essays

This is part of a series

1897

After Nestor: On Interest & Usury—Basis vs. Apex

Instead of A Book, By A Man Too Busy to Write One

Two readers square off on Tucker’s pages, somewhat crudely debating a somewhat pre-Austrian concept of economics.

Instead of a Book, By a Man Too Busy to Write One

Part Three: Money and Interest

 

Who is the Somebody?

(published first in Liberty, August 6, 1881)

“Somebody gets the surplus wealth that labor produces and does not consume. Who is the Somebody?” Such is the problem recently posited in the editorial columns of the New York Truth. Substantially the same question has been asked a great many times before, but, as might have been expected, this new form of putting it has created no small hubbub. Truth’s columns are full of it; other journals are taking it up; clubs are organizing to discuss it; the people are thinking about it; students are pondering over it. For it is a most momentous question. A correct answer to it is unquestionably the first step in the settlement of the appalling problem of poverty, intemperance, ignorance, and crime. Truth, in selecting it as a subject on which to harp and hammer from day to day, shows itself a level-headed, far-sighted newspaper. But, important as it is, it is by no means a difficult question to one who really considers it before giving an answer, though the variety and absurdity of nearly all the replies thus far volunteered certainly tend to give an opposite impression.

What are the ways by which men gain possession of property? Not many. Let us name them: work, gift, discovery, gaming, the various forms of illegal robbery by force or fraud, usury. Can men obtain wealth by any other than one or more of these methods? Clearly, no. Whoever the Somebody may be, then, he must accumulate his riches in one of these ways. We will find him by the process of elimination.

Is the Somebody the laborer? No; at least not as laborer; otherwise the question were absurd. Its premises exclude him. He gains a bare subsistence by his work; no more. We are searching for his surplus product. He has it not.

Is the Somebody the beggar, the invalid, the cripple, the discoverer, the gambler, the highway robber, the burglar, the defaulter, the pickpocket, or the common swindler? None of these, to any extent worth mentioning. The aggregate of wealth absorbed by these classes of our population compared with the vast mass produced is a mere drop in the ocean, unworthy of consideration in studying a fundamental problem of political economy. These people get some wealth, it is true; enough, probably for their own purposes: but labor can spare them the whole of it, and never know the difference.

Then we have found him. Only the usurer remaining, he must be the Somebody whom we are looking for; he, and none other. But who is the usurer, and whence comes his power? There are three forms of usury: interest on money, rent of land and houses, and profit in exchange. Whoever is in receipt of any of these is a usurer. And who is not? Scarcely any one. The banker is a usurer; the manufacturer is a usurer; the merchant is a usurer; the landlord is a usurer; and the workingman who puts his savings, if he has any, out at interest, or takes rent for his house or lot, if he owns one, or exchanges his labor for more than an equivalent, – he too is a usurer. The sin of usury is one under which all are concluded, and for which all are responsible. But all do not benefit by it. The vast majority suffer. Only the chief usurers accumulate: in agricultural and thickly-settled countries, the landlords; in industrial and commercial countries, the bankers. Those are the Somebodies who swallow up the surplus wealth.

And where do the Somebodies get their power? From monopoly. Here, as usual, the State is the chief of sinners. Usury rests on two great monopolies, – the monopoly of land and the monopoly of credit. Were it not for these, it would disappear. Ground-rent exists only because the State stands by to collect it and to protect land-titles rooted in force or fraud. Otherwise the land would be free to all, and no one could control more than he used. Interest and house-rent exist only because the State grants to a certain class of individuals and corporations the exclusive privilege of using its credit and theirs as a basis for the issuance of circulating currency. Otherwise credit would be free to all, and money, brought under the law of competition, would be issued at cost. Interest and rent gone, competition would leave little or no chance for profit in exchange except in business protected by tariff or patent laws. And there again the State has but to step aside to cause the last vestige of usury to disappear.

The usurer is the Somebody, and the State is his protector. Usury is the serpent gnawing at labor’s vitals, and only liberty can detach and kill it. Give laborers their liberty, and they will keep their wealth. As for the Somebody, he, stripped of his power to steal, must either join their ranks or starve.

