Book Twelve - Money in Disintegration

Book Twelve. MONEY IN DISINTEGRATION BY the eighteenth century the spirit of individualism and freedom that had been fermenting since the Renaissance broke forth in political revolt. The War of the American Revolution, precursor to the French Revolution, was as much a rebellion against the idea of autocracy as against particular grievances. In the sixteenth and seventeenth centuries, as we have briefly noted,1 sovereignties asserted not only absolute political prerogative, but economic monopoly as well. The use of the word "royalty," as fee to a proprietor for the exploitation of a work or property, derives from the period when the sovereign assumed title to all wealth of the realm. It was the struggle for freedom from these encroachments of the state that chiefly marked the nineteenth century, and established everywhere constitutional regimes of limited authority. /. The New Authoritarianism In the twentieth century, however, we have witnessed a gradual and almost unresisted movement back to state authoritarianism, primarily in the economic sphere, accompanied by the spread of state monopoly and intervention. This new authoritarianism is as pervasive in its way as in 1600 when the English merchant who was not a member of one of the state-chartered trading companies was excluded from trade everywhere except France, Spain, and Portugal.

What is significant for our discussion is the manner in which statism and state monopoly have expanded, with the silence of a cat and the enveloping quality of fog, by means of the money mechanism. The Federal Reserve System had been set up, as has been noted,2 with the idea of an elastic currency to meet the seasonal 250 MONEY IN DISINTEGRATION 251 needs of business. Money supply was to be expanded or contracted in accordance with commercial, rather than public, needs, and by the process of purchasing ("discounting") shortterm notes executed to finance the production or marketing of goods. The banks could issue their credit either in the form of deposit credits or circulating notes, so long as gold was held to the extent of 40 per cent or 35 per cent of the credit outstanding. Theoretically, as the note matured and was paid off the money supply would be contracted. The organization was given a great deal of autonomy and it was to be largely independent of government interference. Twothirds of the directors of the Reserve Banks were to be chosen by member banks, but the System's board of governors, who appointed the other directors and also supervised the operations of the System, were named by the President.

It is at once paradoxical and in accord with the times that the Constitutional authority for the creation of the Federal Reserve System has never been seriously challenged. Yet a cursory glance at the document will reveal on what fragile grounds this system of bank notes is. The Constitution specifically forbad the States to make anything legal tender but gold and silver coins or to emit bills of credit (paper money). At the same time the Constitutional convention, debating the question and having in mind the flagrant issues of Continental currency, while confiding to Congress the power "to coin money and regulate the value thereof" pointedly omitted the authority to issue paper money. Nevertheless, the Federal Reserve banks, not an organ of Congress and with practically no Congressional oversight, have enjoyed this power to issue paper money.3 While the Federal Reserve System was thus given quasiindependent status, it was implicit that its power would be exercised in behalf of a planned economy in which the interests of the state were paramount. Its policies were, at the first, to be directed toward maintenance of an even flow of credit to moderate the seasonal or episodic characteristics of the economy.

It was not long before its powers were directed toward the more primary needs of the state. This was the necessity of financing a war—an excuse that is chronic in the history of central 252 MONEY AND MAN banking. At the end of 1917 the Federal Reserve Banks held $660 million of commercial paper sold to them by member banks and $121 million of government bonds. Bills discounted reached a maximum in 1920, when the average amount held by the Federal Reserve Banks was $2.5 billion, and thereafter declined to only $5 million at the outbreak of World War II. Meantime, Federal Reserve credit was flowing into government account, through purchases of Treasury securities. The flow was modest at first, never exceeding $300 million during World War I, but rapidly accelerating after the Crash and the coming of the New Deal with its philosophy of expanded government intervention in the economy. As trade diminished, and the amount of bills offered for rediscount dwindled, credit was pumped into the economy by the purchase of Treasury bills; the amount rose to nearly $1.9 billion at the end of 1932 and hovered around $2.5 billion until the outbreak of World War II.

Thereafter the Federal Reserve System became the chief creditor of the government, and primarily a mechanism for monetizing the public debt. The result was that the money system ceased to respond to the fluctuating demands of business, but responded instead to the political fluctuations of Washington; a condition obtained in which a traditional policy of fiscal prudence, of a balanced budget, and a reduction of public debt—processes formerly regarded as highly favorable to business—was not only contemned, but actually declared to be harmful to the economy, by reason of its effect on the money supply. A few figures will illustrate: by the end of World War II, holdings of Treasury obligations by the Reserve Banks had risen to $24 billion, while discounts and advances were less than $250 million. The end of the war did not mean, however, an end to the monetization of the public debt; twenty-one years later, Reserve Bank holdings of Treasury securities had risen to $42 billion, and advances were less than $1 billion (figures are for the Reserve Banks only). Each dollar deposit with a Reserve Bank had a credit leverage of from 4 to 6 dollars in the commercial bank system. The enormous funds released by these operations found outlet in government bond purchases by the commercial banks instead of loans for commercial and indusMONEY IN DISINTEGRATION 253 trial enterprises. Again, let the figures speak. In 1917 all commercial banks had loans outstanding of $18 billion and investments in United States government securities of $1.5 billion. At the end of 1939 loans were $17 billion and government bonds held were $16 billion, but of loans only $6.4 billion were classified as business loans, the remainder being loans for the purchase of securities and for other purposes. By the end of World War II, holdings of government bonds had increased to $90.6 billion while business loans had increased to only $9.6 billion.

Subsequently, the banks did manage to shift some of their activity back to their original function of commercial lending, and by the end of 1965 had increased their business loans to $71 billion, while reducing their government portfolio to $59Vi billion; but business loans at that date represented less than a fourth of their investments, the balance being in securities, both public and corporate, and various other forms of loans, including real estate mortgages and consumer credit. Commercial banking had in fact ceased to be commercial banking and had become a mongrel form of investment banking. Meantime, government was infiltrating the economy by means of lending institutions, government owned or fostered and financed through the fountains of Federal Reserve credit. The American Bankers Association reported in 1934 that the Federal Government had created or participated in the capitalization and operation of approximately 5,700 lending agencies and corporations, exclusive of its direct participation in banking through the purchase of notes or capital stock of existing banks. In addition, the Reconstruction Finance Corporation, the mammoth government corporation established by the Hoover administration to combat the depression by more loans, had been putting funds in the banking system by way of purchases of bank stocks and debentures, and by March 6, 1934, had by this means acquired an interest in 6,191 banks, or about 44 per cent of the unrestricted (freely operating) institutions of the country.4 A survey of the way in which bureaucracy has interposed itself into business since World War I is beyond our limits here: the territory is immense. We can only refer to the expansion in 254 MONEY AND MAN the field of finance. Thus, a 1960 report of the Joint Economic Committee of Congress on Subsidy and Subsidy-like Programs of the United States Government offered the following list of Federal lending and loan guarantee activities: "purchase of government-insured mortgages on houses, loans to local public agencies for slum clearance and urban renewal, loans to colleges and universities, loans to local authorities for construction of low-rent public housing, loans to war veterans for housing, loans to cooperatives to provide electric power and telephone service to rural areas, loans to farmers to 'strengthen the familytype farm and encourage better farming methods,' loans to farmers on the security of farm products, loans for construction of ships and fishing vessels, loans for student financial aid and construction and acquisition of teaching equipment, loans to American firms and foreign governments of foreign currency proceeds from sale of surplus agricultural products, loans to governments of underdeveloped nations or organizations and persons therein, loans to finance exports and imports and to promote economic development in lesser developed countries, business loans to small business, disaster loans to small business, loans to small business investment companies, loans to State and local development companies, loans for the development of technological processes or production of essential materials for war use"; in addition, "guarantees of real estate loans, loans to veterans for various purposes, farm ownership and soil and water conservation loans, loans on commodities, loans on passenger and cargo-carrying vessels, loans for purchase of aircraft by small concerns, loans to railroads for certain purposes, loans to defense contractors, loans to governments of underdeveloped nations and their citizens."

