Beside this placard a copy of the corresponding printed conversion table[A specimen is given in App. IV. App III shows a specimen butcher’s bill for two weeks.] might be affixed for the public to check the calculation of the cashier or vendor.
The price of single tram-, bus- and underground railway-tickets could not of course be adjusted to slight percentage variations of the purchase-power of current money. They would be sold—as they are to-day in Paris—in little folders, each containing a dozen penny ride tickets for 6 francs = 1/20 £, single tickets being sold at a considerably higher price (e.g. 1½d. for a penny ticket). Since local transport costs are included in the cost-of-living index,[Above, p. 233, §5] it does not matter if the single ticket price has to be raised more than absolutely necessary in terms of farthings.[During the German and French inflation all forms of transport were run at a loss, because fares were always adjusted too late to the rate of monetary depreciation. Under the proposed system the profits of the local transport services would be somewhat higher than normal, this super-profit compensating the outlay on new ticket-selling and money-changing machinery. At first a larger issue of farthings coinage would probably be convenient for purely psychological reasons, in order to avoid such small prices as penny fares being raised immediately by halfpennies, i.e. by 50%, because no smaller coins are available. ]
If groceries, butchers’ meat and similar goods are sold on credit, the shillings and pence figures may provisionally be put down in the ledger with the date and the index (of the week or of the day), to be added and converted into pounds at a convenient time by the book-keeper who writes out the customers’ bills.
Current money will, of course, slowly but constantly[Not, of course, for ever—but until the optimal price-level is reached. See below, pp. 280f.] depreciate through the expansion of credit and currency necessary to meet the requirements of increasing production and consumption, the rate of increase being no longer limited except by the necessity of expanding the expenses of the various countries in due proportion to their actual spending power as measured by the volume of their present gold-standard currencies and by the physical limits of production. This will naturally force commercial and clearing banks to diminish as far as possible their cash reserves by increasing their balances at the National Banks,[These balances would, of course, be expressed in terms of bank-money (£ bo.) and convertible into actual cash at the index-rate of the day. The Macmillan Report (p. 146, § 343) has already pointed out that by establishing depots of its notes in various parts of the country the Bank of England could considerably increase the balances which the joint-stock and clearing banks keep with its Banking Department and diminish the need for till-money kept by the banks in their own vaults. The arrangement suggested below (p. 240, n. 3) and the increased circuit-velocity would probably enable the bank to provide the necessary amount of current money without raising the maximum limit of note issue above the figure of £400,000,000 recommended by the Macmillan Report (l.c.). On the other hand, the joint-stock banks certainly would not care to keep to the old ratio of 1:11 between deposits and ‘cash in hand’, but would substitute ‘balances with the Bank of England’ for most of their cash.] and all private people to spend or to deposit current money as quickly as possible. In this way the circuit velocity of currency, which is now one of the most intractable actors of monetary instability, will always be maintained at its maximum value, i.e. stabilized as far as possible, and the maximum of available credit will be automatically placed at the disposition of traders and producers.
Currency reformer like Sylvio Gesell, the ancestor of the ‘Free Credit’ school, have tried to obtain this desirable result by the imposition of a weekly stamp-duty on bank notes. Leaving aside the foolish idea that such a duty could annihilate the receipt of interest on loans, and disregarding the intolerable inconvenience of having constantly to stick stamps on every bank-note, we may observe that a tax on currency simply produces a constantly depreciating money, which is the characteristic feature of inflation. The idea of a ‘dwindling’ monetary unit was first conceived in Brandenburg in the fourteenth century.[See Eisler, Das Geld, p. 117, on the ‘shophel’-pennies, of which a growing quantity (12 in the 1st, 13 in the 2nd, 14 in the 3rd, 15 in the 4th quarter and 16 in the new year) were equivalent to a shilling silver. About ordinary inflation being a crude form of taxation, see above p. 193, note 1, and J. M. Keynes, Monetary Reform, pp. 42.f] In 1927 the ‘Reichsbund Deutscher Technik’—the German political organization of civil engineers—proposed[Absatzstockung, Arbeitslosigkeit und ihre Beseitigung, Schriften d. R. D. T. Heft II, p. 14.] to introduce a ‘stable mark’ (Festmark) and a constantly (slightly) depreciating ‘currency mark’ (Zahlmark), the growing rate of exchange between the two being fixed by the government with regard to the price-index and with the purpose of flattening out the trade-cycle.[L.c., p. 22.] The author of this idea thought that you could have deposits of ‘current money’ on running account with the banks, failing to see that this contradicts the idea of a stable ‘contract money’ of account, since bank deposits constitute a contract. But otherwise the idea of preventing hoarding by ‘mild’ compensated inflation is absolutely sound and can be realized in the simplest way by the measures suggested above.
