene, and not for transitory periods of industrial

activity. If from any cause persistency is disturbed, the disturbing

factor may for a time change this relation between wages and interest,

and make wages and interest rise or fall simultaneously. We shall see

that the cause of involuntary idleness is just such a factor.

In comparing the proposition that under otherwise equal conditions a

high rate of interest tends to reduce wages with the indisputable fact

that when many men are without employment wages are low, a strong

suspicion is raised that an intimate relation may exist between the

economic cause of high interest and that of involuntary idleness; for

there is no phenomenon which can have two independent explanations. We

are therefore justified in pursuing the investigation by searching for

the law that determines the rate of interest.

This inquiry must be directed, not so much to the cause of the increase

of productivity attainable by the use of capital over that of productive

efforts made without the use of auxiliaries, but to the economic causes

that assign to the owner of capital a portion of. that which is produced

by the co-operation of capital and labor.

In order to discriminate intelligently between the conflicting

definitions of the term “Capital,” as given by the authorities, we

should first understand why a distinction is made between wealth which

is, and wealth which is not, capital. Experience shows that wealth under

certain conditions is capable of bringing a revenue to its owner, and

this power fully justifies a classification being made. There being no

other economic difference of importance, it must be accepted as the real

motive of this differentiation of wealth. Adam Smith defines the term by

this power, and is followed by others, notably Macleod. There is,

however, a strong tendency among modern writers to depart from this

natural definition with a view of indicating the source of this power.

According to John Stuart Mill capital is the accumulated produce of

labor requisite for further production. The term “Capital,” therefore,

covers two totally distinct concepts, which are frequently confounded to

the detriment of correct reasoning. Capital, in its abstract

sense,—comprising all wealth capable of bringing a revenue, —admits the

conception of a “conversion of capital” or of “floating capital,” etc.,

not referring to any particular thing, but to wealth in general when it

has a certain economic relation to its owner, while in its concrete

sense,— meaning certain things produced by labor, and used for certain

purposes,— its conversion is inconceivable. Yet the adherents of the

concrete definition adopt these phrases without even suspecting the

logical error. Moreover, the concrete definition, if not further

qualified, lacks the feature of exactness, in not stating whether wealth

is capital whenever it is capable of being used productively, or only as

long as it is in productive use. There is, however, no room for dissent.

The mere ability of things to be used in production, if they are not so

employed, cannot account for the revenue-returning feature, which being

the distinguishing attribute of capital, it is plain that not the

potentiality of wealth, but its actual use alone can turn wealth into

capital. Nor does this definition cover objects which are being consumed

unproductively, such as private residences rented to tenants, etc. A

hired equipage is aiding further production no more than a private

carriage, yet in one case it is capital, in the other it is not.

Another inconsistency is shown by the exponents of the concrete

definition when they include money in the category of capital, while in

reality money as such neither is nor can be used in the act of

production, and therefore never can be a requisite for further

production. This is admitted either directly or by implication by most

economists. Newcomb asserts that “the money serves the banker no useful

purpose until he passes it to some one else, perhaps a customer. Every

one into whose hands it falls must be paying or losing interest on it

while he keeps it, and he cannot gain the interest until he purchases an

ownership in some form of actual capital.” This is clearly an admission

that interest must be paid or will be lost on money wherever it may be,

or to whatever use it may be put; for even if actual capital is

purchased, the loss of interest must be borne by the one to whom the

money is transferred. Money being thus admitted to be unproductive, it

cannot be considered capital if the definition of Mill is adopted, and

any preposition relating to capital and demonstrated under this

definition cannot be consistently applied to money. It is therefore

important to pay special attention to the interest-bearing power of

money, the real source of which is not generally recognized.

In the following discussion the term capital will be used in its

concrete sense.

The income derived from wealth, whatever be its form, can be acquired by

its owner in two ways. fie may use the wealth productively, or, by

loaning it to others, receive a premium for its use. In the one case the

income accrues as profit, consisting of the excess of value obtained

over and above the market value of the labor applied and other expenses

incurred; in the other case it appears as interest proper, which is

equal to the gross interest minus the rate of risk and deterioration.

But since he who borrows capital is willing to give interest because the

use of capital will give him a material advantage, it follows that

profits derived from loans must be considered mere transfers of the

value of this advantage.

Applying this preposition to the interest-bearing power of money, we are

confronted with the fact that money cannot be utilized as a requisite of

production, and is therefore incapable of bringing an excess of value in

this respect. Consequently we are. obliged to look elsewhere for any

benefit which may be derived from its use. It is true, we are told that

with money actual capital can be purchased from which profit may be

obtained. John Stuart Mill says, “Money, which is so commonly understood

as the synonyme of wealth, is more especially the term in use to denote

it when it is the subject of borrowing. When one person lends to

another, as well as when he pays wages or rent to another, what he

transfers is not the mere money, but a right to a certain value of the

produce of the country to be selected at pleasure, the lender having

first bought this right by giving for it a portion of his capital. What

he really lends is so much capital; the money is the mere instrument of

transfer.”

In this proposition it is assumed that money is not necessarily wealth,

but a right to a certain amount of wealth, and that the lender of money

has received his money by giving a portion of his capital for that which

is merely an evidence of such surrender of capital coupled with the

right to demand an equivalent at pleasure. This right is what is

transferred to the borrower, who can use the capital so obtainable, and

for this use pays interest. To an unprejudiced mind several pertinent

questions will naturally arise. If society has obtained capital for

which it has given merely a right to demand an equivalent, why does not

society pay for the use of that capital, indemnifying the holder of

money for his abstinence, until that right to demand has been redeemed?

If Mill’s reasoning is correct, somebody must have the lender’s capital

even before he lends the money to others, and justice would require that

the interest gained by its use should be paid to the holder of money by

the user of that capital. Moreover, why is it that the borrower of money

must pay interest for the mere right to select capital before the

selection is made? During the interval between the borrowing of money

and the selection of capital society has the use of that capital, and

society rather than the borrower of money should in equity bear the

burden of interest. Furthermore, why should the borrower of money pay

the interest to the lender who has given his actual capital to somebody

else, instead of paying it to him who renders the service of giving

actual capital for a mere evidence of surrender and right to demand an

equivalent?

If capital has reproductive powers while money has not, it is not

reasonable to assume that anybody would willingly exchange actual,

profit-bearing capital for money, on which interest will be lost, if

money should not afford some other equivalent advantage, and

notwithstanding the assertions of authorities we must look for a

property inherent in money which alone can account for the willingness

of borrowers to pay interest to the lender of money.

