Sunday, November 06, 2011


Published in English translation as an appendix in E.
Norgate Ltd, London, 1937


 By Dr Walter Zander

 The subjoined study is the outcome of a lecture
delivered by the author on 8 March 1935 before the
National Institute of Geneva (Institut National

 The devaluation of the belga, which supervened in
April 1935, is taken account of here. On the other
hand, the May 1935 crisis of the French franc took
place after this study had gone to press. It forms an
additional link in the lengthening chain of monetary
difficulties and offers one more illustration of the
dangers to which every monetary system, even when
supported by an enormous gold reserve, is exposed
under the rule of a forced rate for the notes of
central banks. The proposals so far made known for
ending the French monetary crisis do not suggest
anything beyond what is implicit in the views
generally current to-day.

Berlin, 2 June 1935.

Dr. Walter ZANDER.

1. The Monetary Chaos.

 The States participating to-day in the world economy
may roughly be said to be divided into two groups. One
of these has abandoned the gold standard and has thus
removed the foundations of its currency. The other has
introduced foreign exchange legislation and has
thereby abolished the freedom of settlement
operations. The first group includes more particularly
England, the sterling bloc countries, the United
States, and Japan; the second group, Austria, Germany,
Russia and the great majority of the remaining
countries. Placed between these two groups, is the
steadily disintegrating gold bloc. Italy left it for
all intents only recently and yesterday as it were
Belgium followed suit. If we bear in mind that since
the War France and Poland had already devaluated their
currencies to a fraction of their pre- war parity,
virtually Holland and Switzerland alone may be said to
uphold the pre-war monetary system. However, even in
these two small countries, which represent but a tiny
fraction of the world economy, certain restrictions
concerning the convertibility of banknotes and the
gold market have been introduced, and the general
uncertainty as to the future of currencies exerts a
baleful influence in these countries also.

2. Disadvantages of Devaluation.

 Whether the abandonment of the gold standard is
advantageous to an economy, is decidedly problematic.
In most cases the object aimed at has not been
attained. So far as devaluation is intended to
stimulate exports, we should not forget that for most
countries the magnitude of their export :trade
compared to that of their total trade is comparatively
insignificant. This alone renders it questionable to
embark, for the sake of the export trade, on measures
which modify the basis of a national economy as a
whole. Moreover, such measures, if successful, may be
imitated by any other country, thus nullifying their
favourable effect. Accordingly, the abandonment of the
gold standard has led to "a race for the worst
currency", in which the most powerful States are
participating. It is obvious that in the long run such
measures for the stimulation of the export trade are
bound to prove worthless.

 Moreover, devaluation does not only affect the export
trade of a country. On the contrary, it touches every
branch of an economy. This holds most especially of
imports, since these must become dearer to the precise
extent that exports become cheaper. So far as
exporting, like in Germany for example, presupposes
the importing of raw materials, a portion of the
anticipated gain is thus necessarily lost. But, in
general, import restrictions, so popular to-day in
many countries, lead eventually to a decline in
exports, for the simple reason that in the last resort
exports can only be paid with imports.

 Furthermore, money debts abroad are augmented by a
devaluation of the currency.

 However, what is of crucial importance is the fact
that an abandonment of the gold standard involves the
devaluation of the entire savings of a country,
particularly as invested in savings banks, State
loans, bonds, and mortgages. If the effect of a
general adjustment of prices to the fall in the value
of money is not visible at first or is deferred by
artificial devices, eventually prices always rise when
a currency has

been devaluated.

Thus while the intended advantage for the export trade
is emphatically dubious and at best only of passing
importance, the loss in savings and capital is certain
and lasting.

 But even if the reason for abandoning the gold
standard, as in the case of the United States, is the
desire to devaluate capital savings, - that is, if it
is intended thereby to adjust the claims of creditors
to fallen prices and to the shrunken turnover of the
debtors - the success is nevertheless more than
doubtful. For what is decisive for the value of a
claim is not so much its magnitude as the business
turnover of the debtor. Everything depends therefore
on increasing trade and

this is nowise assured by attacking the rights of
creditors, to say nothing of the moral and economic
disorganisation which this creates.

