The Natural Economic Order/Part III/Chapter 11

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If we recognise demand and supply as the sovereign regulators of prices, if we are convinced that the subject-matter of the theory of value is an illusion, and further, that production oscillates about price as centre of gravity and not vice-versa, it is clear that price and the factors influencing price will absorb our interest, and that certain facts which until now seemed trivial will assume an immense new importance.

One of these apparently trivial facts, which has, up to the present, been totally overlooked, is that the nature of our traditional money allows demand (the offer of money) to be delayed from one day, one week, one month, one year to another. whereas supply (the offer of wares) cannot be postponed a day without causing its possessor losses of every kind. The French war-indemnity of 180 million marks of gold stored in the fortress of Spandau has not entered the market once in 40 years, yet any expense caused the German government by this so-called war-chest has come from without, not from within the Julius tower. The amount and quality of the gold has remained the same. Not a pfennig has been lost through loss of material. The soldier on guard protects the gold, not from moth and rust, but from thieves. He knows that as long as the locks remain intact no harm can come to the treasure piled within.

In contrast to this, a real war-chest, the so-called "wheat of the Swiss Confederation" stored at Berne, suffers annually a loss of 10% of its material, apart from the cost of guarding and storage. (Without counting interest, which the owners of the Spandau treasure also lose).

The wares which compose supply decay, lose weight and quality, decrease continually in price in comparison with fresh wares.

Rust, damp, decay, heat, cold, breakage, mice, moths, flies, spiders, dust, wind, lightning, hail and earthquakes, epidemics, accidents, floods and thieves wage war continuously and successfully upon the quantity and quality of wares. Few wares fail to exhibit the results of this warfare a few days or months after their production. And it is precisely the most essential wares, food and clothing, that are least able to withstand these enemies.

Like all things earthly, wares are in constant state of flux. Rust is converted into pure iron by fire, and iron is converted back into rust by the slow fire of the atmosphere. Costly furs fly out of the window in the form of a thousand moths. Dry-rot converts the woodwork of a house into dust. Even glass, which might seem better able than other products to withstand the assault of time, sooner or later undergoes something of the game transformation—it breaks.

Each product is threatened by a particular enemy-iron by rust, furs by moths, glass by breakage, live-stock by disease; and with these particular enemies are allied common enemies, water, fire, thieves and the oxygen of the air, which slowly but surely burns everything away.

Who could pay the premium for insurance against all these risks? How much does the shopkeeper pay for the place of storage, only, of his wares?

Wares, again, not alone deteriorate, they also become antiquated. Who would today buy a muzzle-loader or a spinning-wheel ? Who would even pay the cost of the raw material of such wares ? Production is constantly bringing newer and better models into the market; the Zeppelin had no sooner proved its dirigibility than it was outflown by the aeroplane.

The only way in which an owner of wares can protect himself against such losses is to sell them. He is compelled by the nature of his property to offer it for sale. If he resists this compulsion he is punished, and the punishment is carried out by his property, by the wares in his possession.

It must also be remembered that new wares are continually flowing into the market. A cow must be milked daily, a man without possessions is daily compelled by hunger to work. The offer of wares must therefore become larger and more urgent if sale is delayed. As a rule the most favourable time for the sale of a product is the moment it leaves the factory. The longer sale is delayed, the less favourable the market conditions.

Newsboys shout and run because their wares are unsaleable a few hours after production. The milkman's cart is provided with bells because he must make his sales to the hour and minute. The vegetable woman is the earliest riser of God's creatures; she awakens the sleeping cocks. The butcher cannot afford to oversleep himself or to close his shop during the Whitsun holidays, for in twenty-four hours his wares would be on the verge of putrefaction. Bakers can sell their wares at the regular price only as long as the loaves are warm. They are throughout their lives as hurried as the good Zürchers who once a year appear with their millet broth in Strasbourg. The farmer who has ploughed out his potatoes and fears an early frost hurriedly collects them and as hurriedly brings them to market to take advantage of the fine weather and to save, as far as possible, the laborious loading and unloading of his cheap and heavy product.

