THE MONEY PROBLEM

Chapter XIV.

CREDIT—THE CAUSE
OF FINANCIAL PANICS



WHEN a merchant accepts money for his goods, he receives it believing he can exchange it again for other goods he may need.  He accepts it in expectation of its future redemption.  Here the element known as “credit” enters.  Credit is defined as “ expectation of future payment for property transferred or promises given.”*  The person who sells goods expecting a future return is said to sell on credit.  The seller is termed a creditor and the buyer a debtor.  The amount due the seller is to him a credit, and to the purchaser a debt.  Credits and debts are merely two aspects of the same thing.  Every credit is a debt, and every debt a credit.  Whenever a transaction occurs, in which one party receives satisfaction and the other does not, the latter is said to receive credit in place of satisfaction.  This credit entitles him to satisfaction at some future time.  We may define credit, therefore, as the expectation or anticipation of satisfaction.  Credit and debt are merely the two poles of satisfaction, credit being the positive and debt the negative pole.  Thus, if we estimate a man’s wealth we place the plus or positive sign in front of every credit and the minus or negative in front of every debt.  Every commercial transaction must necessarily take one of two forms, either the barter or credit form.  Goods are exchanged for goods or for credit ;  the direct exchange of one commodity for another is barter ;  and wherever this does not take place, credit takes the place of one or other commodity.  Practically, all the commerce and trade of the civilized world is done upon a credit basis.  Credits may be divided into two classes :  stationary and circulating.  Circulating credit is money, but it is customary to apply the term credit exclusively to the stationary class.  Thus, if in exchange for goods supplied, a man gives me his promissory note, payable six months hence, and I am unable to use it to purchase other goods, or get others to accept it in payment of debts owing by me, the note remains with me until mature ;  it is stationary.  Such a note whilst in my possession is simply a credit note, it is not money.  If, on the other hand, I can pass it to obtain the satisfaction I desire, the note, being current, is currency or money.  Credit is purchasing power.  Now, purchasing power may be special or general ;  it is general whenever it is generally transferable and acceptable.  Thus, legal tender represents general purchasing power ;  i.e. it is generally accepted throughout the country by all people in payment of all debts.  On the other hand, a mere promissory note which is not generally negotiable, is an example of special purchasing power.  It is given to a particular person in payment of a special debt, and cannot be used by that person until maturity, owing to his inability to pass it on.  All commodities have special purchasing power, and the exchange of commodities for money is the transformation of special purchasing power into general purchasing power.  Circulating credit is, therefore, general purchasing power, and stationary credit is special purchasing power.  For instance, railway and theatre tickets are credit notes representing special purchasing power.  They are redeemable in railway journeys and admissions to theatrical performances ;  and since they are not negotiable, and cannot he used to purchase other commodities, they are stationary credits.  Although it is customary in trade to distinguish between money and credit, yet, as we have seen, they are of precisely the same nature.  Strictly speaking, credit is the general term of which money is a species.  One often hears a so-called cash business contrasted with a credit business, as though the two were of opposite character ;  the truth being that cash is only a higher and more general form of credit.

“ They are each a right or title to demand something to be paid or done by someone else.  No one can compel another to sell him anything for money or credit.  When, therefore, any person has voluntarily taken money in exchange for anything, it is in reality only credit ;  because he only takes it in the belief that he can exchange it away again.” (Macleod.)

The attempts of governments and legislators to make of money a commodity, is nothing more nor less than an attempt to destroy the chief function of money.  The idea that money must be “something valuable,” “ something having intrinsic value ” in order to constitute “honest” money, shows a complete misconception of money and it functions ;  for if money is a valuable commodity, if it is, per se, an equivalent for the goods purchased, it cannot represent a credit or a debt.  If in return for goods I give their equivalent in “ full value,” there is no element of credit whatever ;  the transaction is a barter transaction.  Now money does not enter into barter.  Instead of an exchange of present satisfactions, the use of money involves the exchange of an immediate satisfaction for a deferred satisfaction.  All commodities represent immediate satisfaction ;  i.e.  they themselves satisfy human wants and desires.  Money and credit are merely the symbols of or rights to satisfaction ;  hence, when the commodity appears, satisfaction accompanies it, like a man and his shadow ;  it is no longer deferred, it is present.  Therefore, “ commodity-money ” is a contradiction in terms.  Hence gold and silver coins of “ full value ” are not, scientifically speaking, money ;  they are not representatives of debt.  The worth of the gold and silver which they contain cancels the debt which, as money, they represent.

