The Natural Economic Order/Part III/Chapter 1
If the inscriptions on coins are supposed to furnish information about the nature of money, it must be admitted that the information is scanty. The inscriptions run "10 Marks", "10 Francs" or "10 Roubles", and if we fail to deduce the nature of money from these words, the marginal comment "Mit Gott" or "Liberté, Egalité, Fraternité" will hardly bring us enlightenment.
If we compare the present German coins with the old Prussian thalers it is noticeable that the inscription no longer states the quantity of fine metal contained in the coins. As the indication of weight was often a convenience, its omission must have been intentional. Why was it omitted ? Perhaps because the indication of weight as inscribed on the Prussian thalers, suggested problems that could not be solved by the monetary theories then prevalent theories that still hold the field today. By suppressing the indication of weight on the new coins, the monetary authorities at least avoided the danger of becoming involved in contradictions.
If "XXX Thalers are a pound of fine silver" then a pound of fine silver is XXX thalers, and the conception "thaler" becomes by this inscription, by this inscription, simply a unit of weight reserved for silver, just as in England special units of weight are used for certain commodities. (Diamonds, for instance, are weighed by carats. In Neuchâtel a "mesure" of apples or potatoes contains 20 litres and a "mesure" of grain 16 litres).
But if a pound of fine silver is thirty thalers, if, as the inscription and the theory of the thalers assert, the coin is identical with a certain weight of silver, how can silver be demonetised? How can the thirtieth part of a pound of silver be separated from a thaler? Is it possible from one conception to make two, namely "silver" and "thaler"? Before the year 1872 XXX were one pound of fine silver, but after that date no longer so. If the latter statement is possible (and it is a fact), the first statement can never have been true, and the inscription on the coins represented to us as one conception what had always been two conceptions—the thaler, and the material of which the thaler was made. Only the weight of the thaler was equal to the thirtieth part of a pound of fine silver, one pound of silver was necessary to make thirty thalers, just as one pound of iron is necessary to make a horseshoe. A thaler was no more a certain quantity of silver than a house is a pile of bricks, or a pair of shoes is a yard of leather. The thaler was a product manufactured by the German mint and quite distinct from silver. And, in spite of its inscription, it was that as much before as after the demonetisation of silver.
The inscription made the thaler and its material one and the same conception; the demonetisation of silver proved the existence of two conceptions in the thaler. The withdrawal of the right of free coinage of silver made the thaler transparent, so that through the silver we saw its inner nature. We had believed that a thaler was merely silver, but now we were forced to recognise that it had also been money. We had denied the thaler a soul until, at its death, a soul left its body before our eyes. Up to the withdrawal of the right of free coinage the subjects of Prussia had seen only silver; now for the first time was revealed to them, in the conjunction of silver and a law of the State, the existence of a peculiar manufactured product, namely money.
Before the closure of the mints to silver, the explanation of money given by theorists, both monometallists and bimetallists, passed without contradiction; but the demonetisation of silver showed that although coins are struck from metal bars, metal bars are not for that reason coins.
"Coins are bars of metal the weight and fineness of which are attested by the stamp."
(Chevalier, La Monnaie, p.39)
"Our German mark is simply the name for 1/1395 of a pound of gold."
No one saw that the free coinage of silver, which in practice, of course, converted coins into bars of metal and bars of metal into coins, was a law, a law made by the State and dependent upon the will of legislators. No one saw that the thaler was a manufactured article, a product of legislation, the silver being but the arbitrarily chosen raw material of the thaler. The law made the thaler; the law umnade it; and what is here stated of the thaler applies, of course, also to its successor, the German mark. The right of free coinage of gold, which today in practice identifies coins with gold. is the work of our legislators. The means which called this right into existence may withdraw it. The right may be challenged at any time if the opinion prevails that much which was taken for granted at the adoption of the gold standard cannot stand the test of criticism. But if this happens, if the mints are closed to gold—and the recognition of the notes of the Reichsbank as legal tender is a first step in this direction—what is then the relation of gold to our money? Merely that, like copper, silver, nickel and paper, it is used as a material in the manufacture of money; that is to say, the relation that obtains between stone and house, leather and boots, iron and plough. All trace of identity between money and the material of money would disappear, and the distinction between gold and the mark would be as apparent as the distinction between silver and the thaler, or between hats and straw.
We must therefore make a sharp distinction between money and its raw material, between the German mark and gold. Money and its material can never be considered one, for between them lies the law which today unites, but tomorrow may separate them.
This distinction between money and its raw material has always existed. It existed in a concealed form during the free coinage of silver, and it exists in a concealed form with the gold standard. But the distinction was revealed to everyone by the withdrawal, the legal arbitrary withdrawal, of the right of free coinage of silver. The distinction is equally apparent at the present day to those who have learnt from the history of silver that the privileges of money are not inherent in any metal, but can be transferred by law from one material to another.