Or take wage-earners, the ten thousand battalions of workmen. Are they not as hurried as the newsboy, the vegetable-seller, the farmer? If they do not work, Part of their assets, their capability to work, is lost with every beat of the pendulum.

Thus the nature of wares, their transitoriness, arouses the majority of us every morning from sleep, spurs us to haste and forces us to appear at a given hour in the market. The possessor of wares is commanded by them, under threat of punishment, to seek the market, and the punishment is carried out by the wares themselves. The offer of a ware for sale depends, therefore, not upon the will of its possessor, but upon the ware itself. Wares seldom leave their possessors free-will, and then only within narrow limits. A farmer, for instance, can, after threshing his wheat, store it in his barn to await a better opportunity of sale. The nature of wheat allows its possessor more time for reflexion than the nature of salad, eggs, milk, meat or labour. But the time for reflexion is not unlimited; for the wheat loses weight and quality, is eaten by mice and mites, and must be protected from fire and other dangers. If the farmer brings his wheat to a granary, storage, even if interest is neglected, costs him in six months a considerable part of the wheat. In any case the wheat must be sold before the next harvest, and the harvest, owing to import from the southern hemisphere, now occurs once every six months.

Mlle. Zélie, of the Théâtre Lyrique, Paris (1860), receives for a concert on the island of Makea in the Pacific, as entrance money for the 860 tickets sold: 3 pigs, 23 turkeys, 44 chickens, 500 coconuts, 1200 pineapples, 120 measures of bananas, 120 gourds, 1500 oranges. She estimates the receipts, at Paris market prices, at 4000 francs and asks; "How can I convert all this into money? I hear that a speculator from the neighbouring island of Manyca is prepared to make an offer in hard coin. Meanwhile, to keep my pigs alive, I give them the gourds, and I feed the chickens and turkeys with bananas and oranges, so that, to preserve the animal part of my capital, the vegetable part must be sacrificed."[1]

It can therefore be said without fear of contradiction that supply is subject to a mighty compelling force inherent in the objects of which it is composed, and that this force increases from day to day and breaks down the barriers separating supply from the market. Supply cannot be postponed. Quite independently of the will of the possessors of wares, a supply of them must daily appear in the market. Whether the sun shines or the rain falls, whether political rumours alarm the exchanges, supply is always equal to the stock of wares. Supply remains equal to the stock of wares even if the price of wares is unsatisfactory. Whether the price brings the producer gain or loss, the wares must be offered for sale-usually at once.

We may therefore regard the supply of wares, that is, the demand for money, as identical with the wares themselves. Supply is independent of deals on the market. Supply is a thing, a material, not a business transaction. Supply always equals the stock of wares.

Demand, on the contrary, as we have already shown, is not subject to this compulsion. It is composed of gold, a precious metal which, as the expression implies, occupies an exceptional position among the products of the earth. Gold may be regarded almost as foreign matter intruded upon the earth and successfully withstanding all the destructive forces of nature.

Gold neither rusts nor decays, neither breaks nor dies. Neither frost, heat, sun, rain nor fire can harm it. The holder of money made of gold need fear no loss arising from the material of his possession. Nor does its quality change. Gold which has lain buried for a thousand years remains unconsumed.

Again the production of gold is trivial in comparison with the masses of gold accumulated since the earliest times. The production of gold in three, six, twelve months hardly equals the thousandth part of the stock of gold.

Nor is gold money affected by changes of fashion. The only change of fashion in money in 4000 years was the change from bimetallism to a simple gold standard.

Gold has only one possible danger to fear-the invention of an efficient form of paper-money. But even here the holder of gold is safe enough, for such paper-money would have to be introduced by the will of the whole people - a slow-moving force which gives him time to save himself.

The possessor of gold is protected from loss of his material by the unique characteristics of this foreign body. Time passes gold unnoticed by, for gold is charmed against his ravages.