//. Money and the New Internationalism MEDIATING in the twentieth century between those who would settle the world's problems by the sword and those who would rely upon the Cross, has arisen a dominant element who would MONEY IN DISINTEGRATION 255 determine matters with the check book. As in the days of the Medici and the Fuggers, the direction of international diplomacy has come again under the influence of bankers and accountants and financial experts who would use the power of money rather than arms or morals to control and direct affairs. To their credit let us add that they have been importantly on the side of peace and conciliation through the years and principally the architects of the institutions of international cooperation. To rebuild devastated Belgium following World War I, bankers were called in and they floated a loan. This became a favorite process of restoration and a main instrument of the League of Nations. Austria was given an injection of a League of Nations loan. Defeated Germany was not allowed to collapse completely, but a Dawes Committee came to the rescue with a loan, and the subsequent Young Committee sired both a loan and a bank.

None of these efforts succeeded in preserving the peace, and there is ground for arguing that by dealing in palliatives rather than cures they only aggravated the condition that brought on World War II. When the struggle began, American sympathies were soon manifested in the specious lend-lease program whereby billions of dollars of war materials and strategic commodities were provided to the Allies under the pretext of a loan rather than the gift they proved to be in large degree. * As the defeat of Germany merely served to elevate into the annals of history two vaster antagonists, Soviet Russia and the United States, around which the lesser sovereignties of the earth were to cluster as satellites, the institutions of finance were again invoked to maintain the peace and to support alliances. The task of distributing money naturally fell to the United States, where $25 billion in gold had accumulated, or some 70 per cent of the * Total lend-lease aid amounted to $46,728 million less offsetting aid in kind received from Allies totaling $7,819 million. Fifteen years after the end of the war, $3,258 million had been paid on account and the balance had been written down to $1,734 million. See U.S. Foreign Aid, prepared by Legislative Reference Service, Library of Congress (Washington, 1959).

256 MONEY AND MAN world stock. Later, the Soviet Union, more accustomed to political than economic warfare, would embark upon a subtle diplomacy of purchase which, like its money, consisted more of promises than of substance. «§ £»» The first of the postwar dollar aid programs was that of the United Nations Relief and Rehabilitation Administration, toward which the United States contributed $2,670 millions of aid. In 1947, when Soviet political pressure on Greece and Turkey threatened the independence of these powers, the United States undertook to support their governments with military and financial aid. Military aid was limited to military supplies and technical assistance. Chief reliance was upon a program of economic aid for which an initial appropriation of $400 million was made. Meantime, a postwar lassitude in Europe, accompanied by commercial stagnation and a deepening political discontent, prompted the United States Government in 1948 to offer what became known as the Marshall Plan—a five-year program of financial assistance to cooperating European countries in the prospective sum of $20 billion.

The psychological effect of this proposal was as striking as the financial. The offer of American economic aid, the objective researchers of the Library of Congress found, "had the effect of lifting European morale and providing a leadership that gave promise of helping Europe to save itself."1 In Germany, where the money had again depreciated to zero, monetary reforms in 1948 had an electrifying effect. As Jacques Rueff and Andre Piettre reported: "The black market suddenly disappeared, shop windows were full of goods, factory chimneys were smoking; and the streets swarmed with lorries. Everywhere the noise of new buildings going up replaced the deathly silence of the ruins. If the state of recovery was a surprise, then its swiftness was even more so. In all sections of economic life it began as the clocks struck on the day of currency reform. Only an eyewitness can give an account of the sudden effect which currency reform had on the size of stocks and the wealth of goods on display. Shops filled up with goods from one day to the next; the factories began to work.

MONEY IN DISINTEGRATION 257 On the eve of currency reform the Germans were aimlessly wandering about their towns in search of a few additional items of food. One day apathy was mirrored on their faces while on the next a whole nation looked happily into the future."2 The moral and psychological factors in European recovery were overlooked or ignored among policy framers, however, for the official line adopted was that the world suffered from a "dollar shortage" and insufficient capital investment. In 1949 President Truman announced his famous Point Four, making United States financial and technical assistance available to the "underdeveloped" countries as a continuing policy. This program was enthusiastically accepted by the electorate for motives that are somewhat mystifying—a mixture of shrewd mercantilism, of naive philanthropy, of moral obligation, of fear of the "evil eye" of envy, and a conviction, fostered by many economists of the Marxian, economic-determinism school, that people could be reformed, discontent allayed, and communism resisted by economic-financial programs designed to raise the standards of living.3 Despite the doubtful constitutional authority to tax the citizens for largesse to foreign sovereignties, and increasing evidence of the ineffectuality of the program, of waste and corruption in its administration, the Congress continued to vote, year after year, with little opposition, enormous sums for foreign aid.

By the end of 1970 some $210 billion had been expended in various forms. This immense employment of finance as an instrument of diplomacy did not increase the general sense of security or allay the universal unrest; the burden of armament continued to mount, and the United States found itself engaged in a monstrous arms race with Soviet Russia of the very sort that public opinion had so fervently deplored in the case of Europe two generations earlier. By 1960, before the beginning of United States involvement in southeast Asia, the arms budget was of the order of $40 billion, or more than 10 per cent of the gross national product* of the country—more than twice the relative * A statistical measurement in monetary terms of the value of goods and services produced.