We have now to see the effect of the credit system upon commerce.  By far the greater part of the world’s commerce is done on a credit, as distinguished from a cash basis.  A report from a representative house, referred to by Macleod, shows that “specie did not enter into their transactions for little more than 2%.”  This was on transactions of upwards of £1,000,000.

“ A similar investigation instituted by some bankers, resulted in the fact that specie only entered into their operations to the amount of 4 per thousand.”

It has been estimated that the amount of credit in use in Great Britain is at least £5,000,000,000, the amount of coin and notes being about £120,000,000.  In the United States not more than 2% of the business done is on a cash basis.  The creation of this enormous volume of credit—stationary credit**—has been caused by the absurd restrictions which governments have placed upon the issuance of money.  Industry, which is always naturally ahead of finance, demands a greater volume of currency than exists anywhere ;  and since money is scarce, industry calls credit into play.  In fact, were it not for the credit system, commerce and industry would decline to where it was a century ago.

John Law said :  “ The introduction of credit augments the quantity of money more in one year than a prosperous commerce would do in ten.”  It has been shown by J.S. Mill and others, that the effect of credit upon prices is the same as an increase of the volume of the circulating medium.  Since credit affects the supply and demand of money, just as an increase in the amount of money would do, it is obvious that prices must be affected to the same extent.  “ In a state of commerce in which much credit is habitually given,” says Mill, “ general prices, at any moment, depend much more upon the state of credit than upon the quantity of money.  For credit, though it is not productive power, is purchasing power ;  and a person who, having credit, avails himself of it in the purchase of goods, creates just as much demand for the goods, and tends just as much to raise their price, as if he made an equal amount of purchases with ready money.”

So Macleod says :  “ It is the enormous creation of credit in modern times, in the form of banking credits and mercantile credits, which has so prodigiously raised the prices of products, and diminished the rate of interest, in the last two centuries, in this and many other countries.  It is the quantity of credit in modern times which chiefly determines the price of products ;  and variations in the quantity of credit produce more changes in the prices of products than any variations in the quantity of gold and silver ;  and it is the abuses of credit which produce these terrible calamities, termed commercial crises and monetary panics, which we shall have to investigate afterward.”

The cause of these calamities, however, as I shall hereafter prove, is quite the opposite of what Macleod and other economists would have us believe.  It is not the abuse of credit that creates these calamities, it is the scarcity of money.  It is the interference of legislators and governments with natural operations, that causes financial trouble ;  the attempt to compel people to do the impossible, viz., to transact the entire business of a nation upon a single commodity basis.  It is the result of attempting to redeem credits in one particular commodity, instead of in all ;  it is the attempt to drive the camel through the eye of the needle.

In the chapter on Price, I have shewn the cause of the phenomenon known as a general rise and general fall of prices, which is due to the fluctuations in that which is used as the denominator of values.  Referring to the example there given :  tea is selling for 60 cents per pound, wheat 75 cents per bushel, iron 25 dollars per ton, silver 90 cents per ounce.  Now, since the dollar is the common denominator of values, the price form of these commodities is as follows :—


1.00 (one dollar)
Tea
in pounds
0.60
Wheat
in bushels
0.75
Iron
in tons
25.00
Silver
in ounces
0.90

It is apparent that the values of these fractions vary inversely with the denominator.  If by artificially restricting the supply, the value of one dollar should increase to two dollars, the above fractions are changed as follows :—


2.00
Tea
.60
Wheat
.75
Iron
25.00
Silver
.90

The price of tea is now 60-200 cents, or 30 cents per pound, instead of 60 cents.  So the price of wheat has fallen from 75 cents per bushel to 37 1-2 cents.  Iron has also fallen 50%, in price, viz., from £25 per ton to £12.50 per ton, etc.

