Voluntary Socialism

A SKETCH (1896)

by Francis Dashwood Tandy (1867-1913)

Chapter VII.

Money and Interest.

VS-7.1 The statements made in regard to rent and interest in the preceding chapters, were necessarily brief and unsatisfactory. It is now time to analyze these matters more fully, in order that is may be shown how surplus value can be eliminated without denying equal freedom. In order to do this, it is necessary, first of all, to obtain a clear idea of the nature and function of money.
VS-7.2 Primitive man made everything he used himself. As he became civilized labor was more and more divided, and exchange became necessary. At first this exchange was effected by pure barter, but as the system grew more complex, a medium of exchange became necessary. Hence, money is “any medium of exchange devised to overcome the difficulties attending a pure system of barter.” (H. Bilgram, Study of the Money Question, p. 17.)
VS-7.3 At first, of course, men picked upon a certain commodity to perform this function. In different parts of the world, at different times, many different things have been used, but of all others gold and silver seem to have been most universally employed. The fact that so many other things have been used, is proof that gold and silver are not the only things capable of performing this duty. What then are the qualities which money must possess?
VS-7.4 In order that anything can be satisfactorily used as a medium of exchange, it must be capable of negotiating all kinds of exchanges. In proportion as it does this, it is good money, and in proportion as it fails in this respect, it is bad money. The power of money to negotiate exchange, must necessarily be limited by the willingness of all people to accept it in exchange for the products of their labor. That is the best money, therefore, which will be most widely accepted.
VS-7.5 No one will accept money which does not either possess intrinsic value in itself, or else represent intrinsic value which can be obtained for it. The former kind, that is, money which possesses intrinsic value in itself to its full face value, we will call for convenience “commodity money.” The other kind, that is, money which merely represents intrinsic value that can be obtained for it, we will call “credit money.”
VS-7.6 No piece of money can circulate forever. It must ultimately be redeemed in something, or the person who last holds it must lose that which he gave in exchange for it. Commodity money, of course, can be redeemed at any moment, as, possessing a commodity value equal to its value as money, it can always be used as a commodity by its possessor without loss. But credit money is different. It must ultimately return for redemption to the person, or corporation, which issued it. If he does not redeem it, he will have received something for nothing, while the last holder of the money will get nothing in exchange for the goods he sold for it. Consequently, no one will accept credit money unless it can be redeemed by its issuer, and unless they also know that it can be so redeemed. For if not, how can anyone tell that he will not be the one to lose? Thus money will not be accepted unless it is known to be based upon value, and unless it is accepted, it cannot be used as a medium of exchange.
VS-7.7 One other thing is still necessary. A man must not only know that he can get goods for the credit money he accepts, he must also know how much of these goods he can get. But as a certain amount of a given commodity may be worth more one day than it is the next, he will want to know, not how much wheat, for instance, he can get for his money, but what value in wheat he can get. Now this value must be measured in something. As all commodities fluctuate in value more or less, it is impossible to obtain a perfectly equitable standard of value.
VS-7.8 From these remarks it will be seen that a standard of value and a basis of value are two entirely different things. With commodity money, of course, these two separate functions are performed by the commodity of which the money is made. But this is not so of credit money. A Greenback is based upon Government credit, that is, the willingness of the Government to accept it in payment of all debts due to it, but it is measured in gold. A silver dollar is based partly upon the value of the silver and partly upon Government credit, but it is also measured in gold.
VS-7.9 There is no reason why any or all commodities may not be used as a basis of value. But it would be inconvenient, though by no means impossible, to have several standards. People get accustomed to measuring values by a certain standard, and it would occasion a small amount of annoyance to reckon in accordance with any other. An Englishman, who is accustomed to reckoning values in pounds, shillings and pence, finds it a little inconvenient to reckon in rupees until he gets used to it. But the difficulty of measuring different money by different standards is not very great, when it is known by what standard each piece is measured. This is practically done every day in all business houses that have transactions with foreign countries.