258 MONEY AND MAN burden carried by other members of the North Atlantic Treaty Organization. Not unexpectedly, the evolution of this new diplomacy of purchase was a burgeoning of official financial institutions. By mid-century the financial center, not only of the United States, but of the world, was centered in Washington. In 1934, as part of the New Deal, the Export-Import Bank of Washington had been created to finance exports by loans to foreign governments and enterprises. Following World War II, the political planning for the peace resulted in the creation of two international financial agencies—the International Monetary Fund and the International Bank for Reconstruction and Development—as adjuncts to the United Nations. The International Monetary Fund was a reserve of gold and United States dollars, originally subscribed in varying amounts by member governments, upon which they were in turn permitted to draw to meet deficits in their balance of international payments and to stabilize their currencies. In practice the principal reserve was United States dollars, which had become the accepted international currency; at the end of 1959, of $3,451 million currencies drawn down by Fund members, $3,084 million consisted of United States dollars.4 The International Bank for Reconstruction and Development, with a subscribed capital (1966) of $22.6 billion, lends to member governments for economic development purposes, and by the end of 1966 had lent some %1VI billion, of which nearly $5 billion was in dollars. * Other official institutions began to sprout—among them the International Finance Corporation (1956) for development loans to private enterprises; the Development Loan Fund (1957) for "soft" loans to poorer countries, that is, loans in dollars that could be repaid in the inconvertible currencies of the borrowing countries; the Inter-American Development Bank (1960), a regional organization for loans to Latin America; the * By 1974, however, due to the decay of the dollar, the bulk of the loans were repayable in other currencies.

MONEY IN DISINTEGRATION 259 vaguely conceived and vaguely dedicated International Development Association (1960); and in 1966 the Asian Development Bank, a counterpart of the Inter-American Development Bank, but designed to accumulate Asian support for the U.S. war involvement in Viet Nam. The unnoticed phenomenon about these developments was the transfer of enormous aggregations of power to little groups of financial managers over whom only the barest shreds of control existed. As agents responsible to forty or more different governments, with the chain of authority filtering through a maze of bureaus and ministries, these officials were practically immune to interference; they were given a lofty prestige and were endowed with more power than many a Caesar. In former times the degree of risk and the value of a security was assessed by the democratic processes of the market place, functioning through several thousand security dealers reflecting the judgments of millions of individual investors. These judgments were now exercised in an absolute fashion by a few score officials almost completely isolated from the currents of the market.

That the defects of this financial monopoly were not immediately exposed is due to the fact that the early managers were generally men drawn from the market place—practical bankers and businessmen—not yet inebriated with power. ///. The Ghost of Hamlet9s Father AT the end of the seventh decade of the twentieth century, nearly 1.2 billion ounces of gold was held by the central banks of the world's sovereignties. Although more and more of new mine production was being used in industry or privately hoarded as a result of rising inflation and distrust of currencies, the official stock represented some 45 per cent of the estimated total output of gold since the discovery of America. At the same time, thanks to the cyanamid process of gold extraction and the deposits in South Africa, newly mined gold continued to come into the market at the rate of 40 million ounces annually.

260 MONEY AND MAN Yet no anxiety was more dissimulated among the monetary managers than that occasioned by a prospective shortage of gold. In Soviet Russia few secrets are more carefully guarded than the gold reserve of the state bank and the current output of the mines. Disclosure of such information is a high crime with penalties as severe as for treason. Here is a paradox. Everywhere the leading monetary economists were contemptuous or skeptical of the importance of gold as money. Lenin is variously quoted as saying that in the classless society they would use the gold to pave the public privies, and economists of the capitalist "camp" have not been much kinder in their references to the metal. Some have proposed, with some acuity, that instead of keeping such a vast quantity of gold in vaults built deep in the earth at such expense, we simply dump it all into the sea. This school of economists, of whom John Maynard Keynes became the principal exponent,1 held that, more important than the intrinsic value of the standard were the wisdom and skill of the central bank authorities in controlling the quantity of money and the uses to which it was put. These objects the bank managers achieved by means of the official interest rate and by intervention in the market by buying or selling securities and thereby affecting the general flow of bank credit. So influential was this school that by mid-century few central banks were under any restriction so far as gold reserves were concerned, or as to the amount of circulating notes or bank credit they might create; they were governed only by their reaction to the movement of the price indexes, the indexes of employment and production and other criteria.

In the United States, which held the greatest reserve stock of the metal, the official Treasury policy began to disparage gold and advocate its demonetization—a view, however, that found little support among the electorate or among the foreign central banks. The premises and postulates of the managed money school rested upon a seemingly firm ground of historical experience. For years there had been in progress a process of "economizing MONEY IN DISINTEGRATION 261 gold," as the economists called it, by which lesser and lesser amounts of gold were made to carry the burdens of money, or rather, heavier and heavier burdens of money were saddled on to the available supplies of gold. First, there had been the fractional reserve system by which circulating notes were issued to several times the amount of gold they were presumed to represent as resting in the vaults of the issuing authority. This device contrived to make the same gold unit serve in several places at the same time for the transfer of value. There followed the development of "checkbook" money, by which banks created credits for customers and thereby invested them with purchasing power through demand drafts the total of which represented liabilities of the banks several times the amount of actual funds held by the banks.

In the nineteen twenties, as we have noted, the practice developed abroad by which central banks substituted for gold in their vaults, and treated as reserves equivalent to gold, credits of foreign central banks—particularly the Bank of England and the Federal Reserve Banks—that were payable in gold. Despite the general suspension of convertibility from 1930 on, the system survived and expanded. It survived because the United States Treasury continued until 1971 to deliver gold to foreign central banks against notes or deposits here, although it had suspended redemption of notes and deposits held by its own citizens. The gradual effect of this, combined with the movement of gold to this country until 1950, was that by mid-century half the reserves of the central banks of the rest of the world consisted of dollar exchange and deposits in United States banks. Thus, a bank deposit credit of one dollar in the United States, against which there might be in reserve only a few cents in gold, was equated with gold of the value of a dollar in the reserve of a foreign central bank, against which it was able in turn to create the equivalent of several dollars' purchasing power in the form of circulating notes and deposits.2 <«§ $»» Just before the Great Depression, as we have observed,3 the United States gold stock had fallen to less than 10 per cent of the 262 MONEY AND MAN note and deposit liabilities of the money system, and in 1933 the system collapsed.

The means employed to meet the crisis were the timehallowed methods we have observed in Athens, in Rome, in medieval Europe, in France in the time of Louis XIV. By the Agricultural Adjustment Act of May 12, 1933 (the Thomas Amendment) and the Gold Reserve Act of January 30, 1934, the President was authorized to fix the gold content of the dollar from time to time, within limits of 50 to 60 per cent of its former value. This was tacit recognition of the inflated state of the money mechanism and acknowledgment that the country was bankrupt and that the only way to restore solvency was to write down all liabilities accordingly in correspondence with the value of the assets. The proclamation of the President on January 31, 1934, officially devaluing the dollar to 59.064 per cent of its former value, was in effect a reduction of the gold value of the mass of outstanding debt. Under authority of the legislation all gold was withdrawn from circulation and United States citizens were forbidden, under severe penalties, to hold monetary gold; all domestic trade in gold was also effectively prohibited. Gold became a monopoly of the government.

