What is Mutualism?

What is Mutualism?
by Clarence Lee Swartz

In collaboration with The Mutualist Associates (1927)

  1. What is Money?
  2. The Gold Monopoly
  3. The Profits of Banking
  4. What is Interest?
  5. Benefit to the Workers
  6. Power of Interest
  7. Not More but More Flexible
    Currency Needed
  8. Value of Paper Money
  9. Successful Experiments
  10. Necessity for Sound Basis
    for Money
  11. What is Credit?
  12. Insurance of Credit
  13. The Mutual Bank
  14. Mutual Bank in Operation
  15. The Marginal Producer
  16. Benefit to Farmer and Manufacturer
  17. Benefit to the Wage Worker

Chapter IV
Money, Credit, Interest and Exchange

What is Money?

Free and equitable exchange is as much a requisite to the satisfactory functioning of human society as blood is to the human body. Of course, mankind will continue to struggle along somehow, as it has done in the past, no matter how much friction, and jamming, and overloading with monopolies and privileges may be brought about by a small ruthless group among its members; but in order that it may evolve into a free society, it will be necessary to remove all obstacles in the way of its evolution. Chief and foremost among those obstacles are the privileges and monopolies interfering with exchange.

The money problem is essentially very simple and easy to solve. That solution is the abolition of interest, which may be achieved when the issue of money is no longer monopolized through government privilege and when the basis for the issuance of currency is extended to other commodities than gold. But most learned professors of economics are either blind or else afraid to tell us what they see. At any rate, they have succeeded wonderfully in circulating such a host of misconceptions and misconstructions regarding this problem that the simple layman stares at it in utter bewilderment, unable to make up his mind one way or another. It will be necessary to dispose of some of these misconceptions before advancing a solution of the problem in detail.

What is money? How did it evolve?

Primitive man produced goods only for his own use. With evolution from that primitive stage came the division of labor. Production of goods was organized and distributed over a number of trades, resulting in increased efficiency and quality. But this system necessitated the exchange of goods, value for value. Such a method of exchange of commodities is called barter. Soon immediate barter ceased to be practical, and exchange had to become mediate.

To illustrate: A hunter wants to trade for arrows from the arrow-maker. The latter has already taken in trade as much meat as he can possibly use for his family. But he is in need of flint stones which the trader will bring in a fortnight. Therefore he will insist that the hunter must give him something in exchange which will represent the correct value but which is not perishable, so that he may keep it until he can utilize it in exchange with the trader. This something we call the medium of exchange. It may consist either of another commodity, in which case it should have the characteristics of compactness, durability, divisibility without destroying its value, universal desirability, as certain kinds of metal, or it may consist of a tangible promise to furnish value at a time when it shall be possible and desirable - in other words, of an instrument of credit.

The medium of exchange is usually called money. Money might then be defined as "wealth or any symbol of wealth in such form as to assure its holder that it is readily exchangeable for other wealth seeking exchange."

To act as a medium of exchange, as a symbol of values merely, money need not have any intrinsic value. All that can logically be required of it is that it shall actually represent value. The material of which it is made is of little importance. Paper money (bank-bills, drafts, checks, bills of exchange) serves the same purpose as money of gold or silver. What is of importance is the absolute guaranty behind the money. However, the guarantor might be any responsible private individual or group of individuals just as well as the State. But, if any factor of doubt enters into the guaranty, the value of the money decreases just to the extent in which the doubtfulness of the guaranty increases, whether the guarantor be a private organization or the State. The best illustration of the truth of this statement is the case of European currency after the World War, which will be referred to more fully below. As its redeemability decreased, its value correspondingly decreased also.

What is "cheap" money? Some economists speak of "cheap" money, meaning money low in value as compared with other things. Thus, money is said to be cheap when prices are high, as in 1920, and dear when prices are low, as was the case in 1897. Mutualists, however, agree with the more logical conception which calls money cheap when the interest rate on it is low, and dear when the interest rate is high, apart from its purchasing power. The amount of interest which money commands does not, in the ultimate analysis, depend so much on the amount of money in circulation as it does on the conditions upon which it is issued. The money monopoly which exists today has been created and is being sustained by the fact that, by government decree, gold has been made the sole basis of issuing money, and by the promise, to redeem paper money in gold on demand.

The Gold Monopoly

There is much confusion of ideas as to the true function of gold. Few writers on the subject seem to realize that gold performs two entirely separate and separable functions in connection with exchange. In the first place, gold is the standard of value, that is, the denominator in which the comparative values of all goods and services are estimated and expressed. For this function it seems very well adapted, due to its relative stability in value as compared with other commodities. This function, however, it can perform without actually coming into the possession, of the borrower or lender, the buyer or seller - in other words, without being at all actually used except as a measure "for reckoning," as Aristotle suggested many centuries ago. But, in its other function, as the sole basis of security upon which paper money is to be issued, gold has been one continuous source of trouble and disaster. This latter function could be fulfilled much more satisfactorily by other commodities than by gold alone, as shall be presently seen.

In examining the Federal laws concerning the subject, we find that the government:

First: Defines a dollar to be 23.22 grains of pure gold.

Second:  Buys, $ 20.67 per troy ounce, all the gold bullion offered to it.

Third: Coins this gold into money.

Fourth: Declares this gold coin to be legal tender.

Fifth: Makes this gold coin the only basis for the issue of paper money.

Sixth: Promises (with some exceptions) to redeem the paper money in gold on demand.

As may be inferred, Mutualists have no particular fault to find with the government for defining the dollar. It is necessary that some standard of value be clearly defined. Unless a definite commodity is made the standard of value, money is impossible.
The failure to understand this simple economic truth has given rise to much confusion of thought on the subject, even among the greatest writers. John Stuart Mill, quoting Montesquieu, cites the African macute as an ideal [i.e. abstract] standard not measured by any concrete object; but recent investigation has shown that the macute represents a definite, though probably variable, number of cowrie shells (at one time 2000), and in consequence is no ideal [i.e. abstract] measure at all.

