Part 02, Chapter 10 : Apex or Basis

[Liberty, December 10, 1881.]

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Apex says that it is a barbarism to pay interest on money. That is another way of saying that a state of society in which wealth is not universalized is barbarous, since, in our present state of evolution, those who have no capital of their own will be glad to borrow from those who have, and to pay interest for the use of the capital.(62 ¶ 1)

For it is really capital that is borrowed, and not money, the latter being only the means for obtaining the former, as money would be worthless if it could not be exchanged for the capital needed. We see already that, as the loanable capital of a country increases, the rate of interest diminishes, and when the accumulated wealth of the world becomes large enough no one will pay interest.(62 ¶ 2)

But to denounce the payment of interest to-day, and (if it could be done) to forbid the man of ability, but lacking means, borrowing the capital he needs, or, in other words, using his credit, would not tend to universalize wealth and so destroy usury; but, on the other hand, it would discourage the production and accumulation of capital, since one of the principal incentives to that production is the use of capital to increase production and add to one’s wealth. It is obvious, that unless the use of capital added to the productiveness of labor, no one would wish to borrow, and no usury could be had. It should not be forgotten, in considering this question, that, in the last analysis, reducing things to their simplest, individualized form, the possessor of capital has acquired it by a willingness to work harder than his fellows and to sacrifice his love of spending all he produces that he may have the aid of capital to increase his power of production. For example, two men work side by side; one consumes all he produces, the other saves part of his product. In time the latter has saved enough to enable him to build or buy a tool by the aid of which he accomplishes four times as much work as before, and is able to go on adding to his accumulation. The one who has not saved, seeing the advantage of the use of capital, naturally desires to obtain the same benefit for himself; but, not liking to save and wait until he can create capital, he proposes to borrow a portion of the capital of the other. By means of this borrowed capital he can quadruple his product, and is very willing to give a part of his increased product to the neighbor who has befriended him. Would he not be a mean sneak if he were not glad to do so? By the use of the borrowed capital he is not only enabled to pay for the advantage gained, but, by his greater power to produce, he can, in a short time, buy his own tools and no longer be forced to borrow.(62 ¶ 3)

Although our present system of business is vastly complicated, and we sometimes seem to borrow money merely, the actual transaction being kept out of sight, yet the case supposed is the real basis of all just payment of interest. I believe there will be a state of society in which money will not be necessary, but that state cannot be built up by commencing at the top. We must build from the foundation, understanding things as they are as well as knowing how they ought to be.(62 ¶ 4)

The question is asked—and it is a very important one, and, simple as it is at bottom, a complex one as it stands—What is money? It would simplify this matter very much if all would agree to call coin, or money having value as merchandise, money, and paper, or representative money, currency, or notes. It is plain that the representative money is that which must be and is principally used in this country and in all commercial countries. Coin money derives its real value in exchange, and as a measure for the exchangeable value of other products, from the fact that it costs labor to produce it; and, although government laws may foolishly try to make it pass for more than its cost value, they never succeed in doing so. No government ever has succeeded in overriding natural law, though they may and often do obstruct the operations of Nature’s laws to the great detriment of Nature’s children.(62 ¶ 5)

The simplest form of representative money, or currency, is furnished by Josiah Warren’s labor note, which was substantially as follows (I quote from memory):(62 ¶ 6)

For value received, I promise to pay bearer, on demand, one hour’s labor, or ten pounds of corn.(62 ¶ 7)

Josiah Warren.

Modern Times, July 4, 1852.

So long as it was believed by his neighbors that the maker of such notes always had the corn on hand with which to redeem them (since their redemption in labor would rarely be practicable or desirable), they would pass current in that locality; and, in fact, such labor notes did pass to a limited extent at Modern Times. Interesting as that experiment was, and showing clearly, as it does, the principle at the basis of all good currency, it could not be extended so as to satisfy the needs of a great commercial country, or, safely, of a large neighborhood.(62 ¶ 8)