Thus, the gold dollar established in 1834 lasted just one hundred years—a better record than most moneys, not so good as some. IV. Dethronement of the Dollar AFTER World War II, as after World War I, the United States was called upon to contribute its resources to the restoration of a devastated Europe. By 1949 the United States Treasury controlled some 24^ billion of gold (at the $35 an ounce parity) or around 70 per cent of the visible world stock. United States policy was to redistribute this treasure. With the help of the Marshall Plan, the foreign aid program, and the various international lending agencies referred to in a preceding section, Europe recovered its productive capacity—but monetary stability proved more elusive.

MONEY IN DISINTEGRATION 263 An attempt to restore convertibility to sterling in 1947 lasted only six weeks, and in 1949 the pound was devalued to a fine gold equivalent of 2.48828 grams (compared with a 1914 equivalent of 7.332382 grams) and to the equivalent of $2.80 in terms of the post-1934 devalued dollar. In 1954 the London gold market that had been closed since 1939 was reopened to foreign trading in the hopes of restoring confidence in sterling, but it remained closed to British subjects. Germany, where the mark had become so worthless that by 1947 cigarettes supplied to United States occupation troops became the common media of exchange, had greater success in regaining stability. In 1948 a new Deutschmark was introduced, along with a new bank of issue modeled after the Federal Reserve banks, and in 1953 the mark was given a gold value and convertibility. In France, postwar inflation and depreciation of the franc continued until the revolutionary crisis that brought Charles de Gaulle to power in 1958. As with Bismarck, as with Napoleon, as with Constantine the Great, almost the first step by de Gaulle in the reform of the state was the restoration of a sound currency. On December 29, 1958, the French franc, now worth about a quarter of a United States cent, was abolished in favor of a new franc equivalent to .18 grams fine gold (United States $.2025). The value of the new standard was maintained de facto rather than de jure by an open gold market and official exchange operations.

Following these reforms, European currencies gained the appearance of stability through increased reserves of gold and foreign exchange. Unfortunately, these reserves had been acquired largely at the expense of the United States economy. The United States, as we have noted, lost gold steadily after 1949. The effect of creating dollar credits both abroad and at home forced up the domestic price level, that is, lowered the purchasing power of the dollar, which by 1966 had dropped to nearly half its 1945 level.* * As measured by the Bureau of Labor Statistics index of consumer prices. By 1975 the dollar had dropped another one-third in value. The 264 MONEY AND MAN The same inflationary trend in prices—depreciation of currencies—was happening abroad in varying degrees, the effect of creating currency and credit on the mixed base of gold and United States dollar deposits. (Foreign-held dollar deposits, under the commitments assumed by the United States in organizing the International Monetary Fund, were convertible into gold at $35 an ounce, and hence under the gold-exchange standard were treated as equivalent to gold.) The inevitable consequence was a growing but generally unperceived distrust of currencies in favor of gold. Despite the immense amount of new gold production, more and more was being taken by private buyers ("hoarding"), with central banks getting only the crumbs.* At one time in 1960 private buying bid the London bullion price up to $40 an ounce. Since the literal meaning of this was to degrade all so-called gold currencies, the event sent a shock wave through the board rooms of central banks all over the world.

In 1962 public demand for gold again pushed the open market price above statutory parity, and an international run on gold became imminent. The first overseas transmission of television pictures was one of President Kennedy dramatically assuring the world of United States determination to maintain the value of the dollar at $35 an ounce. At the same time, the principal central banks formed the International Gold Pool to provide gold to the market through the agency of the Bank of England, with quotas assigned to various central banks and the United States Treasury furnishing the moiety. Public uneasiness continued, accompanied by gold buying and a massive outflow of gold from the United States stock. In 1965, to assure a gold supply in the market, Congress abolished the gold reserve requirement for Federal Reserve deposit liabilities. In 1967, Great Britain again devalued the pound, and, in 1968, under United States pressure, the "two tier" system was steady depreciation of the dollar is concealed by periodically adjusting the index to a new base.

* Almost everywhere except in the two richest countries of the world —Great Britain and the United States—where private holding of gold money was forbidden.

MONEY IN DISINTEGRATION 265 evolved by which all central banks ceased selling gold in the market—in effect suspended convertibility—but maintained the parity of their currencies with each other by exchanging gold at the official rate. To sustain the fiction of official gold values of currencies, the United States undertook to sell gold at the official rate to other central banks that adhered to this agreement. Further manifestation of both the corrosive inflation in prices and public dismay with what was happening to money was a spurting demand for Federal Reserve notes. From an increment of some $300 million annually, circulation now began to increase by $2 billion annually. The American public, so docile in monetary matters, was becoming mutely agitated over the increasing insecurity of their money and fearing perhaps another bank holiday, but unable, like the French and the Germans, to put away some gold coins as defense, were fortifying themselves with a feeble barricade of paper notes.

Since the circulation, by law, required a gold backing of 25 per cent, the obvious was done. In 1968, by act of Congress, the gold reserve against the note issue was summarily removed, thereby breaking the last fragile tie of the United States monetary system to gold. To bolster the appearance of reality to money, however, a further fiction was introduced. Members of the International Monetary Fund were permitted to treat as prime reserves—that is, equivalent to gold—rights to a quota of certain currencies upon which they could draw to settle their international obligations to other central banks. These were known as Special Drawing Rights, and were defined as the equivalent of .888676 grams of fine gold (the gold content of the United States dollar at $35 an ounce). On August 15, 1971, the United States suspended all gold convertibility, and although Congress acted to revalue the dollar at $38 an ounce, and again to $42.22 in 1973, to all effect the United States dollar, which had become the standard of the world, was no more than a piece of paper. To justify this development the Treasury declared official policy henceforth to be that of demonetizing gold. On this question, however, Congress, which had the last word, hesitated to speak, and on the 266 MONEY AND MAN contrary, each legislative act devaluing the dollar continued to declare its new value in terms of so many grains of fine gold.

On December 31, 1974, by Congressional act, United States citizens were again permitted to own and trade in gold. Gold trading soon began at a level some four times the official price, as further confirmation of the collapse of the fractional reserve system of money and the incapacity of man to manage a fiat money system. Such is the record which the school of monetary management has to offer in support of its theories. V. The Phoenix—Silver BEFORE concluding this account of money it is necessary to treat again the metal that for some three thousand years of historical record prior to 1871 had served mankind as the principal medium of commerce, substance of adornment, and repository of accumulated wealth. No understanding of money can be complete without a grasp of the historical service of silver in the commerce of mankind. Although bronze, silver, and gold were being struck in uniform pieces, or coins, as early as the eighth century B.C., silver, until late modern times, was the most accepted and widely used in ordinary commerce. Gold was reserved as the tribute to emperors, the ransom of kings, the indemnity of war, the ornament of princes, the plating of idols. While gold is mentioned very early in the Genesis account of Creation, as found in one of the rivers of Paradise—"Pison, where there is gold: and the gold of that land is good"1—all early references to money payments were in terms of silver, measured by shekels of the Sanctuary standard of weight and fineness.