The slight automatic profits which the Central Banks will make at the expense of all those obliged through their particular trades to keep a certain amount of ready cash in their tills, but prevented by all kinds of accidental circumstances from immediately exchanging their surplus cash for bank-money,[If indices were published each Sunday, all loss could be avoided by depositing surplus cash at the banks every Saturday, as soon as shops were shut. Commercial banks would deposit their surplus cash at the next Central Bank branch office. In each town one big bank or post office could function as such a branch, the cashier being preferably a Bank of England official, paid by the joint-stock bank or the post office.] will serve to cover the cost of printing the bank-notes, the remaining surplus being heavily taxed or entirely appropriated by the state, which is—though [sic] conferring on the Central Bank the privilege of issuing notes—the ultimate source of this profit.
The power of bank-money to purchase consumable goods would be absolutely constant, even in periods of credit or currency expansion.
Wages and salaries, interest and rent being fixed in bank-money, i.e. subject by statute to regular increase corresponding to an eventual rise in the index figures, the (nominally) rising price-level will in no way diminish the real wages of the manual and intellectual worker or the income of the rentier, nor will it increase the wages-bill of the employer.[It does not matter in the least to the employer how much current money the wage-earner will cash at the bank for his weekly wage-cheque of, say, £3 or £4. The employer buys his materials, etc., sells his product, and pays his wages with cheques—i.e. bank-money; the cost-of-living index does not interest him one way or another, except in his capacity as a householder.] Conversely, the real cheapening of production through the increase of output and the proportionate diminution of overhead charges made possible by increased consumption would accrue in the shape of higher profits to the entrepreneur, so that he[On this question cp. Also above, p. 29, last §.] will be able to spend or to reinvest on a larger scale and thus create further opportunities for employing labour in the production of new capital goods and in the luxury trades.
In terms of this bank-money the price of each individual commodity or service will vary as before in comparison with the price of any other or in relation to the average price of all commodities. But this average—the so-called retail price-level of consumable goods—is practically stabilized within very narrow limits, that is to say, it can only vary during the interval between the publication of two successive cost-of-living indices. Since the cost-of-living index is a retail price index based on figures which move much more slowly than the ‘reagible’ wholesale prices, the movements which are possible between successive index-calculations based on the market prices of each Saturday—the day following the Friday evening wage-payments in current money or in wage-cheques—are practically negligible.
Readers who remember the vertiginous price-movement on German, Austrian and Polish retail markets in the heyday of inflation may be in inclined to imagine that equally rapid price-movements would take place under the influence of a compensated currency-expansion. They forget that these price-movements were caused by a demand for commodities which was artificially stimulated because people were prevented from converting current into stable money, that is, into claims on stable purchasing power. Under the new system price-rings of traders will still be able to fleece the customer to a certain extent, but the practice will be limited by the competition of outsiders and of the co-operative stores.
If the reader will take the trouble to look at the curves describing the typical effects of a classic currency inflation,[Eisler, Das Geld, Munich, 1924, fig. 128, p. 252 (our pl. 8). Only the later part of the curves shows the hyperbolic shape determined by the ‘quantity law’, according to which a rapid initial depreciation should gradually slow down. At the beginning, the movement follows, on the contrary, Fechner’s law of psychological effect: beginning slowly, it gains gradually in speed and momentum.] he will find that prices are rising in a rather sluggish way at the beginning and that a rapid depreciation of the currency does not set in until the late phase of the movement.
If the slow and unimportant initial depreciation of current money is compensated from the start by the facility of converting current money either into commodities (which are depreciating not only because they are perishable and cannot be kept free of ‘carrying costs’, but also because of the rapidly increasing production) or into stable bank-money, it is highly probably that the movement of nominal prices will be slow and rather regular. If the contrary should happen through the panicky reaction of people who remember the days of former inflations, it would not matter, because the only untoward consequence of a rapid depreciation of current money would be the need to publish bi-weekly or even daily index figures for a short time until the public got accustomed to the new mechanism.
On first consideration, the expert reader will be inclined to object that the use of a money of account alongside current money is not a new invention, and that all previous attempts to introduce such a double standard have been failures, as is proved by the fact that it has always disappeared after a short time. At the height of inflation in 1923, Germany tried to introduce a money-of-account, variously called Festmark or ‘gold-mark’, and attached to the U.S.A. dollar. In a similar way Poland had in 1922 its zloty, which was at first nothing but a money-of-account equivalent to the Swiss franc.
