Chapter 6, Toward a Natural Monetary System
Since money is but the mathematics of value, there is no more justification for the nations of the world to have separate monetary systems than separate systems of mathematics.
It has been said that a communist is a socialist in a hurry, to which it may be added that a fascist is a socialist dragging his feet. They all face in the same direction. All groups, whether they are called radicals or conservatives, progressives or reactionaries, have turned their backs upon personal enterprise and their faces, directly or obliquely, toward state dictatorship. All advocate state intervention in some form or degree.
Adam Smith in his political economy allocated the money power to the state, and thus he anteceded Marx as a socialist. It is his followers, unconscious socialists, and not those of Marx, who constitute the greatest peril to the social order. The Smith philosophy is taught in all our schools and colleges, and we are all indoctrinated with it, unaware that in its monetary concept it is antithetic to the true philosophy of personal enterprise.
The Smith and Marx philosophies are of the Old World, authoritarian. America, under the democratic ideal, must perfect the personal enterprise system by reserving to it all three essential factors, to wit, the means of exchange, the means of production, and the means of distribution. In the Old World structure of the enterprise system, monetary power, the keystone of the arch, has always been lacking, and thus the temple of personal enterprise has never withstood the political winds and storms.
"Political economy," the gospel of the so-called free world, is an assembly of speculations upon the behavior of man in political subjection. It offers no emancipation. It challenges no political presumptions, nor does it embody a fundamental concept of money, the life blood of economy. Hence its speculations are useless, for man's behavior must of necessity differ under a true monetary system than under a perverse one. An unnatural monetary system begets unnatural economic manifestations.
How can a free economy work with the monetary system socialized? As the very name suggests, political economy is an attempt to compound antitheses. The term is usually applied to the so-called classical school founded by Adam Smith, but it can be applied just as appropriately to the mercantilists, the physiocrats, and others that went before. All take the socialist approach; they differ on the extent and means of political intervention, but not on the principle. We search their literature in vain for any challenge to the basic socialistic doctrine of political money power.
With the modern world thus educated to think in terms of the political means of accomplishment, is there hope of salvation? Professional economists do not find the principle of separation of money and state in their textbooks, and to espouse it would require turning somersaults in public. If salvation depended altogether on reason, therefore, there might be none, for statism is deeply imbedded in the mores of the peoples of the earth. But it is not solely upon the rationality of the truth that we must depend; the irrationality of the existing order is being demonstrated by the collapse of the political monetary system. As we progress toward runaway world inflation and all that that signifies, there will come a public demand for an escape which political action cannot supply. Private, nonpolitical action alone can provide a true monetary system to which the peoples of all lands may turn for self preservation.
A monetary system is simply a system which facilitates the money issuing powers of its constituents and accounts for their monetary instruments. Personal enterprisers, which term includes employees as well as employers and the self-employed, have in their hands all the powers for the establishment and maintenance of such a true and stable system, while governments hold none. The substantive element of all money ever issued has been supplied by personal enterprisers, hence it is nothing new to propose that money be issued by them. What is new is the idea that governments be excluded from the issue power. Governments under such a system would be enabled to collect and dispense money that had been created by personal enterprisers, and they would also be enabled to borrow such money, but they would not be permitted to undertake the creation of money.
Whence will come this saving and liberating movement? It might come through a worldwide effort of superstatesmen of the business and financial spheres, or it might arise, instead, from small local action in one or several locales with the humble and modest purpose of preserving and promoting local trade. In the former case, a world authority would be set up with a single monetary unit and overall administration. In the latter case, each locale would nominate its unit and govern itself until mergers brought about unification under one unit and one administration.
Any sizable group anywhere, any day, could start a nonpolitical monetary unit and system. There is no law against it, and no legislation need be invoked. The legal tender provision is gratuitous window dressing, for any monetary unit that is not acceptable in trade cannot be made so by law and, if acceptable, needs none.
Since participants in a personal enterprise monetary system will have to be drawn from the established political monetary systems, its success will depend upon demonstrated merit. By the test of competition, it will have to prove itself worthy of universal acceptance by traders. Such a system will enjoy no monopoly privilege. It will entail no political action. Therefore, there will be no question of majorities - or minorities - denying to any his right to trade with whatever medium is preferred by him. If the system does not prove responsive to the needs and preferences of all people, it will soon face competition from one or more alternative systems. Because trade naturally tends to unify and to adopt a single monetary language, one of these systems, through sheer merit, must sooner or later become universal.