Until 1871, in modern times, Great Britain was the only major power that used gold as the standard of value. In that year Germany, flush with its victory over France and in possession of a 5-billion-franc indemnity, inaugurated the German Empire with the adoption of a gold coinage and standard. Following MONEY IN DISINTEGRATION 267 this lead the countries of Europe and North America rapidly demonetized silver as a standard of value, though retaining silver as a medium of payments in the form of subsidiary coinage. In 1900, with the shift of the Indian currency system to a goldsterling base, most of Asia followed suit. The consequence of these official actions was not to replace silver with gold in circulation but silver with paper and to throw vast quantities of demonetized silver upon the market. The depressing effect upon the substantial United States silver mining industry led to the enactment of various silver purchase laws, some of which we have already noted.2 In 1932 the price of silver reached the lowest in history, of twenty-five cents an ounce compared with the statutory value of $ 1.29 an ounce by which the dollar had been coined since 1837, and under the Silver Purchase Act of 1934 the Treasury was directed to purchase silver at its discretion until the monetary stock of silver was equal to onefourth the total monetary stock of gold and silver.

Under this program and succeeding legislation the Treasury stock of silver reached a total of 2.43 billion ounces in 1942, of which about half was held in coined dollars or in bullion as reserve against silver certificates issued; the balance, representing the seignorage,* was held in the Treasury general fund. The program was only partially successful so far as the mining interest was concerned, for silver production went into a secular decline. By 1960 there was only a handful of silver mines in operation, silver production was less than twothirds of the production at the beginning of the century and nearly twothirds of that production came as a by-product of the smelting of copper, lead, and zinc ores. Prices had recovered to ninety-one cents an ounce by 1960, but by comparison with prices for other nonferrous metals in 1900 and 1960, or in consideration of the historical relationship with gold, silver was a cheap metal.

Unlooked for consequences of the demonetization of silver and the United States silver purchase program were the disappearance of a visible silver supply throughout the world and a * That is, the profit between the price paid for the silver and its monetized value of $1.29 an ounce.

268 MONEY AND MAN United States monopoly of the available stocks. The importance of this monopoly became apparent in two world wars, but its actual and potential significance was ignored among Treasury and central bank officials, monetary economists, and the silver manufacturing interest. When World War I broke out, the British Government discovered that the people of its Indian empire were increasingly suspicious of the paper money secured by sterling credits in London and demanded good silver in exchange for their goods and services. As Britain had demonetized silver, it had insufficient supply and appealed to the United States. Under the Pittman Act, 200 million ounces were made available by melting down silver dollars held by the Treasury. Hardly had the war ended when this salutary lesson in monetary economics was forgotten. In fact, during the following decade, under the influence of prevailing monetary concepts, various American "money doctors" went about the world prescribing central banks on the model of the Federal Reserve System, and recommending the demonetization of silver. By the time World War II broke out, the only power in the world employing silver as an official element of its monetary system was the United States and the only paper money anywhere in the world fully covered by the metal it purported to represent was the United States silver certificate. * With the renewal of war in 1939, a demand again arose in Asia for silver. Despite decades of acquaintance with paper money, and despite official efforts to wean the populations from silver coin, the masses of working people rebelled against paper * It is arguable of course that the silver certificate was equally flat money since the silver behind the certificate was valued at $1.29 an ounce, whereas the market price since 1920 had never exceeded 91 cents an ounce. However, since Federal Reserve notes were backed only by 25 per cent gold, silver certificates backed by silver worth anything above 35 cents an ounce in the market were somewhat more reliable, particularly as redemption of the certificates in the metal was never suspended, whereas the holder of a Federal Reserve note could only whistle for his gold.

MONEY IN DISINTEGRATION 269 money. Again the United States Treasury vaults were opened, and through the mechanics of the Lend-Lease Act, 410 million ounces of silver were shipped to Asia and the South Seas to maintain confidence and allay unrest. What the money managers had overlooked is that while silver might be dethroned as a medium of payment or standard of reckoning, it retained a vast importance in Asia as a store of value. Among these poverty stricken millions, a piece of honest silver saved from the day's or week's earnings was the beginning of financial security, independence, and contentment. When the colonial and other sovereignties began to substitute paper money and debased silver for good silver coinage they opened the flood gates to political discontent and revolution. The experience of Iran is of interest. In 1294 A.D., Kai Khatu, the Mongol ruler of Persia, on the advice of his vizier and in imitation of his brother monarch, Kublai Khan in China, introduced paper money into his realm. This action aroused such resentment among the merchants that a riot ensued. The vizier was seized by the mob, torn to pieces, and thrown to the dogs.

The edict establishing paper money was withdrawn and no Persian monarch until the twentieth century dared impose paper money upon his subjects.3 The standard of value and the common medium of exchange continued to be silver of high purity. Paper money was an alien device until 1931, when the modern-minded Reza Shah introduced a national bank of issue and gradually withdrew and melted down the silver coinage in circulation. It is of interest to record that Reza Shah lost his throne just ten years later, and while the one event was not the cause of the other, it nevertheless facilitated the execution of the other. When the Soviet and British governments concerted in 1941 on the occupation of Iran, the Shah's forces were able to offer only feeble resistance, and the Shah was compelled to abdicate. The two powers, however, affirmed the juridical independence of the country and forswore any interference with the internal administration. By these declarations they excluded the pre270 MONEY AND MAN rogative of a conqueror, of levying taxes, and they were consequently compelled to find means of financing their occupation.

Twenty years earlier, during World War I, when Great Britain sent an expeditionary force into Persia, the unfamiliarity of the people with notes and exchange compelled the commander to carry quantities of British gold sovereigns; with these, however, he had been able to buy supplies, recruit workers to clear the passes of snow, and even to organize a guerrilla force.4 Now, a simpler and less expensive procedure was available. It was to set the printing presses to rolling. The occupying powers coerced the supine Iranian government into financial agreements by which the Iranian national bank was compelled to provide unlimited quantities of rials in exchange for sterling and dollar exchange at a fixed rate. Subsequently the British government agreed to convert 40 per cent of the sterling credits into gold at the official parity, stipulating, however, that the gold be kept either in Canada or South Africa.

To the consternation of the occupying authorities, the rial, which was theoretically the most heavily insured currency in the world, began a precipitate depreciation that carried with it— since they were tied by the exchange agreement—the pound sterling and the United States dollar. * Chaos spread in the market, goods disappeared into hoarding, including precious wheat and copper, and famine gnawed at the country. Within the year conditions had grown so beyond the feeble powers of the government that it was counseled to seek fiscal advisers from abroad, and among these the author was appointed Treasurer General by action of the Iranian Parliament. At the time of his arrival, in January, 1943, such was the disruption of the markets and the depreciation of the currency that an automobile tire that normally sold for $40 cost $700 in the bazaar. The author had some familiarity with the country from resi* Also the ruble, but the ruble had no international value in any case, and the Soviet government had guaranteed in sterling and dollars its drawings of rials.