The American dollar was taken from the Spanish milled dollar and was also supposed to be an ideal measure until it was found to be 412 1/2 grains of silver. Unfortunately, the advocates of irredeemable paper money and the believers in the labor and multiple standard of value cannot be made to understand this; thus, in spite of excellent intentions, they merely help to aggravate an already serious situation by injecting more confusion into this sadly befuddled branch of economics. Gold is the best known of all commodities. It has the advantage over other commodities of possessing to the highest degree the following qualities: homogeneity, divisibility, cognizability, and indestructibility.

Because of the last named quality, the quantity of gold, measured by its value, is comparatively greater than that of any other single commodity. The wheat that is now in existence has been grown within five years; a failure in the wheat crop greatly affects the price of wheat because the amount produced each year is so large a fraction of the whole existing stock of wheat. The same is more or less true for other commodities. But gold has been accumulated for thousands of years and the quantity mined annually is very small in proportion to the whole stock of gold. Gold has fallen 50 per cent in value in thirty years. A bumper prop of wheat has reduced the price of wheat 50 per cent in one year. Those are the reasons why gold, so far, seems best adapted to be the standard of value, and can well continue to be such until a better standard is found.

The government now buys all the gold that is offered at its mints at $ 20.67 an ounce, coins it into money and makes it legal tender. But fixing the price of gold is not fixing its value. Value is an exchange relation between two things, and it is only after they have come together in the market in the act of exchange that we can learn the value of commodities. The miner who digs gold out of the earth and takes it to the mint receives money for it; but not until he attempts to buy goods with the money does he know how much it will buy. The Cripple Creek miner who took an ounce of gold to the mint at Denver and sold it to the government in 1896 received $ 20. 67 for it. The miner who takes an ounce of gold to that mint today also receives $ 20. 67. The price is just the same, but the miner of today can buy only one-half as much goods with an ounce of gold as could the miner of 1896. The value of gold has fallen to one-half of what it was thirty years ago.

Due to this fall in value, many gold mines became too expensive to be worked and had to shut down. The population of the Cripple Creek district has fallen to a small fraction of what it was when gold was high. A rise in the value of gold would reopen some of these mines that cannot now afford to operate. The gold miners of the United States did not get rich during the past thirty years; for it is not selling gold that makes men rich, but lending gold; and it is the banker, not the gold miner, who profits principally by the exclusive gold basis.

There is no particular objection at this time to the use of gold coin for facilitating exchange, except that the expense of coining is quite unnecessary. It is a fact that even now an ounce of un-coined gold has the same value in world trade as an ounce of gold coin, which is one of proofs of the superfluity of gold as coined money. It is the exclusive gold basis, as decreed by the State, to which Mutualists object. If the gold basis and the system of using it to redeem paper money on demand were abolished, the use of gold in connection with banking and with paper money would fall from 40 per cent of the paper money issued (which the law now requires) to perhaps 1 per cent; and in time even this per cent of gold in proportion to paper money would not have to be coined. Once the gold basis is abolished and quantities of gold now needed for reserves are set free and the use of gold reaches the small amount indicated above, the fluctuations in the value of gold will grow less.

The Profits of Banking

The reasons why banks are able to make such large profits are that the State permits only one basis of value for the issuance of money, namely gold; that it further usurps the exclusive right to issue money on this one basis and to lend this money to the banks at a small rate of interest against security which is largely furnished by the bank's customers; that it prohibits the issuing and loaning of current notes (no matter how well secured) by anybody but a lawfully organized bank, with penalties ranging from fine to imprisonment. By the Federal law the fine takes the form of a ten per cent tax upon the notes circulated, which, of course, acts as a complete prohibition.

Thus is established the money and banking monopoly which, by eliminating competition, makes it possible for the financier to exact interest for lending, not his own capital, but merely a claim to capital which is secured by the borrower himself. How profitable this business is, is shown by the fact that the First National Bank of New York earned 140 per cent on its capital in 1925; its stock has gone up to $2,950 for a share having a par value of $100. According to the Financial Age, a Wall Street paper, forty-nine New York banks averaged fifty per cent dividends in 1925.

While considerable space has been devoted here to a discussion of the profits of banking, the reader must not suppose for a moment that the sums paid to the bankers in interest are the big item. The profits on all capital - that is, the increase that all industry of every kind, be it manufacturing, mercantile, farming, or what not, receives as its profits - are multiplied through the addition of interest at every point of exchange. The consumer pays interest charged into the price at every step in manufacture and distribution. The bankers' profits are the cause of all other profits, and the reduction of the bankers' profits, through the abolition of interest, will by the same token decrease all other profits.

But the gain to the public does not stop here. The distribution of all the interest of bankers and bondholders and money lenders generally, and all the profits on capital just mentioned, are a bagatelle when compared to the amount the public would gain were industry permitted to operate at full capacity. Herbert Hoover, certainly a conservative authority, estimates our present output at about one-fourth of what it could be. Calculated on that basis, our present (1918 - 23 ) annual product of $ 64,000,000,000 can be increased to $ 256,000,000,000. If these figures are hard for the reader to visualize, let him, if he is engaged in productive work, imagine his annual income increased, without any extra exertion on his part, to four times its present sum. If he is a common laborer earning $ 4 a day at present, such an income would be $ 16 a day.

This is the answer to the objection always made, when better conditions are proposed, that dividing the annual income equally would give very little increase to the worker who is now so poorly paid. An arbitrarily equal division of all incomes would be a trifle compared to a fourfold increase in his present wage equitably earned and received.

