Chapter 7 : Mutual Credit

VII. Mutual Credit

After this review of the inequalities and striking injustice of the money monopoly, and that free banking in social evolution logically follows from the lines of least resistance under wider freedom, we will proceed to inquire in what manner the organization of personal credit would serve a social function and further the realization of the industrial type. For only as liberty fails to meet the requirements of progress will this or that authoritarian regulating scheme of credit and exchange receive justification. Can free competition be introduced into domestic exchanges and the conditions of production? or must the application of free trade be confined to the manufactured product and distribution? In other words, can the medium of exchange be republicanized without injury to any, or destroying all relations of value? The Anarchist unhesitatingly answers in the affirmative, and in opposition to land nationalizers asserts that in the restrictions placed around exchange lies [sic] obstacles to industrial progress more far-reaching and of deeper importance than even monopoly of land.

To individual credit the objection will arise that it would be limited in scope, from the very nature of the notes, to local needs, or would be more worthless at a distance than the old state-bank notes. But any argument on social relations under absence of compulsory regulation carries with it the recognition of associative action where needed. Spencer is unquestionably right in concluding that “as in the militant type the demand for corporate action is intrinsic, such dead for corporate action as continues in the industrial type is mainly extrinsic – is called for by those aggressive traits of human nature which chronic warfare has fostered, and may gradually diminish as, under enduring peaceful life, these decrease.”{35} But while it remains true that the industrial type will develop the highest individuality and in a large measure substitute individual initiative and responsibility for corporate combinations, still a large field will be left in which cooperation without sacrifice of individuality will be in strict harmony with industrial ideals. What men have done under trammels they will be none the less able to do in the absence of interference. When the interest of all are [sic] led to co-operate where individual initiative is deemed insufficient (a condition more liable to decrease than to increase), rather than made to combine, demand will produce supply. We have evidence of this on every hand in vast national organizations, voluntarily uniting to carry out or achieve some common purpose. Among the many which could be named the farmers alone furnish us with an illustration wherein economic ends are sought in reducing the role of the middle man to a minimum. Why can they not extend the principle to the organization of mutual credit among themselves and thus eliminate both interest and profits and realize progress without poverty? {36} Insurance not being a governmental function, association naturally arises for that purpose, and as the taxation is direct and voluntarily met, and free competition tends to bring it down to the mean of cost, the end is reached easier and cheaper than giving it into the hands of the State where these limitations on expense would not exist. Will the farmers grasp the idea and realize it? Their organizations may afford both indemnity and security for life, for wealth earned, for various enterprises involving risk and great expense, but a common medium of exchange is tabooed! It is not impossible to conceive of the development of the industrial type to that degree where a man may be a member of as many “States” simultaneously as the several functions they discharge attract him.

But liberty, the equality of opportunities involved in emancipation, need not be solely dependent on such associations as now exist to work out a natural and effective method. Existing social mechanism need not fail altogether simply because deprived of certain privileges now conferred. The first question to arise in the mind of the banker on finding money monopoly removed would naturally be: “How can I best adapt myself to the changed conditons?” However onerous may be the burdens entailed by the banking system, still it is indisputable that the banker does exercise a social function. The necessity of a bank to extend credit and that of its privileges are widely distinct propositions. Nor would it be to mutual interests upon the removal of the privileges he had heretofore enjoyed that his ability to still discharge indispensable social functions should be ignored. Nor would this need follow. Liberty cannot imply restriction nor election, but self-election by ability and fitness to perform. Thus, under equal opportunities the field would be open to him.

There would be as urgent need for method as under authority, and the same test, fitness, would far more readily determine a man’s success than now for such functions. Administration is never invented de novo and the methods now in vogue adapted to the changed conditions would answer all the purposes of the social environment. The incorporation, however, of such functions in the program of one of our great associative bodies, like the Patrons of Industry, is feasible, and, and their numbers being sufficiently large to cover the various industries, exchange could be readily effected and their mutual acceptance of bills of exchange, the central executive board acting as a clearing house, both eliminate interest and profits and give an impetus to production by heightening consumptive capacity.