MONEY IN DISINTEGRATION 27 1 dence twenty years earlier, when he served as a teacher in northern Iran and relief worker in the Soviet Caucasus. He had observed the relative economic stability of the Iranian villages despite the breakdown of political authority and an almost nonexistent administration, and for contrast the chaos and prostration of the cities of the Caucasus, ruthlessly governed by an all-powerful Communist dictatorship. In the one region, trade and livelihood persisted with the aid of a plentiful supply of good silver coinage; in the other such anemic trade as one could see was done by means of a depreciated paper currency so worthless that it often went by weight—a bundle of notes in one scale, a loaf of bread in the other. Persuaded that only with the precious metals freely available as a medium of payment and store of value would the hoards of grain and copper be released and prices stabilized, he proposed that the minting of silver rials be resumed. As the dies had been broken and the mint had fallen into disrepair, this idea had to be abandoned.

He thereupon recommended that instead of keeping the gold locked up it be put to work to discharge its historic functions. He proposed that the occupying powers finance their costs with gold instead of sterling and dollar exchange, and that gold be sold directly in the market, to relieve the strain on the printing press. Not only would the process stop the expansion of the note issue, but it would reduce the costs of occupation, since the bazaar price of gold was equivalent to $70 to $80 an ounce, as against the $35 an ounce at which dollars and pounds were being sold to the Iranian national bank for rials. Importantly, hoarders would have a more effective means of storing their wealth than wheat and copper, and these commodities would return to the market. The recommendation was adopted and the United States Treasury offered to provide the gold. As it was prohibited by law from exporting coin, it shipped instead quantities of gold bars, and these were put on sale along with gold of various coinages held by the Iranian national bank. The success of the operation was limited by the fact that the market for gold bars, since they were expensive, was restricted; nevertheless, it proved 272 MONEY AND MAN sufficiently effective and it was extended throughout the Middle East War Theatre.

Similar testimony to the importance of good silver money in the maintenance of economic and political stability among the vast populations of Asia and Africa is afforded by John Leighton Stuart, for over forty years a missionary in China and ambassador to China during the Nationalist-Communist war of 19461949. The United States Government was supporting the Nationalists with arms, munitions, and gold, but the authorities were keeping the gold impounded in Taiwan, and issuing against it notes termed Gold Yuan. In his recollection of these events Stuart commented: "More crucial than strategy were silver coins with which to pay the troops. They did not want Gold Yuan, but four silver dollars per month apiece—two U.S. dollars—or even two of these would sustain their morale. Otherwise, Communist agents could buy them off with hard money or even promises. The government had nearly 300 million U.S. dollars in gold and silver bullion, but most of this was safely in Taiwan."5 Two developments following World War II served to restore the question to public importance. The first was an immense expansion in the consumption of silver in industry. Since the invention of photography and the motion picture, large quantities of silver were being consumed in photographic silver.

Technology now found new uses for which silver was particularly adapted—in brazing alloys in a vast range of appliances, for electrical contacts, in ceramics for the electronics industry, for electrical storage batteries, as a catalyst in the chemical industry, and for water sterilization. By 1960 industrial consumption in the United States required 100 million ounces annually, about three times United States mine production, while consumption elsewhere took an equal amount. In addition, the development of coin vending machines and the parking meter created a new demand for subsidiary coinage. Silver for this purpose began to take from 40 to 50 million ounces annually in the United States. Abroad, governments were MONEY IN DISINTEGRATION 273 discovering that only the precious metals were adequate to the dignity of sovereignty and began to replace their small denomination paper notes and base metal coinage with silver. Including coinage, total free world consumption of silver began to exceed 300 million ounces annually, against world production of around 225 million ounces.

This difference between consumption and mine production was met largely from the seigniorage (general fund) silver held by the United States Treasury. Under the Act of 1946, the Treasury was permitted to sell this silver at not less than 90Vi cents an ounce, and increasing amounts began to flow into the market. By 1961 the stock, which had amounted to nearly XV\ billion ounces in 1942, had been reduced to around 22 million ounces, and on recommendation of the Treasury the President, on November 28, 1961, ordered suspension of further sales at 90V2. cents. Thereafter Treasury silver was available to the market only by redemption of silver certificates. Market prices moved upward and in July, 1963, reached $1.31 an ounce at which price it was profitable to melt down silver dollars. Congress now took the historic step of demonetizing silver. The Silver Purchase acts were repealed, and the free silver market was restored by repeal of the prohibitive Transactions tax.6 The only silver money, apart from subsidiary silver coinage, was that represented by silver certificates, and as the market was now at the mint price the amount of these certificates continually diminished as notes were presented for redemption in exchange for silver bullion.7 Meantime a voracious demand developed for small silver, which was coined at $1.38+ per ounce, and this demand was added to by the minting of commemorative half dollars with the image of the assassinated President Kennedy. These disappeared as rapidly as they came from the mint. In 1964 coinage took over 200 million ounces of silver, and in 1965 over 320 million ounces. These figures compare with 56 million ounces in 1961.

Congress now, under pressure from the Treasury, abolished silver coinage, except for a debased half dollar containing only 40 per cent silver, but fraudulently deceptive by means of a cladding of 80 per cent silver hiding a core consisting mainly of 274 MONEY AND MAN copper.8 As a substitute that would have the electrical properties needed to activate coin vending machines (that were made to work with silver) hermaphroditic "sandwich" dimes and quarters were devised, made of a layer of copper between layers of nickel-copper alloy. The new coinage resulted in reduced consumption of silver in coinage but did not allay the public demand for the metal, which now fed upon the silver reserve. By presenting certificates for redemption the public drew down the Treasury stock from 1.9 billion ounces at the beginning of 1964 to 703 million ounces at the end of 1966, and by 1970 the Treasury supply was substantially exhausted, save for 165 million ounces set aside as a strategic reserve.

There remained, however, a stock of some $484 million silver dollars in circulation, profitable to melt at above $1.29 an ounce, and some $2 billion subsidiary silver, profitable to melt at above $1.38 an ounce. These supplies began to go into the pot or the mattress, and in 1967 the open market breached the mint parities and rose to $1.87 in New York. In 1970 the Treasury, its reserves exhausted, ceased all silver mintage, and thus ended the last vestige of precious metal coinage in the United States. VI. Retrospect THE evidence of modern history confirms the inability of mankind to maintain a standard of value and means of payment based upon a combination of gold and silver. Bimetallism proved unworkable. Whether a monetary system based upon one of the metals could survive in the complexities of modern commerce is still to be discovered, for the gold standard, that became general after 1871, was soon degraded to a gold-debt standard, the stability of which was dependent upon the wisdom of the money managers. The incapacity of the money managers is also evident.