To avert the utter and complete disorder of a moneyless world, however, such a system must come into being before the present expires through total inflation. The present monetary units must not sink to complete worthlessness before a new unit and a true one becomes available. Not only must we act while exchange is still operating under the political monetary system, but we must also make it as easy as possible to exchange the old currencies for the new. To do this, it will be necessary also that we exchange old ideas for new.
The Valun Universal Monetary System
The valun plan for a nonpolitical, universal monetary system represents a concrete effort to implement a new approach to freedom. It takes its name from valun, which is the name for any value unit that is established by a social compact of its users, who agree to bargain with one another in terms of it.
(Dennis Riness, of Seal Beach, California, has suggested Riegel as an appropriate name for a new, wholly nonpolitical monetary unit. -Editors.) [Attention Laurence Gilbert, you cannot lawfully hold patent or copyright title to this concept, or probably any other that you claim!]
This proposed system will not be the only one devised or tried, nor need it be the one that ultimately prevails, but it provides a much needed starting place for thought and action. Free competition in the marketplaces of the world will be the ultimate arbitor, as it is in all things where free choice prevails.
The "built-in " features of the valun system have been limited to those considered indispensable to a successfully working monetary system, leaving to experience and the process of competition the selection of operating policies and details. The "built-in" principles are two:
a) All governments are excluded from the issue power.
b) The power to convert check drafts into currency shall not be limited.
The first principle, being basic to the whole thesis, needs no elaboration. The second is necessitated by the distinction made in the political monetary system between currency money and check money, a distinction which, as we have seen, puts a purely gratuitous hazard in the banking business: The political monetary system imposes artificial restraints upon the banks' ability to convert any or all bank deposits into currency. This is the reason for the recurrent bank crises of the past. Bank runs forced banks to resort to clearing house certificates or else fail, even though they were perfectly solvent but for the arbitrary distinction between currency and checks. This hazard in the banking business has been displaced in recent years by the yet greater evil of legal counterfeit. The banks have purchased so many Government securities that there is practically no possible demand for currency that they could not meet. A true monetary system, however, must preclude not only the major evil of counterfeiting, but the secondary evil of the business cycle as well. Hence the provision for the full interchangeability of checks and currency.
Let us now look beyond these bare-bones features which would obtain in any successful private enterprise monetary system, and envision how such a system actually might work in operation.
Organization of the Valun System
The valun system would be governed on a mutual participation basis. A board of governors would license the participating banks, and the board and member banks would be served by a separate service organization which, like the banks, would be organized and operated for profit. This basic structure is illustrated in Figure 4.
Figure 4, THE UNIVERSAL VALUN SYSTEM
The board of governors would be a non-capitalized, mutual association of participating banks in which all members would have one vote. With the bank stocks, in turn, being held by personal enterprisers, the whole monetary system would thus be truly of, by and for personal enterprise. The banks would pay stipulated fees to the board, and any surplus accruing would be redistributed among the banks in proportion to their volume of valun business, probably with check clearances being the criterion.
The board would license new and existing banks to operate under the system, without distinction as to nationality or the monetary unit in which the latter normally transacted business. Valun banking would require merely a separate set of books. The operating licenses would stipulate rules of practice and provide for periodic examinations. Through its control of the name valun, the board would guarantee adherence to uniform standards by all banks in the system. The board would also authorize the printing of bills and minting of coins and provide for surveillance against counterfeiting of valun currency.
A chief responsibility of the board would be with respect to credit policy. The board could set what it deemed to be the most conservative policy and provide therefor a minimum percentage to be charged for loss insurance, and from there up graduations of more liberal policies, with appropriate percentages for loss insurance for each. Thus there would be no more need for standardizing the basis of credit in the valun system than in the present banking system. Each bank could choose its own credit policy. The appropriate loss insurance percentage would then be added to the check clearing charge made to the customers. In this way, customers of the various banks would pay more or less as the policy of their bank was less or more conservative. The insurance fund thus set up against defaults would be held by the board, subject to draft by any bank to cover any "loss" from credit default.
The service organization would be a profit corporation with capital adequate to promote the adoption of the system by banks and their depositors. In addition to negotiating licenses for the board, it would supply the banks with checks and other forms required by them, as well as any mechanical equipment desired. It would also supply valun currency in bills and coins, as authorized by the board. In view of the national and inter-national potentialities of the valun system, it can be seen that the service organization would have the possibility of becoming a very profitable enterprise, expanding both in capital and income with the growth of the valun system.
The function of the banks would be to administer, for an appropriate service charge, the mutual credit of their account holders. The banks would provide credit facilities for the issuance and redemption of valuns by personal enterprisers and would clear checks and render other appropriate banking services. There would, of course, be no interest charge for lines of credit, since the banks would take no credit risks. Traders to one another would extend the credit, and the banks would not be involved except as administrators.
