Christopher Hollis
Two Nations



Chapter XIII — The Exceptional Auxiliary

It was in that strange and powerful third chapter of Sybil that the Disraeli of the 1840's gave to the world his confession of faith. He showed himself there to have an understanding of the trick-history of the textbooks as deep as that of any man save perhaps Cobbett and Lingard alone. "If the history of England," he wrote, "be ever written by one who has the knowledge and the courage, and both qualities are equally requisite for the undertaking, the world would be more astonished than when reading the Roman annals by Niebuhr. Generally speaking, all the great events have been distorted, most of the important causes concealed, some of the principal characters never appear and all who figure are so misunderstood and misrepresented that the result is a complete mystification."  The true story, he agreed with Cobbett, was that of "a mortgaged aristocracy, a gambling foreign commerce, a home trade founded on a morbid competition and a degraded people."

It was from 1688 that he traced the degradation. "If it be a salutary principle in the investigation of historical transactions to be careful in discriminating the cause from the pretext, there is scarcely any instance in which the application of this principle is more salutary than in that of the Dutch invasion of 1688. The real cause of this invasion was financial.... The prince came; he used our constitution for his purpose; he introduced into England the system of Dutch finance. The principle of that system was to mortgage industry in order to protect property; abstractedly nothing can be conceived more unjust; its practice in England has been equally injurious.... The system of Dutch finance, pursued more or less for nearly a century and a half, has ended in the degradation of a fettered and burthened multitude. Nor have the demoralizing consequences of the funding system on the more favoured classes been less decided. It has made debt a national habit; it has made credit the ruling power, not the exceptional auxiliary, of all transactions; it has introduced a loose, inexact, haphazard and dishonest spirit in the conduct of both public and private life; a spirit dazzling and yet dastardly; reckless of consequences and yet shrinking from responsibility."

Now what did Disraeli mean by saying that credit had become the "ruling power" and by his all-important phrase that it ought rather to be only the "exceptional auxiliary"?

It is clear enough what he meant by saying that it had become the "ruling power."  In order that the world may do its business a certain supply of money is required. Now the system of "Dutch finance" has given to a handful of private individuals the right to invent by far the larger part of that supply and issue it out to producers as loans to be repaid after a certain time.

What is the consequence?

The consequence is this. Let us take this fountain-pen with which I am now writing. In order to produce this pen, as to produce any other article, the manufacturer has had to incur certain costs, and it is manifest that he cannot continue in business unless he can sell the pen for a sum at least equal to those costs. Now people do not really pay for things. Things are free. They pay money to people. The manufacturer indeed paid out some of his costs in wages to his employees; he paid out others of them, it is true, for the purchase of his raw material or his machinery. But such payments, however many the stages through which we trace them back, were all made in the first place not for things but to people. Therefore, at first sight, it might appear that whatever the cost of manufacturing the pen, that money is somewhere circulating about in society, sufficient to buy the pen back.

However, this, as Major Douglas and his followers have truly shown, is by no means necessarily so. For in every process of production it is always necessary to spend before you can sell and to sow before you can reap. Where is the money for this preliminary spending to come from ?  Directly or indirectly it must, in the system of "Dutch finance," come out of the invention of a bank. Either the manufacturer borrows it directly from a bank, or he uses for his manufacturing some of his own or somebody else's savings. If he uses, say, £100 of his own savings, then he has £100 less to spend on other goods, and either goods to that value must go unsold, or else, somewhere or other in society, a bank must create £100 and issue it as a loan to someone who can buy them. For, by buying a machine, he has increased by one machine the quantity of goods on the market, but, unless a bank invents it, there is no increased monetary supply to buy that increased quantity.(136) Therefore every stage in the production of my pen was only made possible by the invention of money by a bank and its issue as a loan. But these loans have all to be repaid. The producer's costs consist not only of the payment of wages and salaries but also of the repayment of bank loans. And, when the loans are repaid, the money is simply cancelled from existence. The greater part of the loans are repaid long before the pen comes on the market. The new money is not created, as it should be, at the time that the article is thrown on to the market and cancelled at the time that the article, owing to the consumer's purchase, is taken off the market. It is created and cancelled at quite a different time. The whole system is, as Disraeli justly said, "loose, inexact, haphazard and dishonest."