The possessor of gold is not forced to sell by the nature of his property. It is true that while he is waiting he loses interest. But does he not also, perhaps, gain interest simply because he can wait ? The owner of wares also loses interest if he delays his sale. But he must be prepared as well for the loss of part of his product and for the expense of storage and care-taking, whereas the possessor of money suffers only the loss of a profit.

The possessor of money can therefore postpone his demand for wares; he can use his will. He must indeed sooner or later offer his gold for sale, for in itself it is useless to him. But he is free to choose the time at which he does so.

Supply can always be measured by the stock of wares in existence; it is exactly equivalent to those wares. Wares command and brook no contradiction; the will of the possessor of wares is so powerless that it may be disregarded. With demand, on the other hand, the will of the possessor of money comes into play, for gold is a patient servant. The possessor of money holds demand like a hound on the leash and lets it slip at the quarry of his choice. Wares are the quarry of demand. Or, to imitate Karl Marx's pictorial language: Demand enters the market proudly confident of an easy victory; supply appears dejected like a beggar who expects more kicks than ha'pence. On the one hand compulsion, on the other hand freedom; and the two together, compulsion and freedom, determine price.

Why this difference ? Because in one case there is indestructible gold to sell, in the other perishable commodities. Because one can wait and the other cannot. Because one possesses the medium of exchange, and, thanks to the physical characteristics of this medium, can, without personal loss, postpone exchange, whereas the other suffers personal loss from the postponement - a loss proportional to its duration. Because this relation makes the possessor of wares dependent upon the possessor of money; because, to quote Proudhon, money is not the key that opens the gates of the market but the bolt that bars them.

Suppose now that demand makes use of the freedom it enjoys and withdraws from the market. Supply must then, because of the compulsion to which it is subject, seek out demand, hasten to meet it and entice it back to the market by the offer of some special advantage.

Demand, instant demand, is a necessity to supply, and demand knows of this necessity. Consequently demand can usually ask for, and obtain some special advantage from its privilege of being able to withdraw from the market. Is there any reason why the possessor of money should not ask for this reward ? Have we not shown that our whole economic system, the determination of prices through demand and supply, is founded upon exploitation of our neighbour's embarrassment ?

A and B, separated by space and time, wish to exchange their wares, flour and pig-iron, and for this purpose need the money in C's possession. C can at once effect the exchange with his money, or he can delay, hinder or forbid the exchange; for his money gives him the freedom of choosing the time at which it shall take place. Is it not obvious that C will demand payment for this power, and that A and B must grant it in the form of a tribute on their flour and pig-iron. If they refuse this tribute to money, money withdraws from the market. A and B must then retire without completing the sale and undertake the heavy cost of returning home with their unsold products. They will then suffer equally as producers and consumers; as producers because their wares deteriorate, and as consumers because they must do without the goods to obtain which they brought their products to market. If instead of gold, C owned any other product, tea, powder, salt, cattle or Free-Money, the characteristics of these media of exchange would deprive him of the power of postponing his demand; he would no longer be able to levy a tribute on other products.

Usually, therefore, that is, commercially, the present form of money acts as intermediary for the exchange of wares only on condition that it receives a tribute. If the market is a road for the exchange of wares, money is a toll-gate built across the road and opened only upon payment of the toll. The toll, profit, tribute. interest or whatever we choose to call it, is the condition upon which wares are exchanged. No tribute, no exchange.

I wish here to avoid all possibility of misunderstanding. I am not now speaking of commercial profit, of the payment which the merchant can and does demand for his work. What I speak of here is the profit which the possessor of money can demand from producers, because he can paralyse the exchange of wares by withholding his money. This profit has nothing in common with the merchant's profit; it is a separate effect produced by money itself, a tribute which money is able to exact because, unlike an other wares, it is free from the material compulsion of being offered for Sale. For supply: the material compulsion inherent in wares; for demand: freedom, will, independence of time - the result must be a tribute. Wares must pay money a tribute because money is free; there is no other possibility. Without this tribute money will not be offered in exchange, and without money to effect exchanges no wares will reach their destination. If, for any reason, money cannot exact its accustomed tribute, there is a crisis; wares he where they are, and rot.

