5. HOW FREE-MONEY WILL BE JUDGED

M. The Theorist on Interest

Free-Money has robbed me of my whole intellectual capital. My finest theories have been refuted by this hateful innovation. For behold, interest which since the dawn of history had always remained at the same level, has now, in utter disregard of all my theories, started on its course towards zero. And those interest-free loans which had always appeared to me as mere Utopian dreams are now considered not only possible but probable. Interest-free loans ! Money, machinery, houses, factories, goods, raw materials no longer capital! My head is whirling!

The convincing "theory of utility", the attractive "theory of fructification", the inflammatory "exploitation theory", the somewhat bourgeois, but all the more popular "abstinence theory", (*This terminology is taken from Boehm-Bawerk's treatise on interest. Irving Fisher's "Impatience Theory" belongs to the abstinence theories of interest.) and whatever else I called them, have all collapsed with the advent of Free-Money.

It seemed natural, obvious. indeed inevitable that the lender of an instrument of production should be able to secure interest for this "service". Yet interest is falling to zero, and capitalists (if they may still be called so) are delighted when anybody consents to take their money with no other condition than simple restitution of the sum borrowed. They say that competition has increased to such an extent that it is more advantageous for them to lend the money in this way than to keep it at home as a reserve for future use. For at home part of the money would annually be lost through depreciation. so it is better to lend it, even without interest, on a mortgage or a bill of exchange which can be converted into ready money again, by selling or discounting, whenever ready money is required. There is then indeed no interest, but neither is there any loss from depreciation.

Interest-free loans are now an advantage not only to the loan-taker, but to the loan-giver as well. Who ever imagined such a possibility! Yet now it has been realised, for what is the saver to do ? A man saves for the future, for old age, for a pilgrimage to Jerusalem, for hard times, for marriage, for illness, for his children and so forth. But what is be to do with his savings in the meantime, until he needs them ?

If he buys cloth, foodstuffs, wood, etc., and stores them, he is no better off than if he keeps Free-Money, for all such stores are subjected to rust, rot and decay. It may here be objected that gold and precious stones may be kept indefinitely without deterioration, but what would happen if this form of saving became general ? How high would the price of these things soar in good years, when everybody saves; how low would it drop when, after bad harvests or in war-time, the savings (that is, the gold and precious stones) were brought to the market in large quantities ? Precious stones are the things that people buy last and sell first. The experiment would not be repeated; this form of saving would be a deplorable failure. (The same is true of wine which is said to become better and more valuable the longer it is kept).

It is surely more advantageous to invest one's savings in bonds. Government securities, bills of exchange and so forth, which, although they yield no interest, are always convertible into ready money without loss.

It may be asked, why not, instead, build houses, or buy industrial shares ? And people do buy and build houses although houses have also ceased to yield interest. They are satisfied with the sums written off annually for depreciation, which the tenants pay in the rent. This form of investment is sometimes even more advantageous than the purchase of Government securities, as it gives a regular return which keeps pace with the depreciation of the house (factory, machinery, ship, etc.), yet leaves a pledge, namely the piece of property, in the lender's hands. That is why so much building is going on in spite of the fact that rents are only just sufficient to pay for repairs, depreciation, taxes and fire-insurance; that is why houses are considered a good medium of saving.

Nevertheless all this is most disturbing. It is difficult to grasp the fact that men still build houses to let, though expecting to obtain as rent merely the repayment of the capital, without interest. For it used to be considered a scientifically established fact that money bore interest only because the instruments of production bore interest, that the interest-bearing power of money was fundamentally a transferred or borrowed power. And it now seems that the reverse is true, for how else could a monetary reform have influenced interest ?

As a matter of fact it was illogical to say that money yields interest because it can be used to buy instruments of production which yield interest. For this fails to explain why instruments of production yielding interest are sold for money which is declared to be barren. Does an ox give milk when you barter it for a cow ?

Catch-words were here evidently substituted for clear thinking. It is nonsense to talk of transferred and borrowed qualities; such transfer of qualities and forces is just as impossible in economics as it is in chemistry. If money had not the intrinsic power of levying interest, where did the revenue derived from the issue of paper-money come from ?

If money was unable by its own power to levy interest, interest-bearing instruments of production and barren money were incommensurable quantities, things not admitting of any comparison and therefore not exchangeable. There are many things which cannot be bought with money.

And what price was paid for a piece of land yielding a rent of $1000 ? The calculation was based on the fact that $100 bore $5 interest, and the price of the land was as many times 100 as 5 is contained in 1000. But how did this rate of 5% originate ? That is the crux of the matter.