The value of gold is determined by comparing it with a number of other products. To make the value of gold uniform, Professor Irving Fisher advocates what he calls a "Compensated" dollar. He would make the number of grains of gold in the dollar vary with its purchasing power. If gold decreased five per cent in value within a certain time, there should be added five per cent to the weight of the dollar; and, correspondingly, if gold increased as much in value, the corresponding percentage of weight should be deducted from the dollar. When gold is no longer the sole basis, but merely the standard of value, such adjustment will not present any material difficulties, as it will then be only a matter of book-keeping, currency being of the credit variety without any commodity value. If the variations in the value of gold should prove great enough, after it has ceased being the sole basis of currency, some such plan could be adopted.

What Is Interest?

Interest is the price paid to the lender by the borrower for insuring and giving currency to his credit.

The temporary exchange of fixed credit for circulating credit is really the whole transaction, and in the illustration of the farmer, given below, the process is described in detail.

But, if the tremendous cost of interest to the producer, together with the hampering of industry by present credit restrictions, be compared with such losses as result from changes in the price level, the latter are so nearly negligible that they may be excluded from the attention of Mutualists, until such time as production may feel the full effects of the abolition of interest and all imperishable wealth is made the basis of monetized credit.

How economically wrong and absurd this exaction of interest is can well be shown by the following illustration: If John Alden, of Pilgrim Father fame, back in 1626, had lent the equivalent of $ 100 in coin to Miles Standish, at five per cent per annum, to be compounded annually, principal and interest to be paid to his heirs after three hundred years, the heirs of Miles Standish would now have to pay John Alden's heirs the sum of a little more than $ 100,000,000 for the privilege of having had the use of $ 100 for 300 years. The computation is mathematically correct and serves to demonstrate the antisocial nature of the exaction of interest.

Professor Frederick Soddy, one of the most distinguished and certainly one of the bravest of British scientists, lately astonished the scientific world by advocating the absolute abolition of interest as the only alternative to the destruction of civilization.

Several years ago, after a visit to Muscle Shoals, where, in the company of Henry Ford, he talked over the farmers' problem, Thomas A. Edison, the greatest inventive genius of modern times, drafted a plan by which the government could lend money to the farmer for a period of one year without interest charge, to be secured by farm products. The plan was to operate as a sort of auxiliary to the Federal Reserve System.

The fact that two such great minds, in different countries and with different environments, but at almost the same time, reach the epoch-making conclusion that the necessity exists for the abolition of interest must produce a profound impression on all thinking people. If financial circulation could be effected at a rate of discount representing only the cost of administration, drafting, registration, etc., the cost of producing goods would decrease enormously, while at the same time, for reasons which will be gone into later, wages would rise to a point approaching and eventually becoming equal to the worker's full product.

Benefit to the workers

The workers for wages are apt to say: "We borrow no money, and therefore pay no interest. How, then, does this squabble concern us?'' In Reality, it is exactly the class that has no dealing with the banks, and derives no advantage from them, that ultimately pays all the interest money that is collected. When a manufacturer borrows money to carry on his business, he counts the interest he pays as part of his expenses, and therefore adds the amount of interest to the price of his goods.

The consumer who buys the goods pays the interest when he pays for the goods; and who is the consumer, if not the public at large, composed chiefly of the workers for wages?

If one manufacturer could borrow money at one per cent, he could afford to undersell all his competitors, to the manifest advantage of the consumer. The manufacturer would neither gain nor lose; the man who has no dealings with the bank would gain the whole difference. And the bank which, were it not for the forcing down of the interest rate by the competition of the Mutual Bank, would have loaned the money at seven per cent interest, would lose the whole difference. It is the indirect relation of the bank to the people as consumers, comprised largely of wage workers, and not the bank's direct relation to the manufacturer and merchant, that enables it to make money.

Power of Interest

Sometimes the argument is advanced that the bank must charge interest in order to be compensated for its services. But it has been amply demonstrated that the cost of the services which the banks give to the public amounts to less than one per cent.

But the profits of the banks do not consist merely of this difference between one per cent, which is the cost of operating them, and the six, seven, or eight per cent which they are charging on loans of their own money. By permission of the government the banks can issue credit money which exceeds their actual capital many times in amount, and on which they also rake in the interest just as if this credit money were actual capital, actual commodities, which they were lending out. At the present time bank credit forms about seven-eighths of our currency circulation. The government's part in finance covers only the gold and redeemable paper money issued, which comprises the other eighth. The banks control and regulate this seven-eighths; and it is admitted that the men who conduct the forty thousand banks in the United States have to use all their knowledge, experience, and skill, in order to decide to whom, in what amounts, for what length of time, and under what circumstances this credit shall be extended.

The power of interest to eat up everything is so great that only the failure of individual enterprises, thereby wiping out debts, makes it possible for the system to go on at all; and, but for those individual bankruptcies, the whole system would have fallen to pieces long ago - that is, universal bankruptcy would have ensued. Proudhon called this condition the "miserable oscillation between usury and bankruptcy."

Price Level Theory Awkward

Proposals to keep the monopoly of money in the hands of the government and to regulate the issue of money in accordance with the price level - increasing or decreasing the issue to make its average purchasing power uniform - are awkward schemes for trying to adjust from the center, through a clumsy and inefficient government, what the banks can do easily and effectively at the circumference.

The currency of the United States amounts to only, $ 7,000,000,000, of which $ 4,000,000,000 is in gold or redeemable in gold. The banks can at best have but a small part of this currency on deposit; yet, by means of bills of exchange, drafts, checks, and clearing houses, they have made it possible for a small amount of money to effect an incredibly large number of transactions. Their deposits run above $40,000,000,000, and every year the colossal sum of $ 700,000,000,000 in checks is issued and passes through the clearing houses.