But what do our legislators now think when the currency question arises, when, for example, they take up a German mark and ask themselves what it is? Are they conscious that the German mark has never been legally defined, that none of the current monetary theories is compatible with the German monetary standard; that the promotion of the German banknote to legal tender deprives the orthodox theory of the gold standard of its last support; that the inscription upon our banknotes has become nonsense?
"The Reichsbank promises to pay bearer at sight 100 Marks German Standard"—so runs the inscription, and monetary theory declared that the banknotes can circulate only because of this promise to pay. But the inscription has been implicitly cancelled by the declaration that the notes themselves are legal tender. Yet the notes continue to circulate. How is this possible? The German peasant, for example, consented formerly to sell his cow for 1000 silver marks which, if melted, would yield only 400 marks worth of silver, and he is now willing to give his best horse in exchange for a banknote which, both from a material and a theoretical point of view, he must regard as a scrap of paper!
The inscription on the notes should be brought into harmony with facts. Upon the notes as upon the gold and silver coins should be written simply 10 - 20 - 100 marks. The rest of the inscription, especially the word "pay", should be cancelled. This word is used in promises to pay (promissory notes, bills of exchange and so forth); and banknotes are not promises to pay. With promises to pay, especially those of the State, the holder receives interest; but with banknotes the opposite is true, the drawer, that is, the State, receives interest.
The drawer or issuer of banknotes, the State, is really the creditor, and the holder of the banknote is the debtor. "The Reichsbank promises to pay the holder..." should be changed to "This is 100 Marks." Banknotes in spite of their inscriptions, can never be promises to pay. Credit paper without interest is, under present conditions, inconceivable. But where, except in the inscriptions on banknotes, do we find credit paper which costs the holder (creditor) interest and brings in interest to the issuer (debtor), and at the same time stands at par with real interest-bearing paper? The German Imperial Loans, which bring the holders 3 % interest annually, stand to-day (1911) at 84.5; the German banknote, which costs the holder annually 4, 5, 6, 8.5 % interest, stands at par. The law and present-day monetary theory treat both kinds of paper alike, regarding each of them as promises to pay, promises to pay made by the same debtor!
Legislation and pseudo-scientific theory so full of contradiction must be swept away.
The cellulose of the banknotes, like copper, nickel, silver or gold, is raw material for the manufacture of money. All these different forms of money have an equal share in the privileges of money and are interchangeable. They are all subject to the same effective control of the State. Nobody buys paper-money with metal money of the same State; one is simply changed for the other. The promise of payment on banknotes should therefore be cancelled and the new inscription should run: "This is ten, one hundred, one thousand marks German standard."
A banknote circulates at par with metal money not because of, but in spite of, its inscription.
What forces, we now ask, make the issuer of a banknote an interest-receiving creditor, and the holder an interest-paying debtor? Undoubtedly the miracle is due to the fact that the note has the privilege of being money. We must therefore examine more closely the nature of this privilege.
- The coin became a legally certified weight with which anyone could check a shopkeeper's weights. The number of coins in a sum of money could be determined by weighing, and conversely the weight of a given number of coins in a sum of money could be determined by counting.
- "XXX ein Pfund Fein" the inscription on the old Prussian thaler.
- The theory of the gold standard is at present in such confusion that it would be difficult to formulate it in words. During the discussions which preceded the adoption of the gold standard in Germany, the bullion theory in its crudest form still held the field. "The value of money is the value it gives itself" said Bamberger; "and gold forces itself forward as money by virtue of its properties as metal."
How can we reconcile with this assertion the fact that a few years later there appeared in Germany "A Society for the Protection of the German Gold Standard"? Did gold no longer force itself forward as money by virtue of its properties as metal? And how did they come to speak of a "German" gold-standard? If, as the theory proclaims, the German mark is simply a certain weight of gold, it is no more German than French, Russian or Japanese. Or does the mine or melting-pot produce German gold, and how is this gold distinguished chemically from other gold? The title of this society, like the leaflets it publishes, contains almost as many contradictions as words.
As an example of the state of monetary theory in Germany as lately as ten years ago, it may be mentioned that the appeal for membership of this society was signed by persons absolutely without professional experience in monetary matters. Mommsen and Virchow gave their names as indifferently as they would have given them for the foundation of a society of goat-keepers. To them the monetary standard was a trifle, a minor controversy to be decided offhand.
- With the present note-issue of 10 billion marks, the State draws 500 million marks interest annually.
- The Reichsbank discounts commercial paper indifferently with its notes or with gold. It receives the same interest for both. Yet it counts the gold as part of its capital and the notes as part of its debts!
- When paper falls below par, the metal money, in accordance with Gresham's law, flows out of the country. The paper-money then circulates alone.