5. HOW FREE-MONEY WILL BE JUDGED

C. The Exporter

The gold standard was introduced on the plea that it would facilitate international trade. No sooner, however, had the introduction of the gold standard, in conformity with the quantity theory of money, resulted in a sharp general fall of prices than a great clamour was raised for protection. Barriers in the shape of protective tariffs were then erected in order to hamper trade with foreign countries. Is not that sacrificing the end to the means ?

But granted that the gold standard could have been introduced without a depression of prices, without an economic disturbance, it would still have been little help to foreign trade. It is indeed sometimes asserted that the increase of our foreign trade since the establishment of the gold standard has been caused by it. But foreign trade increased because the population increased, and it did not even increase proportionately to the increase of the population. Besides this, the increase occurred especially in the trade with countries which had a paper currency (Russia, Austria, Asia, South-America), whereas the trade with the countries on the gold standard (France, North America) developed slowly. (England being a transit country cannot here be used as an illustration).

The gold standard would have some justification if it could be universally adopted without protective tariffs, without economic disturbances and without sudden fluctuations of prices. To lead the way in this would be a reasonable policy for a State which had the power to force the gold standard upon all the other States. But as no State has this power, and as we can only hope that other States will follow our lead, why not lead the way towards an international paper standard ? The German who buys his goods with gold while he is forced to sell them for paper roubles, paper gulden, paper pesetas, paper liras, paper pesos, paper reis and so on, is surely no better off than if he also bought his goods for paper marks. If the selling price has to be calculated in a currency different from that of the purchase price, it does not matter whether the purchase is made in a paper, or a silver, or a gold currency.

But even if the gold standard were universally adopted for international trade, its advantages are small. It was thought that the gold standard would facilitate commercial calculations, that it would suffice to name a sum of money for anyone to know its full significance for every country. But this is an illusion! In the first place the gold standard does not obviate fluctuations in the rates of exchange. Gold imports and gold exports alternate in every country. The quantities may be trifling enough, but they suffice to bring about considerable fluctuations in the rates of exchange. The rate of exchange fluctuates between the cost of import and export of gold, which may amount to as much as 3% in freight, insurance, loss of interest and minor expenses. And in addition to this there is the cost of re-coinage. For, as Bamberger rightly remarks, a journey abroad means for gold a journey to the melting-pot. Such expenses must be considered even in small transactions. But if a merchant is forced to take into account the fluctuating rates of exchange, what is the advantage of the gold standard for his calculations ?

The other supposed advantage of a universal gold standard is even more deceptive. The significance of a sum of money in a country can be understood only when commodity-prices, wage-rates, and so forth in that country are known. If, for instance, I inherit debts, I shall not remain in Germany but go where money is easiest to earn. If I emigrate, the amount of the debt is not decreased, but my power of paying it increases. A man with a debt of $1000 is a poor devil in Germany, whereas in America this debt is a trifle. The reverse is true when instead of a debt I inherit a fortune. In this case what use is the gold standard ? Or take another instance, an emigrant is promised a large amount of gold but at once inquires about the prices of the commodities produced and consumed by him. Not until he knows these prices can he form a conception of the sum of money named. From gold his thoughts immediately fly to the prices of commodities; these, not the gold, are the foundation he can build upon. But if, in order to estimate the meaning of a sum of money, it is first necessary to know the prices of commodities, it surely makes no difference whether the sum of money is stated in gold or in paper. And as a matter of fact nobody knows even approximately the meaning of a given sum of money, no matter whether the money is a gold dollar or a paper rouble.

But in practice all this is of very little importance to the merchant. What are all these small arithmetical problems compared to the thousand imponderable factors on which the merchant's theory of probabilities is based ? The estimate of the demand for a commodity, the determination of its quality, its chances in competition with a hundred other commodities, changes of fashion, the likelihood of new import-duties, the rate of profit that this or that kind of commodity may be expected to yield - these are the things that the merchant must take into account. The conversion of prices from one currency into another is a job for the office boy.

