Free Banking

Excerpted from the book;

Individual Liberty
Selections From the Writings of Benjamin R. Tucker
Vanguard Press, New York, 1926
Kraus Reprint Co., Millwood, NY, 1973.

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In 1889, Mr. Hugo Bilgram first published his "Involuntary Idleness," which Mr. Tucker characterized as the most important book of the generation. But, while admiring the author's examination of the relation between unemployment and interest on money, and while agreeing with his conclusion that "an expansion of the volume of money, by extending the issue of credit money, will prevent business stagnation and involuntary idleness," the editor of Liberty had one substantial disagreement with Mr. Bilgram, which he stated thus:

When Mr. Bilgram proposes that the government shall carry on (and presumably monopolize, though this is not clearly stated) the business of issuing money, it is hardly necessary to say that Liberty cannot follow him. It goes with him in his economy, but not in his politics. There are at least three valid reasons, and doubtless others also, why the government should do nothing of the kind.

First the government is a tyrant living by theft, and therefore has no business to engage in any business.

Second, the government has none of the characteristics of a successful businessman, being wasteful, careless, clumsy, and short-sighted in the extreme.

Third, the government is thoroughly irresponsible, having it in its power to effectively repudiate its obligations at any time.

With these qualifications Liberty gives Mr. Bilgram's book enthusiastic welcome. Its high price will debar many from reading it; but money cannot be expended more wisely than in learning the truth about money.

Mr. Bilgram then writes to Liberty in defense of his contention that State banking is preferable to mutual banking on the ground that "mutual banking cannot deprive capital of its power to bring unearned returns to its owner." Mr. Tucker proceeds to demolish that position:

Mr. Bilgram, if I understand him, prefers government banking to mutual banking, because with the former the rate of discount would simply cover risk, all banking expenses being paid out of the public treasury, while with the latter the rate of discount would cover both risk and banking expenses, which in his opinion would place the burden of banking expenses upon the borrowers instead of upon the people. The answer to this is simple and decisive: the burden of discount, no matter what elements, many or few, may constitute it, falls ultimately, under any system, not on the borrowers, but on the people. Broadly speaking, all the interest paid is paid by the people. Under mutual banking the expenses of the banks would, it is true, be paid directly by the borrowers, but the latter would recover this from the people in the prices placed upon their products. And it seems to me much more scientific that the people should thus pay these expenses through the borrowers in the regular channels of exchange than that they should follow the communistic method of paying them through the public treasury.

Mr. Bilgram's statement that money-lenders who, besides being compensated for risk, are compensated for their labor as bankers and for their incidental expenses "thereby obtain an income from the mere loan of money" is incomprehensible to me. He might just as well say that under government banking the officials who should receive salaries from the treasury for carrying on the business would thereby obtain an income from the mere loan of money. Under a free system the banker is as simply and truly paid only the normal wage of his labor as is the official under a government system.

But, since Mr. Bilgram does not propose to place any restriction upon private banking, I have no quarrel with him. He is welcome to his opinion that private banking could not compete with the governmental institution. I stoutly maintain the contrary, and the very existence of the financial prohibitions is the best evidence that I am right. That which can succeed by intrinsic merit never seeks a legal bolster.

Mr. Bilgram remained unconvinced that he was wrong in every respect, and still maintained that the cost of making the tokens should be defrayed by the government. To which Mr. Tucker replied that there are at least two answers:

The first is that that factor in the rate of interest which represents the cost of making tokens is so insignificant (probably less than one-tenth of one percent, guessing at it) that the people could well afford (if there were no alternative) to let a few individuals profit to that extent rather than suffer the enormous evils that result from transferring enterprise from private to government control. I am not so enamored of absolute equality that I would sacrifice both hands rather than one finger.

The second answer is that no private money-lenders could, under a free system, reap even the small profit referred to.