Hence, under the valun system, credit would be free, but not printing, bookkeeping, insurance and other expenses; service costs would be paid for by the account holders. The small percentage charge stipulated by the board of governors to set up reserves against credit "losses" might range from 1/20th to 1/10th of a per cent per month. Thus the valun system would save business the tremendous sums paid in interest under the speculative political monetary system.
As noted, each bank would adopt and pursue its own credit policy under an insurance agreement whereunder a base, or minimum, premium rate would be charged, subject to increase according to that bank's "loss," or charge-off, experience, the board, of course, reserving the right to determine what constituted a charge-off. Under this arrangement, all valuns issued through all banks would be of equal validity. The insurance rate would compensate for all charge-offs, and the cost of insurance would be reflected in the charges for banking services. Thus, no matter how many banks were authorizing the issuance of valuns, nor wherever in the world their borrower/issuers might be, there could be no variation in the worth of valuns.
In other words, every issuer of valuns would be practically underwritten by the account holders of his bank, through the provision of reserve percentages adjusted to the "loss" experience of each bank. The board of governors might, for example, set a median rate of 1/10th of one per cent per month on debit balances, and then raise or lower this rate in accordance with the experience of each bank. Since these reserve percentages would affect the service charges of each bank, competition among banks would tend to deter laxness in the administration of credit. This credit, it will be remembered, would be based upon the debtor's potentiality of placing in the market, at the market price, the commodity or service that he dealt in, and not any specific, price-pegged commodity.
This insurance feature might better be called the parity provision. Unlike the Federal Deposit Insurance Corporation, its purpose would not be to insure depositors against default of the banks, but rather to preserve the parity of valun issues emitted through the various banks.
How much money might the banks permit each issuer to issue? As much as he could redeem, which means, as much as he might need to get a turnover in his business. This, admittedly, would vary with different lines. All lines, taken together, average about four turnovers a year. Thus, roughly speaking, business would need an issue power sufficient to span three months. This question will be dealt with more fully under "Credit Limits," below.
There would be no need for valun currency at first, because all existing currencies would be purchasable with valun checks at the going rate of exchange. When these currencies became so depreciated as to be inconvenient to use, then valun currency in bills and coins would be made available. These bills and coins would be uniform the world over and would be made of the cheapest serviceable material, without any suggestion of intrinsic value. Such currency would bear the certification of the board of governors and would be available from banks by check requisition, its author being, of course, the check writer from whose check it was converted.
The major policy question to be resolved in valun banking would be the matter of credit limits, i.e. how much should the enterpriser be permitted to issue (to take goods and services out of the market) before being obliged to cancel out an equal sum (to recapture by sales). This could be worked out on the basis of the needs of various trades and professions, rather than passing upon the applications of each member thereof. On the other hand, account holders, once established, might be extended a line of credit based on a percentage of their previous year's business. This being done, each participant would be authorized to draw checks against his assigned credit without giving any note or other instrument. The credit would have no term, but would be in the nature of a call credit, since the pledge would be to deliver value on tender of money.
Different banks would have different needs, determined by whether they were largely agricultural, manufacturing, or mercantile. The nature of the prevailing industry and the degree of presence of reciprocating trades would determine the need for debit balances. For instance, a farmer who sold only once every six months or year, but who bought continuously, would need a longer debit line than a shopkeeper whose selling was more closely synchronized with his buying. A territory where the local product had to be transported a considerable distance before a sale could be effected would also need more time than one which was more integrated or self-sufficient.
The ideal issue policy would be that each customer of the bank be empowered to purchase equivalent to his capacity to sell and to emit sufficient money within such limitation. Whether this ideal could be determined would depend upon solution of the problem as to what constituted "capacity to sell," since value can be determined only in actual exchange and not prospective exchange. Whether the ideal would need to be attained, would depend upon the actual requirements of the money volume and its relation to total exchangeable wealth, of which the former can be determined only by experience and the latter can only be estimated.
Whenever men organize, there is always the possibility that their association may disadvantage some of their number or non-associates. If a debit policy is adopted that makes the money supply inadequate for some or all of the members, the ideal that animates the undertaking is defeated and conspiracy, in effect, exists against those adversely affected. For the money issuing function, although it is private, can be exerted only within the limits of the communal arrangement. There is an ideal debit policy, but it may have to be worked out by trial and error.
