The Natural Economic Order/Part III/Chapter 5

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The tender new idea which sprang into being in the last chapter, germinating amongst the clods of prejudice, must now be protected from the cold wind of doubt until it grows into a vigorous thorn-protected shrub. The idea of paper-money must give the common man a feeling of security instead of making his flesh creep. The German peasant who still often prefers to keep his savings in silver rather than in gold, must come to prefer paper-money to silver because his hard head can no longer reject the truth that, when all is well considered, the paper offers him more security than gold or silver.

It is a question, therefore, of showing not only that paper-money is possible, but also that it is "covered" and secure. I wish to prove that whereas metallic money can, without breach of law, be destroyed by the State that coined it, paper-money can only fall with the State itself.

Otto Arendt's statement "our German mark is but the name for the 1392nd part of a pound of gold" cannot be refuted by the authority of the German currency laws. No law protects the holder of specie or bullion from such a legal interpretation of the conception of money. Indeed, the inscription on the former German coins, "XXX One Pound Fine", and the present inscription on banknotes and treasury notes, "The Bank (or the State as the case may be) promises to pay the holder..., etc." show that the composers of the inscriptions shared Arendt's views on the nature of metal money. We can therefore easily imagine the following situation: The State, for some reason, deprives gold of its monopoly as money, just as, in the past, it deprived silver of its monopoly as money. But instead of exchanging the coins for new money, it defaces the inscription on them by a stroke of the hammer and returns the metal to its possessor with the words, " You have now, on your own admission, all that you are legally entitled to, a bar of gold of a certain weight. But this gold is henceforward not money. The State has adopted another form of money and no longer recognises gold as money, nor will it exchange the new money for gold. Gold coins were, in your words and according to your explanation of the nature of money, protected by their content in gold. You are

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This is now no longer true since the State, by a stroke of the pen, divorced silver from money. Let no one imagine that a great popular movement was necessary to deprive silver of the privileges it had for thousands of years enjoyed as money. The "great monetary reform" was introduced in Germany by a few phrase-mongers, and without risk or trouble defended by them against another half-dozen phrase-mongers. Read, if you have patience, these wordy duels throughout which monetary reform is treated as it would have been treated by the Huns. Empty phrases, undigested theories, cheap assertions, special pleading - such was the great conflict of those days over monetary reform; and in every succeeding one, up to the present time, the arguments have been quite as superficial. Nothing has ever been heard of a medium of exchange, of the needs of the wares awaiting exchange, of the division of labour. It really seemed as if the German mark were nothing more than the 1392nd part of a pound of gold.

Assertions in favour of the gold standard were taken for granted; nothing was tested; there was no trace of scientific inquiry into the subject. Even today, after many bitter experiences, we have no legal definition of the word "money" to which recourse could be had in cases of doubt in the application of monetary laws.

It is also a fact that at the present moment cultured men and women, to say nothing of peasants and labourers, have childish ideas about the nature of money; that "many persons, even economists of repute, have no thought-out theory of money". (Knut Wicksell, Interest and Prices).[1]

In these circumstances we are justified in asking: Where are the security and covering of German money, of the German mark? They certainly do not lie in the metal. That is apparent from the fact that silver, which was more closely united to German money than gold, was in a day, without fuss or trouble, legally separated from it.

Nor is the security of money guaranteed by the law, for a legal definition of the German mark is wanting—so completely wanting, that the question: What, according to law, is a German mark? invariably receives the same intelligent answer: "A mark is 100 pfennigs"—no matter to whom one may apply.

The only real security would be the monetary education of a sufficient number of men who, in the event of legislation affecting monetary standard, would form a bodyguard, so to speak, to protect the mark from bunglers and swindlers. But at present this security does not exist, for the indifference of the general public, of science, of the press, of business men, to monetary theory is so great that it would be difficult to collect among the millions of the German population a dozen persons for a serious discussion of the subject.

Where, then, is the security of the German mark? Who or what protects it from bunglers and manipulators? The leaflets of the Society for Protecting the German Gold Standard? Are not these defenders also bunglers? If the leaflets are examined attentively it is apparent that the writers have no idea of what function money has to fulfil. The fact is never mentioned that money should secure, accelerate and cheapen the exchange of products; that the market, not the metal content, nor the weight, is the criterion of the excellence of money. Money is here viewed from the lowest possible standpoint, the standpoint of the goldsmith or banker. Yet at present the victory rests with this Society!