VS-7.10 This explanation of the nature and function of money in no way explains why interest is paid. Many theories are advanced to explain this phenomenon. To attempt to combat any of them would be out of place in a brief sketch of this kind. If the explanation which I shall give proves satisfactory, all conflicting explanations are thereby disproved. So I will rest my case with that explanation. Nor is it worth while to devote space to ethical considerations. Every moral philosopher from the time of Aristotle to the present day has condemned usury in every form. Even the defenders of interest have never dared to justify their theories on ethical grounds, but on the plea that it is unavoidable. [Online editor’s note: This is a puzzling claim. Bastiat, to name just one of many, defends interest on ethical as well as economic grounds. – RTL] If this proposition can be disproved, ethical considerations will hardly be sufficient to cause men to pay interest when they can get along without it.
VS-7.10 When a man borrows money, he pays a premium to the lender. This is interest. In other words, interest is “the premium paid for the loan of money. ... This must, however, be qualified in order to eliminate the insurance on the risk which the lender must assume. This is the only definition of interest that does not already attempt to explain the cause, thereby prejudicing the impartiality of the argument.” Why is it men are willing to pay this premium?
VS-7.11 The great function of money is to mediate exchanges. In our present complex state of society, with its minute subdivision of labor, the necessity of some such medium of exchange is very great. It is seldom that a finished article is made entirely in one factory, even after the raw material is taken from its natural source. Usually all that is done in most factories is to advance, by one small stage, the process of production. When this is done, the articles are sold to another manufacturer, who advances the production another step. Even after articles are finished, they must be distributed to those who use them before they can finally be consumed. The greater the division of labor in this manner, the more complex do exchanges become, and the greater is the necessity for money. But the division of labor in the production of all commodities is not the same. With some it is greater and with others, less. Consequently, all exchanges are not equally complex, and the necessity for money in some branches of commerce is greater than it is in others. That is to say, when money is employed in certain exchanges, the labor saved is greater than when the same amount of money is used to negotiate other exchanges.
VS-7.12 Let us suppose an ideal community of a thousand men engaged in different occupations, but without any medium of exchange. Let us suppose that each of these men produces value equal to that of 100 bushels of wheat per month. Owing to the lack of money, labor is but little divided. If it could be divided more minutely, some occupations would be benefited in a greater degree than would others. Let us suppose that the greatest benefit to be derived is equal to 200 bushels of wheat per month per man. That is to say, certain of these thousand men can, with the aid of money, create value equal to that of 300 bushels of wheat per month, and without it the value of their product is only that of 100 bushels. It will certainly pay them to give any amount less than 200 bushels of wheat per month for money to enable them to subdivide their labor. They would gain the difference between the amount they paid and the 200 bushels. But if there is enough money in the community to supply all those whose power of production is increased to the extent of 150 bushels, these last would rather do without the money than pay more than 150 bushels per month for its use. For if not, their net wages would be less than before. The owners of this extra supply of money must consequently be content with a premium of a little less than 150 bushels. But the owners of the first sum were getting nearly 200 bushels per month. They will now have to be content with the same amount as the owners of the fresh supply of money, otherwise these latter will underbid them and take their customers from them. Any further increase in the supply of money will produce a like result. Thus we see that money, like everything else, is applied first to the needs which are most imperative and afterwards to those which are less so, and that the price paid for its use is determined by the least productive use to which it is put.
VS-7.13 With an increase in the supply of money, it will be put to a still less productive use, until the point of non-production is reached. So, other things being equal, “the premium paid for the loan of money” decreases as the supply increases, until the point is reached where that premium is just sufficient to cover the cost of issuance and the insurance against risk. It cannot permanently fall much below that point. If it should, those engaged in issuing money would seek more lucrative employment. This would restrict the supply, and the rate of interest would increase.
