Free Trade in Banking.

Free Trade in Banking.

[Liberty, July 11, 1891.]

To the Editor of Liberty:(73 ¶ 1)

It is much to be regretted when Liberty is wounded in the house of her friends. This is caused by those who regard liberty as a panacea for every ill, or perhaps it would be better to say who regard the inevitable vicissitudes and inequalities of life as evil. There is no more philosophical reason for believing that all men can be equal, rich, and happy than for believing that all animals can be equal, including, of course, that they should all be equal to men.(73 ¶ 2)

Freedom is exceeding fair. It is by far the most excellent way. Under liberty the very best possible results in every department of human activity, including commerce, will be obtained. But it won’t make fools successful. One of its recommendations is that folly will more surely be remedied by getting its medicine than by the grandmotherly plan of protection in all directions. In many cases cure is better than prevention. Little burns, we may be sure, save many lives. (1)(73 ¶ 3)

It seems to be a fashion nowadays amongst reformers to rail at our existing systems of currency and to regard government interference here as greater and more pernicious than in many other matters. The truth, however, is that there is scarcely anything which more completely illustrates the powerlessness of government to establish code in opposition to custom than the unvarying failure of unsound currency enactments, and the concomitant dwindling of monetary law into a mere specification of truisms, a registration of established practice, or a system of licensing certain individuals to carry on certain kinds of trade. But all these are evils not peculiar to the money trade, nor do they here produce more injurious results than in the cases of priests, doctors, accountants, lawyers, engineers, and other privileged faculties. (2).(73 ¶ 4)

Schemes to bring about the abolition of interest, especially when the authors promulgate this as a necessary consequence of free trade in banking, are pernicious, and in their ultimate effect reactionary. Low rates of interest depend upon the magnitude of the mass of capital competing for investment rather than upon the presence or absence of the really trifling interference of governments with the modes in which debt may be incurred. What is called free trade in banking actually means only unlimited liberty to create debt. It is the erroneous labelling of debt as money which begets most of the fallacies of currency-faddists, both coercionary and liberationist. (3)(73 ¶ 5)

The principal error of the former is that they advocate schemes for the growth and preferential marketing of government debt. The ignis fatuus of some of the latter is a vision of people both using their property and pledging it at the same time; (4) while some go so far as to dream of symbolical money of indefinite value. Thus we have Mr. Alfred B. Westrup contributing Citizens’ Money and The Financial Problem, both of which tacitly attempt to expound a method to enable every one to get into debt and keep there. (5)(73 ¶ 6)

The introduction to the first-named essay seems by implication to assert that the price of gold is too high, though no attempt is made to show how displacing it from currency would reduce the price as long as its cost and utility remain what they now are; while the author himself appears to think that money can be made very much more plentiful and yet maintain its value, although he is contending that this value depends upon monopoly or scarcity. The last-named essay plainly assumes that by some such scheme poverty can be abolished. (6)(73 ¶ 7)

Banking is not the only financial operation in which government interferes. In the case of insurance companies, benefit societies, limited liability corporations, partnerships, trusts, insolvencies, and hundreds of other ways government is continually interfering. Most of this interference is well meant. Most, if not all, of it is actually injurious in itself, apart from the waste, the jobbery, and the imbecility of officialism it involves. These concomitant evils, though far greater than those directly resulting from the interference, had better for the time being be left out of sight. Their treatment belongs to the general subject of liberty, and they only incidentally pertain to the financial interference of government, as they do to all its other interference. Ignoring then the saving in cost, the immediate effect of the total abstention of government from its protection of the public from financial folly and roguery would be that a great crop of fresh schemes, bargains, and arrangements would offer themselves to those desirous of entrusting any of their wealth to the management of others. A very large proportion of these schemes—possibly the majority—would be unsound. (7) Amongst the unsound, unless its expounders grievously misrepresent it, would undoubtedly be found such mutual banking as is proposed by Mr. Westrup. He is altogether on a wrong tack. His whole talk is about money; but this term in his mouth means indebtedness, trust, credit, paper instruments binding some one to deliver something. Now, credit is not a representative of wealth, as Mr. Westrup so constantly declares. Mr. Westrup’s money is a representative of a promise or debt. It may in many cases, as a matter of history, show that A has entrusted certain wealth to B; but it does not guarantee that B can at call deliver or replace the borrowed articles, or any equal number of similar articles, or an equivalent value in some other articles. (8) As Mr. Donisthorpe insists in his Principles of Plutology (p. 136): There is [at each moment] a certain amount of every valuable commodity in existence, neither more nor less; nor can it be increased by a single atom though the whole population suddenly, as if by inspiration, began craving and yearning for it. (9) Again, what is there to show that any necessity exists, as Mr. Westrup asserts, for enabling all wealth to be represented by money? If I give a man a loaf for sweeping my door-step, the loaf does not represent the work, nor does the work represent the loaf. All we know is that I desire the sweeping more than I desire the loaf, and the laborer desires the loaf more than his ease or idleness. If I give a guinea for a hat, this guinea does not represent the particular hat or any hat. It does not represent it while in my possession before the exchange, nor in the hatter’s possession after the exchange. Gold is valuable; it does not merely represent value. The value represents an estimate of the comparative labor necessary to produce the last increment needful to replenish the stock of gold at a rate equivalent to its consumption,—this consumption depending upon the comparative utility of gold in relation to its own value and to that of other commodities. Or at a given hat-shop it represents an estimate of the cost of bringing as much more gold to the place as equivalent to the cost of bringing another hat to the shop. (10)(73 ¶ 8)