That the metal content provides no security or "covering" for the German mark we have proved from the history of silver. The conclusion to be drawn from silver is so obvious that it should suffice alone to brand as a falsehood the assertion that a mark is the 1392nd part of a pound of gold, and that it is sufficiently secured by its metal content.

In addition it is well established that through the play of forces known as Gresham's law[2], gold can be driven out of a country by the issue of paper or silver money whenever the party in power so determines.[3]

The State need only coin more silver, or the Bank of Issue print more notes, and before long gold coins will begin to cross the frontier. But if the law determines whether gold is driven out by some other form of money, where is the security and covering of gold money? Silver and gold were in circulation in France when John Law began to experiment with paper-money. The security of this French money was so perfect that in a short time it disappeared, leaving paper-money only in circulation. The experiment was repeated with the assignats during the French Revolution. with the same result. Later still, when the war idemnity was being delivered to Germany, the market was again cleared of gold by paper-money. Three times this experiment has been repeated in France, and always with the same result. Three times the security supposed to be given by metal has proved illusory. In Scotland, England, Austria, Russia, Spain, Daly, the United States, South America, metallic money has countless times, as often as the ruling power (autocrats or people's representatives) desired, been expelled by paper. The metal has never been able to protect the money of these countries from bunglers and swindlers, just as the silver content of the thalers failed to protect German money.

The belief that the mark is protected from bunglers and swindlers by its gold content, shows complete ignorance of monetary history.

But quite apart from Gresham's law—whom did the metal content of money protect? Obviously only the chance holders of the coins, the holders of the four or five billions of coined money circulating in Germany. But what importance has this comparatively quite insignificant quantity of gold in comparison with the 500 billions of State debts, mortgages, bills of exchange, leases and other rent agreements? Are these 500 billions also covered by the metal content of the five billions of gold? The only security for these 500 billions is the law; the law, not the metal content of the coins, determines the meaning of the German mark in mortgages, government securities, etc. Forty years ago all German mortgages, securities and bills of exchange were payable in silver, yet the law forced debtors to pay their debts in gold.

From this standpoint also, the security given to the German mark by its metal content proves illusory.

The coined money of a country is a drop in the ocean of uncoined money[4] (that is, all agreements to pay money). Consequently the security given by the metal content of the coined money is a negligible quantity. And at any time the play of forces known as Gresham's law can remove even this infinitesimal security.

In the above-named countries when gold and silver money was expelled by paper-money and copper coins, when in many cases this paper-money became as worthless as the paper upon which it was printed, all agreements between debtor and creditor-government securities, mortgages, bills of exchange - sank simultaneously to the level of the paper-money!

And so, once again, I put the question: where was then the security of metal money?

Money requires the State, without a State money is not possible; indeed the foundation of the State may be said to date from the introduction of money. Money is the most natural and the most powerful cement of nations. The Roman Empire was held together more by the Roman currency than by the Roman legions. When the gold and silver mines became exhausted, and coins could no longer be struck, the Roman Empire fell asunder.

The fact that money is indispensable, and that State control of money is also indispensable, gives the State unlimited power over money. Exposed to this unlimited power the metal covering of money is as chaff before the wind.

Money is as little protected by the money-material from abuse of State power as the constitution of the State is protected from arbitrary usurpation of power by the parchment upon which it is written.

Only the State itself, the will of those in power (autocrats or representatives) can protect money from bunglers, swindlers and speculators - on condition that those in power are capable of purposeful use of their power. Up to the present they have never, unfortunately, possessed this capability.

What has here been said of metal money applies, of course, also to paper-money. The material of paper-money offers no security either to the holders of the money itself or to the holders of promises to pay money (bills of exchange, government securities, titles to pensions, leases and other rent agreements, insurance policies mortgages, bonds).

Paper-money is in this respect somewhat more insecure than metal-money; but, to compensate for this, it is more completely protected by the State.

We have seen that the State, without infringement of the law, and in complete harmony with current monetary theories, can convert coins by a stroke of the hammer into the raw material of which they were made, that the State can deprive gold coins of the privileges of money; that the loss of the privileges of money would depress the price of gold; that the State is bound by no law to compensate the holders for this loss and that, if it decides to compensate them, it acts not in accordance with the law but merely in accordance with fair play. And fair play is an elastic term, much depends upon the class of society by which it is invoked.[5]

The legal position of paper-money is much stronger. The State cannot deprive paper-money of the privileges of money without compensating the holders. By issuing paper-money the State has received something for which it is in the holder's debt. This something must be given back; from whatever standpoint the matter is considered, this cannot be denied. The best proof of the duty of compensation is its obviousness.