Is it possible to return to a metallic money? The principal MONEY IN DISINTEGRATION 275 argument offered to the contrary is the scarcity of gold, but a substance of which some 45 per cent or more of the total known production is still in existence can hardly be called scarce. It is scarce only in regard to the amount of currency related to gold at a given ratio of value. An appropriate revaluation of the price of gold would provide abundance of the metal for monetary use. A mechanism by which such revaluation of the dollar could be undertaken without a convulsion of the debt structure was proposed in the 1934 edition of this work. Other methods are currently under discussion; the task is not insurmountable; the details need not detain us here. What is more to the point is the capacity of mankind, and more specifically the people of the United States, to exercise the restraint necessary for the maintenance of a monetary system linked to a precious metal, the total quantity of which is relatively stable. It is the moral dimension of the money problem with which we must deal.

Money, first of all, is a measure—a common and accepted standard of value for current transactions and future payments.* The requirements of a measure were given by Moses to the children of Israel three thousand and more years ago, and the requirements are imbedded in the moral structure of Western culture: "Just weights, just balances, a just ephah, and a just hin, shall ye have: I am the Lord your God."1 It was in acknowledgment of this principle that President Roosevelt declared to the World Monetary and Economic Conference in London in 1933, that "the U.S. objective would be that of giving currencies a continuing purchasing power that does not vary greatly in terms of commodities and need of modern civilization" and added, "The U.S. seeks the kind of dollar which a generation hence will have the same purchasing and debt paying power as the dollar value we hope to attain in the near future."

We pass over what has happened to the purchasing power of the dollar in the years since. Despite this hopeful promise, the * Most authorities also say that it must have intrinsic value, and serve as a store of value, and argue the relative indestructibility of gold for this purpose.

276 MONEY AND MAN seeds of inflation had already taken root in the fertile soil of the Federal Reserve System. In 1921 the board had adopted a major policy decision, that a principal function of the System was to maintain a stable price level. Euphemistically reasonable, this meant that the maintenance of a sound currency through adequate reserves of gold was no longer the substance and object of monetary management. Since the whole purpose of industrial technology is to make goods more abundant, hence cheaper, the effect of the policy was to direct the money system in the interest of creditors rather than debtors, producers rather than consumers. We have in previous sections surveyed the record of misuse of the monetary power to finance government deficits and various kinds of speculation. We may now note the other major divergence from correct monetary principle. The Employment Act of 1946 declared public policy to promote conditions of useful employment for all, and the monetary system has since been manipulated to this end, particularly by forcing Federal Reserve credit into the commercial banking system regardless of the state of commercial need and indifferent to the integrity of the standard.

Growing fascination by economists and government administrators with state planning, as practiced by soviet-style governments, led in 1975 to the introduction by two leading senators of a bill to provide for a state planning board headed by an official of cabinet status. A plan without a program is a mere intellectual exercise: materials and human resources must be moved about in conformity with the plan. In a country not yet a police state the means to the end is money. Since taxes are onerous, the easiest way to produce money is by the printing press. Abetting this procedure is a school of economists who advocate a steady, mathematical increase in the supply regardless of the reserves to maintain its integrity. The principal theoretical argument of the monetarists—as they are called—is not a defense, but an attack. The use of gold MONEY IN DISINTEGRATION 277 —since the Renaissance, the ultimate standard of value—is derided as a relic of barbarism, and the mining of gold, only to store it in Fort Knox, as arrant folly. Gold has but limited commercial or industrial use, we are told, and hence no meaning in a monetary system.

It should be elementary, of course, that if gold has no importance for the individual, it has little monetary importance to government, and can be dismissed in monetary discussion. Gold reserves in central banks would be as useful as a warehouse of pork in Saudi Arabia. It is evident, however, that despite the protestations of theorists, gold remains of immense importance to individuals, and so long as it does it will be useful as money. The reason for this importance is not hard to discover: it lies in the corruptibility of governments and the uncertainty of personal security. Despite the spreading influence throughout the world of the Prince of Peace, despite all the paraphernalia of the United Nations and networks of treaties and alliances, despite the polarization of influence between two great powers, each avoiding a confrontation, the possibility of war, or at least of political turmoil, continues to enter into the considerations of the prudent. With them, as with the millions who remember, or who have witnessed or experienced, the devastation of war, the disruptions of trade and industry, the uprooting of populations, a stock of the precious metals, however small, is a shield, however feeble, against the shocks of fortune.* Whatever may be the arguments for or against a metallic money, the subject is not closed until we consider the alternatives. In the absence of metal, the substance of money is no more than debt, the fragile promises of men and the hopes upon which they are based. A consideration of man and his money cannot be complete without some reference to the phenomenon of debt in the modern world.

* Recent examples are the influx of refugees from Cuba and from Southeast Asia, and the flight of Portuguese from Angola.

278 MONEY AND MAN VII. The Incubus of Debt As debt is the essence of modern money, so the problem of money is the problem of coping with debt. Debt is not only a system of money and financial status, but an attitude of mind. It is also a canker which is gnawing deep into the vitals of society. With the monetary system as the source of infection, it has spread through the veins of economic enterprise, penetrating with its poison every organ of production and distribution. Indeed, so imbedded has the idea of debt become in the conception and attitudes of people, so coated over with the nacre of terminology—debt is no longer "debt" but "credit," "personal finance," "deferred payments," "securities," and the like—that the nation has insensibly saddled itself with a mountain of monetary obligations that may require a revolution to remove. Before pursuing further the implications of the money-debt system, let us examine the extent of debt. The researches of the Twentieth Century Fund, completed in 1933, give us a summary of the debt structure of this country at that now distant period: In 1913-1914, total longterm debt amounted to thirty-eight billion dollars, or equivalent to 19.7 per cent of the dollar estimate of national wealth ($192,000,000,000) and the debt service amounted to $2,143,000,000, or a 6 per cent charge upon the national income ($36,000,000,000). In 1921, the postwar depression year, total longterm debt amounted to seventyfive billion dollars, or 23.4 per cent of the national wealth ($321,000,000,000) and debt service consumed 7 per cent of the national income ($66,000,000,000). At the height of prosperity, in 1929, the longterm debt amounted to 126 billion dollars, or 32.7 per cent of the national wealth ($385,000,000,000) and debt service consumed 9 per cent of the national income ($85,000,000,000). The depression that set in at the close of 1929 reduced the monetary value of the national wealth to $300,000,000,000 in 1931-1932, but the longterm debt increased to 134 billion dollars, or 44.7 per cent of the national wealth, and debt service consumed 19.8 per cent of the reduced national income ($40,000,000,000).