Not More but More Flexible Currency Needed

It is not so much more currency, but more flexible currency which is needed - a currency which can be had for the mere cost of issue, without interest, and which will naturally expand or contract as the need for more of it increases or decreases. Such a currency can be realized through the Mutual Bank. It will be a credit currency pure and simple, not redeemable in coin of the realm, but secured by tangible values nevertheless.

Mutualists contend that the issue of money should be free to respond to the demands of industry and business, as is the production of other things.
This means that more credit is needed than can safely be based on the one commodity - gold. But it does not follow that a great quantity need be issued. In fact, the amount of money in circulation at present in the United States would be ample for all purposes, if the system of issuing it and retiring it were a free one, which responded quickly to supply and demand.

What is of the utmost importance is that the price for the use of this money or credit shall fall to cost; that the rate of pure interest shall be zero per cent per annum, no matter how much nor how little money there is in circulation.

Value of Paper Money

At this point the incorrigible pessimist will smile and say: "Credit money? Paper currency? And not even redeemable in gold? Nonsense! It has never worked and it never will work. Just look at the financial mess in Europe, especially in Germany, several years ago!"

But why hold up only the disastrous results of some earlier experiments "along that line" as proof positive of the need of gold as the only valid basis for all kinds of security? The trouble with those experiments was that they were not along that line. The critics are strangely silent regarding paper issues which have succeeded, and succeeded dangerously well, even though no gold was promised on demand.

United States treasury notes, at the present day, are not redeemable in gold; but, as they are receivable by the government in payment of certain taxes; and, since taxes must be paid every year, they remain at par with gold and with the other paper money for which redemption in gold is provided. This serves to illustrate the important fact that paper money which is at all times receivable for something of definite value, or which can discharge an obligation which must be paid, will circulate at par with notes redeemable in gold on demand.

In examining the causes underlying those experiments which failed, we usually find that the issues were made by the fiat of government. Sometimes no promise was made to redeem them. At other times a promise, more or less definite, was made to redeem them with new notes. These issues were legal tender and all creditors had to receive them at par, in full payment of debts owing to them.

An excellent example of this sort was furnished by Germany four years ago, during the inflation period, when ten gold marks could buy enough paper money to discharge a debt of thousands of marks. This paper money was issued by the German government to an amount thousands of times greater than all the gold in the world. As the issues were increased and the probability of their ultimate redemption grew less; the value of the money decreased. This stimulated the issuing power to a still further increase of currency. But in such a case the rate of depreciation of the currency easily outruns the rate of increase of issue; that is, the value of the money decreases at an accelerated rate; and it becomes simply a matter of seeing how quickly the printing press can turn out the money, until the output reaches astronomical figures. The orgy continued until the value of the money falls practically to zero. An instructive fact in connection with these experiences is that the rate of interest, instead of going down with the increase in the quantity of money, always kept going up. A rate of 50 per cent was nothing unusual.

However, the promises that are usually made by our own bankers to pay depositors in money on demand, and the promises of the government, in conjunction with the banks, to redeem its paper money in gold on demand, are also absurd, though in smaller degree, since all paper money systems which promise redemption in gold on demand break down when that demand becomes general; and all are successful only in proportion as people waive the right to demand gold. Since we cannot get gold on demand anyway, if any number of us demand it simultaneously in exchange for paper money supposedly redeemable in gold, the question arises whether it might not be possible to make this waiver permanent and make all exchanges without the intervention of coin.

The old conception of the superiority of the commodity gold over other commodities in world trade has been blasted by the World War, along with many other long cherished theories. In the fall of 1915 the Austrian government gave permission to the Austrian Skoda Works for delivery of an order to Holland only on condition that Holland meet its obligation by making half of the payment in copper. And, since the spring of 1916, the Scandinavian countries have refused gold altogether in payment, demanding rather payments in those goods of which they had insufficient supply.

Successful Experiments

But before declaring definitely for any particular basis for a new circulating medium to be established, consideration must be given to some of those credit money experiments of the past, about which most text books on economics preserve deadly silence.

In his book Rural Credits (Appleton, 1914), Myron T. Herrick, American Ambassador to France, gives the following interesting information:

Cooperative land credit was conceived and used in New England thirty-nine years before it appeared in Europe, while the land banks of some of the colonies antedated similar institutions in continental Europe by more than a century and actually practiced what had been attempted previously in England without success. As early as 1686 a plan for a bank to issue bills and give credit on real estate, goods and merchandise was approved by the governor and council of the province of  Massachusetts Bay, with the recommendation that such bills 'be esteemed as current money in all receipts and payments', even for His Majesty's revenues. This plan fell through in 1688, but the contention that land was better than specie as security for bills was persisted in and spread far and wide.

Pennsylvania was the first colony to take a definite step. In 1722 trade had come to a standstill owing to the lack of an adequate medium of exchange. Four or five rich importers had bought up and engrossed the staples of food and wear. They sold them back at high prices, and thus got hold of all the hard money, which they loaned out at eight per cent and placed most of the trades people in their debt. Many failures and general distress resulted from this oppression, to meet which the government founded the Public Loan Office, managed by four official commissioners to which was given the power to emit bills.

These bills were drawn without interest in small denominations, the largest being $ 100, and they were issued only to borrowers, who had to give a promissory note with bond for judgment repayable in twelve annual payments at five per cent and secured by mortgage on land worth double the amount of the loan. No borrower could obtain less than $ 100 nor more than $ 1000 of these bills. The office was inspected by a committee of the legislative assembly, and accounts were settled every six months. 'It is inconceivable', says history, 'what prodigious good effect immediately ensued on the affairs of the province. Commerce revived with England, Scotland, and Ireland. The poor middling people, who had lands or houses to pledge, borrowed from the Loan Office, and paid off their usurious creditors, and the few rich men had to build ships and launch in trade again!' Having accomplished its object and broken up the money trust, the office went out of business after its bills were all redeemed.