Quite recently (14th August 1931) Hungary has introduced, in view of the beginning of the depreciation of its ‘pengo’ notes a theoretical ‘gold pengo’ to serve as standard of all private and public monetary contracts and obligations: in this way it was hoped to maintain Hungarian gold prices and contractual obligations on a par with those in gold-standard countries.[The law has proved mere ‘eye-wash’ because the Hungarian National Bank maintains a pretence of being ‘on par’ by means of exchange restrictions.] All these various moneys-of-account were and are, however, entirely independent of the commodity price-level of the country.
If gold appreciates internationally, Hungarian prices must all fall further in gold-pengos and the total burden of contractual claims established in the past on a gold-standard basis will continue to grow more and more unbearable. If gold were to depreciate internationally, Hungarian gold-pengo prices would rise. If the national gold claims are not constantly convertible by the National Bank into foreign gold-exchange, such claims will be sold abroad at a discount. When this discount becomes known within the country, the legal gold claims de facto depreciate and prices begin to rise, even in terms of national gold claims, in the same proportion as they would rise in paper money according to the quantity law. As soon as this happens, gold-pengos become merely larger denominations of ordinary pengo notes, which means that they become quite superfluous. If, However, and as long as they remain convertible into gold-exchange, the elasticity of the total circulation—bold notes plus ordinary notes—is limited by the gold-exchange reserves of the country, just as if only a single currency existed.
The maintenance of legal index-wages and salaries in one country is of course impossible beyond the limits set by the competition of other countries. Index-wages cannot be maintained nationally with the exception of those in the so-called sheltered industries. In the other industries the basic ‘gold’-wages must be reduced under the pressure of foreign competition.
It follows (a) that national compensated currency systems cannot be permanent; (b) that a national money-of-account legally defined on the basis of the gold parity with money of a gold-standard country cannot be maintained at par without sufficient gold-exchange reserves; © that therefore the stability of the general price-level, the gold value of rents, taxes, wages, etc., defined in terms of such gold notes, is no more stable than if they were defined in terms of ordinary inconvertible paper. In other words, there is no way of stabilizing nationally the retail price-level or reciprocally the purchase-power of a national money.
The bank-moneys (banco talers, ducati di Banco,etc.), of the Venetian, the Hambourg and other early clearing banks, known to historians of the monetary system,[Eisler, Das Geld, p. 213] were nothing but bank transfers of fixed weights of metallic gold or silver deposited in the bank vaults; the banker had a private money distinct from the continually depreciated money of the various states, or rather their rulers, and comparable to the modern gold and silver certificates of the U.S.A. Treasury, which are covered by gold, dollar for dollar. These forms of bank-money were used exclusively between wholesale merchants and never used as contract-money for stabilising wages or retail prices. The purchase-power of such bullion transfers varied, of course, with the quantity of gold or silver entering into world circulation in a given period and with the circuit-velocity of the transfers. As soon as these banks began to give credits and to depart from the 100% proportion of metallic reserves, the purchase-power of their notes became subject to the quantity law and began to show all the symptoms of the ‘inherent instability of credit’.