But if tribute is the obvious condition for the appearance of demand, it is still more obvious that it will not appear in the market if loss awaits it there. Supply is forced into the market regardless of gain or loss. Demand, if conditions are unfavourable, retires into its fortress (its fortress being its indestructibility), and quietly waits there until conditions are again suitable for a sally.

Demand, therefore, the regular offer of money for wares exists, only when the condition of the market ensures:

1. Sufficient security against loss.
2. A tribute for money.

The tribute can be levied only on the sale of wares, and requires the fulfilment of one essential condition: During the interval between buying and selling a product, its price must not fall. The selling price must exceed the price of purchase, for the tribute is contained in the difference between them. In times of trade expansion, when the average price of wares is rising, the merchant's profit rises also. The difference between the two prices is then sufficient to cover the merchant's profit and the tribute paid to money. When prices are falling, the collection of the tribute becomes doubtful or impossible. The doubt alone is sufficient to keep the merchant from purchasing wares. No merchant, speculator or employer will discount a bill at the bank and undertake the obligation of paying interest if he suspects that the product he thinks of buying may fall in price. A fall of price may mean that he does not get back even the amount of his outlay.

If we now consider the two conditions upon which money offers its services as medium of exchange, we see that commerce is mathematically impossible with falling prices. But it should be noted that the only person who speaks of this mathematical impossibility is the possessor of money. For the possessor of wares, extreme, demonstrable losses are no obstacle to supply; for him there is no question of mathematical impossibility. Whether profit is or is not probable, wares are in all circumstances ready for exchange. But money goes on strike if its usual tribute is not assured, and that happens when, for any reason, the ratio of demand to supply is disturbed and prices fall.

But stop! What is it that we have just affirmed ? That demand withdraws the circulation of money becomes mathematically impossible when prices fall! But prices fall just because the supply of money is sufficient. Does the supply of money, when it is insufficient to prevent a fall of prices, withdraw, that is, become still smaller?

It is indeed so, there in no misprint or mistake in what we have just written. Money actually withdraws from the market, the circulation of money is mathematically impossible, when the supply of money becomes insufficient and a fall of prices begins or is expected.

When, after the introduction of the gold standard, the production of money was reduced by the whole amount of the production silver, and prices fell, the circulation of money became impossible and money piled up in the banks. The rate of interest steadily sank. The bimetallists then opened their campaign against the gold standard and argued that the chronic trade depression of that time was due to an insufficient stock of money. In reply, the defenders of the goId standard, Bamberger and others, pointed to the enormous bank-reserves, to the low rate of interest, and asserted, that these phenomena were a conclusive proof that the stock of money was not too small, but too large. The fall of prices, they explained, was due to a general fall in the cost of production (including that of gold ?) with an overproduction of wares.

The bimetallists, above all Laveleye, brilliantly disposed of this argument by proving that the commercial circulation of money is impossible if money is not offered in a quantity sufficient to prevent a fall of prices. The large bank deposits, the low rate of interest, proof that the supply of money was insufficient.

But our monetary philosophers, wandering in the fog of "value", have never understood this. Even today they do not see their way clearly, although monetary history has meanwhile furnished many proofs of the correctness of this part of the bimetallistic theory. For since chance has decreed great discoveries of gold and the prices of commodities have moved strongly upwards all along the line, the great bank reserves have disappeared and the rate of interest is higher than ever. It is therefore a fact that money collects in the banks, that the rate of interest falls, because there is a lack of money; and it is also a fact that the banks are emptied, that the rate of interest rises, because the supply of money is too great.

And prices fall precisely because the supply of money is insufficient.

An actual fall of prices is not necessary to cause the flight of money from the market. If there is a general opinion that prices will fall (no matter whether the opinion is true or false), demand hesitates, less money is offered, and for this reason what was expected or feared becomes an actual fact.