 The heavy depletions on the capital market, the
abrogation of the rights of creditors, the menace to
State credit, and the decline in the standard of
living, represent drawbacks which ultimately outweigh
the transitory advantages.

3. Disadvantages of Foreign Exchange Legislation.

 The injuriousness of foreign exchange legislation is
even more patent. Everybody agrees, and the President
of the Reichsbank, Dr. Schacht, has repeatedly
expressed himself to this effect, that foreign
exchange legislation constitutes a great evil, even
though in most quarters such legislation is considered

 Foreign exchange legislation places obstacles in the
way of settlement operations. These obstacles, in
turn, hamper trade. But every decline in trading leads
necessarily to a decline in well-being, as the latter,
in our age of the division of labour, depends on
commerce. Everything therefore that obstructs trading
tends to intensify want and unemployment.

4. Inadequacy of Compensation and Clearing Agreements.

 All attempts to surmount the difficulties involved in
foreign exchange legislation have hitherto proved
abortive. This is especially true of the different
forms of compensatory trading and is evident as
regards its earlier developments. It could happen
then, for instance, that an instrument manufacturer
had to accept in exchange coffee and was thus
compelled to become a produce dealer. In principle,
later developments left matters unchanged. It is the
very essence of a compensatory transaction that there
is properly speaking no money payment involved and
that the goods themselves have to fulfil this
function. That is, every such transaction represents a
barter operation.

 Whilst it is agreed that movements of goods (in the
broadest sense) underly all settlements, nevertheless
as much as fifteen centuries ago the Roman Emperor
Justinian explained in his Corpus Juris why barter
operations are necessarily inferior to monetary
transactions. And yet the distinguishing mark of the
present-day international compensatory trade is the
abandonment of the monetary system and the falling
back on barter. It is evident that a form of economy
which the Corpus Juris deemed obsolete, must be
unequal to the task of conducting efficiently the
exchange of goods in our highly developed age. A
serious effort should therefore be made to re-instate
the system of monetary settlements in international
transactions. Similarly with so-called clearing
agreements between countries. These have now become
very common, but they cannot remove the difficulties
arising from foreign exchange legislation, for apart
from the fact that in most cases, as between Germany
and Switzerland, they have led to a considerable
dislocation of trade, they are necessarily confined to
transactions between two countries, while the
realities of life demand freedom of movement in every
direction and rebel against bilateral arrangements.
They lack therefore the necessary fungibility and the
attempts to supersede the monetary system in this way
have hence failed. The League of Nations Committee for
inquiring into international clearing agreements has
accordingly drawn attention recently to their
disadvantages and recommended their abolition.

5. Need for Stable Standards of Value and for Removing
Restrictions' to Settlement Operations.

 Shrinkage of international and of intra-national
trade, want and unemployment, heavy investment losses,
and a general uncertainty and loss of confidence,
characterise the present situation in most countries.
It is imperative to create once more reliable and
stable standards of value and to secure the removal of
the impediments to settlement operations between
countries. The solution of these closely related
problems has become a question of life and death for
our social order.

6. Falsifying the Gold Standard through Banknotes
being Legal Tender.

 Whatever the monetary system of a country, it is
essential that the measure of value should be clearly
and unequivocally determined. Thus where there is a
gold currency, a silver currency, or an index
currency, the value should be measured by gold,
silver, and the index respectively. This basis of
measuring economic values, and therefore of any
monetary system, is destroyed when in the case of a
gold or silver currency the notes of the bank of issue
are made legal tender, for this compels everybody to
accept these notes in payment regardless of their real
value. Compulsory acceptance renders it even
impossible to measure the notes by the unit of value
and thus to ascertain their value within the country.
Indeed, it establishes a legal fiction on the basis of
which note and unit of value are identical. For this
reason, the names of the units of value - e.g., the
terms dollar, mark, pound - become ambiguous in that
they mean now a fixed weight of gold and then the note
of a bank of issue. Accordingly, the measure of value,
on the unambiguity of which everything depends, comes
to have two definitions. This renders impossible any
real measurement and thus the whole monetary system is