Under a just and exact system anyone would be allowed to lend money that he possessed but no private person would be allowed to invent money. The Government would be under obligation to keep the price-level stable. When an increased quantity of goods was actually thrown on to the market and its presence was shown by the tendency of prices to fall, then the duty of the Government would be to put an increased monetary supply into the pockets of consumers in order to prevent that fall. It would be essential that that increased supply should be a gift and not a loan to be repaid. How it should be issued would depend on circumstances; the only necessity is that, to solve a problem of under-consumption, the money must be put into the pockets of the under-consumers. The simplest way is merely to unbalance the budget. In the same way, if for any reason there was a decrease in the quantity of goods on the market and prices were showing a tendency to rise, then the Government would call in money by raising more out of taxation than it required for its expenses.

Very different from that, however, was the system which Disraeli found. And it is clear that in that system, the system which still survives to-day, so far from there being an automatic sufficiency of money to buy the pen, the money in the public's pocket would, if matters were left so, automatically be insufficient by the amount of bank-loan repaid to the bank. It is only possible to sell the pen, if indeed it be possible because the bank has, by the time that it comes on to the market, issued out again further money in the shape of new loans for the financing of new productive processes.

Little purpose can be served by embarking upon the sterile debate whether such a process can properly be described as one of a necessary deficiency of purchasing power. If the banks create new money sufficiently rapidly to buy the products as they come on to the market, there is indeed no deficiency of purchasing power, and it is true enough that a banker who understands his business understands that — at any rate under normal circumstances — it is against his interest to allow such a deficiency. But the debate about the mere quantity of purchasing power obscures the truth which Disraeli saw so clearly — the truth that the banker can freely choose which pockets he will fill with that purchasing power. The producer dare not raise a finger in protest against him, for to all protests he can answer, "Very well, then I will not issue the loans at all. I will make your goods unsaleable and thus drive you into bankruptcy."  By consequence the banker, able to control the pockets of the purchasers, is able to dictate the sort of goods that a country must produce. It was this that Disraeli saw and, seeing it, saw how foolish and remote from reality was the Cobdenite rhetoric about each country producing those goods which it was best suited to produce. Each country produced those goods which its bankers told it to produce. And the bankers had told England to stop producing food and instead to produce capital goods for export.

Now let us try and see what degree of reality there is behind this façade of unreality, which is the credit system. Let us forget for the moment all about money, the ticket, and consider the metaphysics of debt in terms of real goods. The traditions of mankind have approved the institution of private property on the ground that men are in general happier and work more efficiently if, as far as possible, they are allowed to own the land on which they work, the raw materials and tools with which they work, and the product of their labour. If that tradition be not a sound one, then there is no reason in private property at all. If on the other hand it be a sound one, then clearly it is necessary not only that private property should exist but also that it should be widely distributed. There are no arguments for private property which are not also arguments for widely distributed private property. For clearly, if property is concentrated in a few hands, then neither is the majority able to own the property which it uses nor the minority to use the property which it owns. Private property ceases to be something which the owner uses and becomes instead something which the owner charges somebody else for using.

Now, so long as the credit system survives, it is folly to waste time on debating the secondary issue whether the institution of landlordism or the private ownership of factories is beneficial. For, so long as a few people have the privilege of inventing money, no one in the country except those few people can really possess private property at all. The rest of us in our fancied property are but tenants-at-will of the bankers in the sense that the bankers can at any time that they wish force us to surrender it. It is idle to say that in practice this does not happen. In practice it happens every day. Two hundred years ago Berkeley prophesied that it would happen. One hundred years ago Cobbett showed that it was happening. To-day we can see it happening around us. Crushed down by the burden of rates and taxes, raised to pay the interest on a debt to fundholders who are themselves in debt to the banks, the old landowners one after another give up the struggle. "The last sad squire rides slowly towards the sea,"(137) little understanding perhaps even in the hour of eviction whose was the strong and secret power that snapped the history of his ancient race. A few only struggle on by themselves taking to usury. If there be a Conservative cause it is the cause of the battle against this power, nor indeed was there any dispute about that, until in this century the Conservative party was invaded by the battalions of big business. "In democracies," wrote(138) Lord Salisbury, Disraeli's successor, "the capitalist seems to have a crushing power — so long as he is content to leave political distinctions to other people."  It was to prevent that crushing power that Conservatism existed.