Is not this sentence a revelation ? Does it not give us a clearer explanation of the nature of commercial crises than is contained in any of the many-volumed explanations of the matter ? From this sentence we learn why a Black Friday, a crisis scattering death and destruction, often comes like a bolt from the blue.

Demand withdraws, conceals itself, because it is insufficient to effect the exchange of wares at the present price-level ! Supply exceeds demand, therefore demand must disappear entirely. A merchant writes an order for cotton. He hears that the production of cotton has increased and consigns the order to his waste-paper basket! Is that not comic?

But production continues to throw new masses of wares upon the market, so the stock of wares increases if sales are interrupted - just as the water-level of a river rises when the sluices are closed.

Supply therefore becomes larger and more urgent because demand hesitates, and demand hesitates simply because supply is too large in proportion to demand.

Here again there is no mistake, no misprint. The phenomenon of a commercial crisis, so ridiculous to the onlooker, must have a ridiculous cause. Demand becomes smaller because it is already too small, and supply becomes larger because it is already too large.

But the comedy develops into a tragedy. Demand and supply determine price; that is, the ratio in which money and wares are exchanged. The more wares are offered for exchange, the greater is the demand for money. Wares reaching the consumer by way of credit or barter are lost to the demand for money. Prices, therefore, rise when credit sales increase, since the quantity of wares offered in exchange for money decreases by the amount of these credit sales, and since demand and supply - the ratio in which money and wares are exchanged - determine price.

Conversely, prices must fall when credit sales decrease, since reaching the buyer through these side channels again create and for money.

The offer of wares for money therefore increases in proportion to the decrease of credit sales.

Credit sales decrease when prices fall, when selling prices fall below cost prices, when a merchant usually loses upon his stock of wares, when on stocktaking day he can buy for 900 those articles in his warehouse which cost him 1000, and must therefore write them down to 900 in his inventory. The solvency of the merchant increases or decreases with the prices of his wares, so credit sales also increase or decrease with the increase or decrease of prices. Everyone knows this fact and everyone regards it as something quite natural. Yet the fact is strange enough.

If prices rise, that is, if demand exceeds supply, credit comes into play, deprives money of part of the wares to be exchanged and drive prices still higher. If prices fall, credit retires, wares must be exchanged for cash, and prices are still further depressed. Need we search further for the explanation of commercial crises?[2]

Because we have improved our means of production, because we have been industrious and inventive, because we have enjoyed good weather and abundant harvests, because our wives have been fruitful, because we have extended the division of labour, the mother of all culture, the supply of wares (the demand for money), has increased; and because we have not balanced this greater demand for money with a greater supply of money, the prices of wares have fallen.

But because prices have fallen, demand withdraws, money is hoarded. And because demand is withdrawn and sales hindered, the wares pile up like ice blocks in rivers when the flow of ice is obstructed. Supply breaks down the obstruction and floods the market, and the wares must be got rid of at any price. But because prices are falling all along the line, no merchant can buy wares for fear that what he is tempted to buy so cheap today could be bought still cheaper to-morrow by his rival with whom, in this case, he could no longer compete. Wares are unsaleable because they are too cheap and threaten to become still cheaper. This is the crisis.

The crisis breaks out, merchants' assets dwindle and their liabilities (in proportion to their assets) increase. Anyone who has signed a contract to deliver money[3] finds the engagement difficult to keep because of the falling prices of commodities (his assets); suspensions of payment begin, and the exchange of wares becomes a game of chance. For these reasons credit sales are restricted and the demand for money is increased by the whole mass of wares hitherto exchanged by way of credit—at a time when money is scarce and therefore disappears.

Just as the draught created by a fire makes it blaze, so obstacles to the circulation of our present form of money stimulate the demand for money. The equilibrating forces, of which so much is written, never come into play. The evil is intensified, not mitigated, there is no sign of any compensatory tendency.