So there can be no question of a transferred power; the interest-bearing power must have been an inherent quality of money. But where was this quality of money hidden? Formerly it would have been difficult to discover, but with Free-Money as an object of comparison the difficulty disappears. For since with Free-Money money has manifestly lost its interest-bearing quality, we need only investigate wherein the two forms of money differ, in order to lay bare the source of interest. Now Free-Money differs from the traditional form of money in being subject to an inherent compulsion to be offered in exchange for goods, whereas the traditional form of money was exempt from such compulsion. Here then, in the absolute liberty of the possessor of metal money to offer his property for exchange whenever he pleased, in the arbitrary power of capitalists and savers who controlled the supply of money, we have to look for the source from which interest sprang.

And we have not far to look. Money is admittedly indispensable for commerce, for the exchange of the products of the division of labour. For how do the makers of goods act when they cannot sell their products for money ? Does the cabinet-maker sleep in his coffins, does the farmer eat all his potatoes ? Nothing of the kind; they try to effect the sale by reducing their prices, they all try to attract money by lowering their claims. If capitalists and savers have withdrawn money from circulation and will return it only if promised interest, they obviously find the ground well prepared for the levy of interest in the readiness of the possessors of goods to surrender part of their produce for the use of money. "You want money for the mutual exchange of your products, and this money is locked up in our safes. If you are willing to pay us something for its use, if you are willing to pay us interest, 4% annually, you may have it, otherwise we shall turn the key and you must make shift without it. Interest is the condition we lay down. Consider the matter; we can wait, we are not compelled by the nature of our money to yield it up".

Clearly it depends on the owners of money whether commerce is to carry on with money or without. At the same time the State makes the use of money inevitable by levying taxes in it. Hence the owners of money can always extort interest. A parallel would be a bridge over a river cutting the market in two, and guarded by a toll-gate keeper. Because the bridge is indispensable for traffic between the two halves of the market, and because the toll-gate keeper can close or open it, he is in a position to levy a toll on all the goods in the market.

Interest was a toll which the makers of goods were forced to pay to the owners of money for the use of the means of exchange. No interest means no money; no money means no exchange of goods; no exchange means unemployment and hunger. Rather than starve, the producers of goods paid interest.

The interest-bearing power of money was not a "borrowed" or "transferred" power. It was a quality of metal money due. ultimately, to the fact that in the manufacture of money a material had been chosen which holds a privileged place among the other products of the earth, since it may be kept indefinitely without injury and without expense, whereas all other products of human industry deteriorate, become antiquated, and are expensive to store.

This explains why people exchanged a field for a sum of money; for both the field and the money, each by virtue of its own power, yielded a rent. In order to establish the exchange ratio of the two things it was only necessary to calculate the sum of money which would produce interest equal to the rent of the field. The field and the money were then perfectly commensurable objects. In the case of the field there was no question of a "borrowed" or transferred power of exacting interest, and the same was true in the case of money.

That hackneyed and meaningless phrase about the transferred power of money deceived me completely, for money, the medium of exchange, was intrinsically capital.

Let us consider for a moment what must happen if we elevate a species of capital to be the means of exchange of all commodities.

1. Money can be capital only at the expense of commodities, for it is on the commodities that money levies the toll that stamps it as a form of capital.
2. If commodities have to pay interest they cannot possibly be capital themselves, for if both commodities and money were capital, neither of the two could assume the role of capital in connection with the other, and in their mutual relation, at least, they would cease to be capital.
3. If commodities seem to us capital in commerce, because their selling price, besides the cost price and commercial profit, includes capital-interest. the explanation is that the merchant has already deducted this interest from the producer's or the worker's remuneration in the purchase price. The commodities here merely play the part of bank messengers for money capital. If the selling price is $10 commercial profit 3, and interest 1, the producer receives $6.

From this it follows that if the medium of exchange, money, were not itself a form of capital, the whole exchange of goods would be effected without any charge for interest. That is what Proudhon always maintained, and it seems that he was right.

Let us now consider the effect of a medium of exchange which is itself capital upon the creation of instruments of production.

How did the instruments of production (machinery, ships, raw materials and so forth) come into existence ? Does a man still make his own instruments of production out of raw materials found on his own land ? Possibly that may happen exceptionally now and then, but the general rule is that the instruments of production have to be bought and paid for with a sum of money. The foundation capital of all enterprises of any magnitude is a sum of money which is entered on the first page of the ledger. Now if this money paid for instruments of production is intrinsically capital, if the owners of the money, by merely locking it up can prevent the creation of an enterprise, it is clear that they will not advance any money for enterprises which yield no interest. If I can obtain 5% on my money from the purchase and sale of commodities. I am obviously not going to be satisfied with less in the manufacture of them. If I can collect ore at the surface I shall not dig a pitshaft.