Thus the effect of increasing the purchasing power of the denominator, is to decrease the price of all commodities ;  and if the denominator is increased 100% there is a general fall in prices of 5o%.  And conversely, a fall in the value of the denominator results in a general rise in prices.  Now, to the general public, there is never apparently any change in the value of money ;  a dollar is always a dollar, it is never two dollars.  Hence, to the average mind, a general fall or rise in prices is as mysterious as a shooting star, and is popularly regarded as one of those “ inscrutable mysteries of Providence.”  If the denominator decreases, prices rise, and this is supposed to be the result of a favorable “ dispensation ” ;  if the denominator increases, prices fall, and this is a judgment, “ the result of the Almighty’s displeasure ! ”

The effect of monopolizing and restricting the supply of money is, however, precisely the same, so far as it affects the purchasing power of money in relation to some one commodity, as the monopolization of that commodity.  And as the “ honest” money advocates make of money a commodity, the results are the same.  A bushel of wheat is always a bushel of wheat, it is never two bushels.  Yet we know that at one time we can purchase two bushels for the same sum that at another time we pay for one bushel.  This is precisely the same with dollars.  Whilst one dollar never becomes two dollars, the purchasing power of a dollar, at a particular time, has frequently been equivalent to the purchasing power of two dollars at another time ;  so that whilst the denominator of values, the dollar, is nominally invariable, its purchasing power varies, and the effect on prices is exactly the same as contraction or inflation.  Here is the insidiousness of our present monetary system.  If money were expressed in units of purchasing power, possessed by it at one particular time and place, in reference to all commodities, such a system would register variations in the commodity which circulates as money.  Then the general rise or fall of prices would be shown in the denominator.  But as the dollar or sovereign is the standard at all times, its fluctuations are registered in commodities, and instead of the dollar rising and falling, to the public it appears that it is commodities that are fluctuating, and that these fluctuations are due to the commodities themselves.

In the price form, therefore, the denominator is always APPARENTLY constant.  It is always represented by one dollar, or numerically 1.00.  It is the numerators, the commodities that are seen to undergo the change.  Thus, tea drops from 60 cents to 30 cents per pound, and wheat from 75 cents to 37½ cents per bushel, whereas, as a matter of fact, these commodities have probably never changed one iota under the influence of supply and demand.

Instead of the price-form appearing, as shewn on page 162, where the purchasing power of the dollar has increased, thus :—


2.00
Tea
.60
Wheat
.75
Iron
25.00
Silver
.90


it is always represented thus :—

1.00
Tea
.30
Wheat
37½
Iron
12.50
Silver
.45

Now the determinant of value is, as we saw when discussing the subject of value, the relation of supply to demand ;  and the causes of variations in the values of commodities, are variations in the supply of or the demand for commodities themselves.  Where the demand for a thing increases, the supply remaining constant, the exchange power increases ;  where it decreases, its exchange power decreases, And vice versa, when the supply increases, the demand remaining constant, the exchange power decreases ;  and when the supply decreases, the exchange power increases.

Where the supply is kept always in excess of the demand, there is no variation.  Where the supply is unlimited in comparison to the demand, values disappear.