While it is obvious that a national, as well as an international, money-of-account based on a gold parity relation is incapable of stabilising the general price-level nationally or internationally, this is not at first sight so clear in the case of a national money of account based on a tabular commodity standard of the type of the primitive system applied in eighteenth-century Massachusetts.[Above, p. 232, n. 2.] This system was tried in Russia in 1922 in the form of the so-called ‘goods rouble’,[See G. R. Hawtrey, Currency and Credit, London, 1930, p. 423; Eisler, Das Geld, p. 32.] only to be abandoned very soon in favour of a gold claim currency (the tchervoncy or ‘goulden’ notes). The explanation is very simple in this case too. In order to finance a country’s imports, accumulated claims in national money must be exchangeable without loss into monetary claims in foreign countries. Since the fixed quantity of commodities and services to which a national claim based on a tabular standard at a constant retail price[In the system proposed above, pp. 232f, the unit of bank-money is not equivalent to a quantity of goods bought and sold internationally at fixed wholesale prices, but to a ‘basketful’ of consumable goods at a fixed retail price. The transfer of such money is useful only to a tourist, a consumer wanting to acquire a fixed claim to the means for maintaining a certain standard of life in a given country, not to a trader, wanting to export or import a quantity of goods wholesale.] cannot itself be freely transferred like gold into another country such a claim must be convertible into a freely and cheaply transportable quantity of gold or gold-exchange or into a foreign warehousing warrant for which an equal quantity of goods and services can be obtained at a fixed wholesale price in other countries. If this is not the case, such a claim will be offered abroad for what it will fetch. The price in terms of gold or gold-exchange or foreign goods warrants which the seller will be able to obtain for such a claim, will fall with the growing value of the imports needed by a country and with the diminishing quantity of its exports. As soon as the foreign exchange value of such a claim has fallen below par, it will not be exchanged against gold claims, but at a discount, even within the country itself. In other words, increased exports will diminish the quantity of goods offered in the home markets and thus raise the real banco prices of all commodities. This will of course destroy the inherent essential stability of the purchase-power of a monetary claim based on the nation cost-of-living index. The internal purchase-power of such a claim will in the last instance depend on the quantity of purchase-power in gold or gold-exchange standard countries, against which it can be exchanged at home or abroad at a given moment. That is to say, the country’s money-of-account will lose all connection with the cost of living and the internal price-level and attach itself automatically to the purchase-power of foreign gold-exchange. Hence the money-of-account of a country depending on the trade with gold-standard countries cannot be anything but a given quantity of gold or gold-exchange, and nothing can be gained by the national introduction of a commodity-standard except a slight, temporary slowing down of the inevitable transfer of purchase-power from the rentier and the wage-earner to the entrepreneur, which takes place whenever credit and currency are expanded.
In other words: there is no way of stabilising nationally the general price-level or reciprocally the purchase-power of a national money.
The first condition for the stabilization of the general price-level and of the national purchase-power of a currency is the international stabilization of the exchanges through the parallel, proportionate and synchronic development of production and consumption in the various countries by means of proportional supplementary budgets and the preliminary exchange of mutual stabilization credits.[Above, pp. 194ff.] If these indispensable conditions are realised by international treaty, the simultaneous application of the tabular standard in each country is the necessary complement of the measures stated. Since all previous experiments with index-currencies cannot be used as an argument against the possibility of organizing an expandable currency of monetary units with stable purchase-power by means of a logical co-ordination of the three above-explained measures.
Another prima facie objection to the proposed system is based on the fact that the cost of living is naturally very different in the various countries which might wish to participate in such a monetary reorganisation.[The so-called purchase-power equation applies only to the wholesale prices of goods bought and sold internationally, not to the retail prices of local products or services. Unilever Ltd. Have had very interesting figures compiled illustrating the comparative cost of maintaining in various European countries a ‘typical’ English standard of life corresponding to English ‘earned’ incomes ranging from £500 to £3000 (‘International Middle Class Living Costs’, The Economist, November 8th, 1930).] The obvious answer is that, equally so, within each country the cost of living differs in various cities, towns and villages. In Germany, officials are paid varying ‘local supplements’ to their wages, according to whether they have to live in the capital or in a cheap provincial town. Nobody would expect the difference in the local purchase-power of money having any other effect, but that impoverished rentiers occasionally migrate from Berlin to Pasewalk.
The cost-of-living variation cannot cause any exchange fluctuations[See J. M. Keynes, A Treatise on Money, vol. I, p. 73: ‘There is no justification even in the long run for any precise necessary or immediate relationship between changes in the rate of exchange of currencies of two countries and the changes in their Consumption Standards relatively to one another.’] in the proposed system, since international trade is carried on exclusively by means of bank-money (bills of exchange, cheques and bank transfers). It does not matter in the least if, beside the pegged exchanges for travellers’ cheques and letters of credit, a variable rate exists for the negligible business of exchanging national against foreign small bank-notes and coins. The continental use of large dollar-notes for hoarding purposes would, of course, disappear very quickly, nobody being the worse for it.
Experience has shown, moreover, that in countries with pegged exchanges, like Egypt and the U.K., the national price-levels will rise and fall together.
Leaving aside such big divergences as are bound to occur in times of war under any system and which would disturb the functioning of any international monetary standard, the differences in the parallel evolution of the various national costs of living in peace-time will not upset the stability of the exchanges any more than they do now.
As long as the exchanges are maintained at par by the above-explained procedure, it does not matter in the least whether the different countries are using exactly the same index figures for exchanging national bank-money into national current money, since nothing but bank-money will be sold and bought internationally. Nobody would think of buying large quantities of another country’s continually depreciating current money if he can always get the foreign stable bank-money by means of a cable transfer or a traveller’s cheque, or by having a bill of exchange discounted by a banker.