After the Loan Office had demonstrated the beneficial effect of a medium of exchange based, not on metal, but on "real estate, goods and merchandise," in other words, on any property which furnished sufficient security, it is pertinent to ask why the government went back to the previous inadequate metal basis. Was there, perhaps, some fear that the success of one heretic idea might start the people thinking? If other commodities than metal could be used as a basis of currency with startlingly good effect, might not people want to go a step farther and insist on utilizing their own credit capacities for the issuance of their own currency, thereby destroying the government monopoly? That such fear would not have been, unfounded is shown by other contemporaneous efforts along these lines.

To quote Ambassador Herrick once more:

In 1730 or 1732, sixty-one influential land owners of the colony of Connecticut obtained from the assembly a charter for the New London Society United for Trade and Commerce. They paid for stock subscribed by giving their promissory notes due in twelve years at five per cent, secured by mortgages on their lands. The Society was authorized to emit bills without interest against these secured notes, which it agreed to accept as money in all payments to it. In other words, the society operated solely with credit capital and the only borrowers were its stockholders, who had control of the management. This was cooperative land credit pure and simple, and gives to Connecticut the honor, which is usually accorded to Germany, of being the birthplace thereof.

The bills of this Connecticut association were phrased in the form of the public paper issued by the colony. They became popular immediately and were freely used as money by the people. But this "swift currency of the New London Society bills through so many hands," as Governor Talcott records, aroused suspicion as to the object of this novel and unfamiliar device. The next year he caused the assembly to decree the dissolution of the Society for arrogating governmental rights and to order the bills to be recalled. The notes and mortgages were then assigned in trust to the Governor and he proceeded to wind up the concern, whose affairs continued to occupy the attention of the assembly until 1749. No question was raised, however, as to the soundness of these bills.

The most memorable of these colonial projects for utilizing land as security for public or private bills was the Land Bank or Manufactory Scheme launched in Massachusetts Bay Province in 1740. The share capital of this association was $ 750,000, of which no individual member was allowed to hold less than $ 500 nor more than $ 10,000. Subscriptions were not payable immediately in cash. Each subscriber agreed to pay five on the hundred of the principal and three per cent use money annually until the whole amount was paid, and to give a mortgage on an estate in land to secure these payments, which could be made in produce grown or manufactured in the province. The association planned to issue twenty-year bills of small denominations without interest up to the full amount of this share capital. These were redeemable only in produce, but the association and the subscribers, so long as they held shares, were obligated to receive them for all payments and in trade and business when tendered by anybody. All members were jointly and severally liable, were the main borrowers, and had votes in proportion to their subscriptions; hence in its general outlines the association was similar to its cooperative prototype in Connecticut.

The directors of this extraordinary financial experiment were among the most prominent citizens of Boston. Judges and legislators were connected with it. Adroit methods of promotion had worked the people up to such a point of fatuity that the majority believed that the means had finally been found for creating the medium of exchange so much needed for relieving the misfortune and poverty of he country. Over a thousand persons subscribed for shares and a number of towns agreed to accept he bills of the Bank for taxes.

It must be remembered that in those days the principles, of paper money were not clearly understood. The sober-minded citizens, however, realized the dangers which lurked in the Bank and, backed by the provincial governor, they proceeded to suppress it. … Armed with ... (the) ... law, ... the opponents of the Land Bank forced it into liquidation. Near riots broke out, severe measures were used, and almost thirty years elapsed before litigation regarding its affairs disappeared from the courts. The foreclosures, attachments and arrests made by the royal government upon the property and persons of the numerous members of this unfortunate concern to settle its debts, engendered, according to Samuel Adams, as much ill will as the Stamp Act.

Although Ambassador Herrick tried to be fair and broadminded, he could not overcome his prejudice against any scheme which might endanger state, privileges and monopolies. All his diligent search for and analysis of credit experiments among civilized peoples apparently failed to make him realize the insufficiency of merely ameliorative schemes, and the possibility of altogether eliminating interest (the greatest individual cause of poverty) seems to have been too bold for him to conceive. Nevertheless, Mutualists are grateful to him for having rescued from oblivion these interesting and instructive experiments.

As to the Land Bank, from all appearances it would have been highly successful, had not the government (on pressure brought to bear by the "men of estates and principal merchants") arbitrarily interfered. Since most of the money issued by the bank was pure credit money anyway, secured by mortgages and notes on property, the members might have agreed not to pay in any capital at all and moreover to eliminate the payment of interest altogether, charging merely for the actual cost of operating the bank efficiently and safely. Barring state interference, the membership would have increased and business would have flourished greatly to the benefit of all the people, due to this "cheap money," which would have been so easy to get. And the bank would then truly have been a "Mutual Bank."

Although it is true that other backing than gold has been used successfully for the issuance of good money, the examples of Massachusetts, Pennsylvania, and Connecticut, given above, are admittedly not of recent date. How would similar Schemes fare at the present time, when finance and industry are functioning quite differently? Here, again, as in so many other problems, the World War has blasted a costly superstition: that gold was necessary to assure stable money. The most convincing experiment was made in Germany, Wien, in the fall of 1923, the paper mark, backed by nothing at all except the government's promise to give other paper marks in exchange and to accept them in payment of taxes, had dropped to one-trillionth part of its pre-war value, the government was bankrupt. Greenbackism was shown in all its nakedness and futility. Then what happened? The industry, agriculture and real estate of Germany accepted a mortgage and, with this mortgage as a backing, issued through the Rentenbank a new money, called the Rentenmark. Not one ounce of gold behind it! Merely the same backing as the currency of Massachusetts, Pennsylvania and Connecticut had had.

