A “Clarion” mare’s nest
The Clarion is a comic paper, but never more so than when it treats of economics. Its latest outbreak is entitled, with unconscious humour, “Mind Your Own Business”, and advocates the adoption on a large scale of the Guernsey plan of raising money for municipal expenditure by issuing notes redeemable at term and acceptable in payment of taxes.
The people of Guernsey are reputed to have raised £4,500 in this way, about 100 years ago, calling in £450 annually to be destroyed until this whole had been redeemed, and they are understood to have never repeated the experiment.. The Clarion writer, however, to rid the municipalities of their debts and to obviate all further borrowings, advises the wholesale adoption of the Guernsey idea, no doubt upon the principle that since a man may take a fraction of a grain of strychnine without serious harm, he may therefore take a few ounces with impunity.
To show what an utter nostrum this currency fad is, it is only necessary to pass in review the conditions governing the currency. The earliest form of exchange we have knowledge of is barter – the direct exchange of one thing of use for another, as, for example, cattle for implements of war, or these for ornaments, and so on. A stage higher in civilization we find the exchange of goods has become more frequent and that the old method of barter has become too cumbrous. Among tribes whose chief wealth was cattle we naturally find cattle being used as measure of the values of other things and as the medium of exchange. Cattle, however, soon gave place to the “precious metals”, whose use for ornament, whose durability, convenience and divisibility peculiarly fit them for use as exchange medium or money.
Gold and silver would, therefore, tend to be generally accepted in exchange for other things of equal value: that is to say, for things requiring approximately the same amount of toil to obtain. With the further advance of Society, and the still greater frequency of exchange; the numerous disputes between buyer and seller respecting the quality or weight of the silver or gold used to facilitate exchange, led to the adoption of an official stamp or coinage to secure uniformity, and as a guarantee of weight and quality of the metal. Here we have money in its complete form; but whatever metal may be serving as the universal equivalent it had its origin as a simple commodity, and was singled out by reason of its convenience to serve as the expression of value in general.
It will now be seen that money is wealth, although the Clarion man cannot grasp the fact because he does not distinguish between popular and scientific terminology. Popular phraseology calls everything money which serves as circulating medium, whether it really be money or only a credit substitute for it. Accurately speaking, however, money comprises solely the coins of the standard metal; since notes and tokens are merely instruments of credit and not really money any more than theatre or soup tickets.
The significant fact is that to-day through no matter what mechanism of exchange, it is only those who have commodities for sale which are desired by others, who can exchange at all, either directly or indirectly; and only then when there are individuals in the same position as themselves (i.e., having commodities for sale desired by the other commodity owners) to exchange with. The fact is at the bottom of all exchange, whether the medium of circulation be gold, notes or whatnot. Clearly, then, the amount of circulating medium is determined by the value of the goods to be exchanged by these possessors of the desired commodities, who are facing each other so much more easily through the institution of money. It is, therefore, the disorganisation of production and distribution which causes gluts and crises, and the currency fluctuates in quantity as required by the circulation of commodities.
The remedy, then, is not the inflation of the currency with paper, for that cannot improve the conditions of production, but to so organise industry that what is required is produced, and that those who produce are not robbed but get the full value of their product. The remedy, in short, is SOCIALISM; and there are no short cuts through the currency.
We can, by considering briefly the credit side of our question, more clearly see the childishness of the currency faddist’s idea, that to be rolling in money we need only set our printing presses to work turning out millions of paper notes.
In a system of production for exchange a large amount of circulating medium is continually going from hand to hand, being sought after, not for its intrinsic worth, but for the purpose of being exchanged again for the article desired. Obviously, then, so long as the Government is stable and has a monopoly of the coinage, it, or its agents, may replace part of the currency by tokens or notes, provided always that the credit of the Government be good and that the total issue does not exceed the minimum amount of currency at par that is always required in circulation. The difficulty of making mere tokens acceptable is got over partly by their convenience, and by making them legal tender in payment of debt in certain proportions.
Should, however, the Government swell the currency beyond the amount which the circulation of commodities can absorb, then the standard is depreciated and the value of the circulating medium is diminished by the amount of the excess.