Launching the Valun
The determination of what value relativity a monetary unit should represent at the time of its adoption is a matter of choice. It might be the equivalent of a bushel of wheat, a bale of cotton, a pound of brass, or any other commodity. On the other hand, it could be placed on a parity with an existing political monetary unit which had attained a significance. It would be easier, obviously, to identify a unit in the public mind by making it at the outset equivalent to the current unit. Doubtless it was for this reason that the United States dollar was initiated at par with the Spanish dollar. For the same reason, therefore, the valun would be initiated at par with the United States dollar.
This does not imply constancy of parity; it merely means keynoting. All monetary units are, in practice, established by relativity to an existing unit. The relativity thereafter is subject to the issue policy governing each. Hence the valun would have an initial value of one dollar, which would be equal to the power of the dollar on the day of the valun's launching. Thereafter, it would be entirely dissociated from the dollar and independent of any subsequent fluctuations in value that the dollar might have.
Existing banks presumably could open valun departments without legal difficulty or political embarrassment, since under the valun system, they would extend no credit and therefore take no risks. Banks would merely administer the credit extended by the account holders to one another. A large bank such as the National City Bank could make the valun plan a world system overnight by offering it from all its far-flung branches.
The actual launching of the valun might be accomplished by enlisting a number of business concerns to pay their bills with [valun-dollar] valdol checks, which would offer the payee the option of accepting payment in valuns or dollars. The purpose of this would be to establish parity for the initial valun issues. It is expected that sufficient acceptances would be had that, from that point on, there would be a money exchange market for valuns in terms of dollars. After this, the free money market would be the guide to the values of the respective units and would govern the number of valuns required to pay for bills rendered in dollars.
The participating banks would open valdol accounts upon request, against which the holders could draw valdol checks. The valdol account would honor the payee's preference of payment in either valuns or dollars or both. In the case of a shortage of either valuns or dollars in an account, and there being an adequate balance of the other, the bank would be authorized to sell a sufficient amount of the long unit on the money market to offset the deficit in the short unit.
Valdol checks are proposed merely as an initial expedient. They would give non-valun account holders the option of accepting either valuns or dollars. Because of this option, these checks would be usable by participating banks in payment of any bill. This would extend invitations far and wide to others to become members of the valun system. Between valun account holders, however, such a form would not be needed, and a single-unit valun check would be used.
The face of the valdol check would carry spaces for the tender of either valuns or dollars, or half in each, and a place for the payee to state his preference and to add his signature. For the information of the recipient, the back of the check would carry the following notice:
After stating your preference and signing on the face of this check, deposit in the regular way if your bank carries valdol accounts. If it does not, write your name and address here (space) and mail to us (name and address of issuing bank). We will immediately send signature card and, upon receipt thereof, will mail you a valdol checkbook.
Thus prospective valdol account holders, no matter where located, could bank by mail should there be no valdol bank in their locale.
The Money Exchange Market
All political monetary units are inflated and growing more so. There is no sound unit to which uneasy money can take flight. As inflation progresses, many will flee from the dollar into property, but it is exchange that produces income, and not the holding of property static. As the many retreat into a static situation, the volume of product will drop, thus aggravating the general inflation problem. The true and ideal accomplishment in an inflationary movement, for the individual as well as for society as a whole, is to keep active in exchange and thus produce income. Yet in order to continue in business without grave hazard, one must switch his exchange commitments to a stable monetary unit and convert his reserves and working capital to such a unit.
The valun, having no inflationary element and being secure against any, would naturally be desired by both the holders of idle funds and by active businesses that wanted to avoid the destruction of capital and profits. Since no valun could be issued except by a producer in the market, no inflationary units could enter into circulation, and the unit would remain stable. The valun user, therefore, would escape the storm; he would not be tossed about on a sea of confused costs and prices. Through the money quotations of the spot market, current remittances could be determined by translating dollar obligations into valuns. Through the futures market, manufacturers, importers, and exporters would be enabled to hedge against the inflationary decline of all national monetary units.
One of the most vexing problems of business is the difficulty of adjusting wages to the decline of the monetary unit. These troubles would be eliminated by employers paying wages with valdol checks. The employee would have his salary or wage stated on his check in both valuns and its equivalent in current dollars. Moreover, given the option to receive their pay in valuns, labor would not have to strike for cost-of-living raises. As inflation raised the dollar cost of living, each valun would purchase an additional corresponding amount of dollar currency.
With the exception of those who had joined the valun system and who thus, by mutual consent, were using the valun, pricing and billing at the outset would be in dollars. As the system spread, however, more and more business would be initiated in terms of valuns, first by manufacturers, then by wholesalers, and finally by retailers.