As regards concrete capital,—i.e., products of labor applied to further

production, there can be no doubt that profits can originate only while

it is used in combination with labor. Capital profits will therefore

invariably appear in conjunction with wages, in the manner shown in the

diagram Fig. 1. (See plate at end of volume.) The term production must

here of course be understood in its broad sense. Goods exposed for sale,

aggregated with others of a similar nature, though apparently out of

use, are really in the stage of commercial production, the process of

distribution requiring them to remain, for a time, in a seemingly inert

state. Industrial capital may also be temporarily out of use without

ceasing to be capital as this term is commonly accepted. Machines are

usually idle not only fourteen hours each day but also one day of each

week.

But the requisites of production may be out of use for quite other

reasons. To be productively employed they must be aggregated in certain

combinations. A power-loom, for instance, can be in industrial use only

when located in a suitable building, when connected by shafting and

belting with a motor, when supplied with yarns to be woven into a

fabric, and when attended by a mechanic skilled in the art of weaving.

Each of the numerous branches into which production is divided requires

a peculiar combination of raw materials, auxiliaries, and human skill.

Any product passing through the various processes in the course of its

economic maturation becomes alternately a raw and a finished product,

the finished product of one group of producers being the raw material of

those that follow.

Regarding a single group, the wealth in course of generation, after

passing through the process peculiar to that group, becomes a finished

product, ceasing to be a requisite of production to this group, and is

to all intents and purposes inert wealth or idle capital. In this form

it is virtually no-interest capital, and has the same function in the

theory of capital-interest that no-rent land has in the theory of rent.

It can be vivified or converted into live capital only if transferred to

another group, in which it will find that combination of capital and

skilled labor congenial to its further maturation.

But in the present quasi-individualistic state of society such transfers

are always contingent upon the return of equivalents. These exchanges

would be beset by serious obstacles, practically forbidding a division

of labor, if the special instrument of exchange, money, were unknown,

which though not a means of production, is a very essential factor in

our industrial system. Without it those transfers which convert inert

wealth into active capital and render possible a division of labor would

be almost impossible.

This will explain why an owner of actual capital is willing to exchange

it for money on which he will lose interest while possessing it. The

capital he is willing to give for money has manifestly arrived at that

stage of production when it is to him a finished product and requires to

be transferred to other producers to become live capital, while he in

turn requires capital which is inert to others but capable of further

productive manipulation by him. To accomplish these transfers, money is

the indispensable instrument. One of the most important phases of this

function is the paying of wages,—i.e., the distribution, among the

producers, of the increment of value which accrues to all products as

they pass through the various stages of production.

This analysis leads to the inference that interest on money-loans is

paid because money affords special advantages as a medium of exchange,

and the fact that most money transactions of to-day are made by means of

paper evidences without transfer of actual wealth confirms this

conclusion. A loan of bank-notes on security is admittedly an exchange

of two rights of action,—one, the security, having a precarious, the

other, the money, having an ever-ready value. The right of action which

the banker accepts as security can be exchanged for other things, or

realized, only on certain conditions, while that which he gives is

readily accepted everywhere at its face value. This universal

acceptability gives to money its special advantage, and being the only

important difference between the two rights of action, the payment of

interest can be traced to no other feature of money.

We can now proceed to investigate the value of this advantage and its

relation to the rate of interest. In a community in which, for the want

of money, barter is the sole method of exchange, an extensive division

of labor with its attending advantages would be impossible. A limited

supply of money can only partially improve this condition, but it would

naturally flow into those channels in which the resulting advantages are

greatest. A second equal supply, while likewise augmenting productivity

by permitting a further division of labor, would not increase it in the

same measure, the channels of the first order being filled. A third

equal supply would further increase productivity, but in a still less

degree. The general advantage afforded by money can therefore be

represented by a curve, as shown in Fig. 2 (see plate at end of volume),

the ordinates representing the increase of annual productivity

contingent upon the corresponding increment of the volume of money

represented by the abscissae, each new addition corresponding with a

diminishing advantage.

Now, although the successive additions to the volume of money produce

different effects as far as the general good is concerned, the law of

supply and demand will tend to accord to all money in the same market an

equal rate of interest, and it can be demonstrated that this rate will

adjust itself to the ultimate utility of money, namely, the annual

increase of productivity, Va, afforded by the last addendum, dV, of the

total volume of money, OV. For if the owner of this last quantity of

money expected a higher rate, he would find all channels capable of

rendering such a rate fully supplied, and must therefore be content with

the advantage of the best channel yet open. He being the lowest bidder,

this obviously determines the market rate of interest, as indicated by

the horizontal line ca.

The diagram now plainly shows the separation of the total benefit

derived from the division of labor attainable by the use of the volume

of money OV, and represented by the area OcbaV, into two parts; the

oblong OcaV incloses that part which the law of supply and demand will

apportion to money as interest, while the remainder, the area cba, will

accrue to capital and labor. The diagram also appears to indicate that

the rate of interest on money-loans, other things being equal, will

depend on the volume of money in circulation, whenever the law of supply

and demand is free to operate.

The inquiry as to the economic cause of the profit which accrues to

wealth used productively can now be continued. Such profit can arise

only if the value created by the combination of capital and labor

exceeds the cost of labor; that is, if the value produced exceeds the

cost of production, this cost including the value of the labor of the

employer. Here the question naturally arises, What determines the market

value of that which is produced, and when and why does it exceed the

cost of production? In answer we must refer to the law of supply and

demand, the effect of which is thus definitely expressed by Ricardo:

“The exchangeable value of all commodities, whether they be

manufactured, or the produce of the mine, or the produce of land, is

always regulated not by the less quantity of labor that will suffice for

their production under circumstances highly favorable and exclusively

enjoyed by those who have peculiar facilities of production, but by the

greater quantity of labor necessarily bestowed on their production by

those who have no such facilities; by those who continue to produce them

under the most unfavorable circumstances; meaning, by the most

unfavorable circumstances, the most unfavorable under which the quantity

of produce required renders it necessary to carry on the production.”

Ricardo has evidently in mind those things which are produced under

different degrees of difficulty, the quantity produced under the most

favorable conditions being inadequate to supply the demand. The total

demand determining the margin of the least favorable point at which

production will be continued, Ricardo’s law of value can be briefly

stated as follows: The natural value of those things that are being

reproduced is always- equal to their cost of production at the margin of

production. Conceding this proposition, it follows that every profit

must be traceable to an advantage which its recipient possesses over the

marginal producer, and, moreover, that no persistent profit can possibly

arise unless there be a difference in the opportunities of production.

In continuing our inquiry we must look for such a difference.