 

Reform Made Ridiculous

(published first in Liberty, September 17, 1881)

One of the most noteworthy of Thomas Jefferson’s sayings was that he “had rather live under newspapers without a government than under a government without newspapers.” The Czar of Russia proposes to make this alternative unnecessary by establishing a national weekly journal to be distributed gratuitously in every village, whose carefully-concocted news paragraphs, severely-sifted political items, and rose-tinted editorials shall be read aloud on Sundays by designated officials to the assembled multitudes. This absurd proposal is no more absurd than that of a delegate to the State Convention of the Massachusetts Greenbackers, who desired that the government should add to its functions that of the collection of news to be furnished gratuitously to the daily journals. And this again is no more absurd than some of the proposals actually endorsed by a majority of the delegates to the same convention, nearly all of whose measures and methods, in fact, are quite of a piece with those of the aforesaid Czar.

For instance, one of the resolutions adopted (and we grieve to say that it was introduced by no less a person than our excellent and earnest friend J. M. L. Babcock of Cambridge) asks the legislature to compel all corporations to distribute their profits on excess of six per cent. among their employees in the proportion of the scale of wages. Saying nothing of the fact that this resolution seriously offends liberty by denying that the equitable distribution of property which the labor movement seeks must result, not from legislative enactment, but from the free play of natural laws, it also offends equity by admitting that capital is entitled to a portion of labor’s product, and that the producer is entitled to exact a profit from the consumer! Yet we are told that only one man in that whole convention had the brains and the courage to rise from his seat and proclaim the great truth that, if labor can claim anything, it can and should claim ALL. What wonder that this half-hearted, half-headed Greenback party excites among intelligent people no sentiment higher than that of a pity akin to contempt! Mr. Babcock’s resolution would take the labor movement off of its basis of right, and degenerate it into an unprincipled scramble for spoils by which the strongest would profit. Take the half-loaf who will; we shall never cease to reiterate that the whole loaf rightfully belongs to those who raise the wheat from the soil, grind it into flour, and bake it into bread, and not the smallest taste of it to the sharpers who deceive the unthinking masses into granting them a monopoly of the opportunities of performing these industrial operations, which opportunities they in return rent back to the people on condition of receiving the other half of the loaf.

 

Usury

(published in Liberty, November 26, 1881)

Paying money for the use of money is a great and barbarous wrong. It is also a stupendous absurdity. No one man can use money. The use of money involves its transfer form one to another. Therefore, as no one man can use money, it cannot be right and proper for any man to pay for the use of that which he cannot use. The people do use money; consequently, they should pay whatever the money may cost.

Money is necessarily a thing which belongs to society. This is one of the great truths of civilization which has been generally overlooked. For this whole question of the rightfulness of interest turns on the question, “What is money.” So long as the people shall continue to consider money as a thing of itself objectively – why, there is no hope for humanity.

All wealth is the product of labor, but no labor can produce money. There can be no money until some wealth has been produced, because money is a representative of wealth.

Money is a form of credit – credit in circulation. It is not a thing of substance. The great object of money is to exchange values. Now, value is an idea, and money is used to represent, count, and exchange values. The symbol or token of money is not the money itself. Therefore, as money is not a thing of substance, and cannot wear out, it is and ever must be a great wrong and an utter absurdity to give wealth for the use of an idea.

In equity compensation implies service or labor, and as money does not cost labor, why, labor cannot justly be demanded for its use.

But let us look at it practically. The people use money; the people furnish the money; and, if the cost of issue is paid, there can be no other expense. The great difficulty touching this whole matter is a barbarous misconception of the nature of money and a more barbarous disposition to monopolize power and rob the weak. For – let us ask – who pays the great tax of interest? Not those who have and handle the money; not those who use the money; but the poor, the weak, the ignorant, the dupes of the ruling class. We can illustrate this by a fact of to-day. If five or more men having one hundred thousand dollars, and no more, organize and establish a national bank, just so soon as their bank is in operation they have the use and income of one hundred and ninety thousand dollars. Now, is it not clear that, this company having got ninety thousand dollars for nothing, somebody has lost that amount? For, if one man gets a dollar that he has not earned, some other man has earned a dollar that he has not got. That is as certain as that two and two make four.

