Saturday, April 20, 2013


Selected Correspondence from 1943 to 1952
(correspondence in chronological order, continued)

To the editor of the New York Times (August 19, 1949)

The composite credit of private competitive traders, based, as it is, upon actual exchange of goods and services, forms the only substance of money. The different national monetary units are merely various dilutions of this substance. It is more correct to say that there is money in each unit than it is to say that each unit is money.

It is for this reason that Gresham's law projects in the words, "bad money drives out good money," a misconception of money. Good and bad are not proper terms to apply to money. Money is invested to a greater or lesser degree in various monetary units, the distinction being quantitative and not qualitative. That units with a lesser money content are proffered by buyers rather than those of larger content is but a natural manifestation of the bargaining instinct.

To M. S. Lurio (November 11, 1949)

Enclosed is a draft of the proposed constitution of the board of valun banks. The purpose is to make it as simple as possible and, except for the projection of a principle, to leave the board free to exercise judgment on the questions that will arise.

In the prospectus of the New York Valun Bank, you will observe that the word money does not appear. The process of the bank is described as "trading by transferable credits," which is really a definition of money. I am continuously at cross purposes between the impulse to make a truthful statement and to yield to expediency as a defense against the reactions that spring from the universal ignorance and superstition of money. In the present promotional effort, I have used the terminology current in business, and yet I inwardly rebel in calling the overdraft bookkeeping entry on the books of the bank, "credit."

This is really not credit in the accepted sense, as it delivers nothing of intrinsic value. It is merely authorization to the member in a debit position to tender a check or checks to some suppliers-who are the actual extenders of credit if they accept the tender. And they do not extend credit to the remitter, but look to some other members to make good. A valun check, like a dollar check, is merely a draft on the market where the real creditors and debtors function, while the bank is merely the bookkeeper.

Now, should we call the bookkeeping entry which authorizes the remitter through the process of red ink figures to tender checks to the market, "credit?" Or should we adopt a more honest name, such as "overdraft power" or "initiating power” or "unearned drawing power," as distinguished from earned drawing power, which is based upon an entry resulting from the deposit of a check which is evidence of having delivered value to the market? Or should we, for expediency's-sake, leave undisturbed the psychology established by banking practice and let account holders and the public think that the bank actually extends credit?

To David Diamond (January 31, 1950)

One of the collateral purposes of the valun plan is to diminish and ultimately abolish the use of currency in payrolls, and thus diminish the use of currency in general. Currency is indispensable, but its present uses are excessive. This is due to its general use in payrolls, and to the unattractiveness to employees of the present checking method.

Under our plan, each employee will be entitled to a check account with an overdraft power with which he immediately can draw checks, thus making it possible for the employer to make up payroll once a month. To accomplish this, the employer will be supplied with a payroll check about the size of a letterhead, on which he will list the employees and the various sums to be credited to their accounts. This will be mailed to the bank, where the various sums will be entered as deposits to the accounts of the various employees. No checks will be issued to the employees, and thus will be obviated the necessity of their making individual deposits. This will dispense with a great amount of detail.

To A. L. Giberson (May 16, 1950)

I have made several approaches to cooperatives, as it seemed to me and others that they were constituted ideally for the valun project for two reasons, to wit: they are drawn together by a common principle and interest and are organized mostly along lines of human necessities, and, second, their employees are more disposed to cooperate than the employees of non coops.

Before the valun or any other plan can gain wide usage, it must enter payrolls, yet this is impossible until the system has broad representation among dealers in consumers goods to bid for the employee's interest.

The dean of the Cooperative movement in America, Dr. James Peter Warbasse, has endorsed the valun plan and mentioned it in his latest book, The Cooperative Way, page 113.

I am enclosing copy of a circular letter now going to a selected list of manufacturers and wholesalers. If this brings response evincing interest, I shall ask them to sponsor the plan to their retail trade, as I find that the retailer asks whether he can pass valuns on to the wholesaler.

To Percival C. Brundage (October 14, 1950)

As long as accountants fail to understand that the monetary concept is the basic concept in accountancy, they will be frustrated in their efforts to bring business facts into proper focus. It is as absurd for them to undertake to present true mathematical analyses of business performance, with the politician continuously changing the power of the unit, as for an artist to paint true pictures with colors mixed by another.