 This falsification is generally hidden from the
public so long as the central bank is legally obliged
to redeem its notes. This, however, only masks the
reality, since convertibility introduces in the
measurement of value an alien element. Indeed, the
fact that convertibility becomes a decisive factor,
shows how the whole problem has assumed a different

 Where convertibility is suspended, we have only a
pure paper currency, this despite strenuous
legislative and administrative efforts to keep the
value of the paper at a certain definite level, for
what counts now is no longer the value of the gold,
but the question whether the note of the central bank,
measured by gold, changes its value. In fact, the
system that has been in general use since the
beginning of the World War, including the so-called
gold standard or nominal gold currencies, may be
described as paper currency.

7. Compulsory Acceptance a Relative Novelty.

 Although the compulsory acceptance of banknotes
appears to-day so natural that most people cannot
imagine a means of payment not having that character,
this system has in reality only come into general use
in recent times. Here are two illustrations

 Par. 2 of the German Bank Law of 1875, provided :

 Payments statutorily required to be made in money
 not be accepted when tendered in banknotes and
the constituent States cannot enact such an obligation
for the State treasuries.

 This provision was only replaced by its converse in
1909. Article 3 of the Act of 1 June 1909 decreed :

 The notes of the Reichsbank are legal tender.

 The course of development was similar in Switzerland.
Here article 39 of the Federal Constitution of 1874
prohibited once for all the compulsory acceptance of
banknotes. However, already in 1891 the Constitution
was amended and they became legal tender in 1914.

8. Compulsory Acceptance establishes the Dependence of
the Currency on the Central Bank.

 The statutory obligation to accept the notes of the
central bank in settlement operations involves not
only the falsification of the basis of the currency.
It also makes the fate of the currency dependent on
that of the central bank and frequently on that of the
banking system generally. If for any reason the
central bank can no longer redeem its notes or
maintain their parity - that is, if the market rate of
the bonds it issues falls - then, owing to the legal
equivalence between the notes of this bank and the
legal standard of value, the calculation of values
generally will be prejudicially affected. Thus it -was
in the main the situation of the Bank of England,
which led in 1931 to the abandonment of the gold
standard and, similarly, it was the National Bank of
Belgium that suggested in 1935 the devaluation of the

 Almost a century ago Lord Overstone grasped this
interdependence when he said that if he ruined his
private bank, he would be ruined, but that if the Bank
of England committed a gross blunder, the Bank could
save itself, but the whole of the community might have
to suffer grievously.

9. Compulsory Acceptance a Condition of every

 Moreover, compulsory acceptance for banknotes forms
the legal and conceptual basis of every inflation, In
the absence of such an obligation, bank crashes, with
all their dire consequences, may occur, but never an
inflation, for the destruction of the standard of
value and the falsifying of all monetary relations,
which are the mark of every inflation, can never
result from the collapse of a single bank. This
confusion is only possible when a legal equivalence
has been established between the notes of this bank
and the standard of value. It was compulsory
acceptance that brought forth the ominous slogan of
the German inflation period : "One mark is as good as
another" ("Mark gleicht Mark"). History has not known
an inflation not due to the legal obligation to

10. The Gold Standard as Gold for account.

 If, then, the pre-conditions of an inflation are to
be eliminated and a reliable :and stable currency is
to be assured, if more especially the gold standard is
to be restored, the falsification introduced in recent
decades must be eradicated and the earlier separation
between standard of value and means of payment must be
re-established. A compulsory exchange rate excludes a
stable and safe currency. No wonder the distinguished
German historian Niebuhr stigmatised compulsory
acceptance as "a legislative provision both ridiculous
and abominable" (Nachgelassene Schriften
nichtphilologischen Inhalts, 1842, p. 485 ff.)