Modern Governments, in their own interests and from bitter experience, go quite as far as is safe in the issue of paper currency, (indeed, only the financially bankrupt oversteps this limit) and the more extensive use of symbols or tokens can only have the effect of increasing the speculative character of industry and adding to the existing distress; whilst if the paper issue inflates the currency beyond the amount needed at par to do the work, then prices rise and the separation of real and nominal value commences; and although a £1 note might still purchase a nominal £1 worth of provisions, the £1 worth of provisions would, with every fresh issue, grow smaller by degrees and beautifully less, the workers, as is usual being the first to suffer.
From the time of the Assignats of the First French Republic to our own day we have numerous instances of the dire effect of the inflation of the currency with paper, and at the bar of History the currency faddist stands irrevocably condemned. For confirmation one has only to turn to some of the instances given by Mulhall and other statisticians of the United States in 1836, 1864 and 1868; of Russia from 1817 onwards; of Austria from 1810 to 1850; of Italy in 1867; of Sweden in 1834, instances when the paper issues depreciated the currency from 15 to 80 per cent., causing a corresponding rise in prices and terrible distress. Even in England in 1814 owing to an over issue of notes the price of an ounce of gold had risen (in notes) from £3 17s. 10 ½d to £5 4s., other prices rising proportionately.
We see, then, how “credit money” works in practice, and to clearly understand why that is so let us here recall the economic law: – “The amount of circulating medium that can be absorbed is governed by the sum of the prices of the commodities to be purchased during any period, divided by the number of times the average £1 in coin or notes changes hands during that time”. If the amount exceeds this there is an over-supply of the medium and prices rise, for the currency is depreciated. Paper is not hoarded, since it is entirely useless and valueless out of circulation, the gold is held in preference, (since it is intrinsically of value) and, if the currency is depreciates by an overissue of notes, the gold remaining in circulation becomes more valuable as bullion than as coin, and is consequently melted down or exported. Thus it is that “bad money drives out good”. With a sufficient margin of standard metal circulating side by side with notes the currency adjusts itself naturally to the fluctuations of trade by the coining or the melting down of gold, but if all the gold be driven out of circulation, then every fluctuation in the volume of trade causes either a shortage or an over-supply of circulating medium with corresponding fluctuations in prices; because a pure paper currency even under the best conditions can only be adjusted artificially to the fluctuations in the amount of trade, and that only when the evil has been made manifest by the rise or fall in prices.
But, it may be objected, although you show us under what conditions notes may circulate and the limits under economic law to their quantity, you do not show why municipalities cannot issue notes in order to avoid borrowing. Having disposed of the general principle of the “paper money” faddist, let us answer this final objection. Provided that sufficient of the standard metal is left in circulation as a safety valve to provide against fluctuations, and the notes are issued cautiously and from one central authority, municipalities may issue notes with safety as Guernsey is reputed to have done. Those, however, of the middle class who are anxious to reduce taxation by this means, conveniently forget that by the proposed redemption of the notes in payment of taxes a large portion of the revenue is thereby turned into so much unprofitable waste paper. The point which we wish to emphasise in this connection is that the amount the municipalities can issue, even under the most favourable conditions, is ludicrously small compared with their needs; and that is the joke.
In the first place, by far the greater part of the commerce of this country is carried on already (as far as the master class is concerned) by means of a perfectly sound system of credit. As long ago as 1889 the business of the principal clearing houses alone amounted to £7,620,000,000 for the year. Indeed, as Marx has pointed out, gold is practically driven into the retail trade, and the amount in circulation is much smaller than most people suppose, whilst it does not increase proportionately to the increase in trade.
In order to give the municipal note enthusiast plenty of rope, we may even for the moment disregard the historic and economic evidence which, as we have seen, shows the dangers of an increase in “paper money”; we may even assume that the amount of gold in circulation may be entirely replaced by credit notes. They admittedly cannot exceed this without causing a depreciation of the currency and a rise in prices. But when all the gold is driven out of circulation by the notes, where are we then?
Mulhall shows that the amount of gold circulating in this country to be about £102,500,000. We will, therefore, to please the currency faddist, assume that no ill effects follow from the displacement of this sum by notes. Now (excuse me smiling) the outstanding liabilities on loans of local authorities in Great Britain are over £400,000,000, or about four times as much as would be available from the currency! Could folly farther go? Some even have intimated that the National Debt also could be liquidated by this means, but the National Debt alone is over £762,000,000. Yet it is proposed to make the currency an universal milch-cow!
Verily, instead of a milch-cow the clarion has found a Mare’s Nest.
(Socialist Standard, August 1906)