Under our present system dollars and pounds are commodities, and are influenced by the laws of supply and demand.  When the supply of dollars is constant and the demand increases, the purchasing power of dollars increases, and vice versa.  When the supply of dollars is diminished by hoarding or by “ cornering ” gold, the purchasing power of dollars increases.  Now money, being a species of credit, the artificial restriction of the supply of money naturally tends to bring into use personal credit.  The natural wants of mankind are not to be suppressed or confined by any artificial restriction, such as a “specie basis,” or a “legal tender” act ;  hence, through the limitation of that which should be unrestricted, a substitute is adopted and “ enormous amounts of credits are piled up.”  The effect of this substitute is the same as an increase in the volume of money, and its tendency is to lessen its purchasing power.  Further, the destruction of credit, which occurs every now and again, is precisely similar in its effects to the destruction or the “cornering” of money, the purchasing power of which instantly rises.  The result is analogous to that which would occur by discovering a substitute for any commodity.  The destruction of credit is similar in its effect to dumping into the ocean so much coin.  The contraction of credits of three thousand millions of dollars is as disastrous to commerce and industry as the loss of that amount of money !  Statesmen worry when gold leaves the country, but regard the contraction of credits with but little anxiety.  The great concern of governments appears to be to facilitate the importation of gold in order to increase the volume of currency ;  but they are stupidly unconcerned when that which fills its place, and which is, after all, the main factor in facilitating exchange, is reduced or impaired.

It will be convenient at this place to point out the manner in which personal credit, although apparently a competitor with money, is made “its partner and associate in crime.”

We have seen the effect of variation in supply and demand upon values.  The greater the demand and the more restricted the supply, the greater the purchasing power of any commodity.  The objects sought after in trade are, therefore, these two, viz.:—

1st.  To create a demand for a commodity.

2nd.  To control its supply.

Now, decreasing the supply of a thing, when demand is constant, has the same effect upon its purchasing power as increasing the demand when the supply is constant, and vice versa.  But if the demand can be increased and the supply suddenly decreased, the effect is enormously augmented.  For instance, suppose the demand for an article, at one time, to be represented by 100, the supply being also 100 ;  and suppose by means of an artificial substitute, demand and supply be increased to 10,000.  Now by suddenly cutting off the artificial substitute, the supply is at once knocked down to 100, the demand still remaining at 10,000.  The appreciation in the purchasing power of that commodity can be better imagined than described !

This is precisely the effect of credit upon money.  Credit is the artificial substitute for money.  (I of course refer now entirely to our present monetary system.  Under a scientific system, money and credit would be synonymous.)

The demand for money is always far in excess of the supply ;  hence, its substitute is called into existence, the first and immediate result of which is to lessen the demand for money.  Interest is less, prices are raised, and the effect similar to that of one competing commodity with another.  But the commodity merchant always regards his competitor jealously and with impatience.  He is ever ready to place obstacles in his path.  Not so the commodity-money merchant ;  he looks ahead.  He will even assist in the piling up of these vast amounts of credit,“ notwithstanding that his interest is temporarily cut down by doing so.  So long as these credits are built upon the specie basis, he knows that as surely as the sun rises, they can be swept out of existence as completely as if they had never existed.  The greater their amount the greater the disproportion between the actual supply and the money demand, and consequently the greater the harvest will the money merchant reap when the crash comes.

These credits being redeemable in specie, are found too enormous for redemption.  There is not enough specie in the world to redeem them with.  And now the operation of driving the camel through the eye of the needle begins.  All that does not pass through the needle’s eye, falls into the hands of the drivers.

The makers of credit find themselves in the position of the Israelites, who were compelled to make bricks without straw.

They are driven to despair.  The holders of specie carefully put it under lock and key, thereby increasing an already enormous deficiency.  The demand remaining what it was when credits were in existence, the supply is cut down to less than that existing before the substitute was created.

The effect of credit is, therefore, to greatly increase the purchasing power of money whenever credit is shaken.

Credit is the fertilizer that serves to ripen the fruit which the money monopolists shake into their own hats.  It produces a harvest which money alone could never produce.  Credit changes the value of the denominator to an enormously greater degree than specie could possibly do.

