Part
II: The Mechanism of the Classical Ideal
CHAPTER I
THE
WORKING OF THE MONEY SYSTEM
IF the considerations thus far advanced are accepted as valid,
certain conclusions seem inescapable. A system of Society
which depends for its structure on the theory of material rewards and punishments, seems to involve, fundamentally, a general
condition of scarcity and discontent. You cannot reward an individual with something of which he has already sufficient for
his needs and desires, nor can you easily find a punishment
which will be effective in a world in which there is no incentive
to crime. We might legitimately expect, in such a Society, a
mechanism which would ensure a continual, and, if rendered necessary
by the advancement of science, an artificial disparity between
demand and supply of material goods and services, together with
an organisation which would prevent any infringement of the
rules by which this disparity is maintained.
We
do, in fact, find exactly such a state of affairs in the world
to-day. The exact methods by which the financial organisation
produces the illusion of scarcity will demand our attention
almost at once, and at some length; the organisation by which
these arrangements are enforced is, of course, familiar in the
form of the Common Law.
It
is astonishing to what an extent the co-operation between Finance
and Law extends without attracting any considerable body of
specific comment. What is called Civil Law is concerned almost
wholly with matters which can be referred ultimately to the
Money System. That is obvious. But it is not less true to say
that an overwhelming majority of so-called criminal cases can
be traced, either directly or indirectly, to a financial incentive.
Even crimes of passion take their origin, in the majority of
cases, from physiological or psychological reactions which
can be traced back to economic or financial causes. The world
is full of organisations for the suppression of such social
evils as inebriety and prostitution. The financial origin of
the latter hardly needs emphasis, but it is not so generally
recognised that habitual industrial overstrain, long hours,
and insanitary conditions of work, and the excessive indulgence
in alcoholic or other artificial stimulation, are almost invariably
found in one and the same geographical locality. And in nearly
every case, attention is directed to the suppression of the
symptom, rather than to the removal of the cause, with the result
that the partial suppression of one evil is only achieved
at the cost of producing a fresh and probably more insidious
disease.
It
has already been, it is hoped, made clear that the gap between
Demand and Supply has nothing to do with the ability of the
production and industrial system to meet the calls which are
made on it; it has to do with the organisation which stands
in between Demand and Supply, that is to say, the Financial
or Ticket System. In other words, the persons who want and cannot
do without the goods which the productive and industrial system
can, and is anxious to supply, have not in their possession
the tickets, the possession of which is essential before these
goods, under present conditions, can be handed over.
Now
this condition has not entirely escaped attention, but most,
if not all, of the attention which has been directed to it is,
I think, stultified by accepting as true, premises which proceed
from the very system which is attacked. There is, of course,
the crude idea on which, originally, most of the orthodox Labour-Socialist
propaganda was based. Observing the condition we have just outlined,
the simple suggestion was put forward that the majority of the
population were so poor, because a minority were so rich.
This simple explanation died hard, even if it can be said to
be dead. It survived a number of statistical investigations,
mostly with the intent of showing that we do not work hard enough,
of which perhaps the latest and most complete have proceeded
from the London School of Economics, an institution which combines
the curious qualities of being the fount of financial orthodoxy,
staffed by the flower of Socialistic personnel, chiefly chosen
and paid by bankers and financiers. Professor Bowley, who was,
if I am not mistaken, connected with this institution, in a
treatise on the Distribution of the National Income, referring
to a period immediately preceding the first world war, estimated
that the total British income in excess of £160 per family
per annum, was
only £250,000,000. Taking the population of Great Britain
as forty-five millions, and the average number of persons per
family as about 4.5, which is a usual assumption, it is clear
that an "equitable" division of this income would result in
an increase of the average family income by £25 per annum,
which can hardly be said to be a promising basis for a sweeping
reform by taxation. As in addition, such a distribution would,
under present conditions, make the possession of such articles
as motor-cars impossible to any private owner, and so would
completely inhibit their production, and the wages, salaries
and dividends distributed in respect of that production, it
must surely be obvious that an explanation more complex than
this must be looked for. The point we have to make is not merely
that financial purchasing power is unsatisfactorily distributed,
it is that, in its visible forms, it is collectively
insufficient.
One
stage in advance towards this end is the theory generally associated
with the name of Mr. J. A. Hobson, who attributes the general
lack of purchasing-power (the fact of which he most properly
emphasises), to the undue investment,of savings, on the part
of the more fortunate members of Society, in what are termed
capital undertakings, with the result that production of capital
goods is in excess of the amount required. That such unbalanced
production does take place, is unquestionable; but that Mr.