VS-7.14 The fact that after a financial panic the rate of interest is low, is in apparent contradiction with this theory. The cause of this is that, during the panic, large sums of money are withdrawn from circulation, and business is brought almost to a standstill. When the panic is over, these large sums again seek investment. But, owing to the stagnation of business, there are fewer exchanges to be conducted. Hence the amount of money is greater, in proportion to the demand, than at normal times. So this fact, far from being a contradiction, is a confirmation of the theory here advanced.
VS-7.15 One serious objection offered to this analysis of interest is the theory that the exchange value of money, like that of all other commodities, decreases as its supply increases and vice versa; that the exchange value of money is its purchasing power; and, consequently, the purchasing power decreases as the supply increases. For example, suppose that when there is $20 per capita in circulation, a pair of shoes cost $4, and a coat costs $4. When the money in circulation is doubled, that is, when there is $40 per capita in circulation, the shoes will cost $8, and the coat will cost $8. So, though the amount of money in circulation is doubled, its purchasing power decreases 50 per cent., and the number of exchanges the increased volume of money is capable of mediating, is exactly the same as the number that could be negotiated by the smaller amount.
VS-7.16 Sometimes it is even asserted that, if there was only one dollar in the world it would be as capable of mediating all exchanges as is all the money in circulation to-day, provided it was equally capable of division.
VS-7.17 The only conception we now have of a dollar is 25.8 grains of gold 9-10 fine. If there were only 25.8 grains of gold (one dollar) in the world for use as money, the value of that gold must be either greater or less than, or equal to, that of the same amount of gold to-day. That is to say, it must be capable of purchasing, or be exchangeable for, a greater, or less, or equal amount of commodity.
VS-7.18 If it be assumed that, under the given conditions, the purchasing power of the gold is equal to that of the same amount to-day, how can it be capable of mediating all exchanges which now require so much more gold? If the purchasing power of the gold remains constant, how can the money based upon, measured in, and made of, that gold have an increased purchasing power? The absurdity of such a proposition is evident.
VS-7.19 If it were possible that the price of gold could depreciate under such conditions, the same absurdity would be manifest in a greater degree. So the only meaning that can be attached to the saying that one dollar would be capable of mediating all exchanges presupposes an increase in the purchasing power of gold, owing to the decrease in the supply. It is only when looked at from this point of view that the proposition means anything. If the price of gold increases as the supply decreases, the total value of all the gold in the world remains unchanged, regardless of the supply. For example, let us say there are at a certain time 25,000 grains in the world. This gold is capable of purchasing, say, 10,000 bushels of wheat. Suddenly the supply of gold shrinks until only 25 grains are left. These 25 grains are now 1,000 times as valuable as they were before, other things being equal, and consequently capable of purchasing as much as the original 25,000 grains. If this is so, the 25 grains are as good a basis of value as were the original 25,000 grains, and consequently money with an equal purchasing power can be based upon them. That is to say, the amount of money in circulation remains unchanged. It is not the increase, or decrease, of the amount of money in circulation that determines its purchasing power, but the increase, or decrease, of the standard of value.
VS-7.20 Practically a dollar is capable of infinite division. Instead of issuing notes and subsidiary coin for fractions and multiples of 25.8 grains of gold, it is just as easy to issue them for fractions and multiples of a portion of grain. A corner lot in San Francisco cannot be moved to New York. Yet a New Yorker can purchase a lot in San Francisco without leaving his office. All that needs to be transferred is a title of ownership. So, while it might be difficult to transfer one-millionth part of a grain of gold, it is quite easy to transfer a title to the ownership of that amount. And this is all that is necessary, if the title be good.
VS-7.21 Money may be said to be a title to the ownership of a certain specified amount of commodity. If that specified amount changes, – that is, if the standard and basis of value vary, – of course the purchasing power of the money is affected. If the title is impaired, – that is, if the amount specified cannot ultimately be realized for the money, – of course it depreciates. But, if the standard of value remains constant and the basis of value is sufficient, I fail to see how the volume of money can affect its purchasing power. Of course, if more money is issued on a given basis than that basis will justify, depreciation must result.