It would be an error to bring into consideration the difference of

abilities of employers. The so-called profits of the enterprising

business manager are, as a rule, a remuneration for valuable services

rendered, and properly belong to the category of wages. Our object is to

find the economic cause which apportions a share of the produce to

capital independent of its owner’s ability or assistance as a worker or

manager. There is but one class of variable producer’s expenses having

the character of a disadvantage that has any direct connection with our

subject. Those who do not own all the capital they are using must pay

interest on their indebtedness, which increases their actual outlay over

that of business-men free of debt. The question is now, should this

outlay be considered an unavoidable addition of the cost at the margin.

If it were paid because of the profit-bringing power of the borrowed

capital, then the solution of the problem would be as remote as ever.

But if there be some other economic factor compelling this outlay, its

examination may reveal that which we are in search of.

Business debts are, as a rule, contracted not by borrowing actual

capital, but by borrowing money, and, as we have seen that money bears.

interest solely on account of its attribute as a medium of exchange, and

have taken issue with the prevailing impression that the borrowing of

money is a borrowing of capital, we must search for the reason why

business- men so largely depend upon loans to procure the medium of

exchange.

Were it possible to separate by a sharp line the financial from the

industrial world, these who issue and those who loan money from those

who produce wealth, the flow of money between these two groups would

present a very striking feature. The industrial group could obtain the

medium of exchange requisite to carry on commerce in but two ways; by

selling the products of their labor to the financial group, and by

borrowing money from them. By the first measure the transfer of money

from one to the other group is absolute, by the second it is conditional

upon a return of the principal with the addition of interest. Loans, as

a rule, imply a return of a greater sum of money than was loaned, and

the only persistent source from which this excess can be drawn is

obviously the first mentioned way of obtaining money. These receipts

from sales are, however, not so much regulated by the productivity of

the debtors as by the willingness of the creditors to buy that which the

debtors offer for sale. And since money loaned to others is a source of

income, it is quite natural that the creditors will not only reinvest

the principal, but will reserve a part of that which they receive as

interest for additional investments. Hence only a portion of the money

Which the debtor class pays as interest to the creditors will return to

them by the regular channels of commerce, and the receipts of money, by

the industrial group, from sales to the financial group being for this

reason less than the amount of interest paid, the primary effect will be

a reduction of the money circulating among the producers. Some of the

channels of commerce, that were previously filled with the requisite

medium of exchange, having been thus depleted, the members of the

industrial group will be induced to borrow not only that money which had

been returned as principal, but also that which the financiers had

reserved for additional investments. This measure will increase both the

indebtedness and the obligation to pay interest, augmenting the

discrepancy between the amount of money received through sales and that

expended to pay interest, the growth of indebtedness assuming more or

less the nature of a geometrical progression. This cannot continue

forever. It not only becomes a physical impossibility for the debtors,

as a class, to ever satisfy their creditors, but they are irresistibly

driven, by the fatality of these conditions, into bankruptcy.

These conditions do in reality exist in our present social system. Even

though the distinction between the financiers and the producers is not

as sharp as outlined in the above analysis, the premises are,

notwithstanding, amply justified. By virtue of “our financial, “laws,

which forbid the issuer of bank-notes to use them for industrial”

purposes, this money can be brought into circulation only by the

creation of a debtor class, which is necessarily recruited from the

industrial group. It is true, the pressure, which we have seen will

inevitably result, will not fall with equal severity upon all men

engaged in production. Many will keep out of debt, while others will

succeed in freeing themselves from that burden. But since interest must

be paid in money, and the debtors as a class cannot indefinitely pay

more than the amount they realize from sales to the creditors,—these

sales being inadequate to restore to the debtors the means of paying the

interest, owing to the fact that the creditors apply a portion of their

income to additional investments,— the inability to pay must result in

the failure of the less successful of the producers despite their

industry and intelligence, not for the lack of business capacity, but

because their competitors are abler than they. They will continue to

produce until their debts exceed the value of their capital, when, being

driven beyond the margin of successful competition, they must succumb to

the inevitable. We here recognize a condition which inexorably forces

upon the producers an ever-increasing indebtedness and obligation to pay

interest, precipitating one after another into insolvency. Those who are

at the verge of bankruptcy, being indebted to an amount equal to the

value of the capital they employ, are obviously the marginal producers,

and as the natural value of the products will equal the cost of

production to them, all producers whose capital is unencumbered will

obtain a profit equal to the interest payable on borrowed money by those

marginal producers.

This course of reasoning would indicate that, quite contrary to the

generally received doctrine, the power of money to command an interest

is not the result, but the cause of capital-profit.

This is, however, not the only important conclusion to which this

analysis leads. The logical results of the conditions depicted agree so

fully with all the phenomena common to business depressions, that no

more complete verification of the theory can be desired. As the

indebtedness of the producers grows with an ever-increasing rapidity,

they cannot indefinitely continue to contract new loans. Money will

accumulate in the hands of the financial class instead of circulating in

the channels of commerce. The inability of the producers to meet their

obligations will become general, investments will become hazardous, and

a portion of the interest must be devoted to cover the occasional losses

of the creditors, the remainder alone being a real source of income.

Interest will thereby be separated into two parts, the risk premium, or

insurance to balance the deficiency of the principal returned on loans,

and the interest proper. The law of supply and demand no longer

dominates in fixing the rate of interest. Its operation is impeded by

the inability of the debtor class to return more money than they

receive. The determination of the rate of interest proper must therefore

be relegated to another law, born of the same conditions that produce

the deplorable results so characteristic of our present industrial

development. The constant drain upon the money in circulation paralyzes

commerce and obstructs the division of labor. Products in various stages

of completion accumulate in the hands of the producers who cannot

transfer them for further productive manipulation. The means of

production are lying idle and workmen skilled in special trades cannot

find employment; The financiers, in whose hands the money accumulates,

are anxious to loan it at low interest on good security, but the general

stagnation of business renders all investments insecure or unprofitable.

Thus we find a ready explanation of the phenomena of business

depression, and can discard such insufficient and illogical though

popular explanations as a general loss of mutual confidence,

speculation, accidental coincidence of unsuccessful enterprises,

excessive railroad construction, over-production, keen competition,

strikes, etc. All these alleged causes are in reality merely symptoms of

the same social disorder.

For the analytical deduction of the Law of Interest see Appendix.

When by purely deductive reasoning we arrive at conclusions so

completely corresponding with experience, it is reasonable to accept

their promptings as to the proper method of avoiding industrial

stagnation, which our investigation has shown to be engendered by an

insufficient supply of money. We are naturally led to ask, What limits

the volume of money? Before the development of the modern banking

system, when the precious metals were the almost exclusive money-medium,

the volume of money could not exceed the amount of those metals. But

since the use of credit as a medium of exchange has been established,

the extent to which the money-volume can be increased is almost

unbounded, encompassing the entire credit of the business world, which

is undoubtedly the natural limit. Our financial laws, however, by

strictly circumscribing the emission of credit-money, impose an

artificial barrier, the removal of which would put an end to the

involuntary idleness which the onerous toll for the use of money

occasions. But since an issue of money, limited only by the effective

credit, would be a radical departure from our present system, it is

proper to examine the principal objections urged against it,—the ease

with which it can be abused, and its effect upon the purchasing power of

money.

