The Interest Standard of Currency

An Attempt

Ernst Dick

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351806213
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Originally published in 1925. This book sets forth a plan to stabilize the currency at a time in which there was much discussion of what to radically change to improve the state of the flow of gold and discounts and interests. It addresses such questions as 'what is a standard of currency' and 'to whom does the gold belong' among its discussion of the best way forward. A fascinating insight into 1920s economic history.

Part I
Preliminary

I
The Heretic and the Professors

IN order to make my way of reasoning and my demonstration understood, I am bound to preface this treatise with a few remarks on SILVIO GESELL, the first and greatest of those economists who have been advocating the stabilization of the currencies. He began as far back as 1891. By 1898 his theory of a stable currency was fully developed, as may be seen from his pamphlet The Monetary Problem in Argentina (La cuestión monetaria argentina). (Gesell had been established in Argentina as a merchant for some ten years.) His most comprehensive and most attractive statement of the problem is contained in Aktive Währungspolitik (An Active Currency Policy) (" a managed currency," in Mr. Keynes's phrase), published in 1908. All the arguments to show the failure of the traditional system and the advantages of a stable standard are there set forth with masterly clearness and completeness. Unfortunately Gesell was led astray by certain hasty conclusions from Ms truly grand discovery, and, not satisfied with a simple monetary reform, he reared a structure of social and political reform which has more and more obscured the real issues of his scheme. I said, unfortunately. From my personal point of view I ought to say, fortunately. For it was by the social programme that I, a confirmed Socialist, was first drawn to the study of Gesell's work, while it was by Ms errors that I was forced to reconsider the whole problem. I owe it in no small degree to what in Gesell's theory is fallacious that I am now in a position to offer a solution which hitherto seems to have escaped the investigators of the problem. I wish it to be clearly understood that my scheme is derived from Silvio Gesell's pioneering work, to the greatness of which, as to the nobility of thought in which it is conceived, no one can pay a sincerer tribute than I do. But also I feel it necessary to state that I have rejected Gesell's land nationalization scheme, his theories of gold and of interest, and his Reparations programme, and that I have dissociated myself from the so-called Free-land Free-money movement in Germany and Switzerland.

It is not for me to tell English readers to whom honour is due in England and America for having been pioneers in the campaign for monetary progress. The names of Professor Irving Fisher and Mr. J. M. Keynes are well enough known, and not only in their respective countries. Rather different from their contributions, less complete in the details, obviously less expert in its treatment of the matter, more like Gesell's in its tone and general attitude, is Professor Frederick Soddy's little book The Inversion of Science and a Scheme of Scientific Reform (1924). But it is immensely suggestive through the high originality of its thought and the powerful denunciations of the abuses and evils of the old monetary theory and practice. When a man of the standing of Professor Soddy turns away from his special work to inform the world of science that an inadequate monetary system threatens to rot the fruit of scientific effort and progress, and when the searching intellect of the born discoverer of scientific facts is led to think that this system, unless it is reformed, is going to wreck the whole of civilization, many will be startled into some amount of interest in the problem who would not otherwise be roused.¹

¹ Henry Lowenfeld, Money in Fetters, did not come to my notice till my book was finished. I have dealt with it in a few additional pages.

II
The Scheme of an Index-Number Standard

I SHALL now sketch, very summarily, the schemes of stabilization as proposed by the authors above mentioned. Professor Irving Fisher's book on The Purchasing Power of Money has been before the students of monetary theory for a good many years. On its findings is based the Bill to Stabilize the Purchasing Power of Money, introduced in the American House of Representatives, May 25, 1922, by Mr. Goldsborough of Maryland, which will be fully discussed below. Professor Keynes has been converted to the Index-number standard more recently—at the time of the Genoa Conference he did not yet declare for it—but his book A Tract on Monetary Reform (1923) bids fair to produce an effect much more far-reaching than any previous publication. In all essentials his scheme corresponds to that of Silvio Gesell as set forth in Aktive Währungspolitik—in Gesell's most comprehensive work, Die Naturliche Wirtschaftsordnung durch Freiland Freigeld (The Natural Economic Order through Free-land Free-money), there is a great deal of matter that lies outside the problem of currency. The following are the points on which all agree:

(1) The main requirement of a standard of currency is the stability of the purchasing power of money; in other words of the general level of prices, as it is to be ascertained by the computation of Index-numbers.

