Chapter
7, Credit and Banking Under Monetary Freedom
The
natural law governing monetary exchange must be adhered to by all,
but upon whom does the right and duty to invoke this law fall?
"The
phrase 'right and duty' of each member to consume seems to justify
the introduction of a moral factor which I wish to disclaim. On the
other hand, it does not seem to me to be the function of a true
exchange system to bias itself in favor of capital accumulation or in
favor of anything except free exchange. Capital formation must
justify itself as must also money saving. There is nothing in the
valun idea to impede or promote either." E. C. Riegel, in a
letter to Raymond J. McNally -Editors.
The
answer to this question is all important. Money is potentially the
perfect medium of democracy, as will be elaborated in the next
chapter. But it will be a limited democracy if money cannot be issued
by all who qualify. If those who want money and are willing and able
to return value to the market for it are restrained from creating
that money, the functioning of exchange democracy will be impaired.
The
process of money creation and retirement must go on unimpeded if
exchange is to fulfill its function in society. While the use of
money benefits both buyer and seller, the responsibility for creating
it falls entirely upon the buyer. If the prospective buyer remains
away from the market for lack of money, the reciprocal good that he
could do by creating money turns into a reciprocal ill, hurting the
potential seller as well as himself.
The
buyer who merely buys with money in hand, i.e. does not create money,
is but a passive supporter of the exchange system. He is a reactor to
the stimuli supplied by those who originated the money he spends. It
is true, of course, that there must be a greater number of reactors
than actors, because every issue of money passes through a number of
hands (transactions) before it returns to the issuer and is retired
thereby. It is likewise true that those who have money cannot issue
money, because to issue money, one must be without it.
We
can comprehend the issuance and retirement of money by visualizing a
red-ink bottle from which money flows, and a black-ink bottle into
which it is retired - destroyed. Money can only flow out of red ink;
black ink is sterile. Persons in the black vis-à-vis the banks are
powerless to issue money - to supply the dynamics of trade. The
red-inkers are the dynamos of business. The black-inker may be ever
so wealthy, yet he can do nothing to give lifeblood to exchange. The
black-inker, if he ever was an issuer, is now sterile.
When
we realize this, we develop a favorable attitude toward credit. Since
money is the lifeblood of business, and only the impecunious [the
poor, etc.] can supply this vital element through bank loans, it is
adverse to the social welfare to put bars against the borrower.
Those
who have money are, to the extent of the sum thereof, creditors of
the market, i.e. they have, as evidenced by their black-ink balance,
delivered more to the market than they have received, and are in
position at any time to requisition values from the market. In other
words, they own units of value that are not in their possession but
which they are able to requisition at any time. To thus accumulate
property without actually possessing it is one of the tremendous
benefits of monetary exchange, because it makes possible the saving
of values without materializing them and subjecting them to
deterioration and obsolescence. In the market these values are always
being turned over and the supply kept fresh.
This
constant freshness is available to the money accumulator only because
there are others who are in the red to the market, i.e. are taking
out of the market with the purpose of later bringing fresh production
into the market. Black ink exists only because of red ink. Red ink is
the sower; black ink is the reaper. Bless the red inker. The greater
his number the sounder and safer is the economy.
Since
every red-ink entry produces a black-ink entry or a diminished
red-ink balance it is, of course, not possible for all enterprisers
to exert money credit at the same time. It is not even necessary that
there be as many money issuers as money holders, because each issue
initiates a number of purchase and sale transactions before it gets
back to the issuer and is retired. But the starters of these monetary
circles should potentially include every personal enterpriser. If the
economy is to be kept fully responsive to purchase stimuli, the power
of money issuance must be exerted by everyone who has need thereof.
Every
man having something to sell must be able to buy and, if need be, to
issue money to start the exchange. One of the virtues of money, if
indeed not the greatest, is the generally unrecognized fact that it
acts as a boomerang. To buy is to cause someone to sell, and to sell
is to be transformed thereby into a potential purchaser. Therefore,
by buying from others we create buying power for our own wares or
services. In other words, by buying from others, we indirectly buy
from ourselves, which is to say, we employ ourselves. Should we, by
shortsighted credit practices, veto the right of any man to employ
himself? Must the personal enterprise system be hamstrung by our
ignorance of the reciprocity of buying and selling?
Since
buying and selling are reciprocals, it follows that not to buy for
lack of money is to deny another the opportunity to sell. To quit
buying because unemployed is to drag someone else into unemployment.
Thus a vicious circle is created by the first market boycotter, since
the reaction to his negative action is to take another buyer out of
the market and thus diminish further the demand for labor services.
The function of money is to bridge the gap between buying and
selling, and this bridge can be erected only by the buyer. The
would-be buyer who is unwilling to build the bridge, therefore, is
not fulfilling his function in exchange. Under the political monetary
system and the conventional attitude of the banker toward the small
tradesman and employee, this failure has largely been due to
disbarment.
The
obvious mal-distribution of benefits derived from the operation of
capitalism is due to the malfunctioning of the political monetary
system. This system not only permits the state to inject unlimited
numbers of spurious monetary units into the money circulation; it
also limits the true issue of money. It is not enough, therefore, to
eliminate the counterfeit issues by the state. Inequalities in the
issue power of money must be abolished as well. For disequilibrium of
monetary power leads inevitably to disequilibrium in the distribution
of the wealth created. The banking system must not carry into the
personal enterprise monetary system the concepts of credit worthiness
prevailing under the political.
