The Natural Economic Order/Part III/Chapter 6

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We have now shown, with all the detail demanded by the importance of the subject that money can be made of paper, or, in other words, that a higher price can be obtained for paper-money than for the same amount of paper without the privileges of money.

Next comes the question: How much higher should the price of paper-money be than the price of the paper of which it is made? What should be the ratio of exchange between money and wares?

This is a question of importance, a question of burning interest to the producer. Producers are indifferent to the substance of money, which is for them merely unnecessary ballast; but their attention is always aroused by the question: How much money do you ask for your cow? or: What do you offer for my tools? For upon the answer depends the success or failure of the whole process of production.

If there is a change in the ratio of exchange between wares and money, everyone in selling his wares receives more or less in money, and when selling his money receives correspondingly less or more in wares. From this point of view, therefore, a change in the price of money would be pretty much a matter of indifference.

But everyone does not immediately buy wares with the money he has received; and for such persons it is certainly not a matter of indifference whether prices have changed during the interval between selling and buying. Still less are the prices a matter of indifference to debtors and creditors. To them the question: How much of my produce must I sell to meet the interest upon my debt and to provide for repayment? (or: How much produce shall I receive for the money coming in as interest and repayment for my loan?) is of vital importance. We shall also see that the question of prices, considered simply from the technical standpoint of commerce, determines the continuation or non-continuation of the exchange of wares, that is, of the division of labour, the foundation of economic life.

To illustrate the importance of prices, we shall at present consider only the relations between creditor and debtor.

The assets of a debtor (mortgagor, issuer of bonds, acceptor of bills, tenant, holder of life-insurance policies, taxpayer) usually consist of wares, machinery, land, cattle, whereas his liabilities always consist of a definite sum of money. And the debtor can obtain money to meet his liabilities only by selling for money part of his assets, usually his produce.

If the ratio of exchange of wares to money changes, the ratio of the debtor's assets to his liabilities evidently changes in the same proportion. Suppose, for example, that the price of wheat is $62 a ton (the price in Germany after the introduction of the import duty on wheat) and that a farmer needs one quarter of his harvest to provide for taxes, insurance and interest, including redemption charges on mortgages (or for rent, in the case of a tenant-farmer). If, now, the duty on wheat is removed, the farmer may have to sacrifice one-third of his harvest to make the same payments. This increase may mean the disappearance of the debtor's profits, and his ruin.

The position is reversed if prices rise, and it is also, of course, reversed if looked at from the standpoint of the creditor, who gains exactly what his debtor loses, and loses exactly what his debtor gains, through a change in the level of prices.

Credit has expanded enormously in modern times. German debtors owe German creditors something like three or four hundred billion marks.[1] The interest and amortisation for this sum can be raised only by the sale of the products of labour. A small change of prices is sufficient to throw a burden of many billions of marks upon one of these two great classes, to the benefit of the other.

An average fall of prices of 1 %, the commonest of events with our much-praised gold standard, throws a greater burden upon the German debtor than the five billions of the war-indemnity of 1871 threw upon the French nation.

Or suppose a tax-payer pays $100 annually in direct and indirect taxes to meet his share of the interest and sinking-funds on local and government loans. The ratio of exchange between money and the product of his labour determines whether he must devote ten, twenty or fifty days to earning the money.

Should our monetary policy aim at raising prices in order to exploit the creditor for the benefit of the debtor, or should we lower prices in order to enrich the stock-holding class ? Are we to leave the determination of the question to creditors or to debtors; are we to allow the monetary standard to be determined by egoistic motives of individuals? The answer is that private interests must never be considered in the management of money. Money must be managed in the interests of economic life as a whole, not in the interests of individuals.

Independently of time and place money should always obtain the price it obtains today. What the holder of money has paid for it in commodities he should be able to demand in commodities tomorrow, or ten years hence. In this way the debtor pays back what he has received, and the creditor receives what he has given, no more, no less.

That is self-evident and requires no proof.


  1. Throughout this book, in accordance with American notation, a billion means 1,000 millions. The German word is "milliard."