(2) The stability of the internal price level must not be sacrificed to the stability of the rates of exchange.

(3) A currency based on gold cannot be stable, because the price (value) of gold is subject to uncontrollable fluctuations; therefore the standard must be freed from the exclusive influence of gold.

(4) To insure an unbiased and impartial management of the currency a close collaboration of the National Treasury and the Central Bank of Issue is essential.

The Index-number Currency may be characterized as a strictly nationalized and State-controlled system, managed on certain principles, with gold excluded as a circulating medium; these outstanding characteristics distinguish it from the Gold Standard Currency, which is supposed to be automatic and free of State control, and from my scheme of a truly automatic and perfectly uncontrolled Interest Standard Currency, as set forth in this book.

Of the Index-number standard more is to be said below. Very succinctly stated, this is the theory of its mechanism; Price is the outcome of the supply of money. It rises when the supply grows, and falls with the supply. Therefore the rise of prices can be checked by the reduction of the supply of money, while the fall of prices is counteracted by increasing the supply of money. The trend of the price movement is regularly ascertained by the statistical computation of the average price of a certain number of staple articles of consumption. According to the findings of the Bureau of Statistics the controlling authority will issue or withdraw money, whenever the Index-number shows a tendency one way or the other.

Part II
The Unsolved Problem of Gold

I
The Disposal of the Gold Reserves

THE monetary systems of the past and present time have been based on a metallic foundation; the new system, rightly understood and carried to its logical perfection, has no use for gold or silver. Of the four schemes which we are here considering, Silvio Gesell's is by far the most thoroughgoing and radical; it leaves no loophole for gold to come in by. Professor Fisher and Mr. Keynes endeavour to spare the old monarch; however, an examination of the plea which they put up for the retention of gold will show that the case is not proved.

From the repudiation of gold as an essential ingredient of the currency arises the necessity to dispose of the precious metal. This brings us up against a difficulty, which it seems to me the advocates of the Index-standard do not fully realize. That the State should be given absolute control of the money system is a drawback only in the eyes of those who do not love the State. But that no one knows how to deal with the old money machine, that is the gold reserves, is one of the hitches on which the money reform idea comes to grief.

All down the ages the money problem has been a gold problem. What has stood the test of time as gold has done cannot be easy to uproot and thrust aside. Silvio Gesell, the Radical, who has little reverence for old institutions, proposes to sever at one blow the connection between money and gold. By his scheme gold is entirely eliminated from the monetary system, and ceases to be money. All its traditional privileges are to be cancelled; gold is reduced to the status of a common ware, such as straw, blubber, dynamite, motor-cars, newspapers, lettuce, false teeth, and treatises on the theory of value. The State will not admit gold as legal tender, so that gold cannot be used to pay taxes with. The State knows that only its own money can hold its own, so the State need not trouble to defend its notes against the competition of demonetized gold: so Gesell argues. This is overlooking the special properties of the gold material, and the mistake is all the more astonishing in the man who traces all the principal evils of the metallic currency to the natural and intrinsic superiority of the precious metal over other commodities. To imagine that this superiority will vanish, as it were to oblige the State, merely because the State abandons gold, is a strange delusion. Gold will be gold and go to market as the ducks to water. Whether coined or uncoined, whether in lumps or wrought into objects of art, profane or sacred: gold will turn itself into money, to buy, when occasion serves.