Mr. Bilgram speaks of those who lend money which they have acquired. Acquired how? Any money which they have acquired must have originated with issuers who paid the cost of making the tokens, and every time it has changed hands the burden of this cost has been transferred with it. Is it likely that men who acquire money by paying this cost will lend it to others without exacting this cost? If they should, they would be working for others for nothing, very different thing from "receiving pay for work they had not performed." No man can lend money unless he either issues it himself and pays the cost of making the tokens, or else buys or borrows it from others to whom he must pay that cost.

Along these same lines Mr. J. K. Ingalls contributed to Liberty an article, and incidentally asked the editor some questions; among others, whether, if mutual money is to be made redeemable in gold or silver, it involves the principle of a legal tender, or of a tender of "common consent" Mr. Tucker answers:

Yes, it does involve one of these, but between the two there is all the difference that there is between force and freedom, authority and liberty. And where the tender is one of "common consent," those who do not like it are at liberty to consent in common to use any other and better one that they can devise.

It is difficult for me to see any fraud in promising to pay a certain thing in a certain time, or on demand, and keeping the promise. That is what we do when we issue redeemable money and afterwards redeem it. The fraud in regard to money consists not in this, but in limiting by law the security for these promises to pay to a special kind of property, limited in quantity and easily monopolizable.

It is doubtful if there is anything more variable in its purchasing power than labor. The causes of this are partly natural, such as the changing conditions of production, and partly and principally artificial, such as the legal monopolies that impart fictitious values. But labor expended in certain directions is unquestionably more constant in its average results than when expended in other directions. Hence the advantage of using the commodities resulting from the former for the redemption of currency whenever redemption shall be demanded. Whether gold and silver are among these commodities is a question, not of principle, but of statistics. As a matter of fact, the holders of good redeemable money seldom ask for any other redemption than its acceptance in the market and its final cancellation by the issuer's restoration of the securities on which it was issued. But in case any other redemption is desired, it is necessary to adopt for the purpose some commodity easily transferable and most nearly invariable in value.

Does Mr. Ingalls mean that all money must be abolished? I can see no other inference from his position. For there are only two kinds of money - commodity money and credit money: The former he certainly does not believe in, the latter he thinks fraudulent and unsafe. Are we, then, to stop exchanging the products of our labor?

It is clearly the right of every man to gamble if he chooses to, and he has as good a right to make his bets on the rise and fall of grain prices as on anything else; only he must not gamble with loaded dice, or be allowed special privileges whereby he can control the price of grain. Hence, in a free and open market, these transactions where neither equivalent is transferred are legitimate enough. But they are unwise, because, apart from the winning or losing of the bet, there is no advantage to be gained from them. Transactions, on the other hand, in which only one equivalent is immediately transferred are frequently of the greatest advantage, as they enable men to get possession of tools which they immediately need, but cannot immediately pay for. Of course the promise to pay is liable to be more or less valuable at maturity than when issued, but so is the property originally transferred. The borrower is no more exempt than the lender from the variations in value. And the interests of the holder of property who neither borrows nor lends are also just as much affected by them. There is an element of chance in all property relations. So far as this is due to monopoly and privilege, we must do our best to abolish it; so far as it is natural and inevitable, we must get along with it as best we can, but not be frightened by it into discarding credit and money, the most potent instruments of association and civilization.

Liberty is published not so much to thoroughly inform its readers regarding the ideas which it advocates as to interest them to seek this thorough information through other channels. For instance, in regard to free money, there is a book- "Mutual Banking," by William B. Greene - which sets forth the evils of money monopoly and the blessings of gratuitous credit in a perfectly plain and convincing way to all who will take the pains to study and understand it. Liberty can only state baldly the principles which Greene advocates and hint at some of their results. Whomsoever such statements and hints serve to interest can and will secure the book of me for a small sum. Substantially the same views, presented in different ways, are to be found in the financial writings of Lysander Spooner, Stephen Pearl Andrews, Josiah Warren, and, above all, P. J. Proudhon, whose untranslated works contain untold treasures, which I hope some day to put within the reach of English readers.