To Holgar J. Johnson (November 9, 1950)

As a constant reader of your excellently edited Money Matters, I see in it reflection of the deep concern that is held by the insurance companies over the progressing inflation. I wonder, however, how much they hope to sweep back the tide with a broom of words. Is there not some quest for action to be taken by the companies themselves to preserve the tremendous equities involved in life insurance?

I wish to go on record as forecasting the complete collapse of the political monetary system in total inflation with no possible point of stabilization. When the insurance companies are prepared to entertain this possibility, I shall be prepared to present my plan for stabilizing their income and outgo on a monetary unit dissociated from the dollar and proof against inflation

To Ivan Firth (February 12, 1951)

Inflation is not a condition of imbalance between goods supply and money supply, for such imbalance cannot occur. Money cannot be issued without an exchange of goods and services, since it is not an entity apart from exchange but springs out of exchange, nor can it be issued unilaterally, since every issue of money requires the tender of it by a buyer and a tender of value by a seller. Hence the two sides are always synchronized and always in balance. Thus, if there were no spurious monetary units injected, the price level would remain constant, though, of course, individual commodities would rise and, reciprocally, others would fall, thus balancing the rises with the falls.

To Ivan Firth (February 14, 1951)

Trade is a process of finding affinities, and it is, of course, more difficult to find direct affinities than by vicarious process. If one of two traders can give the other an instrument that will ferret out his affinity, it follows that trading may be consummated to a much greater extent than if dependence is had upon the mere chance that two traders can satisfy each other's wants.

This transforms trade from a bilateral to a multilateral operation. To accomplish this transformation is the sole and all important function of money - the ferret of affinities.

To Garet Garrett (May 7, 1951)

Our libertarian writers paint a drab picture of the decline of private enterprise and the rise of political enterprise. The political means of attainment is seductively turning the minds of the people from the economic means.

Education is futile to overcome this trend. The cause of the trend must be displaced by a mechanism whereby the trend will be in a wholesome direction.

The Welfare State is one that robs Peter to pay Paul, and its success lies in the fact that Paul is fully aware and grateful for the benefit received while Peter is bewildered over the identity of the robber. He is apt to blame the tradesmen over whose counter he pays his shrunken dollars, and thus private enterprise is doubly punished.

The whole deception operates through a perversion of the monetary system. Many of us suspect this, but our remedy is the usual stereotype - education and a return to sound money. But to attain sound money we must advance, not return, because we never had sound money.

What we had in the "good old days" was unsound money only partly developed. The power to degrade the monetary system and thus sabotage private enterprise existed before Roosevelt, but he was the first to release it beyond the power to arrest. The egg has been hatched, and the chicken grows rapidly. "Sound money" advocates propose to put the chicken back into the egg.

The power of government to make paternalism seem practical, and thus insidiously to socialize the economy, lies entirely in the fallacious belief that government can and does issue money. An understanding of the essence of money shows that no government ever has issued or ever can issue genuine money. Their professed monetary issues have precisely the same effect upon the money supply as a farmer produces by taking the milk pail to the pump-not a larger supply of money or milk, but a mere dilution.

We bewail the ignorance of the people on economic and political matters, but the real cause for dejection is that our businessmen do not know the difference between real money and counterfeit. Because they and the would-be educators of the people accept the fallacy of political money power, they are unconscious socialists. This unconscious socialism is universal; so the task of restraining the onward march of the Welfare State is more gigantic than we have realized, if undertaken through popular education.

However, we need not educate the people on money or economics. We need not tear down the present political monetary system. No governmental or political action is called for. If we realize that only private enterprise can organize and conduct a true monetary system, one that will be stable and sound and inflation-proof, we need but to set it up, and the people will not be slow to secede from the false and join the true.

To Edward Boykin (May 22, 1951)

A friend has shown me your excellent article in the New York Times of May 13; on the 1874 Green back Bill.