Moreover, the gold is with us. It cannot be turned out of our sinful world any more than out of the thoughts of men—and women. It cost rivers of sweat and not a little blood to obtain it. In vast piles it is heaped in the vaults of the Banks of Issue; in numberless little hoards it lies in ambush in the homes of thrifty savers. What is to become of all this treasure? Gesell passes over the problem with a jest: all brides are to be presented with some pretty gold trinket on their wedding day. " If the State sells the gold to the highest bidder," says he, " the price of gold will be depressed, which will embarrass other nations. ..." Would it not seem that gold which is given away should depress the price rather more than gold that is sold at a price? Brides will become mothers and find it convenient to part with their finery for some more necessary piece of goods. By whatever outlet the gold of the Reserve issues into the open, it will depreciate the gold already out. Thus Gesell's expedient is no solution. It leaves the corpse of the murdered gold money lying in the path of the money circulation. A ghost will rise from it and create strange and unholy horrors, which no State authority will have power to allay. Gold has never yet obeyed the decrees of monarchs or parliaments; it will not, it need not, be awed into submission by threats of demonetization.

Mr, Keynes's plan is hardly more reassuring. We are warned off by a certain ambiguity. Very cautiously and wisely Mr. Keynes bases his proposals on the lesson taught by successful experiment:

I believe that in Great Britain the ideal system can be most easily reached by an adaptation of the actual system which has grown up, half-haphazard, since the war.

The position of gold is described in these terms:

The Bank of England's gold is immobilized. It neither buys nor sells. The gold plays no part in our system.

With this compare his proposal with regard to the existing reserve:

If we agree that gold is not to be employed in the circulation, and that it is better to employ some other criterion than the ratio of gold reserves to note issue in deciding to raise or lower the bank rate, it follows that the only employment for gold (nevertheless important) is as a store of value to be held as a war-chest against emergencies and as a means of rapidly correcting the influence of a temporarily adverse balance of international payments, and thus maintaining a day-to-day stability of the sterling-dollar exchange. It is desirable, therefore, that the whole of the reserve should be under the control of the authority responsible for this, which, under the above proposals, is the Bank of England. . . . Nor would the amount of gold, which it would be prudent to hold as a reserve against international emergencies and temporary indebtedness, bear any logical or calculable relation to the volume of paper money: for the two have no close or necessary connection with one another. Therefore I make the proposal—which may seem, but should not be, shocking—of separating entirely the gold reserve from the note issue. . . . The reader will observe that I retain for gold an important rô1e in our system. As an ultimate safeguard and as a reserve for sudden requirements, no superior medium is yet available.

This, surely, is not quite consistent enough. To-day the "gold plays no part in the system," because it " neither buys nor sells "; in Mr. Keynes's own system " gold is not to be employed in the circulation." Where is the difference? The gold at the Bank will no more buy than it does to-day. Nor does the reason given for keeping it at the Bank strike me as valid. With a currency which safeguards economic life from all risks, it is hard to see how the need of "a war-chest against emergencies " should ever have to be faced. In the case of a war, the gold would be held all the more tightly. Where, then, is the reserve gold ever to come into play? If, moreover, the other States follow suit in adopting a stable standard, so that rates of exchange remain constant, and no country can ever have an interest in taking gold in payment from other countries: the reserve will never need to be approached at all. Thus the "important role retained for gold " in Mr. Keynes's system seems to me to be that of the buried corpse. Is Mr. Keynes luring the good public? " An important role for gold? " Why, gold is the rock of safety: let us have, by all means, the stable currency standard that is backed by gold! Sooner or later a real solution will have to be found. For we may count on the gold corpse, however deeply buried, emitting a ghost. Gold is a peculiar stuff, which cannot be stifled and must not be trifled with. Better not create ghosts, but have it downright and plain from the beginning.

Professor Soddy proposes to expel gold entirely from the national currency, but like Mr. Keynes he thinks that it might be usefully employed in settling international relations. He therefore suggests that the gold reserves of the world should be pooled and placed under the guardianship of the League of Nations. A national stock should, however, be kept so that a nation may be able to " buy and sell its own money freely abroad for gold." That he has a proper notion of the gravity of the problem, Professor Soddy expresses in this sentence: " America, left after the war with most of the world's gold, would probably...