Many still seek this compensation in an increased velocity of circulation of money when the demand for money increases. They imagine that the wish to buy cheap t must bring increasing quantities of "money from the reserves" into the market. The contrary is the truth. A rise of prices, not a fall. stimulates the merchant to purchase; a fall of prices can only injure him. The fear that what is offered cheap[4] today will be offered still cheaper tomorrow closes all purses. Purses remain open only as long as a rise of prices is expected. Again, where are these supposed "reserves" to be found? Are they to be found in the banks? The banks withdraw their money from circulation when, because of the general fall of prices, it cannot circulate with safety. The millions thus withdrawn from the market at the time when they are most needed cannot be regarded as reserves. If the harvest fails and the sheriff seizes a farmer's cow, the result is not an addition to the stock of cows. The banks are always overflowing when prices are falling, that is, when the supply of money is insufficient; when prices are rising they are empty. If the contrary were true, we could only speak of reserves. If there are actually reserves in existence, they should, in the interest of the exchange of wares, be used up as quickly as possible, since their existence would be a further cause of price fluctuations. Reserves, that is, collections of money, can be formed only by withdrawing money from circulation, from the market, from the exchange of wares. But if such reserves are formed only when money is already scarce in the market, they are not reserves but poison.

This, therefore, is the law of demand, that it disappears when it becomes insufficient.

But what happens when demand is too large in proportion to supply, when the prices of commodities rise ? This state of the market must also be examined; for it is theoretically possible (p. 122), and has actually occurred, as is shown by the history of the market during the last decades. No one denies that since about 1895 prices, in spite of greatly increased production, have risen sharply.

How does the possessor of money act when prices rise? He expects or knows that what he has bought today can be sold tomorrow at a higher price. He knows that rising prices make everything, from the merchants viewpoint, cheap (see footnote p. 234) and that by turning over his money he can gain increasing profits. He buys therefore as much as he can, that is, as much as his money and credit allow. And merchants obtain credit as long as prices are rising and the selling price exceeds the cost price of merchandise. The optimistic feeling among merchants caused by rising makes them more inclined to purchase; they do not turn a piece of money over ten times before deciding to spend it. Money circulates more rapidly when prices are rising; during a trade-boom the circulation of money attains the maximum velocity which the existing commercial organisation allows.

But demand is the product of the quantity and velocity of circulation of money; and demand and supply determine prices.

Because, therefore, prices rise, the demand for wares increases through the accelerated velocity of money, and at the same time the quantity of wares offered for ready money decreases, because of the increase of credit sales. Prices therefore rise because they have risen. Demand is stimulated and enlarged because it is too large. Merchants buy wares far beyond their immediate needs; they seek to secure stocks for future sale - because supply is too small in comparison with demand. When supply increased and became too large in proportion to demand, the merchant reduced his orders to the minimum, to what he could at once dispose of. He could not allow any time to elapse between buying and selling, for during this time the selling price would have fallen below the price he had paid for the ware. But if wares are scarce he is eager to buy; all the purchases he can make seem nothing to him, he is anxious by every means to increase his stocks. The debts, based on bills of exchange, that he contracts in doing so, sink daily in significance in comparison with his assets, which are daily increased by the rise of prices. These debts cause him no anxiety - as long as prices are rising.

Is not this a fantastic phenomenon, worthy of the other fantastic phenomena of a trade boom?

The demand for wares must always increase far above its usual volume as often and as long as supply is insufficient.

Yes, our gold standard, offspring of the theory of value, stands the test. That our investigation has clearly proved. It causes an increasing demand when demand is already too large, and restricts demand to the personal bodily wants of the few holders of money the moment demand becomes too small! A starving man is deprived of nourishment because he is starving, and a glutton is filled to bursting because he is a glutton.

We know in what the true utility of money consists (Chap. 4). But the true utility of money has unfortunately been hitherto overlooked, with the result that no one was able to imagine demand for a kind of money made of worthless paper. Something must stimulate people to purchase money, and if this something were not its utility as the medium of exchange it would have to be the utility of the material.

Now gold is in fact a material of industrial utility, and its utility would be much greater if it were cheaper. The high price of gold alone prevents its being often used instead of iron, lead or copper.