But a currency, to be good, must possess precisely the qualifications and qualities of that labor note, with the addition of a guarantee, universally recognizable, that the notes actually do represent solid wealth with which they will be redeemed on demand. Now, there is one thing, and only one, that government can rightfully or usefully do in the way of interference with the currency, the ebb and flow of which is governed by natural laws altogether out of the reach of State or national government; and that is to issue all the notes used for currency on such terms that it shall be universally known truly to represent actual, movable capital (not land, which is not property in the true sense, and which cannot be carried off by any one wishing a note redeemed), pledged for its redemption. There should be no monopoly, but any and every person complying with the terms should be furnished with the national note. Of course, no one who had not the requisite capital could procure these notes, and rightly so, because notes made by those who have no capital would swindle the people. And, as our government has no property or capital, except the necessary tools for carrying on the affairs oif the nation, and as government should have no debts and no gold and silver accumulated, it is obvious that it cannot properly make a good note beyond the amount which could be redeemed in payment of taxes. And, as taxes ought to be diminished and ultimately abolished, there is no valid basis for a government note to be used as currency. Neither will Mutual Banks answer any good purpose if the notes are based on land.(62 ¶ 9)

Basis.^[10]

The remarks that follow are not intended to debar Apex from answering his opponent in his own time and way, but simply to combat, from Liberty’s standpoint, such of the positions taken by Basis as seem to need refutation.(62 ¶ 10)

The first error into which Basis falls is his identification of money with capital. Representative money is not capital; it is only a title to capital. He who borrows a paper dollar from another simply borrows a title.^[11] Consequently he takes from the lender nothing which the lender wishes to use; unless, indeed, the lender desires to purchase capital with his dollar, in which case he will not lend it, or, if he does, will charge for the sacrifice of his opportunity,—a very different thing from usury, which is payment, not for the lender’s sacrifice, but for the borrower’s use; that is, not for a burden borne, but for a benefit conferred. Neither does the borrower of the dollar take from the person of whom he purchases capital with it anything which that person desires to use; for, in ordinary commerce, the seller is either a manufacturer or a dealer, who produces or buys his stock for no other purpose than to sell it. And thence this dollar goes on transferring products for which the holders thereof have no use, until it reaches its issuer and final redeemer and is canceled, depriving, in the course of its journey, no person of any opportunity, but, on the contrary, serving the needs of all through whose hands it passes. Hence borrowing a title to capital is a very different thing from borrowing capital itself. But under the system of organized credit contemplated by Apex no capable and deserving person would borrow even a title to capital. The so-called borrower would simply so change the face of his own title as to make it recognizable by the world at large, and at no other expense than the mere cost of the alteration. That is to say, the man having capital or good credit, who, under the system advocated by Apex, should go to a credit-shop—in other words, a bank—and procure a certain amount of its notes by the ordinary process of mortgaging property or getting endorsed commercial credit discounted, would only exchange his own personal credit—known only to his immediate friends and neighbors and the bank, and therefore useless in transactions with any other parties—for the bank’s credit, known and receivable for products delivered throughout the State, or the nation, or perhaps the world. And for this convenience the bank would charge him only the labor-cost of its service in effecting the exchange of credits, instead of the ruinous rates of discount by which, under the present system of monopoly, privileged banks tax the producers of unprivileged property out of house and home. So that Apex really would have no borrowing at all, except in certain individual cases not worth considering; and, therefore, when Basis, answering Apex, says that it is really capital that is borrowed, and not money, he makes a remark for which there is no audible call.(62 ¶ 11)

The second error committed by Basis he commits in common with the economists in assuming that an increase of capital decreases the rate of interest and that nothing else can materially decrease it. The facts are just the contrary. The rate of interest may, and often does, decrease when the amount of capital has not increased; the amount of capital may increase without decreasing the rate of interest, which may in fact increase at the same time; and so far from the universalization of wealth being the sole means of abolishing interest, the abolition of interest is the sine qua non of the universalization of wealth.(62 ¶ 12)

Suppose, for instance, that the banking business of a nation is conducted by a system of banks chartered and regulated by the government, these banks issuing paper money based on specie, dollar for dollar. If now a certain number of these banks, by combining to buy up the national legislature, should secure the exclusive privilege of issuing two paper dollars for each specie dollar in their vaults, could they not afford to, and would they not in fact, materially reduce their rate of discount? Would not the competing banks be forced to reduce their rate in consequence? And would not this reduction lower the rate of interest throughout the nation? Undoubtedly; and yet the amount of capital in the country remains the same as before.(62 ¶ 13)

Suppose, further, that during the following year, in consequence of the stimulus given to business and production by this decrease in the rate of interest and also because of unusually favorable natural conditions, a great increase of wealth occurs. If then the banks of the nation, holding from the government a monopoly of the power to issue money, should combine to contract the volume of the currency, could they not, and would they not, raise the rate of interest thereby? Undoubtedly; and yet the amount of capital in the country is greater than it ever was before.(62 ¶ 14)