The State deprived thalers of their privileges as money and compensated the holders by exchanging thalers for new money.[6] There was no legal right of compensation, but sufficient grounds were discovered for this action apart from the law. The State had, for example, by levying taxes, compelled its citizens to purchase thalers. To pay his taxes, a peasant had first to purchase thalers by selling his cow. Because the State demanded silver, the peasant had to buy silver, even if he had no personal need for it. The State therefore undertook the duty of assuring the sale of these thalers from which may be deduced the duty of compensation.

Such a plea for the duty of compensation deserves a hearing, but whether it would always obtain one is another matter. It is useless pleading to deaf ears, and "none are so deaf as those who will not hear". To plead for a right is, indeed, to acknowledge a weakness.

If the German landowners had known, when the gold-standard was being adopted in Germany, that the demonetisation of silver would cause a slump in its price sufficient to have freed them from 50 % of their mortgage-debts contracted in silver thalers, their attitude to the question of compensation might have been very different. Their later conduct when they learnt, too late, how the matter really stood, justifies the belief that they would have adopted the monetary theory whereby a thaler was declared to be the thirtieth part of a pound of fine silver, and that they would then have insisted on paying their debts, contracted in terms of silver, in uncoined silver at the ratio of 1/30th of a pound of silver for every thaler. This would have been an equally profitable and a more honourable line of conduct than the one actually adopted, namely the raising of their rents through protective duties.

With paper-money there are no such uncertainties. There are no laws and no interpretations of law, no arguments to support the State's duty of compensation, the duty being obvious. For this reason the security of paper-money is greater than that of metal money. Paper-money is secured by all the interests and ideals which weld a people into a State. The paper-money of a State can only go down with the State itself.

Besides the imaginary security of money in relation to the absolute power of the State, a "covering" or economic security is claimed for money. Granted that the State makes the best possible use of its powers, granted that there is no abuse of power, there is still no guarantee, say the advocates of a metal standard, that the holder of money will be recouped for the outlay he has made in obtaining it. Metal money contains in itself the material for meeting this outlay, it has "intrinsic value" (for the moment it does not matter what meaning is attached to this term), whereas paper-money has no content and must seek its covering elsewhere, apart from its material.

This objection is void and shows confusion of thought, as we have already learnt in the chapter "So-called Value" and in the above discussion of the security of money. The mere fact that all the holders of the demonetised silver coins, without exception, made use of the right of exchange, shows clearly that metal money is not a full "covering" for the holder for his outlay in obtaining it. If it had been a full covering, the holders would simply have kept the silver.

To what has already been said in reply to the above objection, all that may be reasonably, though perhaps superfluously, added is this:

A ware is covered as long as someone is prepared to give the usual quantity of other wares or money in exchange for it, in other words, as long as the demand for it does not fail. But no ware is covering for itself. The division of labour and the word "ware" imply that the product of the producer's labour is useless to him. What, we repeat, can tailors, shoemakers or chemists do with their produce, or farmers with the gold of the coins, if no one offers to purchase it from them?

By the covering of money is meant utility such as the possessor of goods for use (provisions, tools, etc.) derives from their use. It is sought to provide the possessor of money with the same kind of utility through the material of money. Money is to be simultaneously a material for the satisfaction of personal needs. Money a ware and is to be a hybrid, an impossibility.[7] The moment the money-material became useful to all its possessors, money would cease to exist. The utility of the money-material would force the coins into the melting pot. But money is indispensable; therefore it must not be consumed.

As long as the division of labour exists, as long as we produce wares, products useless to us personally - so long shall we need a medium of exchange, that is, money. The demand for money is therefore permanent and continuous; it is based upon the division of labour, the foundation of our existence. Why should anyone have the power of using up and destroying money ? Would not the possibility of consuming the medium of exchange endanger the exchange of wares and the continuation of the division of labour?

A covering of money such as the above objection implies, does not, and cannot exist.

It is not the money-material, but the function of money as the medium of exchange, that covers money and ensures the economic demand for it. In the last analysis money is covered by the inexhaustible treasures brought within reach of humanity by the division of labour.