If all men could use their own credit in the form of money, there could be no such thing as interest. Yet, to put this idea into practice, there must be organization and consolidation of credit. Commercial credit, to be good, must be known to be good. A man’s credit may be good to the extent of a thousand dollars, but, that fact not being generally known, he must, as things are, exchange his credit for that which is known to be good, and pay a monopoly price for the privilege of using his own credit in the form of money.

Let us remember that no man can borrow money, as a good business transaction, under any system, unless he has the required security to make the lender whole in case he should lose the money. What a stupendous wrong is this – that a man having credit cannot use it, but must exchange it and pay a monopoly price, which is really for the privilege of using his own credit!

And again, he cannot pay this himself, but must compel the poor man to work out this tax; the latter must pay this interest in the enhanced price of goods. I wonder if the people will always be thus blind and stupid!

So long as business men, as such, and laborers shall permit the few shrewd moneyed men to monopolize commercial credit – that is, money – just so long will it be hard times for business and labor. What we want now is the organization of credit on a just and equal plan. William B. Greene solved this whole matter and summed it up in two words: “MUTUAL BANKING.” This is what we want.

Apex

 

Apex or Basis

““Apex” says that it is a barbarism to pay interest on money. That is another way of saying that a state of society in which wealth is not universalized is barbarous, since, in our present state of evolution, those who have no capital of their own will be glad to borrow from those who have, and to pay interest for the use of the capital.

“For it is really capital that is borrowed, and not money, the latter being only the means for obtaining the former, as money would be worthless if it could not be exchanged for the capital needed. We see already that, as the loanable capital of a country increases, the rate of interest diminishes, and when the accumulated wealth of the world becomes large enough no one will pay interest.

“But to denounce the payment of interest to-day, and (if it could be done) to forbid the man of ability, but lacking means, borrowing the capital he needs, or, in other words, using his credit, would not tend to universalize wealth and so destroy usury; but, on the other hand, it would discourage the production and accumulation of capital, since one of the principal incentives to that production is the use of capital to increase production and add to one’s wealth. It is obvious, that unless the use of capital added to the productiveness of labor, no one would wish to borrow, and no usury could be had. It should not be forgotten, in considering this question, that, in the last analysis, reducing things to their simplest, individualized form, the possessor of capital has acquired it by a willingness to work harder than his fellows and to sacrifice his love of spending all he produces that he may have the aid of capital to increase his power of production. For example, two men work side by side; one consumes all he produces, the other saves part of his product. In time the latter has saved enough to enable him to build or buy a tool by the aid of which he accomplishes four times as much work as before, and is able to go on adding to his accumulation. The one who has not saved, seeing the advantage of the use of capital, naturally desires to obtain the same benefit for himself; but, not liking to save and wait until he can create capital, he proposes to borrow a portion of the capital of the other. By means of this borrowed capital he can quadruple his product, and is very willing to give a part of his increased product to the neighbor who has befriended him. Would he not be a mean sneak if he were not glad to do so? By the use of the borrowed capital he is not only enabled to pay for the advantage gained, but, by his greater power to produce, he can, in a short time, buy his own tools and no longer be forced to borrow.

“Although our present system of business is vastly complicated, and we sometimes seem to borrow money merely, the actual transaction being kept out of sight, yet the case supposed is the real basis of all just payment of interest. I believe there will be a state of society in which money will not be necessary, but that state cannot be built up by commencing at the top. We must build from the foundation, understanding things as they are as well as knowing how they ought to be.

“The question is asked – and it is a very important one, and, simple as it is at bottom, a complex one as it stands – What is money? It would simplify this matter very much if all would agree to call coin, or money having value as merchandise, money, and paper, or representative money, currency, or notes. It is plain that the representative money is that which must be and is principally used in this country and in all commercial countries. Coin money derives its real value in exchange, and as a measure for the exchangeable value of other products, from the fact that it costs labor to produce it; and, although government laws may foolishly try to make it pass for more than its cost value, they never succeed in doing so. No government ever has succeeded in overriding natural law, though they may and often do obstruct the operations of Nature’s laws to the great detriment of Nature’s children.