But suppose, on the other hand, that all these banks, chartered and regulated by the government and issuing money dollar for dollar, had finally been allowed to issue paper beyond their capital based on the credit and guaranteed capital of their customers; that their circulation, thus doubly secured, had become so popular that people preferred to pay their debts in coin instead of bank-notes, thus causing coin to flow into the vaults of the banks and add to their reserve; that this addition had enabled them to add further to their circulation, until, by a continuation of the process, it at last amounted to eight times their original capital; that by levying a high rate of interest on this they had bled the people nigh unto death; that then the government had stepped in and said to the banks: When you began, you received an annual interest of six percent on your capital; you now receive nearly that rate on a circulation eight times your capital based really on the people’s credit; therefore at one-eighth of the original rate your annual profit would be as great as formerly; henceforth your rate of discount must not exceed three-fourths of one percent. Had all this happened (and with the exception of the last condition of the hypothesis similar cases have frequently happened), what would have been the result? Proudhon shall answer for us. In the eighth letter of his immortal discussion with Bastiat on the question of interest he exhausts the whole subject of the relation of interest to capital; and Basis cannot do better than to read the whole of it. A brief extract, however, must suffice here. He is speaking of the Bank of France, which at that time (1849) was actually in almost the same situation as that described above. Supposing, as we have just done after him, a reduction of the rate of discount to three-fourths of one percent, he then asks, as we do, what the result would be. These are his words in answer to Bastiat, the Basis of that discussion:(62 ¶ 15)

The fortune and destiny of the country are to-day in the hands of the Bank of France. If it would relieve industry and commerce by a decrease of its rate of discount proportional to the increase of its reserve; in other words, if it would reduce the price of its credit to three-fourths of one percent, which it must do in order to quit stealing,—this reduction would instantly produce, throughout the Republic and all Europe, incalculable results. They could not be enumerated in a volume: I will confine myself to the indications of a few.(62 ¶ 16)

If, then, the credit of the Bank of France should be loaned at three-fourths of one percent instead of at four percent, ordinary bankers, notaries, capitalists, and even the stockholders of the bank itself, would be immediately compelled by competition to reduce their interest, discount, and dividends to at least one percent, including incidental expenses and brokerage. What harm, think you, would this reduction do to borrowers on personal credit, or to commerce and industry, who are forced to pay, by reason of this fact alone, an annual tax of at least two thousand millions?(62 ¶ 17)

If financial circulation could be effected at a rate of discount representing only the cost of administration, drafting, registration, etc., the interest charged on purchases and sales on credit would fall in its turn from six percent to zero, — that is to say, business would then be transacted on a cash basis: there would be no more debts. Again, to how great a degree, think you, would that diminish the shameful number of suspensions, failures, and bankruptcies?(62 ¶ 18)

But, as in society net product is undistinguishable from raw product, so in the light of the sum total of economic facts capital is undistinguishable from product. These two terms do not, in reality, stand for two distinct things; they designate relations only. Product is capital; capital is product; there is a difference between them only in private economy; none whatever in public economy. If, then, interest, after having fallen in the case of money to three-fourths of one percent,—that is, to zero, inasmuch as three-fourths of one percent represents only the service of the bank,—should fall to zero in the case of merchandise also, by analogy of principles and facts it would soon fall to zero in the case of real estate: rent would disappear in becoming one with liquidation. Do you think, sir, that that would prevent people from living in houses and cultivating land?(62 ¶ 19)

If, thanks to this radical reform in the machinery of circulation, labor was compelled to pay to capital only as much interest as would be a just reward for the service rendered by the capitalist, specie and real estate being deprived of their reproductive properties and valued only as products,—as things that can be consumed and replaced,—the favor with which specie and capital are now looked upon would be wholly transferred to products; each individual, instead of restricting his consumption, would strive only to increase it. Whereas, at present, thanks to the restriction laid upon consumable products by interest, the means of consumption are always very much limited, then, on the contrary, production would be insufficient: labor would then be secure in fact as well as in right.(62 ¶ 20)

The laboring class gaining at one stroke the five thousand millions, or thereabouts, now taken in the form of interest from the ten thousand which it produces, plus five thousand millions which this same interest deprives it of by destroying the demand for labor, plus five thousand millions which the parasites, cut off from a living, would then be compelled to produce, the national production would be doubled and the welfare of the laborer increased fourfold. And you, sir, whom the worship of interest does not prevent from lifting your thoughts to another world,—what say you to this improvement of affairs here below? Do you see now that it is not the multiplication of capital which decreases interest, but on the contrary, that the decrease of interest multiplies capital?(62 ¶ 21)