Now consider what would be the nature of debt, if instead of the credit system we had a property system. Under such a system men would as a general rule own a little property — the land on which they lived and the land on which they worked or, if they worked in a cooperative enterprise, then they would own a share in the enterprise. They would start life with a certain stock of money. After all what is money but a ticket, the surrender of which entitles us to become possessors of the appropriate quantity of such goods of our fellow-citizens as they choose to throw upon the market ?  And how can we play at that game of exchange and barter unless we start with sufficient counters to play it with ? that is to say, unless the normal family is the unencumbered possessor of a sum of money neither wildly more nor wildly less than its fair, mathematical share of the national income ?  "Riches," said the great Lord Bacon, "are like muck, which stink in a heap but, spread abroad, make the earth fruitful."  It is not necessary that our stocks of money should be equal to one another to a sixpence; what is necessary is that all of us together, all consumers, should between us have sufficient money to buy the consumable goods which the producers among us are offering for sale.

When we play at vingt-et-un, we are each, as we sit down at the table, given a certain number of counters. If at the end of the evening we have more than our original number, we say that we have won; if less, that we have lost. But we do not go into debt unless by misfortune we have lost all our counters. We are not such fools as to think that we are in debt to the bank for the original counters that were given us to play the game with. We can see that, if that were so, the game would be an idiot's game, for then the bank could not possibly lose nor anybody else possibly win. Yet that is precisely the system by which the business of the world is conducted under the credit-system.

Under the property system then the average man will be the possessor of sufficient property and money to enable him to perform the normal business of life without going into debt. It is true that on occasion men would embark on some enterprise that would not of its nature produce its results in marketable goods for a long period — for a period so long that those engaged on it could not keep themselves on their own money. During the interval then, in whatever monetary language we choose to describe the business, they would have to live on the consumable goods produced by others and for which they were at the moment giving nothing in return. They would have, that is to say, to go into debt. That is what Disraeli meant by saying that real credit is an "exceptional auxiliary."  Monetary debt under the credit system is universal, inevitable, and irrepayable; real debt is comparatively rarely incurred and soon liquidated. Establish a true monetary system which only reckons people to be in debt when they really are in debt, and the problem shrinks from its present dominating proportions to proportions proper and manageable.

So far Disraeli went, but there was a necessary consequence to his teaching which he never had the courage to preach, though it is not to be believed that he did not have the intelligence to see it. The life of society is a continuing life. Therefore we do not apply all our labour to the production of consumable goods to-day. We divert a proportion of our labour to the production of capital goods, to-day useless but necessary because without them it would be impossible to maintain and perhaps increase the supply of consumable goods tomorrow. Those who work on these capital goods and immediately produce nothing must nevertheless consume. Whatever our economic system, those who produce directly, or indirectly, consumable goods must somehow be compelled or persuaded to surrender a proportion of their product for the consumption of the producers of capital goods.

How is that surrender to be arranged?

The Socialist would do it by compulsion. He would take from the producer by force and by taxation a proportion of his product, and with that proportion feed the worker on the capital goods. The capitalist system professes to do it by persuasion. By the device of interest it offers to the possessor of claims on consumable goods that, if he will allow the producers of capital goods to-day to consume in his place, he will in return be allowed to consume somewhat more to-morrow.

The plan is not in itself an unreasonable one. It is indeed unreasonable that a man should be allowed merely to lend money — to lend £100 to-day and to be repaid £105 next year, irrespective of what has happened to the value of the pound in the interval or of what use has been made of that particular £100. But there is no injustice in his allowing another to work on his surplus goods with the understanding that, if, as a result of that work, the number of consumable goods is increased, the surplus shall be divided between the original abstainer and the worker. There is no objection, that is, to benefiting from breeding where there really has been breeding. It is indeed wise and healthy policy for the working partners to buy out the sleeping partners as soon as they are able to do so, but there is no essential injustice in partnership as such. To-day, it is true, with a fluctuating price-level, it is so little possible to tell what will sell, that people dare not risk their savings in ordinary shares and have to have recourse to the usurious dodges of gilt-edged securities and debentures. But with a stable price-level, with a sufficiency of purchasing power to buy the goods that come on to the market, an article would only be unsellable because it was really so unattractive that people would rather not possess it than possess it. Under such circumstances there would be no difficulty in finding securities that really were secure.

Yet, though the right to invest is not an unreasonable right, out of the concession of that right there has arisen the wholly unreasonable notion that all money saved has, as it were, a natural right to interest and that, where there is not an augmentation of savings, there has been a violation of the rights of property — a notion that has only to be stated in its nakedness to be seen to be clearly untrue. A gentleman of independent means, living on the dividends of inherited money, sometimes talks as if he were living on his grandfather's savings. Monetarily he is, but in fact he is eating not the surplus corn produced by his grandfather sixty years ago, but corn annexed from the producers of this year's crop. The system may be right or it may be wrong, but at least that is the system — a system as little respectful of the maxim, "Let him that soweth also reap," as is that of the Communists. Indeed the very phrase "independent means" is a phrase of folly. How can anyone except the chameleon have means that depend on nobody?