But gold is not too dear to be used at least for ornaments, where expense need not be considered. Gold is in fact the special raw material of the jeweller's trade. Bracelets, chains, watch-cases and such ornaments are made of gold, as are chalices for the Catholic form of worship. The fittings of motor cars, church clocks, lightning conductors, picture frames, etc. are plated with gold, and dentists and photographers use considerable quantities. All this gold is withheld from the currency. Coins are usually the goldsmith's cheapest raw material.

The use of gold for industrial purposes increases with the love of splendour, with the growth of prosperity and wealth; and wealth increases through production, through work. During years of prosperity goldsmiths work overtime; during periods of economic depression people in difficulties bring them back gold ornaments for the melting pot.

That is, when more wares are produced, when the demand for money, the medium of exchange, increases, large numbers of gold coins are thrown into the goldsmith's melting pots.

But halt ! Surely this statement is mere nonsense! The more work performed, the more wares produced, the greater is the increase of wealth. And the greater the increase of wealth, the more money (the medium for the exchange of wares) is melted down for jewellery. We cannot have heard aright!

But such indeed was the statement. There is here no misunderstanding and the words are uttered with the gravity of a judge passing a death sentence. For in these words there is cause enough to condemn the gold standard. Let those who have the temerity to deny this truth produce their arguments!

We repeat: the more wares produced, the greater is the growth of prosperity, the accumulation of wealth, and the love of splendour. The population having attained prosperity through the production of wares, empties the jewellers' shops, and the jewellers throw part of the money they receive into the melting pot to replace with money-material (gold) the watches, chains, etc. which they have sold.

Many wares have been produced. A process has been invented for making good steel of indifferent ore. This steel has given us good tools which increase ten-fold the product of our labour. In addition, the waste products of the process prove to be an excellent fertiliser which trebles the produce of our fields. Our workmen have learned in technical schools to use their hands intelligently. In short, the supply of wares has increased. And because the supply of wares has increased, we destroy the demand for wares by melting down the medium of exchange, the bearer of demand!

What would be said of a railway company which decided that the best way to celebrate a good harvest, or a time of industrial prosperity when factories were working overtime, was to burn its rolling-stock ?

If my potatoes are a success this year, I shall buy my wife a gold necklace, says the landowner.

If my cow has two calves this year, I shall buy my sweetheart a wedding ring, says the young farmer.

If I can finish twice as many pairs of trousers with my sewing machine, I shall buy a gold watch, says the tailor.

If I can produce ten times as much nitrogen with my new process, I shall regild the chapel of Our Lady of Succour, says the chemist.

If the production of my steel works again increases this year, I shall buy a service of gold plate, says the capitalist.

In short, the purchase of the wedding ring, necklace, and so-forth, is always caused by increased production of wares, increased supply, and the gold for these necklaces and wedding rings is always deducted from demand, from the coinage. (Uncoined gold, also is by law money).

The money melted by the jeweller is lost from the demand for wares, and lost, unfortunately, at a time when the supply of wares is increasing (see below). But demand and supply determine price. Prices therefore fall. And this fall of prices interrupts the exchange and production of wares. The result is unemployment and pauperism.

The gold standard, the usefulness of the money-material for industrial purposes, is thus the saw that saws away the branch upon which prosperity grows. Money is the condition of the division of labour, the division of labour leads to prosperity, and prosperity destroys money.

Prosperity always, therefore, ends by cotton parricide.

The gold standard and beggary are inseparable. Frederick the Great was ashamed of ruling over a nation of beggars and thereby proved that he had an over-delicate sense of honour. He had no special cause for shame, for wherever the previous metals have become the standard of money, kings have always ruled over nations of beggars. If men continue to love display and to spend part of their increase of income in buying the products of the goldsmith's art; and if gold continues to be the raw material for the medium of exchange - the prosperity of mankind as a whole is impossible.

But a farmer does not always use a good harvest to buy his wife a gold necklace, nor do all chemists implore a blessing upon their inventions by vowing to regild a statue of the Blessed Virgin.

If the harvest turns out well, I shall buy a reaping machine, says the farmer.