Now, this reduction of the rate of discount to the bank’s service, and the results therefrom as above described, are precisely what would happen if the whole business of banking should be thrown open to free competition. It behooves Basis to examine this argument well; for, unless he can find a fatal flaw in it, he must stand convicted, in saying that when the accumulated wealth of the world becomes large enough, no one will pay interest, of putting the cart before the horse.(62 ¶ 22)

Basis is in error a third time in assuming that Apex wishes to forbid the man of ability, but lacking means, using his credit It is precisely because such men are now virtually prohibited from using their credit that Apex, and Liberty with him, complains. This singular misconception on the part of Basis indicates that he does not yet understand what he is fighting.(62 ¶ 23)

The fourth error for which Basis assumes responsibility is found in his statement that in the last analysis the possessor of capital has acquired it by a willingness to work harder than his fellows and to sacrifice his love of spending all he produces that he may have the aid of capital to increase his power of production. A man who thoroughly means to tell the truth here reiterates one of the most devilish of the many infernal lies for which the economists have to answer. It is indeed true that the possessor of capital may, in rare cases, have acquired it by the method stated, though even then be could not be excused for making the capital so acquired a leech upon his fellow-men. But ninety-nine times in a hundred the modern possessor of any huge amount of capital has acquired it, not by a willingness to work harder than his fellows, but by a shrewdness in getting possession of a monopoly which makes it needless for him to do any real work at all; not by a willingness to sacrifice his love of spending all he produces, but by a cleverness in procuring from the government a privilege by which he is able to spend in wanton luxury half of what a large number of other men produce. The chief privilege to which we refer is that of selling the people’s credit for a price.(62 ¶ 24)

Basis is guilty of several other errors which we have not space to discuss at length. He supposes that to confine the term money to coin and to call all other money currency would simplify matters, when in reality it is the insistence upon this false distinction that is the prevailing cause of mystification. If the idea of the royalty of gold and silver could be once knocked out of the people’s heads, and they could once understand that no particular kind of merchandise is created by nature for monetary purposes, they would settle this question in a trice. Some persons seem to think that Josiah Warren based his notes on corn. Nothing of the kind. Warren simply took corn as his standard, but made labor and all its products his basis. His labor notes were rarely redeemed in corn. If he had made corn his exclusive basis, there would be no distinction in principle between him and the specie men. Perhaps the central point in his monetary theory was his denial of the idea that any one product of labor can properly be made the only basis of money. To quote him in this connection at all is the height of presumption on the part of Basis. A charge that his system, which recognized cost as the only ground of price, even contemplated a promise to pay anything for value received, he would deem the climax of insult to his memory. Basis, in donning the garments of Josiah Warren to defend the specie fraud, has stolen the livery of heaven to serve the devil in. Basis is wrong, too, in thinking that land is not a good basis for currency. True, unimproved vacant land, not having properly a market value, cannot properly give value to anything that represents it; but permanent improvements on land, which should have a market value and carry with them a title to possession, are an excellent basis for currency. It is not the raw material of any product that fits it for a basis, but the labor that has been expended in shaping the material. As for the immovability of land unfitting it for a basis, it has just the opposite effect. Here Basis is misled by the idea that currency can be redeemed only in that on which it is based.(62 ¶ 25)

But this fertile subject has taken us farther than we intended to follow it. So here, for the present, we will quit its company, meanwhile handing over Basis to the tender mercies of Apex, and heartily endorsing almost all that Basis says at the close of his article concerning the true duty of government, as long as it shall exist, regarding the currency.(62 ¶ 26)

62 n. 1. It is interesting to note that Basis, abandoning later the theory of interest maintained by him in the above article, took the initiative in the formation of a society for the abolition of interest, and now considers such abolition essential to the solution of the social problem. ↩

item d5674210. Nevertheless, to everybody but the issuer, representative money is capital to all intents and purposes, because it will procure capital. But to the issuer it is not capital, because he issues it against security belonging not to himself but to the borrower, would not be able to issue it were it not for such security, and therefore parts with nothing in issuing it. Now the idea that money is capital does not sustain the position of Basis, unless it be taken to mean that money is capital to the issuer. ↩