Mr. Westrup’s fallacious analysis of commerce dogs his steps in every process of his reasoning. The gravest evils of the interference of government in monetary matters are little more than its cost and the deadening influence of fancied protection. The reform which monetary liberty would secure would not include any redistribution of the products of labor. This depends partly upon the possibility of the laborer possessing the skill of a speculator and of a producer and exercising both at the same time, and partly upon the enormously disproportionate share of taxation which he has to bear. These and many other evils, in so far as they are increased by government, depend not upon arbitrary money, but upon the arbitrary alienation of the substance of the citizen. It is a most trivial incident that the plunder is nominally priced in and redeemed by one commodity. The evil is that it should be taken. The form makes but an infinitesimal difference.(73 ¶ 9)

Mr. Westrup would do well to ask himself these questions, and, in answering them, to assign the grounds upon which he proceeds in arriving at the conclusions. (11)(73 ¶ 10)

  1. Would the value of gold be (a) increased (b) reduced by mutual banking? And what percentage?(73 ¶ 11)

  2. Is gold the only commodity produced and bought by people who don’t want to consume it?(73 ¶ 12)

  3. Would gold lose its pre-eminence as the commodity the value of which is most correctly estimated, and which it is therefore safest to buy at market value when disposing of our own or our purchased produce?(73 ¶ 13)

  4. What has the rate of interest to do with the net or residual increment of wealth remaining as a surplus after maintaining the population? Is this less in the United Kingdom where interest is low than in the United States where interest is high?(73 ¶ 14)

  5. How could legislation maintain the value of gold if it became as abundant as copper? Would the volume of money then be greater than now? Would the rate of interest be affected by this alteration apart from the changes due to the act of transition from the present state of dear gold to the supposed state of cheap gold?(73 ¶ 15)

  6. How is the voluntary custom of selling preferentially for gold a monopoly? Are cattle a monopoly where used as a medium of exchange?(73 ¶ 16)

  7. What analogy is there between a law to require the exclusive consumption of hand-made bricks and any law specifying that the word Dollar in a bond shall imply a certain quantity of gold? Does any government force anyone to consume gold in preference to any other commodity? Does government consume gold in constructing its offices and defences, or does it merely swap it for other commodities? Is all silver or gold in the United States delivered to government as fast as made, or does government purchase it in the open market?(73 ¶ 17)

Yours, etc.,

J. Greevz Fisher

78 Harrogate Road, Leeds, England.

Pending the arrival of any answer Mr. Westrup may desire to make to the foregoing criticisms upon his pamphlets, for which purpose the columns of Liberty are open to him, I take the liberty of offering some comments as well as answers to Mr. Fisher’s questions.(73 ¶ 18)

(1) I know of no friend of liberty who regards it as a panacea for every ill, or claims that it will make fools successful, or believes that it will make all men equal, rich, and perfectly happy. The Anarchists, it is true, believe that under liberty the laborer’s wages will buy back his product, and that this will make men more nearly equal, will insure the industrious and the prudent against poverty, and will add to human happiness. But between the fictitious claims which Mr. Fisher scouts and the real claims which the Anarcihsts assert it is easy to see the vast difference.(73 ¶ 19)