“The simplest form of representative money, or currency, is furnished by Josiah Warren’s labor note, which was substantially as follows (I quote from memory):

“For value received, I promise to pay bearer, on demand, one hour’s labor, or ten pounds of corn. (Modern Times, July 4, 1852 – Josiah Warren)

“So long as it was believed by his neighbors that the maker of such notes always had the corn on hand with which to redeem them (since their redemption in labor would rarely be practicable or desirable), they would pass current in that locality; and, in fact, such “labor notes” did pass to a limited extent at Modern Times. [Online editor’s note: Modern Times, New York, was an intentional community founded by Warren on labour-cost principles in 1851. – RTL] Interesting as that experiment was, and showing clearly, as it does, the principle at the basis of all good currency, it could not be extended so as to satisfy the needs of a great commercial country, or, safely, of a large neighborhood.

“But a currency, to be good, must possess precisely the qualifications and qualities of that labor note, with the addition of a guaranty, universally recognizable, that the notes actually do represent solid wealth with which they will be redeemed on demand. Now, there is one thing, and only one, that government can rightfully or usefully do in the way of interference with the currency, the ebb and flow of which is governed by natural laws altogether out of the reach of State or national government; and that is to issue all the notes used for currency on such terms that it shall be universally known truly to represent actual, movable capital (not land, which is not property in the true sense, and which cannot be carried off by any one wishing a note redeemed), pledged for its redemption. There should be no monopoly, but any and every person complying with the terms should be furnished with the national note. Of course, no one who had not the requisite capital could procure these notes, and rightly so, because notes made by those who have no capital would swindle the people. And, as our government has no property or capital, except the necessary tools for carrying on the affairs oif the nation, and as government should have no debts and no gold and silver accumulated, it is obvious that it cannot properly make a good note beyond the amount which could be redeemed in payment of taxes. And, as taxes ought to be diminished and ultimately abolished, there is no valid basis for a government note to be used as currency. Neither will Mutual Banks answer any good purpose if the notes are based on land.

“Basis.”

The remarks that follow are not intended to debar “Apex” from answering his opponent in his own time and way, but simply to combat, from Liberty’s standpoint, such of the positions taken by “Basis” as seem to need refutation.

The first error into which “Basis” falls is his identification of money with capital. Representative money is not capital; it is only a title to capital. He who borrows a paper dollar from another simply borrows a title. Consequently he takes from the lender nothing which the lender wishes to use; unless, indeed, the lender desires to purchase capital with his dollar, in which case he will not lend it, or, if he does, will charge for the sacrifice of his opportunity, – a very different thing from usury, which is payment, not for the lender’s sacrifice, but for the borrower’s use; that is, not for a burden borne, but for a benefit conferred. Neither does the borrower of the dollar take from the person of whom he purchases capital with it anything which that person desires to use; for, in ordinary commerce, the seller is either a manufacturer or a dealer, who produces or buys his stock for no other purpose than to sell it. And thence this dollar goes on transferring products for which the holders thereof have no use, until it reaches its issuer and final redeemer and is cancelled, depriving, in the course of its journey, no person of any opportunity, but, on the contrary, serving the needs of all through whose hands it passes. Hence borrowing a title to capital is a very different thing from borrowing capital itself. But under the system of organized credit contemplated by “Apex” no capable and deserving person would borrow even a title to capital. The so-called borrower would simply so change the face of his own title as to make it recognizable by the world at large, and at no other expense than the mere cost of the alteration. That is to say, the man having capital or good credit, who, under the system advocated by “Apex,” should go to a credit-shop – in other words, a bank – and procure a certain amount of its notes by the ordinary process of mortgaging property or getting endorsed commercial credit discounted, would only exchange his own personal credit – known only to his immediate friends and neighbors and the bank, and therefore useless in transactions with any other parties – for the bank’s credit, known and receivable for products delivered throughout the State, or the nation, or perhaps the world. And for this convenience the bank would charge him only the labor-cost of its service in effecting the exchange of credits, instead of the ruinous rates of discount by which, under the present system of monopoly, privileged banks tax the producers of unprivileged property out of house and home. So that “Apex” really would have no borrowing at all, except in certain individual cases not worth considering; and, therefore, when “Basis,” answering “Apex,” says that “it is really capital that is borrowed, and not money,” he makes a remark for which there is no audible call.

