MONEY — What is it?
Review
by Keith Wilde
Garden City Press Study Club, 263 Ade-laide Street West, Toronto, and Garden-vale, Quebec. Sewn binding, hardbound with a brown cloth cover. 181 pp. Not dated, but content confirms it was published early in 1935.
This is part of “The Reading List of an Economic Radical,” detailed in ER of July, 2005. The writer mentions that it is an election year, also that the Bank of Canada has been legislated into existence, directors have been elected and a governor and deputy-governor appointed. “The Bank will open its doors for business in the spring of 1935.” Money reform was in the air, and even the Prime Minister was calling for it. It was also the election in which the new Social Credit Party of Canada ran candidates in at least four western provinces and 17 were sent to Parliament. Blackmore served as their leader in the House of Commons. The inscription in the front of the book reads: “Presented to Jno. H. Blackmore March 27, 1936, by J.J. Harpell.”
The Garden City Press at Gardenvale and J.J. Harpell are an important link in money reform literature, as explained July ER. Gardenvale has vanished as a place name in official gazetteers of Quebec, as also the Press, but the Pilgrims of St. Michael remain as a lively reminder of the enthusiasm of their founder, Louis Even, for the ideas of C.H. Douglas. Advertisements on spare leaves in the back of this book announce the already published exposition of Social Credit by J. Crate Larkin (From Debt to Prosperity) and a larger work by G.G. McGeer which I conjecture to be a pre-publication announcement of The Conquest of Poverty under a less catchy title. The latter did get into print in that same year, and has had significant impact in money reform literature as described in several ER items in months past. (It is described in this blurb as asserting that money supply must be taken away from the present private monopoly and controlled entirely by the government.)
The title page says the author had the collaboration of a manufacturer, a merchant and a banker, each described in sufficient detail to demonstrate that all three were significant business leaders. Also that the book “gives expression to the school of thought on the subject of money for which Mr. Neil McLean of Saint John, NB, is responsible.” (Caldwell identifies himself with Bristol, New Brunswick.) It is said by the publisher to explain the fundamentals of money “in terms which a boy or girl with an elementary education can understand.” (An indication, perhaps, of how far educational standards have diminished since then!)
A feature of Caldwell’s presentation is emphasis on the global extent of the problem and the widespread attention given to it by people in every kind of productive activity, including domestic bankers. The author points out that it is the focus of study clubs in Australia, the US and Britain (especially the London Chamber of Commerce) as well as Canada, giving the impression that money reform was an urgent topic of popular attention throughout the Industrialized world, that all were transfixed by the gravity and at the same time the absurdity of the situation. The importance of educating citizens to the nature of the monetary and banking system is a feature of most of the items described in “The Reading List of An Economic Radical” (July ER), for it is only through such a grassroots initiative that reform can be achieved. The same theme is being renewed in our own time by observers who see the system going off the rails. Many of these are cited in the book by former industrialist Ray Carey in his book Democratic Capitalism, reviewed in August ER.
Caldwell states in the Foreword that his two main targets are usury and the gold standard, and that they go together in sustaining a pernicious system that has to be changed, by evolutionary means to deter revolution. It is also clear from the outset that he sees himself as on the side of domestic farmers, merchants, resource extractors, manufacturers and even bankers, and that international financiers are the sponsors and beneficiaries of the perverse and corrupted system.
Money is a utility, a wheel for moving goods. It should not be locked up in vaults in the form of gold. Money supply should be related to production capacity in general, not to the supply of gold. It should reflect embodied labor, the recognition of saved up labor for spending at some other time and place. A store of value, the accumulation of a person’s focused efforts to build up a competence to support himself in sickness and old age. Also a way to keep score, of counting up one’s contributions to society over time. His argument that money supply should be related closely to production capacity sounds a lot like the “stable money” movement described by Robert L. Owen (Sen. Doc. 23).
Although Caldwell takes for granted the conventional notion that money originated as a means to facilitate barter exchange, that interpretation is not critical to his thesis, which focuses on Renaissance or early modern times when gold was becoming a critical factor in the struggle of princes for financial power to conduct military and political adventures. (He says at least three times that it was the accumulation of impossible debts that collapsed the feudal system.) He needs only the premise that gold was universally accepted as modern Europe took shape, and that this circumstance made it possible for goldsmiths to begin the credit expansion activities which evolved into monetary and financial practices that are still familiar. From its origin in gold, money evolved into debt. The argument is fleshed out, solidified, with reference to international trade and especially currency exchange.
The mercantilist goal of a “favorable balance of trade” is implicated, for it is impossible to keep exporting without also importing in exchange. Given that businessmen want to be paid in money, they necessarily resort to international exchange (currency) markets. This provides big opportunities for speculators. Gold is deeply implicated here and international financiers cling to it as an instrument for their manipulation (to build up debts). “None but the international financier can benefit from a system that has the debt objective.… With international trade, as with domestic business, the management of money is designed to bring men into debt.” This, he says, has been kept a secret from the average businessman. Money and credit are created as international financiers see opportunities for lending at a profit – at rates that are higher than producers can pay. For banks to win, others must lose, for banks don’t issue sufficient money to cover the interest they demand in payment.
The combination of interest and principal is greater than the amount initially loaned out. Thus there simply is not enough money in the system to pay it all back. If all the interest is to be paid, it means that someone has to suffer an unfair loss, because money isn’t functioning simply as a wheel. This only becomes obvious when times turn bad and loans are called. The system has an extortionist aspect, therefore, as depressions and foreclosures consolidate wealth in the hands of ever fewer persons.