In those days, the means of inflating the circulation was by printing currency. The modern way is to print bonds, sell them to commercial banks, then print checks to draw against the bank balance and let the currency expand according to public demand. This is the smarter way of using the printing press. It fools the people.

You will recall that the Act of May 12, 1933, gave Roosevelt the authority to direct the Treasurer to issue greenbacks up to $3 billions, which authority he did not use. He used the roundabout method and increased the circulation by many times this amount with not a single banker crying out, "printing press money. " You see, the greenback way pays no interest, while the bond-check-currency printing-press method does, and that stops the mouths of the wise and deceives the public.

The practice by government of inflating the circulation is now in its third and last phase. The first was by debasing coins, the second was printing currency, and now it is by the method above described. This is the end of the trail; all governments are now perpetrating this ultimate fraud, and I see no escape from total inflation, not only national but worldwide.

To Ivan and Gladys Firth (June 15, 1951)

A friend asked me to review this old book, and since it covers a period before your time, I thought you might be interested in reading this first draft.

Review of W. H. Harvey's Coin's Financial School

The tattered and faded book from which these photostats were made awakens nostalgic memories of the last decade of the nineteenth century, when depression-inspired pursuit of the solution of the money problem made passionate partisans of all men. Those were the days when one could get at least emotional exhilaration out of an otherwise dry-as-dust subject.

The "free silver" crusade of the late eighteen-nineties marked an epoch in American history. It was the all-time high for popular interest in the money problem, approached in fervor only by the Andrew Jackson campaign against the Second United States Bank. It divided the nation not only politically, but also geographically. Had the depression continued until the end of the decade, there might have been a schism between the West and South against the East, for the latter was considered by the former as "the enemy's country.”

Josh Billings said, "The less people know, the more they suspect." The people, knowing little about the cause of the misbehavior of money, instinctively became suspicious. The demonetization of silver, called "the crime of 1873," served the need for the emotional surge. Added fuel was supplied by the suspicion that England had inspired the "crime."

The "gold bug" partisans for the gold standard against bimetallism were equally off the beam of reason, and answered their opponents with invective and diatribe. A veritable groundswell lifted all men into the air. While the free silverites were no more rational than the gold bugs, the writings of "Coin" Harvey gave a scholastic background to the former, for they were written in pedantic style and were widely read.

The torrent of hot words reached its climax in the presidential campaign of 1896 with William McKinley, the Republican candidate, opposed by William Jennings Bryan, "the boy orator of the Platte," who stampeded the Democratic convention with his impassioned speech concluded with the peroration, "thou shalt not press down upon the brow of labor this crown of thorns nor crucify mankind on a cross of gold." Though the campaign was a contest of passions, the race was not decided by the amount of heat generated, but by cold and brutal strategy conceived by Mark Hanna, the McKinley manager who enlisted the banks to pressure manufacturers to post ultimata on their plants. In cases where the plants were closed, a promise was made that they would open immediately after election if McKinley were elected. On the open plants, the poster carried the threat that they would close if McKinley were not elected.

But for this thrust at the breadbasket, the silverites might well have carried the election. For the force of their crusade much if not the major credit, must be given to "Coin" Harvey. His technique merits examination.

Harvey’s style of writing was popular mainly because he personalized the subject by boldly using the names of prominent Chicago businessmen and bankers and publishers as stooges to appear at his "school" to ask the questions he wished to be asked, and brought off each fictitious encounter with a personal triumph of his little hero, Coin. The tactic second in importance was his liberal use of cartoons. He artfully professed throughout the book that he appealed only to reason and abjured sentiment, but as one comes to the end of the book one discovers that he used the method of Mark Antony at the grave of Caesar, for he climaxed with the most incendiary words.

While the conspiracy theme of the "crime of '73" is not referred to in the book proper, there are appended two chapters of his A Tale of Two Nations, wherein the fiction is given form with the arch conspirator being the English "Baron Roth." The reader can easily supply the second syllable. " A certain Senator," the American co-conspirator and mercenary, is easily identified as John Sherman, author of the "infamous" Sherman Act that demonetized silver. Such were the tools with which the little master, Coin, biased the minds of his readers.