Economic readers will remember where Amasa Walker {37} describes the method by which foreign exchanges are effected without the disbursement of money save to pay balance; and that this logically resulted from the absence of international authoritative interference. Extension of distribution ever tends as commerce becomes more developed to simplification of methods and to individual responsibility, as far as governmental noninterference permits. Let us see how the same mutual arrangements might be effected in domestic transactions. Col. William B. Greene,{38} in his little work on “Mutual Banking” has given such a method, based upon Proudhon’s more elaborate “Organization of Credit” in explanation of the “People’s Bank of Exchange.” To Proudhon must be ascribed the merit of first generalizing the bill of exchange to relieve commerce from the monopoly legislation had fastened upon it. In Col. Greene’s sketch we have the following plan for a mutual bank:

“1. Any person, by pledging actual property to the bank, may become a member of the Mutual Banking Company.

“2. Any member may borrow the paper money of the bank, on his own note running to maturity (without endorsement), to an amount not to exceed one-half of the value of the property by himself pledged.

“3. Each member binds himself, on admission, to receive in all payments, from whomsoever it may be, and at par, the paper of the mutual bank.

“4. The rate of interest at which said money shall be loaned shall be determined by, and shall, if possible just meet and cover the bare expenses of the institution. As for interest in the common acceptation of the word. its rate shall be at the Mutual Bank precisely 0.

“5. No money shall be loaned to any persons who are not members of the company; that is, no money shall be loaned, except on a pledge of actual property.

“6. Any member on paying his debts to the bank, may have his property released from all obligations to the bank, or to the holders of the bank's money, as such.

“7. As for the bank, it shall never redeem any of its notes in specie; nor shall it ever receive specie in payments, or the bills of specie paying banks except at a discount of one-half of one per cent.

“Ships and houses that are insured, machinery, in short, anything that may be sold under the hammer, may be made a basis for the issue of mutual money. Mutual banking opens the way to no monopoly, for it simply elevates every species of property to the rank which has hitherto been exclusively occupied by gold and silver.”

This is a plan for voluntary cooperation of individuals in a community, who, by a pledge of the result of past labor, receive therefor bills in the form of divisible receipts to augment the result of present labor, which among all members serve as a medium of exchange. By the continuance of the clearing house, by social needs rendered a functional necessity, these bills would be interchanged and redeemable only in merchandise and services. Currency, or domestic bills of exchange, in being redeemable in the product of labor would establish labor as the standard and measure of value, and as redemption would be cancellation the desire could not give rise to a panic.

But the “practical man,” caring nothing for equitable principles, may here charge that this may be a very fine millennial dream, but impracticable here and now. Let us see. Leaving for the moment abstract principles let us attempt a concrete application.

The last resort of the Illinois Bureau of Labor Statistics gives tables of mortgage indebtedness calculated to awaken serious thought. The question of most practical importance to all mortgages is how their indebtedness can best be liquidated, and at the same time their capital for productive purposes increased. By dint of parsimony many a farmer has been enabled to extricate himself from the slough of debt, but even then his ability to capitalize wealth for new ventures remained “the substance of things hoped for.” {39} Parsimony never increases wealth. Ability to possess land, the source of all production, no matter under what kind of tenure it is held, will only increase the wealth of the producer as ability to use is joined with possession.

Man’s productive power is practically unlimited, but great and serious checks exist upon his consumptive capacity. To increase this is to highten [sic] demand, raise the standard of comfort, and with this ability to capitalize wealth, and hence, an indefinite increase of productive power. Productive power is only limited by demand, and whatever limits this necessarily contracts production and fetters the producers. Mortgage indebtedness is such a fetter or clog upon the farmer, inasmuch as it not only diverts a large portion of wealth in distribution, but also acts directly in limiting production to consumptive capacity based on enforced parsimony. These are incontrovertible economic facts irrespective of all financial systems, and the query arises, is there not in mutual banking an escape from these conditions without resorting to the questionable process of trusting a politician in power to keep the promises he made to attain it?