And this money - this theoretically bad and unsafe money - which, according to political economy, should have gone down in ignominy, circulated at par with gold-backed currency. And that is not all. For the Rentenbank issued a certain amount of its money to the bankrupt "Reichsbank" to clear off its debts, after receiving a guarantee that the printing press of the Reichsbank would stop grinding out paper money. It issued credit to industry and agriculture, and a people driven to the verge of collapse by the fraudulent, insane money issue of its government began to take on new life.

Necessity for Sound Basis for Money

The lesson taught by all Europe, but by Germany in particular, is: Any money, whether governmental or private, that lacked backing by sufficient tangible value, became utterly worthless; any money, governmental or private, that had sufficient tangible value to back the issue, was sound.

Thousands of private concerns issued their own money (Notgeld - distress-money) during inflation. The public money, based on real estate (Rentenmark) or private money, which was to be redeemed in 100 pounds of rye, coal, potash, potatoes, or in other commodities, was just as good as the United States dollar, sometimes even better. It was certainly superior to the theoretical gold mark, which fluctuated greatly with the increase and decrease of the gold supply at the Reichsbank. Securities issued in terms of commodities of the particular industries, such as coal, sugar, potash, etc., did not cause loss to their owners; but holders of bank accounts, mortgages, government securities, war bonds, governmental and private money calling for "marks" were cheated out of the implied promise without any formality.

The second lesson, therefore, is: The question of good or bad money is not one of government backing, but of the economic values behind the money.

Private money is just as safe as government money, if properly backed, and it is less likely to become a calamity to a whole people.

The following quotation, from a report to the United States Senate Commission of Gold and Silver Inquiry, Foreign Currency Investigation, 1925, by Henry M. Robinson, president of the First National Bank of Los Angeles and member of the Dawes Reparation Commission of 1924, speaks for itself:

"The past gives us outstanding examples of banks whose notes have passed current, even at a premium, where there was no redemption in gold, and such banks have operated through long periods without gold backing for their notes and bills but with the world's confidence in their management. We have now come to recognize that, while gold backing for currency issues in a reasonable ratio is most desirable, still, unless the ratio is 100 per cent, the question, of management is of very great, possibly paramount, importance; as the ratio of gold cover grows less, the importance of the managing factor increases, though not necessarily in direct proportion."

"A dramatic example has been given within the year in Germany. A sky-rocketing, almost astronomical, currency inflation left Germany with a currency so devaluated that it was in fact no currency. Almost overnight, and without any attempt to gloss over the facts, there was created a currency without gold backing, based very largely on real estate. While this was recognized as only a temporary measure, yet for nearly a year Germany has been able to maintain the Rentenmark substantially at its full gold value as a currency medium."

What further arguments for a credit currency could be needed, when even the master minds of high finance admit the soundness and workability of the idea?

What is Credit?

Just a few words about the meaning of Credit.

The late Charles A. Dana, editor of the New York Sun, in a series of newspaper articles on "Proudhon and his Bank of the People", has this to say:      

What is credit? It is a sort of corollary to the exchange of products, or a kind of second stage of that process. A has a bushel of wheat which he does not need and which B does, but B has nothing at present to give in exchange for it. A lets him have it, and receives his promise to deliver an equivalent at some future time, when he shall have produced it. Such is the operation of credit, which arose after the commencement of exchanges. Presently it assumed a new feature, which may be illustrated thus: B needs A's bushel of wheat and has an article produced by himself, but cannot divide it so as to render an equivalent, or does not wish to dispose of it at present, and accordingly takes the wheat on credit. Thus credit is the giving of one product in consideration of the future return of another yet to be produced, or which is already produced but not on the spot, or in a condition which will not allow it to be delivered. The uses and advantages of this operation are well known and need no explanation.

All credit presupposes labor, and, if labor were to cease, credit would be impossible. What then is the legitimate source of credit? Who ought to control it? And for whose benefit should it most directly be used? The Laboring classes. But, instead of credit being governed by the producers in a nation, it is always in the hands of the intermediaries, the exchangers and agents of circulation; and instead of being used to aid the workers, it is generally used to make money, i.e., to get the greatest possible amount of the products of labor for the least return, and if possible for none at all. And it is manifest that if the working classes could once gain possession of this great instrument, which rightly belongs to them, they might escape from the necessity of working for others, or, in other words, of giving the larger parts of their products for the use of capital; they might become the owners of the tools they use, become emancipated from the domination exercised over them by their agents and public servants, set up for themselves and enjoy the fruits of their industry.

But how can they gain possession of this instrument? By the organization of credit, on the principle of reciprocity or mutualism. In such an organization credit is raised to the dignity of a social function, managed by the community; and, as society never speculates upon its members, it will lend its credit, not as our banks do theirs, so as to make seven per cent or more out of the borrowers, but at the actual cost of the transaction. A practical illustration of the above named principle in a similar matter may be found in the system of mutual insurance.

But credit is not restricted to the mutual exchange of services. It has an even bigger and more important field in the production and exchange of goods. Elastic credit currency is a, prerequisite to unhampered industrial activity.

William Beck, of Cincinnati, Ohio, proposed a bank in which credit in account was to be used instead of money. This was in 1839. Today, this very credit in account is the method of doing business by banks to the extent of ninety-nine per cent of their transactions; but, instead of furnishing this credit at cost, to the customer's benefit, the banks charge interest on it as if it were hard money, and pocket the profit.