VS-7.22 With gold coin the gold is both the basis and the standard of value, and the commodity is transferred, instead of a title to that commodity. From the long-continued use of gold, which embodies these various functions, much confusion of thought has arisen. Men are perpetually confusing the title of ownership (that is, the money), the commodity which that title represents (that is, the basis of value), and the terms in which it is expressed (that is, the standard of value). These are three distinct things. The fact that they are sometimes embodied in one article in no wise alters the case.
VS-7.23 Suppose all the gold in the United States was deposited in banks and all exchanges were made by means of checks. Suppose that the aggregate deposits amounted to $100,000,000, and the total amount of checks issued was only $40,000,000. Now, suppose the amount of checks is suddenly doubled, while the amount of the deposits and the value of the gold remain unchanged. Will those checks depreciate in value? If so, why? This is a condition in which the basis of value is always ample, the standard of value remains unchanged, but the amount of money in circulation is doubled. Unless it can be shown that under these conditions the notes will depreciate, this criticism must be abandoned, and we are justified in maintaining, that rate of interest proper will be reduced to zero, if there is sufficient money in circulation to negotiate all exchanges.
VS-7.24 The great question now is, how can the volume of money be increased? Whatever solution is offered to this question must recognize the fact shown above, that the money must be known to represent a definite amount of actual value or it will be no good.
VS-7.25 The great cure-all usually prescribed for all social evils, no matter what their nature may be, is “Pass-a-law!” In finance this generally means a legal tender law. The very object of such a law is to compel people to accept a certain form of money in payment of all debts due to them. We have seen in a previous chapter, that a direct act of aggression is the only thing which warrants any interference with the acts of any individual. I challenge anyone to show how I can commit an act of aggression by refusing to accept a certain form of money for my merchandise or my labor. If I know that the money is good, I will need no legal-tender act to make me accept it. If I do not know that it is good, it is the most flagrant act of injustice to compel me to take it. Edward Atkinson – and surely he is conservative enough! – in a recent pamphlet, defines legal tender as “an act by which bad money may be forced into use so as to drive good money out of circulation.” He quotes numerous legal-tender acts in support of his definition.
VS-7.26 These laws had their origin in the Middle Ages. “Kings of all countries were habitually extravagant and always hard up. A favorite method of raising funds with them was to abstract from coins a part of the metal of which they were composed, and replace the amount with some base metal. This was carried to such an extent that some of the coins contained but a sixtieth part of their original value. People refused to accept debased coin; so the king declared that it was a legal tender, and the people were obliged to accept it. This was the beginning of mandates of legal tender, and it is an absolute truth that no such legislation was ever required except where money had been debased or had come to be looked upon by the people with distrust. Legal-tender acts are necessary only when there is a lack of confidence. So long as quality is unimpaired, no artificial aid is required. Truth is always able to commend itself without using physical force. It is also true that but for the interference of kings in the first place, and afterwards of other governmental agencies, with the quality of money no legal-tender act would ever have been heard of.” (A. W. Wright, Banking and the State, a paper read before the Single Tax Club of Chicago in the Spring of 1894.)
VS-7.27 To make any form of money legal tender is to give it an advantage over other money, and so to deny free competition. Thus do all legal-tender acts stand condemned as violations of Equal Freedom.
VS-7.28 Any law which prohibits, or places any restriction upon, the issuance of money is manifestly a restriction upon all who would issue or accept such money. If A wishes to issue money a and B wishes to accept it in exchange for his labor, it is gross injustice to both to prevent the exchange. Interference, even on the grounds that such an exchange would be detrimental to both, is unjustifiable. So any law, which either creates a legal tender, or restricts the issuance of money, is inconsistent with Equal Freedom and must be abandoned.
VS-7.29 The only excuse that any person has for interfering with other people, who wish to use any kind of money they see fit, is when any one of those people violates the contract entered into when that money was issued. Then, and not till then, is aggression committed and interference becomes justifiable. Not only must the “Pass-a-law” idea be abandoned, but those laws which now exist must be repealed, if the greatest possible freedom is to be maintained.

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