First, let us see what the conditions are as shown in the Bureau report. Taking only the mortgages on lands, of one acre or more, and eliminating those on lots and chattels, we find that there are recorded 99,777 mortgages, amounting to $147,320,054, and covering 8,082,794 acres. This is subdivided in loans and deferred payments; the former showing absolute need for money, the latter possession of money to invest and a legitimate expectation of more. For loans the indebtedness covers 7,050,799 acres, while those for deferred payments are only 1,031,995 acres. Compared to the whole acreage the percentage of acres mortgaged is 23.38; the average present incumbrance per acre on lands actually mortgaged $18.23. Compared with the census aggregate of value of farm lands in 1880, this is equivalent to 14.1 per cent. The tables also show that from 1870 to 1880 the increase in mortgages was over 21 per cent, while from 1880 to 1887 it was over 23 per cent.

If we consider chattel mortgages, the incumbrance of life stock, farm implements, growing and garnered crops, embrace nearly 45 per cent of the entire amount.

These tables show both increasing indebtedness, and a wider diffusion to population. The disease arising from legislative action, and all attempts at political remedy having proven unavailing, it by no means follows that other agencies cannot furnish the remedy. In fact, there is a deep and wide spread conviction that the evil being an economic one, remedy does not lie in political treatment. Happily, the signs of the times indicate that remedial virtue has passed from government, and is to be found in association; not in political compulsion, but in voluntary cooperation. The possibility of organization among agricultural producers is no longer questionable. Various organizations all over the land show that the farmers are learning the power of organization, and the possibility of attaining results heretofore scouted by those economists who regard the relation of demand and supply, within the restrictions of privileged legislation, as one of “unalterable law.”

The need of exchange in our complicated social organism demands method and administrative direction, but the assumption of authoritative regulation, in which is involved the denial of competition, is as unwarranted in exchange as it would be if claimed for insurance. How then can farmers’ organizations not merely pool their credit, which we already see done, but also organize their credit so as to capitalize wealth at minimum cost, thereby giving a spring to productive industry, which would both free them from the incubus of indebtedness, and increase demand for supply? Whether the organization be called Patrons, Alliance, Wheel, or Grange, it lies in the power of each and all to mutually organize credit. One of these organizations now number [sic] over 100,000 members in a single State, Michigan, and are reported to be increasing over 1,200 per month.

The Executive Committee of the State organization can direct the organization of credit on the mutual plan I have outlined by issuing divisible receipts for ample security pledged. Under their direct administration, acting through each subordinate local, the members can agree to mutually receive and interchange these mutual tokens of credit, or bills of exchange. For instance, any member having labor product saved in the nature of buildings, machinery, or nonperishable products, by offering these as security for advanced capital would receive in return divisible receipts for the sum desired, in which cost would regulate price or expense. These bills of exchange being amply secured, and being received at par by all fellow members, would among themselves afford a medium of exchange from which interest (and its sequence, profits) would be eliminated. With such bills of exchange “republicanized,” they would interchange from hand to hand.

In thus capitalizing his wealth earned the farmer could give a greater impetus to production, and when he desired to effect redemption by exchange of products, redemption would be cancellation. To deny this is to deny the productive power of capital. Every divisible receipt being amply secured by wealth pledged, and redemption being cancellation proceeding from capital advanced by such organization of mutual credit the only inflation that could ensue would be that of wealth; and the only one probably desiring redemption would be the one who contracted the loan, when the capital advanced had produced sufficient surplus wealth to enable him to seek its liquidation.

This plan, it will be seen, preserves the full individual liberty of the member seeking credit upon what may be determined to be sufficient security, and is but an extension of the industrial idea of equal freedom, and voluntary cooperation, to the functional necessity for rendering exchange free and equitable, and thus giving production an indefinite impulse never yet obtainable. One such organization, having thus shown the social advantage of such friendly interchange of fully secured credit, in abolishing both interest and profits, cost would necessarily become the mean of price. Other organizations would quickly follow the example. The State or National board at first acting as a clearing house for adjustment of balances between their own locals could easily extend the scope of administration to a mutual understanding with kindred or any other organization.