After the presidential election had put out the fire, what resulted from the great conflagration? The silverites had argued that the demonetization of silver had cut half the base from under money, thereby reducing circulation and bringing hard times. The gold bugs had maintained that "sound money" could be had only with a gold base. Silver was not remonetized, and the gold standard held full sway until another and worse depression which overtook the nation in 1930-1933, brought forth the theory that the trouble came from trying to maintain any metallic base. In 1934 gold was demonetized, and we are today without any "redemption money.”

So it was all much ado about nothing. The partisans of one metal and the partisans of two metals were not talking about money at all. They were merely debating, in their torrid fashion, whether the Government should peg the price of one metal or two. But the Turkish bath was good for the nation, because it got some poisons out of the system.

So intricate are the machinations of money and so complicated are the causes of its misbehavior, that it baffles even calm reasoning, and solution is hopeless when emotion confounds logic. The moral is that there will never be a solution of the money problem through groundswells and prairie fires.

To john Chamberlain (April 10, 1952)

Your booklet containing "The Faith of the Freeman " is written with such sincerity in the cause of private enterprise, that I assume you will welcome comments. I hang my hat on this quotation: "In terms of current labels, the Freeman will be at once radical, liberal, conservative and reactionary. It will be radical because it will go to the roots of questions."

I wonder if you will go to the root of the money question. In your recitation of the proper functions of government, you do not mention money control. No doubt you take that for granted, as your readers probably do also. I do not imply that you approve of the monetary policies of the present and past administrations. But you probably have not posed the question whether the state can, under any conditions, provide a monetary system that is not adverse to a free economy. Yet so long as you do not tackle this fundamental question, your other soundings will be immaterial.

You denounce, and rightly, such interventions as "tariffs, quotas, exchange control, bilateral treaties, import and export prohibitions or restrictions, government price supports, subsidies, or loans to favored industries," etc. This constitutes your credo as a professed friend of private enterprise. Like all other "friends," no darts are aimed at the political presumption of monetary control. This precinct you hold sanctuary.

With the monetary system socialized, the state can yield on all your protests, and still the economy will be progressively socialized by diluting the money supply with issues of spurious money. The state can even abolish all formal tax levies, thus creating the appearance of a taxless Utopia and giving society a free ride to its doom. You are, in fact, spreading the opium unconsciously, as you state: "It is imperative that those who already believe in a market economy, limited government, and individual freedom should have the constant encouragement of knowing that they do not stand alone, that there is high hope for their cause."

Thus, within the purview of your iconoclasm, leaving untouched the superstition of the State's most stupefying icon, the more success that attends your efforts, the more you contribute toward the vulnerability of private enterprise, which you undertake to defend.

The universal attitude of private enterprisers and economists is to attribute the power and duty to the State of supplying the monetary medium to the economy, reserving only the right to bellyache over the consequences. This shows that at bottom, our whole society is tainted with paternalism. The blame for the political perversion of the monetary system must be placed upon society. For it has tried to escape the task of rationalizing the subject and has thrust the problem upon the Great White Father, who is just as ignorant as to what constitutes money but is, of course, glad to grasp power.

The monetary system must be alienated from the state and its control assumed by private enterprise. To accomplish this, businessmen must be roused from their private "initiative," and journalists can serve the public interest by ringing the alarm, not by soothing words.

To Ludwig von Mises (April 10, 1952)

You deplore the fact that the prevailing number of economic teachers and writers are of the Leftist persuasion. From the viewpoint of the Radical Right, there are no others. The so-called academic or conservative or classical teachers and writers are merely different categories of socialists, because they all accept the socialization of the monetary system. Can you name any "capitalist minded " authors, teachers, businessmen, bankers or taxicab drivers, here or abroad, who do not accept the state control of the monetary system?

The economy functions by means of verbal and written contracts, and under a monetary system, these contracts are all expressed in terms of the monetary unit. Hence the meaning of the monetary unit is the meaning of the contract. With the state's power to change the meaning of the monetary unit, it holds complete pervasive power over the economy. To admit this all-pervasive intervention while objecting to collateral ones, is to swallow a whale while gagging at minnows.

