Promise to Pay
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Robert McNair Wilson
Promise to pay
An Inquiry Into The Modern Magic
Called High Finance
Robert McNair Wilson
Promise to Pay
An Inquiry Into The Modern Magic
Called High Finance
First Published in 1934
Published by Omnia Veritas Ltd
www.omnia-veritas.com
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Table of Contents
preface
Introduction
I Confidence
II Economic Law
III The “Credit Cycle”
IV The Balance Of Trade
V Foreign Exchange
VI Remember The Moratorium
VII International Finance
VIII The Gold Standard
Notes And Quotes
In the civilised world there are enough raw materials, machinery, labour and scientific knowledge to satisfy the needs of all the inhabitants.
Poverty and hunger exist because people have not enough money to buy all the output of modern civilisation at a fair price to the producers.
When there is a shortage of anything the most obvious remedy is to create some more and there is no real difficulty in creating more money. Promise To Pay shows how this should be done when money is backed by goods and services.
The creation of money should be in the hands of the State or Head of Government and not in the hands of private banking. The state would issue sufficient money to enable the buying power to keep pace with production.
Paper money issued by banks is not real money but “Promise to Pay” money and the amount in circulation bears little relation to the amount of goods and services available.
When there is less money than goods, people go short of food and clothes. When there is more money than goods prices rise and people pay more and more for less and less.
Preface
Next to the weather, finance is now the most talked about subject in the world. But discussion remains difficult owing to the confusion which exists in many minds about the nature of money. In the following pages an attempt has been made to describe the money system so that its principles may be grasped easily by anyone above the age of sixteen years.
I wish to thank my friend C. Featherstone Hammond for the great help he has given me.
R. McNair Wilson.
Introduction
It is a crime in this country to coin money or to print banknotes. The reason is two-fold. If a man counterfeits money and spends it, he has gotten goods without working for them, and has taken by stealth a little of the riches of his neighbours.
The last crime is more heinous than the first as can be understood by consideration of a simple instance. Let us suppose that we have taken our places at an auction sale. There are few buyers and prices, in consequence, are low. Then a stranger enters the salesroom and begins to bid. The auctioneer immediately gets higher prices. The newcomer’s money has made everything in the sale room more valuable and has, correspondingly, reduced the value of all the money on offer.
By bringing his money to market and using it there to buy goods, the counterfeiter raises the price of goods, and so lowers the value of money. He enriches sellers at the expense of buyers by increasing demand; for money is most valuable when it is least plentiful. If it was possible for a counterfeiter to double the number of £1 notes in use, each £1 note, of those existing before the counterfeiter began his operations, would buy only half the quantity of goods which it bought before. In other words each one pound note would soon be worth only 10s [50 pence - ed].
Counterfeiters, therefore, are thieves in the respect that they slip their hands into other men’s pockets and take away a part of the value of other men’s money. All have to pay for the goods which these rogues are getting. Like brigands, indeed, they force honest folk to give them tribute. The theft, so secret and hidden that none is aware of it, is not less real than the picking of a pocket or the emptying of a safe.
It follows that any creation of new money, no matter by whom made, diminishes the value of the money already in use. The owners of money already in use suffer loss, when new money is put into circulation, without knowing how this loss has occurred. All that they are aware of is that the price of goods has risen and that, in consequence, their money buys less. In fact they have been compelled, without their knowing it, to pay a kind of ‘‘invisible tax’’.
Who gets the benefit of this invisible tax? In the case of the issue of false money the benefit, obviously, goes to the counterfeiter. In the case of the issue of good money, the person or persons issuing the good money is enriched.
In former times new, good money was issued only by the King and his Government. It was used to pay for public works such as the upkeep of the army and navy and the service of public health and education. Thus, what the owners of money had lost, when the new money was created, came back to them, later, in the form of a reduction of taxation. The ‘‘invisible tax’’ took the place of the visible one. But since, in modern days, Governments have everywhere surrendered to private individuals the right to create what is in effect new money, the benefit gained by the creators of the new money is no longer returned to the public. The private creators of new money, like the counterfeiters, keep the benefits to themselves and thus profit at the expense of all their neighbours including the King and his Government.
Worse still, the surrender to private individuals of the power of creating new money has given these private individuals the power to change the prices of goods, or in other words, to alter the price-level. The more new money they create, as has been seen, the dearer will goods become.
In these circumstances ordinary citizens owe it to themselves and to one another to obtain some understanding about the way in which money is now created by private individuals and about the uses which these private individuals make of the money created by them.
I Confidence
From very early times people have taken their money to strong-rooms and vaults because of their fear of burglars. In most towns some citizen built such a strong-room and set up in business as the keeper of his neighbours’ gold and silver. He offered security and charged a small fee for it.