A little later. Col. William B. Greene, and the great French economist, Proudhon, each independently worked out the idea of the Mutual Bank. So keen was their insight and so prophetic their vision, that, after eighty years, hardly any changes have to be made in their plans, in order to bring them up to date.

Insurance of Credit

The principles of insurance have been applied in many directions, and where a scientific basis has been established and maintained, the results have been universally satisfactory. Insurance is an undertaking for the purpose of averaging risk, distributing the force of calamity, hardship, disaster, and the like; it serves to distribute the cost of benefits enjoyed as well as of burdens to be borne.

It is necessary only to apply the principle of Mutualism to the insurance of credits in order to secure the best form of money. This can be accomplished by insurance companies that would insure the credits of borrowing members.
Strictly speaking, the borrowing member assures his own credit by the pledge of exchangeable wealth. It is the province of the local association to give effect to his assurance by affording it a wider scope; that is to say, by extending to him the power to monetize his credit - a quality which his unaided individual credit lacks.

The local association, by the issue of its notes, exchanges its credit for the secured credit of the borrowing member. These notes are money, but not the best form of money, because they do not compel recognition beyond the locality in which the skill and probity of the management of the local institution is known. Hence, instead of issuing to the borrower its own notes, the society would issue the notes of the National Clearing House of Mutual Banking Associations. This general institution would supply the bills to the smaller cooperative bodies, and such bills would, in the nature of things, supplant other forms of circulating medium.

Of course, the beneficiaries of the Associations would be obliged to pay for maintaining them; but this cost, instead of being interest on the amount of credit extended, would merely be the cost of transacting the business. It would include the expenses of management of the local and general Mutual Banks, the actual cost of engraving, printing, and shipping the currency tokens, and an insurance premium for risk. This total expense will be, as stated above, but one per cent or less. Skillful management of the primary banks would tend to minimize the element of risk to the point of its elimination, for the general society would discontinue extending its services to branches that exhibited lack of judgment and skill in determining the margin of values against which credit may be safely issued. That risk would be inconsiderable, even in the early stages of the operation of the system, inasmuch as each local association would, as a rule, select its most cautious men on its board of supervision.

The Mutual Bank

The essential features of a Mutual Bank may be outlined as follows:

  1. Mutual Banking Associations shall be formed to do a general banking business and to issue paper money for the use of their members.
  2. Members of such associations shall, upon admission, bind themselves in due form to receive the money issued by the association from all persons, in all payments, at par.
  3. The associations may issue their paper money as loans to their members to circulate as money among them and such other persons as are willing to receive it. This money will not be legal tender.
  4. Any person may become a member of any association and may borrow the money issued by the association, by giving his promissory note therefore, and by pledging improved property to the association to secure the payment of said note, or by having his loan insured as hereinafter provided.
  5. Loans may be made for an amount not exceeding one-half the assessed value of the improvements situated upon the real estate pledged, or in an amount not exceeding one-half the value of goods, chattels, implements and machinery used in productive enterprises, or upon shares of stock of such enterprises, and upon warehouse receipts. The period for which loans shall run shall be determined by the marketability and possible depreciation of the security offered.
  6. Loans may also be discounted by the association, for those who have no property to pledge, upon the payment of a sufficient premium to insure the risk with an authorized insurance company.
  7. The rate of interest shall always be zero. The charges for which said money shall be loaned shall be determined by and shall just meet and cover the losses sustained and the expenses of the association.
  8. Members, by paying their debts to the association, shall have their property released from pledge, and be themselves released from all obligations to said association and to the holders of its money as such.
  9. Wage workers who are willing to receive the money of the association in the payment of their wages may deposit the same with the association subject to check.
  10. The money of the association shall be issued in denominations of one, two, five, ten and twenty dollar bills; at least one-half of the issue shall be in the first three denominations.
  11. A dollar is hereby defined to be 23.22 grains of pure gold.
  12. The check, draft, bill of exchange and travelers' checks may be adopted to facilitate exchanges between the various members of the associations and between the associations themselves.
  13. Associations may form clearing houses in all cities, and regional clearing houses where most convenient, and a national clearing house in a city near the center of population.

Offhand, there seems to be a risk connected with the acceptance by the Mutual Bank of all kinds of property as security for loans. But, in reality, the risk will be very slight. If a member of the Mutual Bank should fail to redeem his note at maturity, the property he has pledged will be sold for gold coin. The auctioneer pays to the Bank in gold the amount of the note, which gold the Bank will then hold, in order to redeem with it an equivalent amount of Mutual Bank currency. The balance of the gold will be paid to the debtor for his equity. Under our present system, with all its uncertainty, a foreclosure does not take place once in five hundred instances. Under the system just outlined, it will happen even less often. About two thousand dollars in gold coin is all that would be needed to protect a million dollars in loans. And even this amount can be dispensed with by insuring the risk with a reliable insurance company.

In general, the advantages of this Mutual Bank will be:

Mutual Bank in Operation

Let it be assumed that the Mutual Bank has been established and offers credit at the cost of operating the bank, which is about one per cent. This will be the full rate charged on all loans. This rate comes into competition with the rate charged by all other banks and all other money lenders. The effect on the other banks will be felt very soon, because no one is going to pay six or eight per cent for money when he can get it for one per cent or less. One of two things must happen: The old banks must either meet the cut and also lend money at that rate, or else lose their customers, who will go to the new bank. The new bank needs no capital, as it does business entirely on the capital of its customers, who are also its members; for every member virtually brings his own capital, to the Mutual Bank when he joins it.

The business the Mutual Bank can do is unlimited, and each new member joining the bank increases the number of people who can do business with each other on this new basis. The circle of exchange becomes wider and wider, and it cannot be long before the whole community is impelled by self-interest to do business on this plan.