Far more important than the currencies of the different countries with which a merchant is doing business are the protective tariffs and their alterations. To protect the gold standard, many countries have broken away from free-trade. But an exporter would prefer any kind of currency, even the cowry-shell currency of Central Africa, and free-trade, to a gold currency coupled with protective-duties. And there is no denying the fact that wherever the gold standard has appeared, protection has followed.

In international commerce, goods are paid for with goods, and if a deficit occurs it can only to a very limited extent be paid in currency. Prolongation of credit, bills of exchange, loans and transfers of securities are here employed. For the balance of payments the policy of the Banks of Issue is far more important than the existence of a form of money suitable for export. Here, as elsewhere, prevention is better than cure. The Bank of Issue must learn to consider a fall in the rate of exchange as a sign that it is issuing too much money and thus raising prices, hindering export, and encouraging import. In this case it must promptly work for a reduction of prices by limiting the supply of money. And in the opposite case it must increase the supply of money. If it proceeds in this manner payments must always tend to cancel each other, leaving no balance to be paid by the export of money. It is therefore, to say the least, unnecessary to provide a national currency that can be exported. Indeed the export and import of the national currency can become a grave danger to a country. If the currency can be exported, the Bank of Issue loses the monopoly of the money supply and the home market becomes exposed to the control of foreign, often hostile, influences. French money invested in German banks was, for example, withdrawn during the Moroccan crisis with the purpose of injuring Germany, a purpose which was attained. Every blunder in currency control abroad reacts on the currency at home and cannot be counteracted - except by tariffs. When foreign countries introduce a paper currency and thus drive out gold, this gold seeks employment elsewhere and comes pouring into our country, forcing up prices, perhaps at a time when they are already too high. And when foreign countries substitute the gold standard for a silver or paper currency, gold flows away from our country, not infrequently at a time when there is already a shortage of it. Such blunders in the management of the currency have again and again brought our debt-ridden German farmers into difficulties.

All this was proved theoretically long ago (* Gesell: Anpassung des Geldes an die Bedürfnisse des modemen Verkehrs, Buenos-Aires, 1897. Frankfurth and Gesell: Aktive Währungspolitik, Berlin, 1909.) but has been demonstrated in practice only since the introduction of Free-Money. For we have now a form of paper-money completely detached from gold. With Free-Money there is not even the promise of redemption in gold, but nevertheless the rate of exchange with foreign countries is more stable than before. At first the National Currency Office concentrated all its efforts on the stabilisation of the general level of prices. The effect was, that while prices remained stable, the foreign exchanges fluctuated. The reason of this was that prices in other countries, where the gold standard remained in force, fluctuated in the usual fashion. The other countries refused however to admit this explanation, maintaining that our paper money was to blame. Our Currency Office then decided to prove that the fluctuations were due to gold, and gave up the policy of stabilising home prices, in order to stabilise the rate of exchange. When the rate of exchange of the mark rose, it increased the stock of money, and when the rate fell, it withdrew money. And since with Free-Money the stock of money is the demand for goods, the effect on the prices of goods, as well as on the foreign exchanges, was exactly as foreseen by the Currency Office: the exchanges were stabilised and prices fluctuated. Thus we demonstrated to the world that a stable rate of exchange together with a stable level of prices cannot possibly be expected from the gold standard, and that the two aims can be combined only when the stability of prices is universal. The aim in every country must therefore be the stabilisation of home prices in order to obtain a stable rate of exchange. Only through national currencies managed on the same principle in all countries can stable rates of exchange for international commerce be combined with a sound national standard. The other countries seem now at last to have grasped this fact, for an international conference has been summoned for the purpose of establishing an international paper currency and an International Currency Office.

Something must be done. We want free-trade, stable foreign exchanges and stable prices in the home market. With national institutions alone we cannot fully realise these three aims, so we must come to an agreement with the rest of the world. And Free-Money seems destined to furnish the basis for such an agreement. For Free-Money is submissive, adaptable, plastic. It lends itself readily to the realisation of any aim.