He used, further, to supply his clients with receipts for their money. If you put £100 in gold into his strong-room he gave you an IOU for £100.
When you came back to take the money away the IOU was destroyed. The IOU in other words was a promise-to-pay signed by the owner of the strong-room.
The particular owner of a strong-room, with whom we are now concerned, happened to be an observant man. He noticed after a time, that very little of the gold and silver which had been entrusted to him was ever taken away again. People brought hundreds of pounds; but they seldom wanted to remove more than a few pounds at a time. He noticed, further, that people whom he had not seen before came to his strong-room with IOUs and demanded money for them. These people explained that they had taken the IOUs in payment for goods supplied or in payment of debt.
‘‘Bur my IOUs are not money,’’ he protested. ‘‘Why should you take them instead of money?’’
‘‘Because we know that you’ve got the money here in your strong-room.’’
‘‘How can you know that?’’
‘‘We trust you. Those who have taken your promises-to-pay have always got their money when they asked for it.’’
‘‘So you are using my promises-to-pay instead of money? Just as if they were real money?’’
‘‘Why not? It’s much safer and more convenient to use a slip of paper than to carry round bags of gold or silver. We all know you in this town. Your name on a promise-to-pay is as good as gold. The shopkeepers take your IOUs. One
can buy food and clothes - anything at all - with them. Why bother to draw out gold or silver unless one is going on a journey into towns where your name is not known?’’
The owner of the strong-room thought long and deeply about this conversation. It was true; his promises-to-pay were being used instead of money by the whole town. Farmers took them in exchange for their beasts and crops at the markets; shopkeepers took them; the doctor and the lawyer and even the tax-collector took them. Very well then, they were money, seeing that money is anything for which people will give goods or services or which they will accept in payment of debt. The owner of the strong-room opened the door of his vault and looked at the bags of gold and silver on his shelves. Suppose that, by chance or ill-luck, half of that money got lost, nobody would be a penny the wiser or a penny the worse off. There would still be enough, far more than enough, left to meet all the demands for gold or silver that were ever likely to be made. The promises-to-pay would go on circulating just the same; people would take them just as eagerly as before.
The owner began to study his ledgers. He found that, on average, only one-tenth part of the gold and silver held by him was ever asked for. If a client had put £100 in the strong-room, the odds were that, during any year, that client would not draw out more than £10. The other £90 would lie idle on the shelf from one year’s end to the other. That meant, as he saw, that if he lost even as much as nine-tenths of all the gold and silver entrusted to him, he would still be in a position to meet every claim for gold or silver that was likely to be made upon him. His promises-to-pay would be just as highly valued as before and just as readily accepted.
For all those who wanted gold or silver could be supplied with it the moment they presented their IOUs.
He had, at this time, some £10,000 in gold and silver in his strong-room and there were, therefore, promises-to-pay to the value of £10,000 in the hands of his clients. Why not increase the number of promises-to-pay to £100,000? The idea seemed so wild, so preposterous and so dangerous that, at first, he put it away from him. How could he sleep easily in his bed if he knew that people held IOUs for £100,000 in his strong-room?
Could he be sure that his promises-to-pay would go on circulating instead of real money? Might not all his clients descend on him, one day, in a body, with their IOUs in their hands, demanding gold and silver in exchange for them?
But that mood of panic passed. Day followed day without bringing any change in the habits of his fellow townsmen. A few of them came to take away small sums of money. These were people about to travel into regions where his name was not known and where, therefore, his IOUs would not be accepted, or people in need of pocket money or people obtaining coin with which to pay servants’ wages.
The great mass of the population never entered his door. They went on paying and receiving in the shops and markets his IOUs exactly as they had always done. And still his ledger bore witness that, on an average, only one-tenth of the quantity of gold and silver in his strong-room was ever asked for.
Timidly, therefore, and with great caution, our owner of the strong-room went into the business of lending promises to pay what he did not possess. Having found a client who was short of cash, he offered him £100 worth of IOUs on condition that the loan was repaid by a certain day and that it carried, meanwhile, interest at 5 per cent. As a guarantee of good faith the borrower handed over the title deeds of his house, saying that, if he failed to repay the IOUs the lender could sell the house and so recoup himself.
This guarantee given by the borrower caused the lender a pang of conscience. For he was well aware that he had lent no money at all buy merely a promise to pay money. The fact that people would give goods for these IOUs did not in the least alter the fact that they were IOUs and nothing more - IOUs moreover, which lacked a backing of gold and silver.
He had created these IOUs out of nothing; why should he receive interest on them? Again, since they were going to play the part and fulfil the functions of true money, was he not guilty of creating money in the manner of a counterfeiter? Had his strong-room not become a kind of private mint?