The first of these objections is not justified, since the abolition of

an arbitrary limitation need not involve the withdrawal of the ordinary

safeguards that restrain the unscrupulous. To prevent fraud and

imposition the government has been invested with the power to furnish

money, guaranteeing its value, and controlling its issue. But

restrictions are made that are not in harmony with this reason for

confining the regulation of credit money to the government, and they are

primarily responsible for the scarcity of money and its consequences.

The unlimited issue, by the government, of credit money to those

furnishing proper. security, precisely as it now loans notes to the

national banks, with this difference, that not only national bonds, but

any adequate security be acceptable, while removing the arbitrary limit,

would in no wise facilitate abuse. The risk involved in accepting

securities other than bonds could be met by a charge of interest

sufficient to cover these losses, the rate of such risk being readily

ascertained. In the absence of an arbitrary limit the volume of money

would be free to expand in proportion to the effective demand, and the

rate of interest being reduced to the rate of risk only, interest proper

for the use of money would cease.

To be sure, capital as well as money when loaned will continue to bring

a return, but the law of supply and demand operating without artificial

restriction, the pay for the loan of capital will naturally adjust

itself to the economic value of its use,—i.e., the rate of risk and the

deterioration of the capital loaned. Only the apparent power of capital

to more than reproduce itself, the ability to bring a persistent

revenue, will terminate.

The removal of the artificial impediment to the free conversion of sound

credit into money would have a. vital bearing upon the Rent question

which is now exciting considerable interest in economic circles. A

reduction of the current rate of interest is known to have the effect of

raising land values, and if the rate of interest proper were reduced to

zero, land values would obviously rise until the taxes, if assessed pro

rata on the value of real estate, will practically absorb all of the

economic rent. The nationalization of the economic advantages of natural

and local opportunities would therefore result without any further

legislation on the subject.

The second objection, founded upon the assertion that the purchasing

power of money is always inversely proportional to the total volume,

other things being equal, is widely accepted as conclusive. Were it true

that an increase of the volume of money would be balanced by a reduction

of the value of each dollar, the capacity of the total amount of money

to perform its function would remain unchanged, and under such

circumstances the measure suggested would obviously be futile.

This theory of the value of money, though disputed by some economists,

is vigorously defended by most English and American writers. Ricardo

asserts: “That commodities would rise or fall in price, in proportion to

the increase or diminution of money, I assume as a fact which is

incontrovertible.” Yet the strongest arguments that can be adduced

against this position are found in this writer’s works. He unqualifiedly

declares that the value of any article capable of reproduction is equal

to the highest cost at which its production is continued, the cost at

the margin of production. It is therefore remarkable that in the

quotation referred to this law of value, which has been so properly

applied in the theory of rent, has been totally ignored, especially

since he admits that, “While the state coins money, and charges no

seignorage, money will be of the same value as any other piece of the

same metal of equal weight and fineness; but if the state charges a

seignorage for coinage, the coined piece of money will generally exceed

the value of the uncoined piece of metal by the whole seignorage

charged.” Here it is plainly acknowledged that the value of money equals

its cost of production. Now, if this proposition is true, the value of

money can rise or fall, or prices in general can fall or rise, only if

the cost of producing money is changed, and the volume of money already

in circulation cannot influence this value. If, on the other hand, the

quantity of money in circulation determines the value of money, this

value, in consequence, would be independent of the cost of production.

Obviously one of the two Ricardian propositions must be wrong.

John Stuart Mill follows Ricardo very closely. In two consecutive

chapters he expounds both propositions, and attempts to harmonize them

by referring to a particular illustration in which the contradiction

does not present itself plainly. Other inconsistencies are disposed of

in an equally remarkable manner. After showing that money is merely a

contrivance for facilitating exchanges, the mode of exchanging things

for one another consisting in first exchanging a thing for money and

then exchanging the money for something else, he asserts that “The value

or purchasing power of money depends, in the first instance, on demand

and supply.... The supply of money ... is all the money in circulation

at the time.... As the whole of the goods in the market compose the

demand for money, so the whole of the money constitutes the demand for

goods. The money and the goods are seeking each other for the purpose of

being exchanged. It is indifferent whether, in characterizing the

phenomena, we speak of the demand and supply of goods, or the supply and

the demand of money. They are equivalent expressions.”

This proposition leads to a very remarkable inference. Conceding that

the seller of things wants money only for getting other things, then the

demand for money is virtually a demand for those other things; and since

the supply of goods and the demand for money are “equivalent

expressions,” and the denial for money really means a demand for goods,

it must logically follow that the value of all money must equal the

value of all goods offered for sale. This conclusion is obviously at

variance with facts. It is true, in the same chapter this very inference

is repudiated, — but this involves a qualification which reflects

disastrously upon the original preposition. The logic of a writer can

fairly be questioned who propounds a doctrine, repudiates one of its

corollaries, and then finds fault with others for refusing to accept

this preposition as incontrovertible.

Professor Newcomb attempts to show by the equation existing between the

industrial or societary and the monetary flow that prices in general

must rise or fall as the volume of money is increased or reduced, but

the fact appears to have escaped his attention that a restriction of the

money-volume necessarily reacts upon the corresponding industrial flow,

which renders untenable his conclusion based on a constant industrial

flow. It is the amount of societary circulation and eventually the

rapidity of circulation, and not the value of the dollar, that will

respond to a change of the volume of money. His. equation, properly

interpreted, proves conclusively that the limitation of the volume of

money, in being attended by a restriction of the monetary flow, must

react unfavorably upon the industrial flow and consequently produce

business stagnation.

The opinion that the value of money bears an inverse ratio to its volume

originates from a misconception of the nature of credit-money, resting

on the absurd belief that value can be created or changed by the flat of

the government. Even though the followers of Ricardo contest this view,

they inadvertently commit themselves to it in their doctrine of the

value of the so-called inconvertible notes. They aver that such notes,

when brought into circulation while coin is yet in use, in driving the

coin out of circulation assume a value equal to that of the precious

metals thus displaced. This would obviously imply that the issue of such

notes does increase the wealth of a country.

