Part 02, Chapter 43 : Free Money and the Cost Principle

[Liberty, December 1, 1888.]

To the Editor of Liberty:(94 ¶ 1)

I understand that the monopoly of money should be broken, and this would leave all persons who possessed property free to issue solvent notes thereon, the competition between them so reducing the rate of interest that it would enable would-be business people to borrow on advantageous terms. Now, to my mind this would do no good unless the new order of benefited business persons adopted the Cost principle in production and distribution, in order to break down the present bad arrangements in society that is composed of workers on the one side and idlers and unproductive or useless persons on the other side.(94 ¶ 2)

If the cost principle was not in view, the result to my mind of plentiful money would only lead to a short briskness of trade and a speedy breakdown,—much speedier than now.(94 ¶ 3)

Neither do I think (in the absence of applying the cost principle) that competition among bankers would bring the issue down to cost through the sheer force of competition, because people would cease to go into the banking business if it did not yield the normal rate of interest on capital.(94 ¶ 4)

In conclusion, I must say I believe in the Cost principle, and yet as an Anarchist there seems something arbitrary in it. It is the reconciliation of Cost and competition that my mind cannot yet grasp.(94 ¶ 5)

Yours faithfully,

Frank A. Matthews.

The Cost principle cannot fail to seem arbitrary to one who does not see that it can only be realized through economic processes that go into operation the moment liberty is allowed in finance. To see this it is necessary to understand the principles of mutual banking, which Mr. Matthews has not attentively studied. If he had, he would know that the establishment of a mutual bank does not require the investment of capital, inasmuch as the customers of the bank furnish all the capital upon which the bank’s notes are based, and that therefore the rate of discount charged by the bank for the service of exchanging its notes for those of its customers is governed by the bank’s rate of discount, for capitalists will not be able to lend their capital at interest when people can get money at the bank without interest with which to buy capital outright. It is this effect of free and mutual banking upon the rate of interest on capital that insures, or rather constitutes, the realization of the Cost principle by economic processes. For the moment interest and rent are eliminated as elements of price, and brisk competition is assured by the ease of capital, profits fall to the level of the manufacturer’s or merchant’s proper wage. It is well, as Mr. Matthews says, to have the Cost principle in view; for it is doubtless true that the ease with which society travels the path of progress is largely governed by the clearness with which it foresees it. But, foresight or no foresight, it gets there just the same. The only foresight absolutely necessary to progress is foresight of the fact that liberty is its single essential condition.(94 ¶ 6)