(2) I do not understand how the unvarying failure of unsound currency enactments makes the interference of government with finance seem less pernicious. In fact, it drives me to precisely the opposite conclusion. In the phrase concomitant dwindling of monetary law into a mere specification of truisms, Mr. Fisher repeats his attempt, of which I complained in the last issue of Liberty, to belittle the restrictions placed upon the issue of paper money. When he has answered the question which I have asked him regarding the English banking laws, we can discuss the matter more intelligently. Meanwhile it is futile to try to make a monopoly seem less than a monopoly by resorting to such circumlocution as system of licensing individuals to carry on certain kinds of trades, or to claim that the monopoly of a tool not only common but indispensable to all trades is not more injurious than the monopoly of a tool used by only one trade or a few trades.(73 ¶ 20)

(3) It is true that if the mass of capital competing for investment were increased, the rate of interest would fall. But it is not true that scarcity of cpital is the only factor that keeps up the rate of interest? If I were free to use my capital directly as a basis of credit or currency, the relief from the necessity of borrowing additional capital from others would decrease the borrowing demand, and therefore the rate of interest. And if, as the Anarchists claim, this freedom to use capital as a basis of credit should give an immense impetus to business, and consequently cause an immense demand for labor, and consequently increase productive power, and consequently augment the amount of capital, here another force would be exercised to lower the rate of interest and cause it to gradually vanish. Free trade in banking does not mean only unlimited liberty to create debt; it means also vastly increased ability to meet debt: and, so accompanied, the liberty to create debt is one of the greatest blessings. It is not erroneous to label evidence of debt as money. As Col. Wm. B. Greene well said: That is money which does the work of the tool money. When evidence of debt circulates as a medium of exchange, to all intents and purposes it is money. But this is of small consequence. The Anarchists do not insist on the word money. Suppose we call such evidence of debt currency (and surely it is currency), what then? How does this change of name affect the conclusions of the currency-faddists? Not in the least, as far as I can see. By the way, it is not becoming in a man who has, not simply one bee in his bonnet, but a whole swarm of them, to talk flippantly of the fads of men whose lives afford unquestionable evidence of their earnestness.(73 ¶ 21)

(4) Mr. Fisher seems to think it inherently impossible to use one’s property and at the same time pledge it. But what else happens when a man, after mortgaging his house, continues to live in it? This is an actual every-day occurrence, and mutual banking only seeks to make it possible on easier terms,—the terms that will prevail under competition instead of the terms that do prevail under monopoly. The man who calls this reality an ignis fatuus must be either impudent or ignorant. Unfortunately it is true that some believers in mutual banking do dream of symbolical money of indefinite value, but none of the standard expositions of the subject offer any such fallacy; and it is with these that Mr. Fisher must deal if he desires to overthrow the mutual banking idea.(73 ¶ 22)

(5) Mr. Westrup’s method, if I understand it, would not enable every one to get into debt and keep there, but rather to get into debt and out again, greatly to the advantage of the borrower and of society generally. Mr. Westrup does not contemplate the issue of bank-notes against individual notes that never mature.(73 ¶ 23)

(6) Mr. Fisher, in his remark that no attempt is made to show how displacing gold from currency would reduce the price as long as its cost and utility remain what they now are, is no less absurd than he would be if he were to say that no attempt is made to show how displacing flour as an ingredient of bread would reduce the price of flour as long as its cost and utility remain what they now are. The utility of flour consists in the fact that it is an ingredient of bread, and the main utility of gold consists in the fact that it is used as currency. To talk of displacing these utilities and at the same time keeping them what they now are is a contradiction in terms, of which Mr. Fisher is guilty. But Mr. Westrup is guilty of no contradiction at all in claiming that money can be made very much more plentiful and yet maintain its value at the same time that he contends that the present value of money is due to its monopoly or scarcity. For to quote Colonel Greene again:(73 ¶ 24)

All money is not the same money. There is one money of gold, 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 …. If ordinary bank-bills represented specie actually existing in the vaults of the bank, 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 banks’ vaults; and every cancelling 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 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 action is kept up, the silver dollar is depreciated, and tends to emigrate for the purpose of travelling 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.(73 ¶ 25)

This is one of the most important truths in finance, and perfectly accounts for Mr. Westrup’s position. When he says that money can be made very much more plentiful and yet maintain its value, he is speaking of mutual money; when he says that the present value of money depends upon monopoly or scarcity, he is speaking of merchandise money.(73 ¶ 26)