There is but one rational theory of credit-money. The note is merely an

evidence that the bearer has a right of action against the issuer,—in

other words, a qualified right of ownership to wealth held by the issuer

of the note,—and its current value equals the amount of wealth or

services obtainable, or supposed to be obtainable, for this evidence

from the issuer. The value must of course be specified by reference to a

value unit,—usually a definite weight of silver or gold,—in which the

notes must be conditionally redeemable, but not necessarily on demand,

and a depreciation from this nominal value can occur only if the issuer

fails to fulfil his promise and the holders of the notes are unable to

compel such fulfilment. As regards their value, banknotes as well as the

so-called inconvertible notes are essentially analogous to mortgages,

promissory notes, and other evidences of indebtedness, and any attempt

to apply the volume doctrine to the value of the latter would properly

be condemned as a fallacy. Why, then, should it be true if applied to

credit-money? If a bank-note is a receipt, showing that the holder has

surrendered some value, it must also specify reciprocally as to who has

received this value, and will return it when the note is retired. The

members of society severally can surely not be held responsible for what

one person has given to another; they will therefore not accept a note

unless they have the assurance that the issuer, who is the first

recipient of value for the mere paper evidence, will ultimately redeem

the note by giving the specified value for it. The so-called

inconvertible notes contain the premise of redemption by implication

only; and whenever the government accepts them in payment of taxes—that

is, in exchange for services rendered—this promise is fulfilled. But not

being definitely expressed, governments have often taken advantage of

this looseness of contract, and have violated what should have been a

sacred obligation. Even now the opinion prevails that the excess of the

nominal over the intrinsic value of subsidiary coin is a legitimate

“Profit” to the government, contrary to the dictates of honesty, which

demand that this excess should be viewed as a temporary surrender of

value by the bearer of the coin, to be returned when the coin is

retired. Unfortunately, it is not generally recognized that in money

three factors are essential: first, the token; second, wealth in the

control of the issuer and obtainable, or supposed to be obtainable, in

some form by the holder of the token; and, third, the general agreement

which makes the token universally acceptable. In making the token of

gold weighing 25.8 grains per dollar, any further guarantee is

superfluous, but if only a portion or none of the value accompanies the

token, the deficiency is supplemented by a right of action or its

equivalent against the issuer. For this reason depreciation cannot take

place unless the holder of the token is unable to obtain the promised

value from the issuer. Should the government furnish money-tokens to all

those who give proper security in the form of rights of action against

their possessions, the property so involved would be the basis of the

value of these notes, the government holding the rights of action to

insure the ultimate redemption of the notes.

It is frequently urged that the French assignats are an example of the

evil effects of an expansion of credit-money, while in reality their

depreciation must be attributed to a virtual absence of any Specific

right conferred by their possession. While their value was alleged to be

founded upon land, neither the amount of land nor its value was in any

way defined upon the notes, and a statement of value or exchangeability

having thus been omitted, their value was purely imaginary, and they

could circulate only as long as there was a hope of an ultimate

redemption. The United States greenbacks depreciated for no other reason

than a partial repudiation, consisting in the refusal of the issuer to

accept them for all debts at face value,—i.e., 25.8 grains of gold per

dollar. Manifestly, the idea that the volume of money has any effect

whatever upon the purchasing power of the dollar—except in the measure

in which a change of the volume of coin may affect the demand for, and

hence the commodity value of, gold—is a gigantic delusion, warranted

neither by theory nor by facts, and the second objection to an extensive

issue of credit-money falls to the ground. There remains no reason to

fear any evil effects of an expansion of the money-volume while it

remains within the bounds of substantial credit.

But few words are needed to show how insufficient are the current

theories that seek to account for the reproductive power of capital.

There are really but two doctrines in vogue, the one ascribing interest

to the increased efficiency of labor when supplemented by proper tools,

the other claiming that men will not forego the present use of wealth

without compensation for their temporary abstinence, and that this

payment is necessary to induce people to make and save wealth to be used

as capital.

An illustration will enable us to examine the correctness of the utility

doctrine.

Since a tailor can do more work by using a sewing-machine than he can by

hand, rather than do without the ma- chine which he may be unable to

purchase he will gladly give a portion of the increased production for

the hire of such a machine. This is altogether true, but what does it

prove? It certainly proves nothing in regard to capital-profit. The same

argument might be offered to demonstrate that all drinking-water must

have a price because any man famishing from thirst would willingly pay a

high price for a drink. Returning to our illustration, let it be assumed

at first that only one man can make sewing-machines, he being the

patentee. The tailors will no doubt offer as, a hire a part of their

extra earnings, and the supply of machines being inadequate, those

wanting machines, in competing against each other, will offer almost the

entire advantage gained by the use of the machines. We must of course

take into consideration that the aversion of tradesmen to change their

wonted method of working and other elements reduce the estimated

advantages below the actual increase of production. With this

qualification it can be said that there exists an economic tendency to

give to the sole maker of the machines approximately the entire

advantage gained by the use of the machines.

But after the patent expires and others can make sewing-machines, their

supply will rapidly increase because they will be a profitable

investment. Then the owners of the machines will compete, and the rate

of hire will fall, involving a cheapening of the produce of the

sewing-machine, the consumers of which will reap that part of the

benefit resulting from the invention which ceases to be returned to the

owners of the machines. The question is now as to how far competition

will tend to depress the hire. Why is it that the law of supply and

demand assigns only a portion of the benefit of the invention, after it

has become public property, to the consumer of that which has been

produced on the machine? Why is it that a portion of that which had

formed the remuneration of the inventor goes to the owner of the machine

in which that invention is incorporated? The inventor as such certainly

ceases to reap any specific benefit from the time the invention becomes

virtually public property. The answer to these questions must furnish

the real clue to capital-profit, if it is attributable to the benefit

afforded by the use of capital. The hire being now less than the

advantage due to the use of the machine, this advantage ceases to

determine the hire, and we must look for some other economic factor

fixing this rate. Capital will no doubt continue to be invested in the

making of sewing-machines as long as the profit resulting from this

investment exceeds that which can be obtained from other investments,

and the hire will fall as more capital is invested in this branch. Were

other forms of capital incapable of returning a profit, the investments

in sewing-machines would increase until the profit accruing after

deducting risk and deterioration would be only nominal, or practically

nil. But other forms of capital being known to bring a revenue,

investors will be attracted only so long as the hire of sewing-machines

will bring a profit over and above that of other investments. We are

thus led to the inference that capital in the form of sewing-machines

can persistently bring interest only because other forms of capital are

capable of bringing interest. The sewing-machine as such can therefore

not account for profit on capital; the cause of interest must be looked

for elsewhere, and since the same can be said of all other means of

production, we are again compelled to fall back upon the

interest-bearing power of money as the cause of all capital-profit,

money being the only form of wealth to which an economic cause for

interest can be assigned, while laws are in operation which by

obstructing commerce render possible the collection of a tell from the

toilers.