To Bennett Chalis (September 12, 1952)

A pipe through which water flows has capacity, but the power that moves the water lies elsewhere. The same is true of money. The monetary unit is merely the conduit through which purchasing power flows, such purchasing power lying in the commodities or values exchanged. Therefore the student of money must be careful not to fall into the error of thinking that money has purchasing power. Things are purchasable only with things. This unchanging law is just as operative under a monetary economy as under a barter economy.

To F. A. Harper (October 1, 1952)

I have now read with pleasure, for the second time, your pamphlet, "Inflation."
I have looked for areas of agreement between your ideas and mine, because I would be particularly pleased with such concurrence. Ever since reading your The Crisis of the Free Market, published in 1945, I have regarded you as an exceptionally clear thinker.

I would say that we agree that: a) Governments can and do issue counterfeit money, and that b) such issues act as insidious taxation. We only partially agree as to the genuiness of any issue of "money" by any government.

Your designation as counterfeit (impliedly) applies to issues against deficits only. This makes the criterion of genuiness one of balancing the budget. As I see it, the professed issues of money by governments, national, state and local, cannot be genuine, because they are not the criteria of free exchange, i.e. a tax levy is not determined by free exchange, which is the only area in which money can be invoked.

I raise this distinction to lay a more fundamental objection to governments undertaking the issue function, although the distinction is really academic. Governments have no need to issue "money" where they have the courage to balance their budgets by frank taxation. Are you not saying, for all practical purposes, therefore, that all issues of professed money by governments are counterfeit?

It is not clear whether you use the word money in the sense that I do. I regard, as the primary monetary form, a draft against a drawing account established by a credit administrator of the monetary system. Thus the currency form would be but a conversion of a check, the primary form.

I read your pamphlet eagerly looking for some suggestion of a remedy for legalized counterfeiting, and found this on page 23:

A step in the right direction…….would be to compel the government to live within its income. This means limiting government expenditures, strictly and absolutely, to taxes that are openly acknowledged to be taxes. This means prohibition of the concealed and deceptive tax of inflation.”

Compel and prohibition are words of coercion that apply to Government measures over the citizen, but not in reverse. We cannot prevent the Government from following political expediency, and it certainly is expedient in practicing paternalism to hide the taxation under deficits by means of counterfeit money issues. To do otherwise would be to let the socialist cat out of the bag.

Even if it were possible to force Government to a balanced budget policy, it would not avert disaster, because of the more than $100 billion of bonds in the hands of private parties, which, of course, have not yet been monetized. When the demand for cashing comes, as come it must, the Government will have no place to go to get the necessary cash to "redeem " these bonds but to the banks, and this flood of counterfeit dollars will wreck not only the dollar but the Government itself. Business must build its own monetary system to save both itself and government from utter chaos.

May I discuss with you the point you raised at the conference relative to the "insurance" provision in the valun plan? Perhaps you think its purpose is similar to the Federal Deposit Insurance Corporation, but it is not.

My visualization of the problem is this: Each bank in the monetary system is the mechanism of a community of money issuers, all using the same name, dollar or valun, etc. These issues pass into the common stream of money. Yet the varying credit policies of the various banks with their varying loss ratios suggests that there be introduced some compensatory factor to make them par. Or should we ignore these discrepancies, as has been done in all monetary systems to date? The tendency of defaults of money issuers is to unbalance the money supply with the values supply, producing slight inflation. But there is an offset-ting factor in the loss - which may be considerable - of our currency through various natural causes. What do you think?

To Paul L. Poirot (June 21, 1952)

Frank Chodorov's piece entitled "Shackles of Gold" turns out to be a confession rather than an accusation as the title had led me to expect. It is the old-time religion, humbly expressed and pleasantly intoned for the ears of the faithful of the Gold Standard League.

Chodorov has discovered that "money was invented by traders long before any government thought of monopolizing it." What escapes him is that traders have continued to issue all of the money in circulation and will ever be the sole issuers of money. He does not realize that no government ever has or ever can monopolize money issuance, because the so-called money issue of government cannot circulate of itself. It can only flow by blending with the real money issued by traders. The farmer cannot produce a salable commodity from the water pump alone; he must first get the milk from the cow and then inject the water into it to make diluted milk.