The Marginal Producer

Reducing the interest rate to zero not only saves the interest to the borrowing community, but it also tends to reduce to zero the profits now made in industry. How profits are made is so well shown by Bilgram and Levy in their book, The Cause of Business Depressions, that their meaning is best conveyed in their own words:

There are at all times and in all trades producers who are in debt to the extent of all the capital they employ. From the capitalist's standpoint these are obviously the marginal producers, namely, those who, as regards the use of capital, are working under the most unfavorable circumstances under which production is being continued; The interest paid on money loans by the marginal producers, that is, by the producers who are indebted to the limit of their capital, is an expense which they cannot escape under present conditions. Their expertise in producing the goods is equal to the cost of conducting the business plus the interest paid on the borrowed money. The more fortunate business man who owns the capital employed by him, and who therefore is not under obligation to pay interest, can produce the same goods at the mere cost of conducting the business. But whatever it may cost the different producers to make the goods, the selling price is the same for all, and this price is established by what it costs the marginal producer to make the goods. Hence those who own the capital they employ reap a profit on their sales equal to the money interest which the completely indebted producer must pay, and this profit is what constitutes capital returns. It is in this way that capital goods acquire what seems to be an earning power, the rate of which is the same as that of money interest.

The importance of this extract cannot be emphasized too strongly; for it makes entirely clear the fact that all profits are based upon and caused by interest; and it matters not whether few or many capitalists own the capital they are using or are indebted to the banker or money lender for it. The single entrepreneur who is so indebted fixes the price which all of them can charge. Thus, one fully indebted producer or merchant out of a hundred who pays interest on the entire capital (land, improvements, machinery) involved, must charge a price sufficient to cover this interest before he can gain anything for himself, while the other ninety-nine, who may be little or not at all in debt for their capital, can, at his price, make a profit and pocket it because of the interest.

It is plain that by the operation of the Mutual Bank, capital will practically cease to exist as an income producing fund, for the simple reason that if money, wherewith to buy capital, can be obtained for one per cent, capital itself can command no higher price for its use.

The possibility of obtaining credit upon convertible assets of any kind will almost put an end to bankruptcy, because, in most cases of financial failure, there are abundant assets to cover all claims, and the bankruptcy is, so to speak, merely fictitious, brought about by the impossibility of obtaining currency or credit.

Many Mutual Banks will therefore be established. Not, however, as banks are established now, by a handful of stockholders for their own profit, but by associations of producers for their convenience and advantage.

Benefit to Farmer and Manufacturer

For the farmer also is included among the beneficiaries of the Mutual Bank. He needs money for seed, for farm machinery, for fertilizer, and for wages. He goes to the Mutual Bank to borrow. He makes out his personal note, secured by collateral or a mortgage, and receives Mutual Money. With this money he pays the people whom he owes for products and services. They in turn pass the money on to others from whom they must buy needed commodities. Thus, the money keeps on moving through scores, or even hundreds, of hands, in all the intricate processes of production and exchange. It may even, from time to time, pass through the hands of the original borrower who would again pay it out. In the meantime, the farmer's crop is growing. When it is finally harvested and sold, he takes the proceeds to the bank and out of them pays his note and has the mortgage released; and the borrowed Mutual money, thus paid back into the bank, is canceled.

A manufacturer, similarly, may want money at the beginning of a season, in order to buy raw materials, new machinery, to meet his pay roll, or for the production of goods on which he will not be able to realize any money until some time in the future; or the merchant has to lay in a stock of goods. They all proceed in the same way. In some instances, the credit period may have to be longer, in others shorter. But all of them will need credit part of the time, and many even all the time.

It is a most important feature of the Mutual Bank that money will be issued at the very moment when it is needed and that it will be automatically retired when it has performed its duty. The exact amount required is always in circulation or can immediately be brought into circulation.

The high discount rates of today discourage borrowing. The bankers maintain that they merely want to discourage speculation; but they harm the legitimate producer far more than the speculator. Under Mutualism, there will be a tendency, by and through the force of economic processes, toward the elimination of the speculator.

Mutual Money will not be legal tender. No one is forced to take it in payment of a debt. Thus, there can  be no over-issue and, consequently, prices will not be affected by it. If at any time a member of the Mutual Bank should have more money on hand than he immediately requires, it would have no more effect on prices than extra sheets of postage stamps in his desk would have on the price of carrying letters.

Benefit to the Wage Worker

The wage worker, and in fact all those who have services to sell, while not borrowing from the Mutual Bank themselves, will nevertheless benefit by the bank's operations, in that the extra credit facilities will stimulate industry to the fullest and will thus add to the production of all kinds of goods. Since the cost of goods will not include the toll of interest, which today adds so much to the price of all products, the price of all goods will drop, so that most of the so-called luxuries of today will come within the reach of everyone.

As will be shown in another chapter, slow production means idle workers competing with one another and lowering wages still more. Increased production will create jobs for the idle workers and cause competition among employers for the services of the workers, thereby bidding up wages. Thus there will be a double gain: a decrease in the price of goods to the consumer and an increase in the price of services rendered. Competition among producers is bound to achieve the former - namely, forcing down the prices of all goods; while competition among employers must of necessity lead to the latter - the forcing up of prices for every form of service. This double gain for the  workers will be realized entirely at the expense of the money monopoly, without revolution or industrial upheaval, without expropriation of any kind, through the establishment of the Mutual Bank, which will make it impossible for capital to continue to exact profits.

Finally, there will be the further benefit to the worker through the increased opportunity for self-employment which will be furnished by the organization of Mutual Credit, since it will enable him to engage in many individual enterprises which now he dares not undertake on account of the inevitable tax he is forced to pay to the money lender.

The launching of the new ventures that will thus be encouraged will give an additional impetus to industry that will be immediately reflected in the total abolition of all involuntary unemployment.