The Natural Economic Order/Part II/Chapter 2
The State purchases all private property in land-agricultural land, forests, building sites, mines, gravel-pits, water-power. And the State pays for what it purchases, it compensates the landowners.
The purchase-price is based on the rent which each piece of land hitherto yielded or would have yielded. The rent thus calculated is then capitalised (*Capitalisation of rent means calculation of the sum of money which would yield interest equal to the rent.) at the mortgage rate of interest, and this amount is paid to the landowners in interest-bearing State securities; not one penny more or less.
But how can the State pay the interest on such tremendous sums ? The answer is: with the rent of the land, which, of course, now flows into the public treasury. This revenue is equal to the amount of interest to be paid, not one penny more, not one penny less, since the debt is simply the rent of the land capitalised.
Suppose, for example, that the annual rent of the land is one billion dollars. (*Billion: Throughout this book, in accordance with the convenient American (and French) notation, the word "billion" denotes "one thousand millions". The German word is "milliard".) The compensation paid by the State, at a rate of interest of 4%, then amounts to 25 billion dollars, and the interest on this sum, at the same rate of interest, is also one billion dollars. The sum paid out and the sum received are the same.
The size of these figures need cause no alarm, for the size of the debit is measured by the size of the credits. (*At the present moment, indeed (November 1919) there is practically nothing left to redeem. The German debt for reparations, which is equivalent to a first mortgage, will claim the greater part of German rents. Already a large German estate can be bought for the price of a few acres of Swiss land.) In itself nothing is either great or small. France though burdened with a national debt of 35 billion francs and as much again for private mortgages is piling up billions upon billions in foreign State securities.(* Written before the war.) The capacity of the reservoir is great. It would be the same with the debt resulting from nationalisation of the land. The immense debit would be balanced by an immense credit. It would therefore be quite superfluous to calculate these sums in advance. If the amount is 100 billions, good; if it is 500 billions, good again. For the State finances the entry is transitory. These billions troop through the public treasury without leaving a trace. Is a banker alarmed when entrusted with a fortune ? Is the President of the Reichsbank alarmed at the sums, however great, that pass through his ink pot ? Not at all, he sleeps as soundly as the director of the Bank of Heligoland. Have the debts of the Prussian State become more oppressive since the railways were bought by the State and paid for with State securities ?
It may indeed be objected that the State does incur a risk in connection with the nationalisation of the land, in so far as rents are determined by fluctuating economic factors (tariffs, freights, wages, currency-standards), whereas the rate of interest on the debt, like the debt itself, is fixed on paper.
Such a risk exists, and strangely enough its existence is exploited by the landowners as an argument against nationalisation. For how have the landowners protected themselves hitherto against the shrinkage of rent ? Have they not always, in such cases, appealed to the State for help, shifting the whole burden of their loss to the State which they are now so anxious to protect from risk ? And they omit of course to mention that where there is a risk there is usually also a chance of profit; they are wont to transfer the risk to the State, but to claim the whole of the profit for themselves. With regard to the private ownership of land the State has hitherto always played the part of a loser in a lottery. For the State the blanks - for the landowner the prizes. When rents increase, the beneficiaries never propose to restore to the State what they have received from it in times of need. In former times the landowners were able to help themselves. They aggravated the conditions of slavery or serfdom, and when slavery could no longer be maintained they forced the State to help them by restricting freedom of movement, whereby wages were depressed below their natural level. And when such methods became too dangerous, the State was requested to come to their aid with the bimetallic swindle, that is, to sacrifice the currency-standard, and thus by a shameless inflation of prices, to liberate the indebted landowners from the burden of their debts, at the expense of the rest of the population. (This sentence will be more easily understood later on by readers who are as yet unfamiliar with the problems of currency.) When this attempt failed through the opposition of the other class of receivers of unearned income, namely the bondholders, and nothing more could be gained by force, the landowners changed their tactics and whined for sympathy. To justify their demand for protective-duties on agricultural produce they called attention to the "plight of agriculture". To protect and increase rents the mass of the people were to pay higher prices for bread. Thus it has always been the State, the people, that took upon itself the risk connected with landed property. A risk borne by so broad and powerful a class as the landowners is in practice equivalent to a risk borne by the public treasury. After nationalisation of the land the only change would be that, in return for the risk incurred, the State would have a chance of profit.