Having
evolved from pawnbroking, the banker has used wealth as the criterion
of credit; the propertied alone being regarded as good "risks."
He has been retrospective, whereas money is the instrumentality of
the prospective. His attitude has been aristocratic, whereas exchange
is democratic. He favors seniority, whereas the dynamic force abides
with the juniors. He caters to bigness, which in the aggregate is
smaller than the sum of all small business interests. He rates high
the materialized and low the potential.
The
banker has been so dominated by the state and so intimidated by the
consciousness of hazards in the political monetary system that he has
functioned more as a subject of the state than as an agency of
personal enterprise. So far as he shall operate under the
nonpolitical monetary system, however, he will be oriented completely
away from the state, with freedom to serve society according to his
own judgment. He will acquire a new consciousness of his place and
function in the economy. He is destined to be the equilibrator of
capitalism.
Under
the valun system, or an equivalent system of personal enterprise
money, the banker will be free of all restrictive regulations, all
stipulation as to capital, surplus, and profits. He will determine
his own credit policy and will go as far as he chooses in approaching
the fundamental ideas herein discussed. Some bankers will approach
them more nearly than others, and thus competition will be the
ultimate determinant of the prevailing practice.
The
idea that the banker is a credit "grantor" will be
dispelled, and with it will go the idea that he creates money. As was
noted earlier, to mark a figure, called a "loan," on the
banker's books is not an act of credit and, of course, does not
constitute a money issue. It merely puts the "borrower" in
the way of getting credit from the market at large. The credit, and
therefore the money, does not arise until the 'borrower'/buyer
purchases something from a seller, and then the credit exists between
the buyer and society. In other words, so-called banking credit is
social credit. The banker is but the bookkeeper and administrator.
Inasmuch
as banking "credit" is social credit, its incidence and
volume must be determined by the interests of society. Is it not in
the interest of society that exchange be facilitated as fully as
possible? To deny the would-be 'borrower'-buyer access to the market
is to deny the prospective sellers the opportunity of making sales,
and this limits, in turn, the buying of such prospective sellers - a
vicious circle.
No
banker can be wise enough to judge the potential of a would-be
'borrower'-buyer to redeem his money issue by subsequent sales. That
can be determined only in the exchange process of the market. If and
when the market refuses to accept the goods or services of the
'borrower'-buyer, a "loss" will appear on the banker's
books which will have to be absorbed, not by the banker, but by his
customers, since all costs of banking service must be borne by the
customers. Such "loss," being accountable, will stand out
like a sore thumb. But the loss to society resulting from a refusal
by the banker to admit to the market the applicant for credit, though
unaccountable, is far more serious.
The
first of many consequences is that the rejected applicant becomes a
potential object for charity, either private or public, and his
support is either contributed voluntarily by society or, through
taxation, by the "welfare state."
When
we contemplate the jams that occur in the distribution of
commodities, moreover, and the large advertising and selling effort
needed to overcome them, we realize what a cost is incurred by the
economy for lack of an adequate money supply, adequately distributed.
If we distribute buying power adequately, the products of industry
will be drawn by the buyer rather than having to be pushed by the
seller. With the equitable distribution of the money power, the
distribution of goods and services will no longer be a problem.
It
is said that two out of three business enterprises fail in the first
two years. Such a shocking record must be due in large measure to the
inability of such enterprises to buy-and to benefit from the buying
of others who are likewise limited. If two out of three business
enterprises die before their third year because they are beneath the
notice of the banker, is it any wonder that capitalism appears to be
a rich man's game, and that by failing to nurture new enterprises it
strikes at its own generative process? Does not this exclusion shunt
the would-be enterpriser into the labor market, thus making
competition therein excessive while curbing competition among the
surviving businesses?
Equity
between the price of labor and the price of goods and services cannot
be attained unless there is ease of entry from one sphere into the
other. Whenever inequity appears in either sphere, it must be readily
adjusted by the employee going into business or the businessman
retiring to the employee sphere. This automatic adjustment must not
be impeded by bank credit policy.
The
dignity of man requires justice, not charity. Capitalism must operate
for all members of society who bring values to the market. There must
be no ostracism. When the applicant for banking credit conceives a
marketing plan, the banker is confronted with the option of acting as
midwife or abortionist. The impersonal experience of the market
should be his only guide as to whether, and at what point, such a
would-be money issuer should be barred from bank credit.
The
money creator is the self starter or spark plug of exchange. His
issue starts a chain of exchange, and it is doubtful whether his
failure to retire his issue by sales could be as harmful to the
economy as his exclusion from bank credit. The economy is dependent
upon the initiation of exchange by money creators, and it is manifest
that it is better that there should be many such with small issues,
than few with large issues. It is also patent that the unemployed man
can do more harm to the economy by not buying, than by buying on bank
credit, even though his credit remains unliquidated. By the latter
process, he isolates the germ of unemployment; by the former, he
renders it epidemic.
If
capitalism is to be equilibrated and rendered equitable, it must be
at the point where the banker functions, and this point is so
critical, that the banker must be free to submit himself to the
impersonal judgment of the market rather than acting ex cathedra as
he is compelled to do under the present system. Under a natural
monetary system, the banker, divorced from politics and free to
determine his own credit policy, will arrive by the aid of
competition, at the happy median where the profits from increased
business counterbalance his charge-offs. At that point he will become
the equilibrator of capitalism, and capitalism will be universally
acclaimed.
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