But will the government not tax it out of existence in the interest of bond-holding lords? The question is secondary to its economic equity and an organization extending to every county in a State, and offering such inducements to all honest toilers, would at once be in a position to meet such an attempted invasion of equal rights by politicians as to not render the result doubtful. The path to the capitalization of all wealth lies before the farmer here and now, and the adoption of such a course is in no wise tainted with the socialistic paternalism of George’s or Bellamy’s schemes of authoritarian direction. Is this utopian when applied to exchange, and sound business when daily exercised in countless other relations not under governmental direction?

Here I might pause, but for sake of greater clearness let us listen to the master. Proudhon says:

“Is this a paper currency?

“I answer unhesitatingly, no: it is neither paper money, nor money of paper; it is neither government checks, nor even bank bills; it is not of the nature of any thing that has been hitherto invented to make up for the scarcity of specie. It is the bill of exchange generalized.

“The essence of the bill of exchange is constituted, 1. by its being drawn from one place on another; 2. by its representing a real value equal to the sum it expresses; 3. by the promise or obligation on the part of the drawee to pay it when it falls due.

“In three words, that which constitutes the bill of exchange is exchange, provision, acceptance.

“As to the date of issue, or of falling due; as to the designation of the places, persons, objects, – these are particular circumstances which do not relate to the essence of the title, but which serve merely to give it a determinate, personal, and local actuality.

“Now, what is the bank paper I propose to create?

“It is the bill of exchange stripped of the circumstantial qualities of date, place, person, object, term of maturity, and reduced to its essential qualities – exchange, acceptance, provision.

“It is, to explain myself still more clearly, the bill of exchange, payable at sight and forever, drawn from every place in France, upon every other place in France, formed by 100,000 drawers, guaranteed by 100,000 indorsers, accepted by 100,000 subscribers.

“I say, therefore, that such a title unites every condition of solidity and security, and that it is susceptible of no depreciation.

“It is eminently solid, since, on one side it represents the ordinary, local, personal, actual paper of exchange, determined in its object, and representing a real value, a service rendered, merchandise delivered, or whose delivery is guaranteed and certain; while, on the other side, it is guaranteed by the contract, in solido, of 100,000 exchangers, who, by their mass, their independence, and at the same time by the unity and connection of their operation offer millions of millions of probability of payment against one of nonpayment. Gold is a thousand times less sure.

“In fact, if in the ordinary conditions of commerce we may say that a bill of exchange made by a known merchant offers two chances of payment against one of nonpayment, the same bill of exchange if it is endorsed by another known merchant will offer four chances of payment against one. If it is endorsed by three, four or a greater number of merchants equally well known, there will be eight, sixteen, thirty-two, etc. to wager against one that three, four, five, etc. known merchants will not pay at the same time,{40} since the favorable chances increase in geometrical proportion with the number of indorsers. What, then, ought to be the certainty of a bill of exchange made by 100,000 well-known subscribers who are all of them interested to promote its circulation?

“I add that this title is susceptible of no depreciation. The reason for this is, first, in the perfect validity of a mass of 100,000 signers. But there exists another reason, more direct, and, if possible, more reassuring: it is that the issues of the new paper can never be exaggerated like those of ordinary bank bills, treasury notes, paper money, assignats, etc.; for the issues take place against good commercial paper only, and in the regular necessarily limited and proportionate process of discounting.

“In the combination I propose, the paper, (at once sign of credit and instrument of circulation) grows out of the best business paper, which itself represents products delivered, and by no means merchandise unsold: This paper, I affirm, can never be refused in payment, since it is submitted {41} beforehand by the mass of producers.

“This paper offers so much the more security and convenience, inasmuch as it may be tried on a small scale, and with as few persons as you see fit, and that without the least violence, without the least peril.

“Suppose the Bank of Exchange to start at first on a basis of 1,000 subscribers instead of 100,000: the amount of paper it would issue would be in proportion to the business of these 1,000 subscribers, and negotiable only among themselves. Afterwards, according as other persons should adhere to the bank, the proportion of bills would be as 5,000, 10,000, 50,000, etc.; and their circulation would grow with the number of subscribers, as a money peculiar to them. Then when the whole of France should have adhered to the statutes of the new bank, the issue of paper would be equal, at every instant, to the totality of circulating values.” {42}