Doubting that the use of inanimate products can account for the apparent

reproductive power of capital, some writers resort to a modification of

the utility argument, which may be presented by quoting Jeremy Bentham’s

criticism of Aristotle, who held that all money is in its nature barren.

“A consideration that did not happen to present itself to that great

philosopher, but which, had it happened to present itself, might not

have been altogether unworthy of his notice, is, that though a daric

would not beget another daric, any more than it would a ram, or a ewe,

yet for a daric which a man borrowed he might get a ram and a couple of

ewes, and that the ewes, were the ram left with them a certain time,

would probably not be barren. That then, at the end of the year, he

would find himself master of his three sheep, together with two, if not

three, lambs; and that, if he sold his sheep again to pay back his

daric, and gave one of the lambs for the use of it in the mean time, he

would be two lambs, or at least one lamb, richer than if he had made no

such bargain.”

In this illustration we are told of two persons, one having sheep, which

have the power of multiplying and are therefore supposed to be capable

of spontaneously reproducing value, the other having money, which is

acknowleged to be barren; yet one is willing to give his reproductive

capital for money which is minus this desirable attribute. To say that

with the daric the seller of the sheep might buy other sheep, or wheat,

or wine, would be arguing in a circle. Viewing the transaction in the

light in which its presentation is intended, it is evident that some one

will be deprived of that benefit which the buyer of the sheep can reap;

for the darics will continue to exist as darics and are not converted

into anything else, and those who unwisely sold their automatic

value-producers are just minus the three lambs as a result of their

exchanges. There must be some flaw in this argument, for the sellers of

sheep are as a rule as shrewd as the buyers. It appears that a

consideration did not happen to present itself to the critic of the

Greek philosopher, but which, had it happened to present itself, might

have deterred him from antagonizing Aristotle. The housing, feeding, and

raising of the sheep and lambs require labor, without which the owner of

the sheep would not have been the owner of the lambs. Leaving out of

account the conditions which give rise to rent, as well as the effects

of various restrictions to competition, the value of that labor and the

value of the three lambs would be identical. The value of the lambs,

then, must be attributed to the labor spent, and not to the reproductive

power of the sheep; hence the logic of Bentham falls to the ground.

It is remarkable that this very argument has been revived by Henry

George, who has more than any one else contributed towards popularizing

the doctrine that the forces of nature cannot produce value independent

of the quantity of labor applied, unless the supply is inadequate; and

the margin of cultivation being the limit that separates an insufficient

from a redundant supply, it manifestly marks the line at which the

bounty of nature ceases to have an exchange value. Presuming freedom. of

competition, the reproductive powers of nature at the margin can

accordingly produce no value beyond that of the labor requisite to aid

nature in its processes and to appropriate its gifts.

But even admitting, for the sake of argument, that interest could arise

from the creative forces of nature, it remains a mystery as to how this

power is imparted to money when loaned. The allegation is that its

exchangeability with vital products accomplishes this transfer. This,

however, is not a valid reason. Exchanges are consummated on account of

the properties possessed by the objects of exchange; but here we are

informed that a thing can be invested with a property it does not

originally possess by the mere fact of being exchanged for a thing which

has that property. This is clearly one of the many instances in which

cause and effect are confounded.

Were it true that vital products are capable of bringing interest while

money as such is not, then vital products and money would be

economically heterogeneous and hence non-interchangeable.

Regarding the abstinence doctrine, its repeated condemnation and revival

in modified forms alone is sufficient to betray its weakness. Its modern

presentation generally takes the form of the assertion that immediate

payments are preferred to premises of future payments. But we cannot be

unmindful of the fact that Safe Deposit Companies are even paid for

delivering at a future time valuables received at present. This shows

that those who accumulate wealth for a future use will prefer a future

delivery if it saves the trouble and risk that accompanies the

conservation of wealth; provided the factor of risk is absent, and the

wealth receivable is not available for profitable investment. The

possibility of a profitable investment of capital is therefore one of

the conditions under which this argument is applicable, and for this

reason abstinence cannot account for interest. In the sense in which it

is used by the followers of Senior, abstinence is a voluntary delay of

consumption, nothing more; and since no one can deny that the utility of

abstinence consists in the ability to consume at a later day that which

is not consumed to-day, its natural pay cannot exceed the value of the

wealth conserved. The “Element of Time” is frequently mentioned as a

factor in the law of distribution, but its exact bearing on the genesis

of interest is never made quite clear. If time has any economic effect

upon wealth, it is generally one of deterioration, involving a loss of

value, the exceptions being rare.

Other arguments are equally doubtful. The assertion that man would not

save capital if he could not make it a source of income is an insult to

the intelligence of man. While it is true that he will not loan his

wealth to any one without interest when he can get interest for the same

loan from others, his propensity to accumulate will continue even after

all but the natural motives for saving are removed. Man is certainly not

inferior to the bee or the badger. That he will provide for the

contingencies of the uncertain future even at the risk of loss and

deterioration is indisputable.

The expectation to meet, or the fear of, a future want is, however, not

the only inducement; there exists another most potent motive for

producing capital. Experience has taught that the indirect way of

production which brings into requisition auxiliaries of a more or less

intricate character is the most fertile and the least irksome method.

The accumulation of capital is essential to the saving of labor, and our

desire to gratify our wants with the least exertion prompts us to

produce these auxiliaries which facilitate production, even if they

should lack the power of returning a revenue.

For this reason there is no foundation for the fear that progress will

be impeded when capital fails to bring a persistent income. Those

producers who employ the most approved method of production will always

have an advantage over those who are slow to follow the march of

improvement. But even the latter will in time follow in the footsteps of

their more enterprising competitors, when a cheapening of the product

will transfer the benefit of progress to the consumers, while

competition will render retrogression impossible.

Equally groundless are the fears of those who imagine that capital will

not be invested and industry will languish when capital ceases to return

an interest exceeding its replacement. This pessimism can be traced to a

misconception of, and a failure to distinguish between, the functions of

the capitalist and of the employer. The fact that they are usually

centred in one person is no reason why they should not be separated in

an analysis of their relation to production. The capitalist who as such

is the owner of the capital and the recipient of interest, is personally

inert and is performing no part of the employer’s. and manager’s work,

who receives as remuneration for his services what is generally termed

business profits, often affected more or less by occasional profits or

losses due to speculation or to unavoidable fluctuations of the market,

etc. And as the remuneration of labor including the employers’, is

increased by a diminution of interest, other things being equal, the

inducement to work will really be increased and industry will be

encouraged rather than otherwise.