The nonsense about gold convertibility as a converter of counterfeit money into genuine: Does regulating gamblers make them any the less gamblers? This is not a perfect analogy, since in the case of counterfeit money the regulator and the regulated are the same. Nonetheless, the gold bugs do not seem to realize that we have gold/dollar convertibility on a sufficient scale to prove that it is no deterrent to the issuance of counterfeit. As you know, foreigners may convert dollars into gold, and yet gold piles up in Fort Knox. Also, there is no diminishment in the domestic gold miners' conversion of gold into dollars.

During the Civil War, the Government suspended convertibility. After serious debate for years, it restored convertibility on January 2, 1879, under tense fears of a run on gold. But the conversion worked in reverse; more gold flowed into the Treasury than flowed out.

When Roosevelt ordered the people to turn in their gold at $35 an ounce, they responded with alacrity.

The people, today, can get the substance silver not only in exchange for silver certificates, but for any bills. Yet there is no demand for conversion.

It is disconcerting that businessmen, realizing that there is something wrong with the monetary system, try only to get the counterfeiter to purify itself, instead of taking in their own hands the exclusive power and responsibility for the medium of exchange. It shows that they are at bottom paternalistic, willing only to whine against the socialistic trend which the political monetary system makes inevitable.

Random (Undated)

Are you not willing to give your IOU when you want to buy something, provided that that IOU is payable only in your services or goods? Of course you are. Everybody is. It merely means creating sales for yourself. We are all willing to issue our IOU's. Now all we have to agree upon is that we will all accept one another's IOU's. Thus we really redeem our own IOU's by accepting anybody's IOU's. Since, therefore, it makes no difference where the IOU originated, individual signatures need not appear thereon, and we can adopt standard pieces of printed paper and coins….

From Paul L. Poirot (September 11, 1952)

It is not clear to me why the details of a valun banking system are included at all in your presentation. Does that not presume an impossible insight into the results of freedom?

Let us say, for example, that I am in theoretical opposition to our public highway system; I would prefer privately owned and controlled roads. Must I presume to know how or where or why or when individuals would voluntarily develop a system of highways? Or shall I leave that development to the voluntary efforts of individuals, some of whom are more facile than others? The question, I suppose, is one of strategy: How can I best persuade others to give private roads a trial?

Private money must be a credit instrument, a promissory note, for which some individual assumes responsibility. I can issue a promissory note without a bank's signature. I cannot circulate it as money except among those who have faith in my productive capacity, in my ability to deliver the promised goods or services. Within the trading circle of my immediate family, we use such a system, based upon unwritten "scrip" and unworded "promises." Credit is sought and received and honored strictly on the basis of personal acquaintance. Is there any other way of promoting the use of private money within a larger social circle than the family, except on that basis of faith in the individual? A man's money cannot possibly be any better than his word - his honest effort to redeem his promises.

I can see how voluntary credit insurance might be a profitable business adjunct of a private monetary system. I might well elect to patronize a bank which specialized in character reading and insuring the credit of individuals, just as I now buy term insurance to cover my outstanding debts. Certainly, I would prefer to "shop around" among competing bankers for that particular service, just as I now shop for life insurance or any other commodity or service. I would abhor a universally acceptable valun if I thought it depended upon, or might somehow lead to the development of, a single central bank or credit clearing house. I am trying to say that I do not care to know in advance precisely how the valun banking system might develop under private enterprise. But I am sure we could depend upon private competitive enterprise to coordinate and blend into a workable arrangement a series of individually developed and originally highly variable valuns.

I should not attempt to offer an exhaustive list of the means to be followed toward the end of perfecting a private monetary system. For to attempt such a thing would be in itself a denial of faith in individuality and private enterprise. Let the best man work out the best means.