The second error committed by “Basis” he commits in common with the economists in assuming that an increase of capital decreases the rate of interest and that nothing else can materially decrease it. The facts are just the contrary. The rate of interest may, and often does, decrease when the amount of capital has not increased; the amount of capital may increase without decreasing the rate of interest, which may in fact increase at the same time; and so far from the universalization of wealth being the sole means of abolishing interest, the abolition of interest is the sine qua non of the universalization of wealth.

Suppose, for instance, that the banking business of a nation is conducted by a system of banks chartered and regulated by the government, these banks issuing paper money based on specie, dollar for dollar. If now a certain number of these banks, by combining to buy up the national legislature, should secure the exclusive privilege of issuing two paper dollars for each specie dollar in their vaults, could they not afford to, and would they not in fact, materially reduce their rate of discount? Would not the competing banks be forced to reduce their rate in consequence? And would not this reduction lower the rate of interest throughout the nation? Undoubtedly; and yet the amount of capital in the country remains the same as before.

Suppose, further, that during the following year, in consequence of the stimulus given to business and production by this decrease in the rate of interest and also because of unusually favorable natural conditions, a great increase of wealth occurs. If then the banks of the nation, holding from the government a monopoly of the power to issue money, should combine to contract the volume of the currency, could they not, and would they not, raise the rate of interest thereby? Undoubtedly; and yet the amount of capital in the country is greater than it ever was before.

But suppose, on the other hand, that all these banks, chartered and regulated by the government and issuing money dollar for dollar, had finally been allowed to issue paper beyond their capital based on the credit and guaranteed capital of their customers; that their circulation, thus doubly secured, had become so popular that people preferred to pay their debts in coin instead of bank-notes, thus causing coin to flow into the vaults of the banks and add to their reserve; that this addition had enabled them to add further to their circulation, until, by a continuation of the process, it at last amounted to eight times their original capital; that by levying a high rate of interest on this they had bled the people nigh unto death; that then the government had stepped in and said to the banks: “When you began, you received an annual interest of six per cent. on your capital; you now receive nearly that rate on a circulation eight times your capital based really on the people’s credit; therefore at one-eighth of the original rate your annual profit would be as great as formerly; henceforth your rate of discount must not exceed three-fourths of one per cent.” Had all this happened (and with the exception of the last condition of the hypothesis similar cases have frequently happened), what would have been the result? Proudhon shall answer for us. In the eighth letter of his immortal discussion with Bastiat on the question of interest he exhausts the whole subject of the relation of interest to capital; and “Basis” cannot do better than to read the whole of it. A brief extract, however, must suffice here. He is speaking of the Bank of France, which at that time (1849) was actually in almost the same situation as that described above. Supposing, as we have just done after him, a reduction of the rate of discount to three-fourths of one per cent., he then asks, as we do, what the result would be. These are his words in answer to Bastiat, the “Basis” of that discussion:

“The fortune and destiny of the country are to-day in the hands of the Bank of France. If it would relieve industry and commerce by a decrease of its rate of discount proportional to the increase of its reserve; in other words, if it would reduce the price of its credit to three-fourths of one per cent, which it must do in order to quit stealing, – this reduction would instantly produce, throughout the Republic and all Europe, incalculable results. They could not be enumerated in a volume: I will confine myself to the indications of a few.