Hobson's explanation is inadequate to explain the process which
accompanies and complicates this unbalancing, is, I think, not
less certain. Nor does this theory account for the collective
growth of bank deposits.
Both
of these explanations really proceed from a misconception of
what actually takes place in the financial and costing departments
of industrial organisations, and a further failure to grasp
the possible relation which can exist between the abstraction
of money and the concrete physical realities to which it relates.
There is every justification for these misconceptions; they
are strictly orthodox in the sense of being the general teaching
of the majority of those persons who claim to be experts on
the matter; and it is necessary that they should be stated in
order that the invalidity of them may be exposed.
This
orthodox theory, then, assumes that the money, equivalent to
the price of every article which is produced, is in the pocket,
or the bank pigeon-hole of somebody in the world. In other
words it assumes that the collective sum of the wages, salaries
and dividends distributed in respect of the articles for sale
at any given moment, which represent collective price, are available
as purchasing-power at one and the same moment. Certain
persons have more money in their pockets or bank pigeon-holes
than they wish to spend on consumable goods. They do not spend
it, they save it, as the phrase goes. By this abstinence from
spending, they form a fund which enables capital goods, i.e.
tools, plant, factories, to be paid for, and therefore produced,
and because of the process by which these are paid for the capital
goods thus produced become the property of those persons who
have thus saved.
Now
the first point to be grasped in regard to this argument as
a whole is that, even supposing at any given moment it were
true, one week afterwards it could no longer be true. If on
a given day, there was extant in the world, sufficient money
to buy all the goods in the world at the prices it had cost
to produce those goods, and any portion of that money were applied
to form the payment for the production of new goods, then that
money so applied forms the costs of the new goods, and immediately
there is a disparity between the total costs, which are
the minimum total prices of goods, and the amount of
money in the world which would ex-hypothesi, be exactly
the same as before. This would be true even if no one "saved"
any further quantity of money. The persons who had saved
the money would not have saved the goods which the original
money represented, they would merely have transferred their
claims from the original goods in existence to new goods, and
could only "get their money back" by the sale of those goods;
nor would there be any mechanism in existence by which the old
goods could be bought. That surely must be self-evident.
But
the process does not stop there. From the investor's or "saver's"
point of view, his only object in putting his money into capital
goods is to get an increased amount of money back, and on Mr.
Hobson's assumption, in particular, he can only get this money
back from the public in the form of prices. The condition then
is, that there are more goods in the world at each successive
interval of time, because of the financial saving, and its
application to fresh production, while the interest, depreciation,
and absolescence, on this financial saving has to be carried
forward into the prices of production during a succeeding period.
Each pound saved would be a pound withdrawn from consumption
and put into production. Since costs must be less than prices,
it only requires a very simple examination of this condition
to see that the cycle would become unworkable in a very short
period of time, since no one would be able to buy anything.
Depreciation alone would absorb the world's purchasing-power,
although not seriously diminishing the world's true wealth,
and if no other factors intervened, we should have starved in
the midst of plenty many years ago.
In
every criticism of the social distribution of wealth made public
prior to 1918, the assumption is implicit that money or purchasing-power
is confined to legal tender, and that bank deposits, etc., on
which cheques are drawn, are deposits and withdrawals of legal
tender only. This is in part equivalent to saying that banks
and financial institutions only re-lend money which has previously
been lent to, or deposited with, them. There is also a nebulous
idea involved, I think, to the effect that the man who grows,
e.g. a ton of potatoes, also grows the purchasing-power
of a ton of potatoes. The facts are far otherwise, as no doubt
large numbers of potato-growers could testify. Given a fixed
amount of legal tender, and assuming legal tender to be the
only purchasing-power, no amount of production would increase
it. Probably a minimum of nine-tenths of the immediately available
purchasing-power in the world arises out of bank loans or their
equivalent in bills discounted. These loans and the purchasing-power
which they create have no automatic relation to either production
or consumption. This question has aroused a good deal of controversy
and has been treated at some length in previous volumes. But
a short and, I think, conclusive mathematical demonstration
is available which may serve to dispose of the matter.