To Paul L. Poirot (September 15, 1952)

If we assume that the money issuer's commitment is a promise, we, of course, involve a moral question. But the money issuing act does not involve a promise, and hence there is no moral element involved. Therefore, there is no need of having the act of money creation underwritten by credit insurance. The reciprocating action of the private enterprise money issuer, i.e. his compulsion to bid for money with his goods or services, as against his bidding for goods or services with money, makes the involvement of a promise entirely gratuitous, and, in fact, irrelevant, since there is no identification of creditor and debtor in the act of creating money. The promissory note that is customarily required by bankers from the "borrower" involves no loan of money. It is but the initial step in the creation of new money, which is not actually created until the "borrowers' " draft upon the "loan" is accepted in the market in exchange for values. Even then, there is no credit since the acceptor of the draft does not know whether it is drawn against black ink or red ink.

There is, in the commercial sense of the word, no credit involved in money creation. Commercial credit involves a specific creditor and a specific debtor, and arises out of the transfer by the creditor to the debtor of goods or services or already existing money. Though it is not recognized by the users of money, there is implicit in the monetary system a faith that none will be admitted to the issue power other than private enterprisers, who, for the reason stated above, keep the redemption power in constant balance with the issue power.

In the valun plan there is free competition among the banks in the system. Some may operate under a broad credit policy, others under a narrow one. Some may operate by the present practice of requiring "borrowers" notes, some by merely allowing overdrafts. Some may charge interest while others may depend upon service charges, or both. Voluntary associations of workers or other groups might organize a bank. Does this not give the flexibility and freedom of competition that you seek?

The plan not only provides for competition within the system but also recognizes that the system as a whole must be exposed to competition and that it cannot grow into a universal system unless it responds to men's impulses for freedom of action. Other than the exclusive use of the name valun, there is nothing monopolistic about the plan. All its procedures are subject to the crucible of competition; it cannot begin as a universal system but must earn that status.

From Paul L. Poirot (September 16, 1952)

The step of running the valuns through a theoretical bank seems unnecessary to me; All the bank does is to endorse a personal note, giving it negotiability. The original signer is still responsible, as a debtor, to redeem his promise, no matter who finally appears as his creditor. Any responsible person could serve the banking function of insuring the creditor against the debtor's default. That is strictly a business service. Let any enterpriser do it. Call him a banker if you please, but all he really does is endorse a promissory note. I can't see how you get to the point of view that valun holdings do not reflect the extension of credit to the original signer of a promissory note. Either the banker or the ultimate creditor - the person who finally claims redemption - extends the credit. But credit it is, or so it seems to me, involving persons who trust one another.

To Paul L. Poirot (September 19, 1952)

Commercial credit is a relationship of a specific creditor and specific debtor, arising out of the transference of some value. It rests on faith in the moral responsibility and competence of the debtor, whose default inflicts loss on the creditor.

Banking credit, on the other hand, or money-creating credit, is social - without specific creditor or debtor. It is the money-creating process. It arises from an implicit compact among a group of traders to honor the requisitions of one another that conform to the rules of the monetary system as administered by a central bookkeeper and credit administrator, commonly called a bank. Its operation is as follows:

1. The bank establishes a drawing account for the prospective money issuer by entering a sum on its ledger. This is called a loan, but involves no transfer of money or value by the bank. It involves no deduction from the resources of either the bank or its depositors. In fact, it manifests itself as an increase in total deposits.

2. The "borrower" draws a draft upon his drawing account and tenders it to a trader who delivers value therefor. This exchange constitutes the issuance of money by the "borrower"- buyer and backing of the money by the seller, who becomes a creditor, not of the money issuer but of all the traders in the monetary system. The money issuer becomes debtor to the monetary system.

3. The money circulates, and thus creditor is replaced by creditor until it finds a customer for the issuer, who then returns value in exchange for the value received in the initial exchange. The money is thus retired.

Throughout the whole process, there has been no credit in the commercial sense of the word. The banker gave no money or other value. The "borrower," with the acceptance of his draft by the seller, created the money. If the "loan " should be defaulted, the banker would lose nothing, because he would merely distribute the deficit over the accounts of all his depositors through his charges for service. Nor would this constitute a loss to them because, but for the monetary system, trading would have to be by barter, and that would be a real loss.