Real, and not merely monetary, considerations clearly dictate that, at any given moment in a society's history, such and such a proportion of its labour should be given to capital, such and such a proportion to consumable goods, the particular proportion of course being dependent upon particular circumstances. The first business of an economic system is to produce the necessities of life for all a country's citizens. That business accomplished, it is for the citizens themselves to decide what proportion of their surplus labour they will devote to the production of luxuries and what proportion to capital goods with their promise of benefit in the future. A just monetary system is a system of voting which ensures that that division is made in accordance with the wishes of the inhabitants.

Now, if it is reasonable to reward those who save more when more saving is required, it is obviously equally reasonable to penalize those who save more when less saving is required. At a time, when the great need is not the production of new capital goods but the consumption of the consumable goods that have been produced already, further saving is not a service but a disservice to the community. There is no opening for investment of the money saved and therefore no possibility of transferring it to the pockets of those who will spend it on consumable goods. As Mr. Keynes has so well shown,(139) the money is in fact not invested but hoarded, whether it be put physically into a stocking or be put into a bank which cannot profitably use it. The money is for practical purposes put out of circulation, and consequently the volume of purchasing power available to purchase the consumable goods that have already been produced already insufficient, is still further decreased. Under such circumstance, so far from rewarding further savings, a wise government would penalize them, taxing them on some such plan as that of Sylvio Gesell, so that, if their first possessor did not spend them on consumable goods, they would at any rate pass into the hands of somebody who would. If it did not tax the hoarded money, it would at the least replace it by new purchasing power sufficient to keep up the price-level.

Private property has its rights. It would be immoral to take from a man his real possession. But money is not a real possession; it is a claim on goods. He can exercise that claim, if he wants to, but he cannot both retain the claim and refuse to exercise it — which is what he does when he hoards. The man who refuses to buy and yet keeps the money prevents anybody else from buying either — or at any rate — what is essentially the same thing at one further remove — he compels the producer to sell at a loss and thus in his turn to buy less. In monetary affairs, as in every other affair of life, a right that is never exercised must after the passage of a certain time necessarily lapse. Credit should be the "exceptional auxiliary."  If nobody happens to want to borrow, then there must be no lending. To make it a grievance that you cannot lend your money at usury is an absurdity. If you won't spend it and can't lend it, you ought to give it away to others of richer personality. What happens in fact is that you crowd to buy shares with it and shares therefore rise to an absurd height. You lose your money in the end. You do in fact give it away — to the speculator who is shrewd enough to sell just before the market breaks. How much more sensible, what much better economics, to have put it all in the poor-box in the first place!

There are times when thrift is a virtue. There are other times when it is a grievous vice, nor is there any single habit of human nature which has so large a share of the responsibility for bringing us to the verge of catastrophe as has that of excessive thrift. The harm that has been done by spendthrifts is in comparison small, for bankruptcy soon puts an end to their riot. But the miser goes on saving until society collapses. The financial system has, as Mr. Keynes fairly claims,(140) "exalted some of the most distasteful of human qualities into the position of the highest virtues."  "The love of money as a possession" is in reality "a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental diseases."(141) Or, as another and even greater economist put it in language even more outspoken, it is "the root of all evil."


proceed !


136. The objector may say: "But all that happens is that the £100 is transferred from the pen-maker to the machine-maker. The machine-maker can spend the £100 on consumable goods."  That is to say, there is nothing to stop the same £100 being used twice in the period in which it had previously only been used once. The answer to that is that it is perfectly true that, with a greatly increased velocity of circulation, we could do our business with a much smaller monetary supply than we now use. But people have certain habits, and therefore in practice the velocity of circulation does not in fact greatly vary. It does not vary so long as the monetary system is working. It only varies when that system is already breaking down. That is to say, if prices are threatening to rise very rapidly then money begins to circulate much more rapidly because people are only anxious to turn their money into goods whether they want the goods or not. If prices look like falling then money circulates more slowly because people refrain from purchasing, thinking that they will get articles more cheaply to-morrow. But so long as the price-level is kept stable then they buy goods as they really want them, and the velocity of their real desires does not vary.

137. The Secret People, G.K. Chesterton.

138. Salisbury, Cecil, iv, 93.

139. Treatise on Money and Essays in Persuasion.

140. Essays in Persuasion, p. 369.

141. Ibid.