In addition to the longterm debt, there was a steadily increasMONEY IN DISINTEGRATION 279 ing amount of shortterm debt, which rose from fifty-one billion dollars at the end of 1913 to 150 billion dollars at the end of 1929, and 103 billion dollars at the end of 1932. At the end of 1932, therefore, the combined total of short-and longterm debt was 237 billion dollars, against an estimated national wealth of 300 billion dollars.1 By 1970, total assets of the United States, as estimated by the Federal Reserve Board in the Flow of Funds Accounts, amounted to $4,076 billion, while total debt had risen to $3,208 billion, or to nearly 80 per cent of assets, while the debt service, at the interest rates occasioned by the rising tide of inflation must be calculated at around $225 billion a year, or 23 per cent of national income. * More disturbing than these figures are the data for personal debt, or "consumer credit," fostered by charge accounts and installment buying. Department of Commerce compilations report this form of debt has risen from $5.7 billion at the end of World War II (1945) to $127 billion 25 years later, a multiplication of twenty-two times. A more recent phenomenon is the growth of credit and finance, the outstanding balances of which increased in the three years 1967 to 1970 from $828 million to over $3 billion.2 Attempts to portray the debt burden statistically are, however, apt to be misleading. Debt is also credit; bonds in the hands of investors constitute wealth to them and the interest therefrom, income. Bonds, evidences of longterm debt, may be used as security, or collateral, to obtain shortterm loans; the debts thus overlap and multiply. Obviously, also, a monetary conception of national wealth is deceptive. Wealth is tangible goods and property; the dollar expression is merely the market value. The reduction of eighty-five billion dollars in estimated national wealth between 1929 and 1933 did not mean any destruction of * Figures are for gross debt, which includes certain duplicating governmental and corporate debt (chain of debt). Net debt in 1970 is estimated by the Dept. of Commerce at $1,844 billion, an increase from $125 billion in 1932 and $490 billion in 1950.

280 MONEY AND MAN actual wealth, except in those cases of disintegration and destruction caused by the malfunctioning of the money mechanism —properties sold under foreclosure and passing into the hands of less capable management, factories dismantled and farms abandoned because they did not earn interest and taxes, conscious restriction of productive activity in order to create an artificial scarcity and thereby raise prices, and such like. The real effect of the money debt system can perhaps be more fully appreciated from the theoretical approach. The fundamental opposition of interest growth and natural growth was argued by Lawrence Dennis in a 19323 work, and analyzed statistically by Bassett Jones.4 To restate their thesis, the burden of debt service constantly tends to overreach the capacity of industry to support it, and the pressure of interest upon income produces the recurrent cataclysms of depression, default and bankruptcy. Debt tends to mount at a compound interest rate. Investors in savings banks, and investors who follow the policy of diversifying risks, operate upon this principle: a dollar compounded at 3 per cent annually is doubled in twenty-four years; at 6 per cent, in twelve years.

So long as the institution of debt is stable, the law is inexorable. "Capitalism," as Stuart Chase phrased it, "operates to a definite rhythm, the rhythm being a curve of development which substantially takes the form of a 3 to 5 per cent compound interest graph—varying at different times and in different countries."5 On the other hand, the physical growth of wealth and economic activity necessary to support the interest on debt cannot proceed at any compound interest rate beyond certain definite limits. Neither the laws of physics nor of biology permit an indefinite growth of physical goods or population. Although physical growth has expanded at an inordinate rate in this country, the process may now be slowing up. Obviously therefore, either the interest rate must steadily decline until it approaches zero, in order to bring the growth of debt to correspond with the growth of physical wealth and activity, or, as Dennis argued, there must occur periodical collapses of the debt structure in order to bring it within a proper relationship to wealth. We appear, in this eighth decade of the twentieth century, to be MONEY IN DISINTEGRATION 281 going through one of these periodical collapses of the debt bubble.

It is not necessary to discuss, in such a study as this, the social and moral effects of debt upon society. Materialism, lack of restraint, mania for speculation, are characteristics of modern life all too prevalent to allow complacency over the wholesomeness of the age. These qualities are certainly stimulated by the ease of going into debt. On the other hand, the necessity for repayment of debt, especially when times are hard, induces a loss of independence, unrest, discontent, and political and social unsettlement. There is, however, one phase of the debt problem which has generally been overlooked and to which attention must be called. That is the fact that our system of money based on debt has destroyed one of the principal functions of money—that of serving as a store of value. At the same time that it has aggravated the business cycle, by encouraging speculation, it has made it almost impossible to build up reserves against the day of inevitable collapse. Under our system of money, it is well nigh hopeless for the average man to save against a rainy day. For savings, under our scheme, are not reserves; they are used by the banking system, they are spent in the capital markets, and when they are needed, they are discovered to be immobilized, to be invested in bonds and loans the value of which is dependent upon a continuation of prosperity.

The effects of this process are made clearer by analogy to a householder whose barn is destroyed in a storm. If he has a golden guinea saved away, he may rebuild his barn. But under the system of deposit money, in which money is representative not of gold, but of wealth, or debt, the barn is also his money, and when it is gone, the money is gone. Stated more definitely, when national calamity strikes—be it the result of economic maladjustments, physical disaster, or war—purchasing power, if money is sound and substantial, is always available for rebuilding, for taking up market surpluses, for discharging debt.

282 MONEY AND MAN But deposit money floats with the tide. Being based upon debt, it becomes worthless when any considerable body of bank customers are no longer able to discharge their obligations. The bank fails, carrying with it the purchasing power of the community, especially that portion of the community which has husbanded its resources and has converted them into the promises to pay of the bank, as deposits. With the whole purchasing power of the community destroyed there is no one left able to come to the rescue. Properties and commodities are thrown frantically on the market in the hope of finding a buyer, until there is a glut for which there is no effective demand; prices are forced lower and lower to meet the shrunken buying power, and the whole structure of society topples in ruins. To examine the problem more concretely: in 1935 the Social Security System was set up by which employers and employees were to pay into a reserve against old age requirements. For the next 40 years the reserve continued to grow, invested in United States securities, as payments to annuitants were less than contributions to the Fund. By 1974 the reserve amounted to $45 billion, but the actuarial realities overtook the System, which was now faced with the necessity of drawing upon its reserves.

With a federal budget deficit of $44 billion, how could the System liquidate its Treasury securities on the market to acquire cash except by crowding all other borrowers from the capital market and depriving industry and trade of funds necessary to carry on their functions? The reverse of debt is credit—to believe. The inherent defect of a monetary system based upon debt is that it rests upon the sands of confidence. The sands run out, and the whole structure topples. Runs occur on the soundest banks, as on the weakest, and as for the whole system, whether it is supported by nothing but confidence, or whether only the last dollar outstanding is so supported, the whole structure is shaken by every wind of popular apprehension.

MONEY IN DISINTEGRATION 283 Inescapably we are brought to the conclusion that our money system will not achieve the stability and strength necessary to enable it to support the vast and complicated structure of modern economy until the moral dimension of the question is faced. Whether, as a practical matter, a money system is based on debt, as at present, upon the good faith and credit of the sovereignty creating it, or whether money should be intrinsic, a metallic coinage or a metallic reserve freely available to note holders, the ultimate answer is a moral response. In the words of a resolution adopted by the Institute for Monetary Research, Inc., "The essence of the money problem is moral more than technical—that as money is the standard of economic value and measure of commerce the manipulation of money is evil, whether in the interest of creditors or debtors, industry or labor, producers or consumers, government or taxpayers; that the integrity of money should be maintained by clearly defined content and composition, and by adherence to the definition."