Hence it follows that the number of houses built is limited by the fact that rents must remain high enough to include the interest-tribute that money can exact. If by chance more houses have been built, if the supply is greater than the demand, rent of course falls and the houses do not yield the interest required. Whereupon workers in the building trade are dismissed, and house-building is suspended until, through the increase of population, the demand for houses has increased to the point where rents again yield the full interest exacted by money. Only then can the building trade make a fresh start.

It is exactly the same with industrial enterprises. When these have become so numerous that the demand for labour which they incorporate has forced up wages to a point at which the employer is no longer able to squeeze capital-interest out of the sale of the product, the founding of new enterprises is interrupted - until the increase in the number of workers and the resulting increased supply of labour again reduces wages and allows scope for the levy of interest.

The instruments of production appear to us as capital simply because they are created by money capital, and because money capital artificially limits their creation so as to place them in a privileged position in relation to the workers. There are always less instruments of production than workers, and the surplus of workers resulting from the shortage of factories depresses wages below the full proceeds of labour.

The picture becomes still clearer if we consider the employer merely as a pawnbroker who advances the necessary money to the worker for machinery and raw materials and is repaid by the worker's produce.

Money, then, controlled absolutely the exchange of goods and the creation of instruments of production. Everything was tributary to it. It intervened between consumer and producer, between workman and workgiver, separating those who were naturally destined to unite and exploiting the embarrassments so arising. Its booty was called interest.

Even I now begin to understand clearly why with Free-Money the rate of interest is falling and already approaching zero.

Money can no longer be withheld from the market; regardless of interest it must be put into circulation, either directly in exchange for goods, or indirectly as a loan. It cannot intervene between the producers to separate them, in spite of itself, in spite of its predatory nature, it is forced to carry out its function and act as the medium for the exchange of goods. Money is no longer a tyrant or bandit obstructing the exchange of commodities; it has now become the unpaid servant of exchange.

Commodities are now no longer excluded from the market and workers dismissed as soon as the rate of interest falls; the exchange of goods proceeds, regardless of interest.

But where work proceeds regularly people save. Immense sums are saved and carried to the banks to be offered as loans. And if this continues year after year, if the workers are not again and again forced by recurring economic crises to eat up their savings, the time must come when the money offered for loan by the savings banks is no longer sought for, the time when the loan-takers say: We have built so many houses that we cannot find tenants for them; we have built so many factories that we cannot find workmen for them. Why continue to build when even now we find it hard to pay interest ?

But then the savings bank will answer: We cannot leave our money idle, we cannot store it. Free-Money forces us to lend it. We do not insist on 5, 4, or 3 %, we are willing to negotiate. If we let you have the money at 2, 1 or 0%, you can reduce your rents accordingly, whereupon those who were satisfied with one room will rent two, and those who had five will want ten. You will then be able to build more houses. There is real need of houses, it is only a matter of price. So take the money at 2% if 3% is now more than you can pay. Build away, reduce your rents; you cannot suffer any loss, for we shall provide you with correspondingly cheaper loan-money. There is no fear that either you or we shall ever be short of money, for the more we reduce the rate of interest and you reduce the rents, the larger will be the sums that the savers will put by and pass on to us. Nor is there any fear that this great quantity of money will force up prices, for every penny of it has Previously been withdrawn from circulation; the volume of money has remained unchanged. Those who saved the money produced and sold more goods than they consumed, so there is a surplus of goods corresponding to the amount of money which we supply to you.

Take the money, therefore, without anxiety. If the interest yielded by your houses falls, we shall follow suit with our money interest, even if interest should be thereby depressed to zero. For even with interest at 0% we are compelled to lend the money.

But it is not only we who are under compulsion; you are in the same plight. For if you attempt to keep up the rent of the houses already in existence ceasing to a to their number, and so reject our offer, we shall point out that there are other builders who possess no houses and are not bound by such considerations. We shall give them the money for building, and the new houses will be built, whether you like it or not.

It is the same with industrial undertakings. If money is available at 0%, no employer can extract interest from his enterprise, either in the form of a reduction of wages or in the form of an increase of prices. For such is the law of competition.

(*The reader will find the theory of interest more fully presented in the last part of this book.)