However we view this abstinence doctrine, when brought to its logical

conclusion, it fails to show how under free competition in a community

capable of producing more than sufficient to satisfy the immediate

needs, the difference between the present and future valuation of

wealth—which is claimed to determine the rate of interest—can in the

average exceed the rate of risk and deterioration, and only in so far as

these two elements are more or less proportionate to time, the “Element

of Time” can legitimately enter into the discussion in an indirect way.

This concludes the chain of arguments which justify the assertion that

involuntary idleness is due to a preventable cause.

The law which denies the producing class the right to issue

credit-money, however high their credit may be, operates like the patent

laws, which in forbidding to others the use of an improvement justly

enables the inventor to reap a part of the advantage which his invention

affords; with this difference, that the free use of the invention of

credit-money is withheld from the wealth-producers for the benefit of

the lenders of money regardless of the time which has elapsed since the

invention should have become public property. It makes that usury an

economic possibility which Bacon. says “bringeth the treasure of a realm

into few hands.” By enabling the owners of money who lend it on interest

to acquire a right to demand an annual tribute from others, it gives to

money directly, and to capital indirectly, a seeming power of

reproduction and endows the dollar with the appropriate attribute

“Almighty.” Although Aristotle over two thousand years ago recognized

the interest-bearing power of money to be unnatural, yet at the close of

the nineteenth century, in which the impossibility of a reproduction of

physical energy has been demonstrated, the doctrine that industrial

energy in the form of capital is an exception to the otherwise

inexorable law of nature still dominates and prevents economic science

from rising above the level of the ancient dogmas that physical science

has long since discarded. The foremost writers commit themselves to

obvious inconsistencies in the vain attempt to give a cogent explanation

of the origin of this power. John Stuart Mill, in commenting on the

expectations of those who advocate an expansion of credit-money, closes

with the remark, “The philosopher’s stone could not be expected to do

more,” unmindful of the fact that, under the conditions which he

defends, capital, if owned in sufficient quantity, can bring its owner

enough of this world’s good to abundantly satisfy the irrational longing

of the alchemist. Bishop Berkeley frankly admitted that a bank is a

gold-mine, and asks if it is not the real philosopher’s stone; but he

failed to see that this magic power can be but the result of political

legerdemain.

This same power of money readily accounts for the absence of the

equation which naturally should exist between the supply of and the

demand for commodities. The medium of exchange being available as a

medium of extortion, is desired, not only for obtaining commodities in

exchange, but also for imposing tribute. Money being for this reason

more desirable than commodities of equal value, the demand for money

will necessarily exceed the supply, and reciprocally, the supply of

commodities offered for money must exceed the demand. The consequent

accumulation of unsold products is often mistaken for the cause of

involuntary idleness, while it is but a symptom of commercial

stagnation. The amount of work that can be done under the modern system

of divided labor is limited, depending upon the amount of products that

can be exchanged through the available facilities for exchange, and only

a lack of such facilities can account for a scarcity of work in a

country so blessed by nature as this. The same fear of a dearth of

employment that instigated the silk weavers to destroy the Jacquard loom

now prompts legislators to “protect” the workers by’ taxing imports,

regulating immigration, passing factory laws, and other similar

ineffective enactments. It cannot be denied that while the debtors’

tribute exceeds the risk-premium, an increase of indebtedness by what is

called an unfavorable balance of trade will impair the prosperity of a

people; nor can it be gainsaid that the immigration of producers, in

absorbing a portion of the available medium of exchange and intensifying

its comparative stringency, can only aggravate the stagnation of

commerce; but these conditions being the effect of an obstruction to

exchanges, additional restrictions cannot give relief.

Our investigation has led to revelations which constitute a serious

arraignment of our present political institutions. There are laws

supposed to protect the toiler in the enjoyment of the fruits of his

labor which uphold a system of exploitation under the guise of justice.

The accusation is too serious to be met by mere denial or by the

recapitulation of untenable doctrines and indefinite statements.

We need look no further to account for the unrest of the producing class

who plainly feel an oppression, the exact nature of which they fail to

recognize, and who attempt to meet the unfavorable condition by

combinations and restrictions wholly opposed to the freedom and

independence of intelligent men. While social science defends the power

which secures incomes to the possessors of wealth altogether

disproportioned to their personal merit, its teachings cannot cope with

the plausible arguments of demagogues, nor check the unwise agitation of

well-meaning men who advocate everything but the removal of inequitable

restrictions as a cure. Nor can it dispel the darkening cloud that

overshadows a civilization characterized by an increasing

differentiation of rich and poor, by a periodical recurrence of business

depressions and a growing discontent of the working classes, manifested

in the hostile attitude of labor-organizations. If our financial

legislation is really the seat of the disorder, the question of securing

remunerative employment to all who are able and willing to work should

no longer be considered an unsolvable problem.

APPENDIX.

As regards purely economic research, the study of the monetary flow

between the creditor and the debtor class in conjunction with the amount

of indebtedness leads to an important discovery. It reveals the law

which under present conditions determines the rate of interest proper.

Though somewhat abstract, the following deduction of this law may be of

interest.

In principle the separation of the financial from the industrial group

can be conceived with perfect precision, if it is based upon functional

relations and not upon the individuality of persons. In tracing the

monetary flow attention must be paid to money rather than to its owners,

by classifying the various purposes for which it is used. The financial

group being considered the source of all money, each piece passes from

it into circulation when used for the first time, and in its further

career it may alternately pass from group to group, communication being

established by several channels through which it will pass when employed

in certain transactions. All money can thus be separated into two

distinct volumes, one being dormant in the possession of the financial,

the other circulating within the industrial, group.

Regarding the relation of indebtedness, those persons interested in both

groups have from the stand-point of our present inquiry a dual

existence, their relations to each group constituting them or making

them distinct individualities, to differentiate which it is necessary to

agree as to what establishes a financial relation. Accepting as

financial obligations all interest-bearing debts which by stipulation

are payable in money, all persons having such claims are to that extent

members of the financial or creditor group, while in every other

capacity they with all others are members of the industrial or debtor

group.

In deducing the law of interest we must obviously take cognizance of all

transactions by which money will pass from one group to the other, as

well as those affecting the relation of indebtedness, while all

transactions which affect neither the relative indebtedness nor the

volume of money in circulation, are of a neutral character and are here

of no consequence.

As we have seen, money can be put into circulation only by purchases and

by loans, and is restored to the financial class by the payment of the

principal of, and interest on, loans. Purchases imply a flow of money

from the financial to the industrial group only if the money paid

emanates from the financial group, while those made with money already

in circulation must be treated as monetary transfers within the

industrial group and have no effect upon the flow under examination. All

investments in stock, business ventures, etc., should be included in the

category of purchases, and the payment of dividends, shares of profits,

etc., are neutral transactions. A flow of money in the opposite

direction through commerce is precluded, because the selling of goods or

services is exclusively a function of the industrial group. The officers

of a bank, in selling their services to the bank, are clearly members of

the industrial group, they are workmen engaged in directing the flow of

money into the most remunerative industrial channels and guarding the

security of financial transactions.