These uneasy questions troubled him for a time but when the loan was repaid, with interest, his scruples vanished. After all, he told himself, he had not created any new money. All that he had created were promises to pay money. What had really taken place was a fair exchange of debts. He had borrowed the title deeds of his client’s house; his client had borrowed the title deeds of £100. As his client continued to live in the house, his client also was obtaining interest on what he had lent.
But conscience continued to prick the banker now and again. The house, as he knew, had cost his client hard work. It had been earned; whereas the IOUs for £100 had cost nothing. They had been created out of nothing, invented by a stroke of the pen. Worse still, they played the part of money, exactly like false coin of forged banknotes. They added, therefore, to the total quantity of buying-power and so, by raising prices, had made all the rest of the money in the town a little less valuable.
Every other citizen had thus been forced to contribute his or her share of the newly-created ‘‘money’’. He, the lender of the IOUs, in other words, had stolen from all his fellow citizens, and had obtained interest upon the stolen ‘‘money’’.
But the system had worked well and conferred benefits on others. Nobody so much as suspected that a robbery had taken place. On the contrary, everybody was delighted. The borrower had been able to develop a new line of his business; there was more trade in the town; it had been possible to give employment to some idle hands. The lender noted all this and proceeded, quietly, to find new borrowers for his IOUs until he had lent £100,000 worth of them and was, consequently, in receipt of an income from interest of £5,000 a year. As soon, moreover, as any loan was paid back he made haste to relend it.
The town now had IOUs for £100,000 in its shops and markets. Prices began to rise sharply and everyone with anything to sell made a profit. As a consequence there was a boom in business and large quantities of goods were manufactured. The farmers cultivated new acres and more food came on the market. But this rise in prices went on only while the owner of the strong-room was engaged in making his loans of IOUs. He noticed that each time he stopped lending prices stopped rising. And each time prices stopped rising business in the town fell away. The hope of making bigger and bigger profits on a rising market had been taken away.
He began to find himself, now, in a difficulty. Because he had lent the whole of the £100,000 (in the form of IOUs) he had set out to lend. He visited his strong-room again. His shelves were no longer crowded with bags of gold and silver. On the contrary, they were nearly empty. His ledger showed him that the amount of gold and silver which he took in each day only just equalled the amount of gold and silver which he had to pay out to the people who wanted to change his IOUs for actual coin.
He gave the matter further careful consideration. Every one of his IOUs, those he had lent as well as those he had given as receipts for gold and silver, were promises to pay gold and silver. Consequently, any of the borrowers of his IOUs could ask for gold and silver in exchange for them.
All these borrowers, indeed, as he very well knew, supposed that it was gold and silver which they were borrowing. They had taken IOUs simply for convenience sake because, like their fellow townsmen, they believed that the lender was good for the money. If the slightest suspicion got about that all the IOUs could not, instantly, be transformed into gold and silver - but he put that terrible thought away from him. He had always had enough coin on his shelves to meet the demands made upon him.
Everybody who had presented an IOU at his counter had instantly obtained gold or silver for it.
But if he went on lending IOUs above the £100,000 worth things might be different. His original calculation had proved in practice to be sound. It was true that people used IOUs in preference to gold and silver and that the amount of gold and silver asked for was, roughly, about one-tenth of the amount of IO
Us asked for. He had started a banking business.
People paid in his IOUs mixed up with gold and silver coins just as if the one was as good as the other. They carried away the same mixture, coins for payments outside of the town and IOUs for payment to their fellow townsmen. Confidence in him was complete. But it depended upon the apparent interchangeability of the metal and the paper.
That must, therefore, be maintained at all costs. In no circumstances could he dare to create IOUs in excess of ten times his holding of gold and silver. He must, therefore, now that he had created the full amount which his holding of the precious metals allowed him to create, draw in his horns and refuse to lend more.
Instead, therefore, of welcoming new borrowers, as had been his custom while he was spreading out his IOUs, he began to discourage them: he could not, he said, see his way to make further loans. He had already gone as far as he felt able to go. The buoyancy at once went out of the market. Those who had bought in the hope of selling at higher prices found themselves disappointed; those who had produced goods to sell at higher prices began to grow uneasy.
The owner of the strong-room shared to some extent in this anxiety. For every loan of his IOUs made by him he had taken some security, a mortgage on a house, or a herd of cattle or a stock of wine or jewellery or silver plate. The prices of all these things were weakening. Would the householder, the farmer, the wine merchant, the owner of the jewellery or plate be able to repay? And if not, would he, the banker, be able to get back his IOUs when he sold the securities?
Another fear came to disturb his sleep. While he was lending and while, in consequence, prices were rising, money had been changing hands with great speed. Both coins and IOUs had passed quickly from buyer to seller and from seller back to buyer again. The borrower had spent as fast as possible in opening a new factory and rushing new goods on to the rising markets. This spending had paid for buildings and materials.