If I become a successful breeder I shall drain the swamp, says the landowner.

If my invention fulfils my expectations I shall build a factory, says the chemist.

If my mill pays a good dividend and the strike is settled, I shall build a tenement house, says the capitalist.

That is, the greater the production of wares, the greater is the increase of the means of producing wares. (So-called real capital).

But from these investments, from real capital, interest is expected and the rate of interest falls if the proportion of real capital to population increases. If there are many houses and few tenants, house-rent is low. If there are many factories and few workmen, the dividends of factories are low.

Figure 2. Trade Boom

Figure 2. Trade Boom

Demand: Gold-discovery or over-issue of paper-money increases credit and the velocity of circulation of money. Demand increases, prices rise.

Supply: The rising prices cause maximum activity of economic life (full employment, overtime, night shifts), but in spite of greatly increased supply, prices are still forced upwards.

The rate of discount rises, but abundant investment depresses the rate of interest on real capital.

If, therefore, real capital is multiplied and the interest upon it in consequence falls below the traditional rate, no money will be given for new undertakings.[5]

Halt a moment! Once more, can I trust my ears? If the interest on factories, houses, ships, falls, no more houses are built, since no one will give money for new real capital? Is this true? How then can cheap houses ever be built?

Figure 3. Trade Boom and Crisis

Figure 3. Trade Boom and Crisis

Explanation: The components of Demand are Quantity of Money (M), Velocity of Circulation (V), and Credit (C). Supply consists of the wares awaiting sale. The rise of prices caused by increase in the quantity of money stimulates production of wares. If the production of wares increases out of proportion to the increase of money, prices begin to fall. The result is that V and C withdraw from Demand and that the fall of prices becomes at * a slump of prices, especially as the fall of prices causes sales to stagnate, so that the quantity of wares awaiting sale increases rapidly. Prices remain stable only if M. V. C, and W run parallel, or if the deviations compensate one another.

These were indeed my words, this is the truth, and will anyone dare to deny it ? If the interest on houses and other real capital falls, the money employed in such enterprises withdraws. What is then to become of the wares hitherto consumed in renewing and extending real capital?[6]

When men are industrious and inventive, when harvests are favoured by sun and rain, when many products are available to multiply houses and factories - this is the time that money (which should facilitate exchange), chooses to withdraw and wait.

And because money withdraws, because demand is lacking, prices fall, and a crisis occurs.

A crisis must therefore always break out when, on account of increased production of real capital, the rate of interest on factories and houses sinks.

In the theory of interest at the end of this book, proof will be given that interest on money is independent of interest on real capital (but not vice versa). The objection that interest on money decreases simultaneously with the decrease of interest on real capital, that there is consequently no lack of money for new real capital, even if the rate of interest on real capital falls, does not. therefore, hold good.

This reason, even taken alone, is sufficient to account for the fact that economic life proceeds from crisis to crisis. Under the rule of metal money men must periodically eke out existence as homeless beggars. Gold, our hereditary king, is the true "roi des gueux", the king of beggars.


  1. Wirth, Das Geld, p. 7.
  2. The amount of the circulation of bills of exchange in Germany in 1907 was given in the Reichstag as 35 billion marks. This sum should possibly be reduced 9 billion marks if it represents the total bills stamped during the year, as these would be three months bills. But even in this case we can imagine how greatly the steadiness of demand and prices is imperilled by such an amount of credit-credit which depends on men's moods and the turn of the market.
  3. Bills of exchange, promissory notes, bonds, rents and leases, insurance policies, and so forth.
  4. From the merchant's point of view no ware is in itself cheap; a ware is cheap only in comparison with its selling price. When prices are falling, all wares are dear. Wares become cheap when a general rise of prices raises the price at which the merchant sells above the price at which he buys.
  5. The reader is referred to the theory of interest developed at the end of this volume.
  6. At the German Congress for Housing Reform, the banker Reusch, Wiesbaden, estimated the amount of money required for house-building in Germany at 1500-2000 million marks annually.