Lending money is eminently a function of the financial group, and every

flow through the loan channel marks an increase of indebtedness. But

when money circulating within the industrial group is used for loans, a

difficulty would arise if the recognition of the economic duality of the

owner did not enable us to regard the intent to use such money for a

loan, as its conveyance from one to the other of the dissociated units

of the owner, as a transfer from the industrial to the financial, from

which it is returned as a loan to the industrial group.

Sales of commodities on credit, if such debts are interest-bearing,

should likewise be considered compound-transactions,—one a complete

sale, the other a return of the purchase-money as a loan.

Indebtedness can be terminated either by payment of principal and

interest, or by remission, when obligations cannot be met. The risk of

losses would not be incurred if the interest paid by the debtors as a

whole did not more than cover such losses, so much of the interest as

will equal them being the insurance. The monetary flow resulting from

the payment of interest is accordingly divided into two branches, the

risk-premium, and the interest-proper, the former being equal to the sum

total of all relinquished loans.

We now clearly recognize five channels of the monetary flow as

represented in Fig. 3. (See plate at end of volume.) By purchases and

loans money will flow from the financial to the industrial group, and by

Transfers, Cancellations, and Interest in the opposite direction, the

interest channel consisting of two branches, Risk-premium and

Interest-proper.

All possible financial transactions can be resolved into these

fundamental currents. Seemingly exceptional cases will be found, upon

proper consideration, not to conflict with this statement. The payment

of debts by check or draft might appear to constitute”an exception,

being a cancellation of debts apparently without a transmission of

money, but such payment is to all intents and purposes cash payment,

money being virtually handed by the payer to the payee, and thus passed

from the industrial to the financial group while lying in bank. Money

received in payment of debts manifestly cannot be applied to the

cancellation of other debts before it is returned to the industrial

group, because a member of the financial group cannot as such be a

debtor. His economic duality, however, allows this transfer to be made

to himself, as it were, in the nature of a business investment, and as

such the money passes through the purchase-channel, to which all

investments have been assigned.

Denoting the currents of money shown in the diagram by the letters P, T,

L, C, R, and I, the total indebtedness by D, and the volume of money

circulating within the industrial group by V, the following relations,

expressible by equations, are self-evident.

Always referring to a definite period, the volume V is increased only by

the currents P and L, and is reduced by the reverse currents T, C, R,

and I; hence the change of volume is represented by the equation:

(1) ΔV=P+L—(T+C+R+I).

(The letter Δ designating “difference” or “change.”)

The financial obligations are increased by loans, and reduced by their

payment and by the remission of bad debts, the latter being equal to the

insurance R. The change of indebtedness is therefore expressed by the

equation:

(2) ΔD=L—(O+R).

From formula (1) it is found that:

I=P—T—ΔV+L—(C+R),

and by substituting the value ΔD for the last portion of this equation,

as per equation (2),

(3) I=P—T+ΔD—ΔV.

This is the total amount of interest paid by the debtor class, and to

obtain the annual rate per cent. this quantity should be multiplied by

100 and divided by the average indebtedness for which this interest is

paid and by the duration of the period considered, expressed in terms of

a year.

It will be observed that for this reason the sum total of interest, I,

is not in any sense an indication of the rate of interest, since the

variable total indebtedness appears as a quotient of the rate. Even

though as a rule a change in the one will also indicate a similar change

in the other, it does not follow that their fluctuations must

necessarily correspond.

Further considerations will reveal the full import of the above law of

interest.

The first two terms of formula (3) are invariably positive, while the

last two are sometimes positive, sometimes negative, according as the

increasing or the reducing currents preponderate. In viewing a long

period they will be insignificant compared with the first two, and may

be neglected, whereby the formula (3) is reduced to:

(4) I =P—T.

In this form the equation clearly indicates that the rate of interest

will rise as the money of the financial class is more freely used for

purchases and business investments, and will fall as more of the money

in circulation is applied to money-loans, the difference of these two

items being the amount which the debtor class is able, in the long run,

to devote to the payment of interest proper.

In considering shorter periods, the terms ΔD and ΔV, which have been

neglected, must be recognized. They will be found to bear a well-defined

relation to the cycle of fluctuating industrial activity. In this cycle

four periods may be distinguished, according as the departure of

interest from the amount indicated in formula (4) is attended more

prominently by a departure from zero of the one or the other of the two

differentials.

The first period is characterized by an excess of interest, accompanied

by an increase of indebtedness, ΔD—ΔV being positive on account of a

predominating positive, ΔD. In the second period interest is likewise

above the rate given by formula (4), but is accompanied by a diminution

of the volume of money in circulation and its accumulation in the hands

of the financial class, ΔD—ΔV being positive because the subtrahend ΔV

is negative. The third period is marked by a deficiency of interest,

accompanied by a diminution of indebtedness, ΔD—ΔV being negative owing

to a negative ΔD, and during the fourth period interest is still

deficient and accompanied by an increase of the volume of money in

circulation, ΔD—ΔV being negative because of the predominance of a

positive ΔV.

Only in rare cases is the transition from one into the other of these

periods of an abrupt nature; the process is generally attended by a

gradual change of conditions. When after a depression business begins to

recover and capital is more freely invested, the demand for money-loans

will increase and interest will rise. The flow L will be copious and the

total indebtedness will increase, making ΔD positive. This condition may

last for years; but the ability of the debtors to furnish adequate

security being limited, new loans cannot always keep up the supply of

money requisite to pay the interest which must ultimately be paid at the

expense of the money in circulation. The positive ΔD will be replaced by

a negative ΔV, marking the advent of the second period, during which

money will accumulate in banks. By the consequent scarcity of money

commerce will be impeded, business depressed, and investments will no

longer be profitable.

The debtors being unable to meet their obligations for want of money,

frequent bankruptcies will occur. This not only reduces the total

indebtedness D, but also the interest proper, since new a greater

proportion of the gross interest is required than formerly to balance

the losses. Both a negative ΔD and low interest proper are thus

traceable to the same cause. Interest will be low even though money is

scarce, and the law of interest illustrated in the diagram, Fig. 2 (see

plate at end of volume), is suspended. During this anomalous condition

both wages and interest. are low because of the industrial stagnation

and dearth of employment which will follow and endure until the excess

of the flow P above the return flow (I + R) increases the volume V

sufficiently to promote commercial activity, when a revival of business

will follow. The law expressed in formula (3) is thus fully in accord

with the features actually observed in the periodical fluctuations of

business.

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