(7) As sensibly might one say to Mr. Fisher, who is a stanch opponent of government postal service, that the immediate effect of the total abstention of government from its protection of the public from the roguery of private mail-carriers would be that a great crop of fresh schemes would offer themselves to those desirous of intrusting any of their letters to others to carry. A very large portion of these schemes—possibly the majority—would be unsound. Well, what of it? Are we on this account to give up freedom? No, says Mr. Fisher. But, then, what is the force of the consideration?(73 ¶ 27)

(8) Mr. Westrup’s money not only shows that A has given B a conditional title to certain wealth, but guarantees that this wealth has been preserved. That is, it affords a guarantee so nearly perfect that it is acceptable. If you take a mortgage on a house and the owner insures it in your favor, the guarantee against loss by fire is not perfect, since the insurance company may fail, but it is good enough for practical purposes. Similarly, if B, the bank, advances money to A against a mortgage on the latter’s stock of goods, it is within the bounds of possibility that A will sell the goods and disappear forever, but he will thus run the risk of severe penalties; and these penalties, coupled with B’s caution, make a guarantee that practically serves. To be sure, Mr. Westrup’s money does not assure the holder that the bank will deliver the borrowed articles or their equivalents on demand from nay customers of the bank that have them for sale, because all these customers are pledged to take the bank’s notes; to say nothing of the fact that the bank, though not bound to redeem on demand, is bound to redeem as fast as the mortgage notes mature.(73 ¶ 28)

(9) I perceive the perfect truth of Mr. Donisthorpe’s remark, but I do not perceive its pertinence to the matter under discussion.(73 ¶ 29)

(10) Nor do I detect the bearing of the truisms which Mr. Fisher enunciates so solemnly. They certainly do not establish the absence of any necessity for enabling all wealth to be represented by money. This necessity is shown by the fact that, when the monetary privilege is conferred upon one form of wealth exclusively, the people have to obtain this form of wealth at rates that sooner or later send them into bankruptcy.(73 ¶ 30)

(11) I conclude by answering Mr. Fisher’s questions.(73 ¶ 31)

The value of gold would be reduced by mutual banking, because it would thereby be stripped of that exclusive monetary utility conferred upon it by the State. The percentage of this reduction no one can tell in advance, any more than he can tell how much whiskey would fall in price if there were unrestricted competition in the sale of it.(73 ¶ 32)

Neither gold nor any other commodity is bought by people who don’t want to consume it or in some way cause others to consume it. Gold is in process of consumption when it is used as currency.(73 ¶ 33)

Mutual banking might or might not cause gold to lose its pre-eminence as the most thoroughly constituted value. If it should do so, then some other commodity more constantly demanded and uniformly supplied would take the place of gold as a standard of value. It certainly is unscientific to impart a factitious, monopoly value to a commodity in order to make its value steady.(73 ¶ 34)

Other things being equal, the rate of interest is inversely proportional to the residual increment of wealth, for the reason that a low rate of interest (except when offered to an already bankrupted people) makes business active, causes a more universal employment of labor, and thereby adds to productive capacity. The residual increment is less in the United Kingdom, where interest is low, than in the United States, where interest is high, because other things are not equal. But in either country this increment would be greater than it now is if the rate of interest were to fall.(73 ¶ 35)

If gold became as abundant as copper, legislation, if it chose, could maintain its value by decreeing that we should drink only from gold goblets. If the value were maintained, the volume of money would be greater on account of the abundance of gold. This increase of volume would lower the rate of interest.(73 ¶ 36)

A voluntary custom of selling preferentially for gold would not be a monopoly, but there is no such voluntary custom. Where cattle are used voluntarily as a medium of exchange, they are not a monopoly; but where there is a law that only cattle shall be so used, they are a monopoly.(73 ¶ 37)

It is not incumbent on Anarchists to show an analogy between a law to require the exclusive consumption of hand-made bricks and any law specifying that the word Dollar in a bond shall imply a certain quantity of gold. But they are bound and ready to show an analogy between the first-named law and any laws prohibiting or taxing the issue of notes, of whatever description, intended for circulation as currency. Governments force people to consume gold, in the sense that they give people no alternative but that of abandoning the use of money. When government swaps off gold for other commodities, it thereby consumes it in the economic sense. The United States government purchases its gold and silver. It can hardly be said, however, that it purchases silver in an open market, because, being by law obliged to buy so many millions each month, it thereby creates an artificial market.(73 ¶ 38)