Take the credits of Great Britain, estimated at from five to six thousand millions of pounds, whilst the legal tender in circulation is only about 120 million pounds.  Supposing that only 10 per cent. of the credit is redeemable in money.  There are then 600 million pounds of credit, and but 120 million pounds, or one-fifth the amount required, to redeem it with.  Now, so long as credit is unassailed and remains intact, everything works smoothly.  Credits are redeemed with credits, extensions given, and a small amount of money serves to do a vast amount of work by circulating rapidly and by making credits redeemable at different times.  But let the public confidence once become shaken, or fear become general through some cause, no matter how trivial, and there is an immediate desire to have credits redeemed.  Instead of redeeming them with credits, or granting extensions, every creditor insists upon cash redemption.  The demand for money, heretofore satisfied with credit, is now centred on gold and will be satisfied with nothing else.  Gold rises enormously ;  multitudes of persons are obliged to sell their goods at a sacrifice.  Down come prices.  Industry is paralyzed and parliamentary and congressional committees are appointed to enquire into the causes of the disaster.  Those whose system is the cause of all the trouble are consulted.  With learned ignorance they propound such theories as “ over-production,” “ over-trading,” “abuse of credit,” “ state-bank currency,” “ reduction of the tariff.”

Their theories are seriously considered and acted upon.  The country pulls itself together, and once more commences its sisyphean task of building another gigantic pyramid with its apex for a base.  Such, in brief, is a synopsis of the financial panics that periodically afflict the world and which have puzzled legislators for the past two centuries, as completely as Haley’s comet puzzled Popes Callixtus and Pius II.

Such results are wholly attributable to building industry upon an insufficient and false foundation.  Panics are not the results of “ over-production,” nor of “over-trading,” nor of the “abuse of credit.”  Panics arise because the gold basis is too narrow and too contracted on which to build the world’s industries.  The building becomes top heavy.  It is pushed into a position of unstable equilibrium by those who control the base, and down it comes.  To say that there is general over-production or over≠trading, is to say that people have more than they want, and that they are trading for amusement.

Human wants are the cause of trading, and because of the insufficient supply of the medium of exchange, men are actually compelled to make industry top heavy and unstable.

I have shewn that money is, from the scientific standpoint, circulating credit, and credits that are not circulating are termed stationary credits.  Now the channel of circulation is filled with these forms of credit, and in order that trade and commerce should be facilitated, it is essential that the material with which the channel is filled, be kept in circulation.

Like blood in the human body, it must circulate freely and unhindered to keep trade in a healthy condition.

The effect of legislation restricting monetary issues by taxation or otherwise, is to increase the amount of that class of credit which may be termed sluggish or stationary.  It is circulated slowly and with difficulty.  The demand for money being greater than the supply, recourse is had naturally to the medium of personal credits, which are essentially sluggish.  Hence the channel of circulation becomes choked, and circulation is hampered or entirely stopped.

We have thus a further illustration of legislation defeating its own ends.  Ostensibly, legal tender acts and specie bases are for the protection of society ;  to provide the people with what the newspapers are fond of terming “honest” money.  In suppressing State and private bank issues by taxation, the Government compels society to have recourse to a system of credit far more precarious than any State or private bank systems that ever existed.  The loss occasioned by a sudden shrinkage of public credit, results in much greater evil and misery than any mere over-issues of bank notes would produce.

The end to be sought by those who would prevent a repetition of the financial and monetary disasters of the past, is to free money from the artificial and burdensome restraints with which it is encompassed ;  to allow the people to attend to and satisfy their own wants in regard to money as with everything else.  The more plentiful the money supply, the less a baseless credit system will be used, until with an adequate supply, the system finally disappears.  The solution is not to make the industrial and commercial structure less bulky, but to broaden the foundation ;  to make the base proportional to the edifice.  To use our former illustration, we must stand the pyramid on its base if we would make it stable.  Those who control the apex may then do their worst, they can never overturn business.

Commerce thus assumes its rightful position and becomes absolutely safe.




1 Webster.

2 It will be understood that when speaking of credit in contra-distinction to money I mean stationary-credit, money being circulating-credit.  The former is usually insecure and not properly backed by sufficient wealth.  It is this form of credit which is so uncertain, so dangerous.