All parties to a monetary system are either creditors (those who have surpluses) or debtors (those who have bought more than they have sold) of the whole system, but no individual is creditor or debtor to any other individual. There is no moral factor involved in money issuance, because the issuer acts as a redeemer of money by merely following his acquisitive instincts. He is eager to exchange his goods or services for money, for it is by this process that he gains his profit. To do otherwise would be to boycott himself. He may fail to "make" money and thus fail to act as a money redeemer, but, if so, it is contrary to his intentions.

But does the moral factor enter at no point in a monetary system? It enters very profoundly if the actors know what they are doing. Alas, all participants in the monetary system, as well as the politicians who make the rules, are innocent of infidelity to the basic faith upon which the system rests. This faith is the unwritten and unconscious pact that exists between the banker and the whole group of trader participants. It resides in the observance of the rule that none but private competitive enterprisers be admitted to the money issuing power. This observed, the monetary system automatically functions for good only. Ignored or contempted, it just as automatically miscarries.

From Paul L. Poirot (October 2, 1952)

I’m still confused as to the difference between commercial credit and bank credit. You seem to be saying that it is possible somehow for everyone to trust everybody without your first trusting me, and vice versa. I would concede that a banker might be a highly useful promoter of this ideal of mutual trust, but doesn't his value in this respect depend entirely upon his personal assumption and fulfillment of responsibilities? I can’t see that the mere presence of a banker automatically relieves all debtors of their responsibilities and all creditors of their fears of loss. If obligations are outstanding, it strikes me that they must be assessed against some individual.

To Paul Poirot (October 9, 1952)

Your effort to understand the social nature of money credit as contrasted with bilateral credit may be cleared up if you will ask yourself this question: What becomes of the "losses" or "charge-offs" in the banking business? Are they borne by the bank or included in the costs of doing business and therefore borne by the bank's customers?
To be sure, if these items become excessive, the bank may be unable to pass them on to its customers, since its charges for services might not meet competition. There is an optimum point at which the charge-off percentage is neither too large, reflecting laxity, nor too small, reflecting ultra conservatism. This point can be arrived at only by free competition among banks, a condition that has not existed under the politically controlled monetary system with its many provisions of capital and surplus requirements and, above all, by reason of the limitation of currency supply.

Banks, incidentally, do not fail because of insolvency, but rather because of their inability to meet sudden and enlarged demands for currency. This limitation is purely gratuitous, as there is no sound reason for the distinction between check money and currency money.

From Paul L. Poirot (October 10, 1952)

The multilateral credit media to which you refer means to me that many persons have collaborated in its creation. In other words, a lot of people may agree that it's all right for me to trade with valuns, if I choose. But it seems to me that the multilateral arrangement ends there. I can't understand how private money or credit can be anything other than bilateral. One responsible person grants credit which another responsible person has requested. If this credit instrument is then negotiable, that doesn't make it multilateral; it just substitutes one debtor or one creditor for another, still leaving only two persons directly involved. The original credit instrument may go through hundreds of hands in that fashion, promoting one trade after another, but never are more than two persons directly involved at any given stage o f this process.

To Paul L. Poirot (October 18, 1952)

You are quite right in your statement that "The multilateral credit media…means…that many persons have collaborated in its creation…but never are more than two persons directly involved at any given stage of the process."

In other words, monetary media move by the displacement of creditor after creditor until they are retired by the issuer/debtor, there being at all times one creditor and one debtor. But the creditor's claim and the issuer-debtor's are vis-à-vis the market and not between two individuals, both of whose identities are merged in the compound which is called social credit. Failure of the issuer-debtor to retire an equal number of monetary units, by his sale of goods or services, imposes a cost on the whole body of exchange participants. These costs are distributed to all the exchange participants through the charges rendered for banking services.

These costs, however, are not losses to anyone, because they are the price for escaping the much greater cost of doing business by the whole-barter method. The method of finding the optimum of such costs is competition among banks, since they are reflected in the charges that banks must make for their services to their customers.

This virtuous social credit process is inherent in any monetary system; it is, in fact, the criterion thereof. Unseen and unsung, it has gone on raising man’s living standards and will continue to do so unless it be overcome by the antisocial counterfeiting practices of governments, than which there could be no greater calamity.


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