“If, then, the credit of the Bank of France should be loaned at three-fourths of one per cent instead of at four per cent., ordinary bankers, notaries, capitalists, and even the stockholders of the bank itself, would be immediately compelled by competition to reduce their interest, discount, and dividends to at least one per cent., including incidental expenses and brokerage. What harm, think you, would this reduction do to borrowers on personal credit, or to commerce and industry, who are forced to pay, by reason of this fact alone, an annual tax of at least two thousand millions?

“If financial circulation could be effected at a rate of discount representing only the cost of administration, drafting, registration, etc., the interest charged on purchases and sales on credit would fall in its turn from six per cent to zero, – that is to say, business would then be transacted on a cash basis: there would be no more debts. Again, to how great a degree, think you, would that diminish the shameful number of suspensions, failures, and bankruptcies?

“But, as in society net product is undistinguishable from raw product, so in the light of the sum total of economic facts CAPITAL is undistinguishable from PRODUCT. These two terms do not, in reality, stand for two distinct things; they designate relations only. Product is capital; capital is product; there is a difference between them only in private economy; none whatever in public economy. If, then, interest, after having fallen in the case of money to three-fourths of one per cent., – that is, to zero, inasmuch as three-fourths of one per cent. represents only the service of the bank, – should fall to zero in the case of merchandise also, by analogy of principles and facts it would soon fall to zero in the case of real estate: rent would disappear in becoming one with liquidation. Do you think, sir, that that would prevent people from living in houses and cultivating land?

“If, thanks to this radical reform in the machinery of circulation, labor was compelled to pay to capital only as much interest as would be a just reward for the service rendered by the capitalist, specie and real estate being deprived of their reproductive properties and valued only as products, – as things that can be consumed and replaced, – the favor with which specie and capital are now looked upon would be wholly transferred to products; each individual, instead of restricting his consumption, would strive only to increase it. Whereas, at present, thanks to the restriction laid upon consumable products by interest, the means of consumption are always very much limited, then, on the contrary, production would be insufficient: labor would then be secure in fact as well as in right.

“The laboring class gaining at one stroke the five thousand millions, or thereabouts, now taken in the form of interest from the ten thousand which it produces, plus five thousand millions which this same interest deprives it of by destroying the demand for labor, plus five thousand millions which the parasites, cut off from a living, would then be compelled to produce, the national production would be doubled and the welfare of the laborer increased fourfold. And you, sir, whom the worship of interest does not prevent from lifting your thoughts to another world, – what say you to this improvement of affairs here below? Do you see now that it is not the multiplication of capital which decreases interest, but on the contrary, that the decrease of interest multiplies capital?”

Now, this reduction of the rate of discount to the bank’s service, and the results therefrom as above described, are precisely what would happen if the whole business of banking should be thrown open to free competition. It behooves “Basis” to examine this argument well; for, unless he can find a fatal flaw in it, he must stand convicted, in saying that “when the accumulated wealth of the world becomes large enough, no one will pay interest,” of putting the cart before the horse.

“Basis” is in error a third time in assuming that “Apex” wishes to “forbid the man of ability, but lacking means, using his credit.” It is precisely because such men are now virtually prohibited from using their credit that “Apex,” and Liberty with him, complains. This singular misconception on the part of “Basis” indicates that he does not yet understand what he is fighting.

The fourth error for which “Basis” assumes responsibility is found in his statement that “in the last analysis the possessor of capital has acquired it by a willingness to work harder than his fellows and to sacrifice his love of spending all he produces that he may have the aid of capital to increase his power of production.” A man who thoroughly means to tell the truth here reiterates one of the most devilish of the many infernal lies for which the economists have to answer. It is indeed true that the possessor of capital may, in rare cases, have acquired it by the method stated, though even then be could not be excused for making the capital so acquired a leech upon his fellow-men. But ninety-nine times in a hundred the modern possessor of any huge amount of capital has acquired it, not “by a willingness to work harder than his fellows,” but by a shrewdness in getting possession of a monopoly which makes it needless for him to do any real work at all; not by a willingness “to sacrifice his love of spending all he produces,” but by a cleverness in procuring from the government a privilege by which he is able to spend in wanton luxury half of what a large number of other men produce. The chief privilege to which we refer is that of selling the people’s credit for a price…

This is part of a series