Once the valun system had started in the United States and the international money market had begun valun trading, check forms appropriate to the currencies of other nations, such as valmark, valpound, valfranc, etc., would be provided. As stated, between valun account holders, valun checks would be used for international as well as domestic payments.
As valun banking spread in this manner, the implications for world trade would be far-reaching. Since the valun would be a universal unit, it would be as much domestic to a nation as would be the unit of that nation. It would be issuable by the citizens of any nation, either through an internal bank or through one beyond the national boundaries. Thus the present obstructions to international monetary exchange would be removed. With monetary exchange operating internally between the national unit and the valun, the limitations on exchange between national units would no longer be restrictive of trade. Exporters and importers could operate with valuns. The valun would thus ameliorate trade restraints even if the national restrictions upon exchange between national units continued.
For these various reasons, therefore, it is believed that the valun would immediately take its place in the world as the monetary criterion, that the dollar would sell at a discount in valuns, and that all other units would be affected in relation to their dollar exchange value.
It might seem impossible to liquidate the extant astronomical numbers of units of money by means of valuns, a unit that would have to start from scratch and that, at the outset, would be infinitessimal in volume. But the problem seems otherwise when we remember that money springs out of exchange, and not vice versa.
If the seller stipulates the unit that a transaction is to be expressed in, the buyer must provide payment accordingly. If he has bank credit in the stipulated unit, he creates the desired units. If he does not have the required bank credit in the unit stipulated, he uses available funds to buy the desired unit. Any unit that is not entirely worthless will buy any other unit at the market price.
Thus, demand for valuns would always be met by supply, either by bank credit in the purchase of goods or services, or by purchase of existing valuns by conversion from other units. As demand for valun bank credit increased, so would facilities therefor, either by expansion into a wider territory by the banks that already offered valun credit, or by new banks nearer to the locale of demand.
By the same token, supply of valuns would never exceed demand, even though there would be no credit limitations imposed upon member banks. The banks would be free to use their discretion, with the sole proviso that their parity insurance rate would be upped or lowered in accord with their loss experience. But with the freedom allowed valun bank credit, one must not visualize an irresponsible surfeit of valuns, for money can be issued only when it is bought into existence by a seller. To establish bank credit does not constitute issue. Issue is not effected until a tender has been accepted in exchange for value. In other words, money, to be issued, must be bought into circulation either with goods or services or by delivery of money of another name, which, being money, is a claim for goods or services. No issuer will issue money except for market value, and each, in turn, is under necessity of bidding for it to remain in business. Thus would the competitive system tend to maintain the parity of the valun unit both during and after liquidation of all political monetary units.
When May the Valun be Expected?
To put the valun theory into practice, it is not necessary to expand the number of theorists. It is no more necessary for men generally to understand the science of money than it is for them to understand the science of any other utility. Given a sufficient number of traders to participate initially, it will take only a few directing individuals to put the system into operation. These numbers of traders are as indispensable as the few theorists, however. One might understand the theory of baseball, be familiar with all the rules, have the diamond, the bats, the balls and gloves, but there would be no game until there were eighteen participants -nine on a side. Likewise there must be many times nine buyers and an equal number of sellers before the game of exchange can be played.
The simile may not seem a good one because the players of ball must be experts, while to predicate exchange upon expert participants would seem to be hopeless. Expertness in monetary exchange, however, does not imply comprehension of the theory of money. It means expertness in making up one's mind on what is wanted and what it is worth. Every person has this expertness. However much we may hear of super-scientific money management, there is no money management, just as there is no money creation, except by the buyer. Money management means spending for self gain, nothing more and nothing less.
To whom shall we look to start the valun? We must look to employers, for as we have seen, it is the buyer and not the seller who creates money. The common man begins his exchange activities by selling his services. He must do this to live, since he cannot apply his services directly to fashioning all his necessities. His psychology is really a buying psychology, since his selling is but the means of his buying. He visualizes the things he needs or desires, and hence, mentally buys before he sells, but chronologically he sells before he buys. The bit of paper or metal that intervenes between the sale of his services and the purchases of his wants, he calls money - if it works. He gives no further thought to the matter.
The first buyer in the chain of exchange is the employer. Therefore we must look to employers to start the valun, and employees have the right to expect it to be trustworthy. Employees will repose confidence in what employers profess to be an honest medium of exchange, and they will underwrite that medium with the basic commodity, the mother of all wealth, namely brain and brawn and sweat. If no one cheats - and in the valun system no one could cheat - the currency will circulate freely without popular understanding of the theory of its being. Let us understand clearly, therefore, that while we need numbers, we do not need understanding numbers. We need no educational crusade. We need but to comprehend the simple acquisitive instincts and how to serve them.