Except the division of labour, there is no covering for money. The division of labour produces a never-ending stream of wares and a never-ending demand for a medium of exchange, for money, regardless of what material the money is made. Whether the money is made of gold, silver or paper has no influence upon the supply of wares, that is, upon the covering of money; for whatever the form of money, the products of the division of labour must be offered in exchange for it. Whether a farmer receives gold or paper for his potatoes has no influence upon the quantity of potatoes he brings to market, for in either case he brings all he can spare. Whether the Reichsbank has 10 or 100 tons of gold in its cellars has no influence upon the supply of wares, upon the demand for the medium of exchange. And since this demand for it is the real covering of money (as of wares in general), therefore the covering of money is independent of the money-material.

Wares, demand for money, and covering of money are three different expressions for the same thing. Where is the covering of a railway share ? Does it consist of rails and embankments ? Everyone knows that the covering of a railway share is the mass of goods daily offered for transport. The division of labour is the covering of the railway share.

The same is true of shares in the privileges of money, that is to say, of the possession of money itself. If freight and passengers fail, the railway share is rubbish; if the division of labour and the stream of wares ceases, money is the most useless of objects; paper-money then becomes waste-paper, and metal money raw material for the least important of industries.

To recapitulate what has been said in this section:

1. The money-material is no security against misuse of State power in monetary matters.

2. Even if we disregard the working of Gresham's law, the money-material can only to a small extent cover coined money (silver covered but 40 % of the thalers). The thousand-fold greater volume of contracts payable in money (mortgages, government securities) remains quite uncovered.

3. If a certain form of money is deprived of its privileges as money, the duty of compensation by the State is obvious only in the case of paper-money. With metal money this duty must be defended against the opposition of large sections of the community whose interests are at stake. For this reason the security of paper-money is greater than that of metal money.

4. The money-material cannot influence the demand for money and cannot, therefore, serve as covering for money. The money-material can neither cause, nor influence, nor control the demand for money.

5. Money is, independently of its material, at all times covered solely by the division of labour.

6. The security of money can be attained only by a sound conception of currency policy shared by the people and their rulers.


  1. The post-war experiences of inflation, deflation and stabilisation have convinced most people that the monetary standard is the very foundation of national life. Nevertheless the new constitution of the German Republic makes no mention of the monetary standard. After the German Government had caused the greatest inflation the world has ever known, our legislators, with German thoroughness (deutsche Gründlichkeit), determined in lengthy debates the colour of the nation's flag-and completely forgot to determine the standard of the nation's money.
  2. Gresham's law: When in any country the stock of money exceeds the needs of the exchange of products, the result is a rise of prices. This rise of prices impedes export and facilitates import. The balance of foreign trade consequently shows a deficit of export in relation to import which is most easily met by the export of gold.
  3. Thus during the years 1872-1874, when Germany was flooded with the French war indemnity, German imports exceeded exports by 3646 million marks, or almost the whole amount of the indemnity. Yet before the war German exports had exceeded imports.
    This export of gold which means a decrease in the stock of money in the country, reduces prices and therefore automatically re-establishes equilibrium between export and import. But if the State takes no heed of the warning given by the export of gold and continues to increase the stock of money by the issue of paper-money, gold continues to leave the country until importers begin to meet with difficulties in obtaining gold (or foreign bills of exchange) to pay for their imports. These difficulties are at once translated into a premium, or agio, upon gold, and this premium then acts as regulator of foreign trade by putting difficulties in the way of import and facilitating export. But at the same time the premium renders the circulation of gold within the country difficult, since government offices and courts of justice accept only paper-money, and the varying premium is soon considered a vexatious concomitant of gold by the Public which becomes unwilling to accept this form of money. Gold cannot circulate, it becomes superfluous and collects in the banks where it lies fallow until sent abroad by its possessors to seek interest. It thus happens that if within a country gold and paper are in conflict, paper always wins. Paper-money, or base currency, drives its rival, gold, over the frontier, and this "law" is called Gresham's law in honour of the Elizabethan statesman who discovered, or rediscovered, it.
  4. With a circulation of five billion marks in gold in Germany, the circulation of bills of exchange was 40 billions, the amount of mortgages 143 billions, etc.
  5. The German landowners asked the State to increase the cost of the nation's food by erecting tariff-barriers, and their request was granted. The German working class asked the State to reduce the cost of food by abolishing the tariff-barriers-and met with a stern refusal.
  6. That the holders of the thalers could suffer any loss through the withdrawal of the privileges of money from silver was, and remains in contradiction with the theory of metal money.
  7. "Usually when a German wants anything he also wants the opposite.", Bismarck.