Moreover, from the point of view of economic life as a whole there is no risk whatever in the decline of rents; from this standpoint, indeed, even their disappearance would be no loss. The taxpayer, who has at present to deduct from his work not only taxes, ,but also rent, could easily bear a larger tax if relieved of the burden of rent. The tax-paying capacity of the people is always in inverse ratio to the power of the landlords.(* Rent on French land fell by 22.25% in the period 1908-1912, as compared with the period of 1879-1881; the price of land falling by 32.6%, In 1879-1881 a hectare cost 1830 francs, in 1908-1912 only 1244 francs.)
At first nobody gains or loses by the redemption of the land. The former landowner receives as interest from the State what he used to receive as rent from his landed property, while the State, through its ownership of the land, receives rent equal to the interest on the State securities.
The net gain to the State will begin only with the gradual amortisation of the debt through the currency reform which we discuss later.
With this reform the rate of interest (both on money-capital and on real capital) will within a short space of time sink to the lowest point permitted by international market conditions, while the international application of the reform would reduce pure interest to zero.
It will therefore be prudent to grant the holders of the land-nationalisation bonds only as much interest as is necessary to maintain the parity of these securities. For the price of securities bearing a fixed rate of interest must respond to all the fluctuations of the market rate of interest. If, therefore, the price of the State-securities is to remain stable, the rate of interest must be adjustable. It must rise and fall with the market rate of capital-interest, this being the only way in which these State securities can be protected against speculation. And it will certainly be in the public interest to protect a capital of from 50 to 75 billion dollars against the raids of speculators, especially as these securities will in many cases be held by persons without financial experience.
We propose to introduce the money reform simultaneously with the nationalisation of the land. Its effect will be to reduce the market rate of interest, so the rate of interest on the nationalisation securities will also be automatically reduced, from 5 to 4, 3, 2, 1, - and finally 0%.
The finances of land-nationalisation will then present this aspect: The rents of a country amount annually to, say, 10 billions With interest at 5%, the State pays the land-owners an indemnity of 200 billions Or, with interest at 4%, an indemnity of 250 billions The interest to be paid on 200 billions at 5% is 10 billions If the market rate of interest now falls to 4%, the interest on the 200 billions must be reduced to 8 billions Whereas the rents at first remain stationary at 10 billions Thus the finances of the land-nationalisation show an annual credit balance of 2 billions
This balance will be used to cancel part of the debt, and the sum on which interest is to be paid will be reduced by this amount, whereas the rents continue to flow, undiminished, into the public treasury. This annual surplus will increase in proportion to the decline of the general rate of interest, and will finally, when interest has fallen to 0%, equal the full amount of the rents - which will also, it is true, decline with the fall of interest, though not to the same extent. (See Part I, Chapter 14.)
With such a development, the whole of the great debt arising from nationalisation of the land is completely cancelled in less than 20 years.
It may be mentioned that the present exceptionally high rate of interest on the war loans, which would be adopted as the capitalisation rate, would be particularly favourable for nationalisation of the land, for the higher the rate of interest, the smaller is the capital sum to be paid as indemnity to the landowners. For every $1000 of rent the indemnity to be paid to the landowners is:
at 5% = $20,000 capital at 4% = $25,000 capital at 3% = $33,333 capital
Whether it is desirable to shorten still further the period of transition and adjustment granted by the above scheme to the beneficiaries of rent, I shall leave it for others to decide. The means to do so will not be lacking. The effects of the monetary reform proposed in Part IV of this book are far-reaching. The money reform allows economic life to develop freely, giving full scope to modern means of production which, in the hands of modern highly-skilled workers, are capable of greatly increased output, and it also puts an end to economic crises and stoppages of work. The taxpaying capacity of the people will increase enormously. If, therefore, it is desired to make use of these forces for a more rapid cancellation of the State debts, the term indicated above can be greatly reduced.