Let
Deposits |
=
D |
Let
Loans, etc. |
=
L
|
Let
Cash in Hand |
=
C
|
Let
Capital |
= K
|
Then
we have
Assets |
=
L+C |
Liabilities |
=
D+K
|
So
that L+C |
=
D+K
|
Differentiating
with respect to time, we have -
dL
|
|
dC
|
|
dD
|
|
|
dK
|
|
----
|
+
|
----
|
=
|
----
|
;
|
K
being fixed,
|
----
|
=
0
|
dt
|
|
DT
|
|
DT
|
|
|
DT
|
|
Assuming
that the Cash in Hand is kept constant
Therefore
which
means, of,course, that the rate of increase, or decrease,
of loans is equal to the rate of increase, or decrease, of deposits.
Now
this theorem that bank loans create bank deposits, and the deduction
from it that the repayment of bank loans destroys deposits,
is vital to an understanding of the process we have been discussing.
The deficiency between purchasing-power, and goods with money
prices attached to them, can be made up (at any rate to a large
extent) by this process of creating bank money. This enables
the business cycle to be carried through. And conversely, the
refusal to create fresh money by banking methods or otherwise,
whatever the cause of this refusal may be, is sufficient to
paralyse both production and consumption. There is no doubt
whatever about the facts; in the past three years we have had
the two conditions side by side; in Great Britain a restriction
of credit and consequent industrial stagnation; on the Continent,
enhanced credit issues, and great industrial activity.
The
repayment of bank loans, unaccompanied by the destruction
of the article produced as a result of its creation, immobilises
an equivalent body of price values, so that neither can the
articles to which the prices refer be sold, nor in the case
of machinery, etc., is it possible to make any charges in respect
of consumption goods which are consequent on the use of such
machinery, without still further increasing the disparity
between the goods available still, and the money available
to buy them.
This
is surely plain enough; but it has also to be remembered that
this process of repayment of bank loans, is a "chain" process,
which starts with the repayment, by the last business concern
engaged in the manufacture of the articles, of the costs and
profits incurred by the stage of manufacture immediately preceding
it. If this operation be clearly visualised, it will be seen
that all payments of costs of goods supplied by one business
firm to another business firm for re-sale, can be assumed to
be the repayment of bank credit, if the first stage in the manufacture
of the goods was financed by a bank credit. But we can go further
and say, that the difference between finance by bank credit,
and finance from so-called capital or savings, is only one of
degree and not of kind, since those very savings, as will be
seen by a careful examination of the foregoing argument, had
their origin in a creation of credit.
We
may now be in a position to appreciate the bearing of the foregoing
analysis on such theories as those of Mr. J. A. Hobson. We have
seen that the factor which modifies so profoundly the importance
of the considerations adduced by Mr. Hobson, is that the inadequacy
of the money available in the hands of the, public to buy the
goods normally available, at the prices necessitated by the
system under which they are costed, is countered by the ability,
and the normal practice of banking and financial institutions
to create and circulate forms of purchasing-power which function
quite as effectively as the sovereign or the treasury note.
This circulation largely functions through wages and salaries
paid out in respect of capital production or goods destined
for export. Unlike the sovereign, or the currency note, however,
these forms of bank-created purchasing-power, are nearly always
redeemable within a definite period of time. It is a feature
on which the banks place the most weighty importance; and exactly
why this is so is worthy of, and will receive, close consideration in a succeeding chapter.
It
is fair to say that almost any explanation which is not a full
and accurate explanation of the working of the financial system,
has the curious result of playing directly into the hands of
the upholders of that system. The simple Labour-Socialist criticism,
which emphasises the contrast between the rich and the poor,
forms a perfect moral sanction for the imposition of taxes
on any portion of the community which is above the starvation
level, since to the man who has only two hundred a year, the
man with six hundred a year is rich. And it is logical, on the
theory that purchasing-power is merely mal-distributed, that
Mr. J. A. Hobson should devote much of his attention also to
taxation.
The business of dealing in money as a commodity is, as has already
been pointed out, advantaged by anything which accentuates the
scarcity of money, so that any form of attack on the business
system, the constructive effect of which is to support increased
taxation, can, and does, receive support from the inner circles
of High Finance. Since the greater part of the real purchasing-power
of the world is in a potential form which is not represented
by any figures anywhere, but can be materialised by those in
possession of the secret of the process, as and when required,
taxation of visible purchasing-power is exactly what
is most valuable in maintaining the power and supremacy - the
power to reward and punish - of the money-"makers." There is
probably not a "levelling-down" movement of any description
anywhere, which is unsupported from Lombard Street, Wall Street,
and Frankfort.
CLICK
HERE TO DISCUSS THIS BOOK
|
|