The former observation is supplemented by noting that real production goes up at a much lower rate than what banks want to charge as compound interest on money. Sheep breeding is an example. The conventional rule is to lend out ewes for given number of years and expect the return of a certain multiple number of sheep at the end of the term. This is based on natural rates of increase, which have limits. Bank loans and debt obligations multiply at a much higher rate than real production can maintain. The necessary consequence is defaults and contraction. Production can pay for loans, if the price is not too high.
One of his interesting and innovative bits of rationale (p. 125) is that if a person has gained real wealth over an active lifetime of production and accumulation of assets, it is a privilege if he is able to transform it all into a liquid asset – i.e., money and be able to spend it in his retirement, or even transform it into some other kind of productive activity. To do so requires cooperation from society at large – government and regulation. This is a big benefit by itself; why should he then expect to be able to store his wealth in liquid form and also accumulate a handsome rate of interest on it? If any interest is paid on it, it should be very low, for he is getting his wealth taken care of at no cost to himself. (That rationale works for farmers, loggers, miners, fishermen, manufacturers of the early 20th century, but not so well for wage slaves of our own time, who are encouraged to put their trust and savings in speculation on an exponentially expanding bubble of financial instruments that are disconnnected from real production. Cf. “Navigating for Security in a Bubble Eco-nomy,” ER of June 2005.)
From those observations on physical limits to economic growth compared to the expectations of money lenders, Caldwell passes on to defects in the money system, especially as governments are implicated. He does not make a lot of effort to bridge the conceptual gap between the origin of banking practices with the goldsmiths and the tradition that kings could command resources by stamping their image and guarantee on pieces of metal, in explaining money supply, passing simply to an assertion that currency issue is a sovereign right, and should be an obligation of governments. Instead of assuming and asserting it, however, governments have ceded a monopoly on money creation to private companies. (All of the thirties money reform literature I have seen emphasizes that coinage, still a royal prerogative, has become a very minor part of a nation’s money supply.) Caldwell quotes William Gladstone, describing his experience as Chancellor of the Exchequer and discovering that the State is in a position of subserviency to the Bank and the City. “The Government was not the power in finance, but was to leave the money power supreme and unquestioned.” (In language of the post-Nixon era, banking was the first public utility to be “privatized” – along with its “license to print money.”)
By giving away this (natural monopoly?) right, governments have wasted vast amounts of money as interest. (By this I think he means that too much of the existing supply was used up in interest payments instead of greasing the wheels of commerce.) Governments are going bankrupt by borrowing their own credit and paying interest on it. Caldwell’s exposition on Debt Money is one of the most persuasive I have seen. Government pays interest to banks for the use of credit money which is backed by the government itself. Governments should issue a greater proportion of the money supply directly. (He does not say all.) Furthermore, the usurious rates that governments are paying on debt already contracted should be revoked. Government debt should be re-financed at a much lower rate.
There is at least a strong hint that the international bankers (if not the domestic ones) understand quite well that their system is designed to aggrandize all the world’s wealth by means of an insufficient money supply and the contraction of credit on the downside of the cycle. The war proved that the system is perverse, for great quantities of real production were destroyed while the money supply more than doubled – as debt. Depressions consolidate wealth via foreclosures. (I didn’t notice that he linked this wartime expansion to the inflation bogey.) In spite of this clear finger-pointing, his tone is very circumspect, suggesting that even the international bankers probably do not understand fully how the system is structured to be destructive of wealth by concentrating it in the hands of a few via debt-based money. He cites Montagu Norman as one of the semi-conscious, in contrast to Reginald McKenna. It is we the people who have acquiesced in a system that makes international financiers the rulers.
On the new, not yet operational, Bank of Canada, he says it should not be operated for private profit because control of money and credit is a sovereign right belonging to the people. By its enabling legislation, profits of the Bank of Canada will go to the government. These should go into a sinking fund to pay down the government debt – not into the Consolidated Revenue Fund for current spending. Furthermore, the Bank of Canada should never be operated as a profit-maximizing enterprise to generate income for the government. Its business is money and credit management in the public interest. Furthermore, loans to the government should come directly from the people and for particular projects, so that a light can be kept on what the government is doing with money it raises from the citizens.
A chapter on alternative schemes for a better socioeconomic system features commentary on Thomas More, Bacon, Bellamy, Henry George, William Morris and H.G. Wells. Of the latter, he notes Wells’ observation that “the present is a race between education and catastrophe” and that by education he meant “development of an intelligent public opinion.” Of current schemes, Caldwell discounts the Townsend plan for a substantial old age pension because it takes no account of “the problem of debt and interest rates that are greater than the average increase in production.” Noting that many of the contemporary plans focus on price levels, he then gives a one-page description of the Douglas Plan that is “often put forward in one form or another.” He then describes proposals of the London Chamber of Commerce for the (Commonwealth, 1933?) conference in Ottawa. Some elements: Lack of purchasing power is keeping resources idle. Primary producers are the creators of wealth, but they pay the highest interest rates; banks render the least service but get money the most cheaply – from governments via the modern money creation process. The value of money is not stable: Farm products and raw materials prices fall while rents, interest and taxes do not. Currency should rise and fall automatically with business activity. It should not be managed. (Shades of Milton Friedman.) Many of the banking leaders (e.g., Montagu Norman) just don’t understand very well the contrast between what is and what ought to be.