 The re-introduction of the gold standard in Germany
in October 1923, after the inflation, offers an
impressive and instructive illustration. The notes of
the Reichsbank, which were legal tender, had
completely collapsed and their value could only be
stated in astronomical fractions. At long last it was
decided to introduce calculating in gold value. First,
taxes were thus calculated. Then a new institute of
issue, the Rentenbank was founded, whose accountancy
basis was to be gold units. There was, and this cannot
be too strongly insisted on, no legal obligation for
the public to accept the new notes in payment, and
these notes have to this day never been legal tender,
They have therefore never been identified with the
unit of value which was then the gold mark The system,
which lasted from the passing of the inflation in the
autumn of 1923 until the introduction of the new Bank
Act in the summer of 1924 (which Act formed part of
the series of Dawes Acts), was therefore a pure system
of calculating in gold units which was not falsified
by any compulsory acceptance.

 A similar example, although confined to one domain
only, is offered by China which recently adopted a
gold unit for its customs charges. By a decree of the
Minister of Finance of 15 January 1930, counting in
silver in the department of maritime customs, the most
important for the Chinese budget, was replaced by
counting in gold. The basis for these calculations in
gold is a weight of 60,1866 centigrammes of fine gold
and represents the customs gold unit. This, customs
unit is exclusively a calculating unit and the decree
specifically provides that the payment of duties may,
as before, be made in local means of payment, that is
in silver dollars and in banknotes. Of course, these
are only accepted in payment at the current exchange
irate, this being measured by the customs gold unit.

 In conformity with the foregoing illustrations, it is
therefore suggested here to introduce generally
(whilst abrogating the statutory obligation to accept
the notes of a central bank) calculating in gold value
and thus to re- establish the conditions existing
until 19,09 in Germany and until 1914 in Switzerland.

11. Is the Inconvertibility of Notes incompatible with
the abrogation of Compulsory Acceptance ?

 It ,might be objected that before the War compulsory
acceptance could be dispensed with because then,
unlike now, the notes could at any time be converted
into gold. The objection does not hold, for
convertibility is not of decisive importance, as will
transpire from what follows.

12. Convertibility as a Basis of Value for Paper Means
of Payment.

 It is generally believed that the value of banknotes
resides in their being convertible into metallic
currency, banknotes being considered in the main a
substitute for gold or silver. Already Adam Smith, in
a famous passage in his Wealth of Nations (bk.2,
ch.2), declared that all paper money represented only
gold or silver. Similarly, the Bullion Report of the
British Parliament of 1810, which was very strongly
influenced by Ricardo, expressed itself to the same
effect. Probably not a single theory in the whole
domain of political economy has evoked such universal

 It is therefore natural that this view should have
been incorporated in legislative enactments. Since
paper money is regarded as a substitute for gold or
silver, it must be at any time convertible into these.
Banknotes and convertibility are therefore
interdependent conceptions and hence all bank acts the
world over contain definite provisions concerning
convertibility, metallic cover, and the ratio of the
notes issued 'to the current gold reserve. Indeed,
every monetary claim is hence regarded as being in the
last resort a claim for payment in gold, although
there is no necessary connection between this and a
gold standard, for a gold standard primarily
presupposes, apart from calculating in gold, that a
creditor cannot refuse acceptance of a payment in
gold, i.e., that there is a general obligation to
accept gold, but by no means the right of a creditor
to insist, in any and all circumstances, directly
or-indirectly, on being paid in gold.

 Firmly based, on the one hand, as seems the general
conviction that convertibility is necessary (and
practically everywhere the ratio of the gold cover is
deemed to be of the utmost importance), there is, on
the other, no doubt that to- day most banknotes have
become legally, or at least actually, inconvertible,
without thereby losing all their value. In fact, for
some notes there exist to-day no provisions of
redemption, and yet they possess value. Accordingly,
there must be, apart from convertibility, another
basis for the value of paper means of payment.

 13. State Fiat as Basis of Value for Paper Means of
Payment ?

 All eyes are turned towards the State to see whether,
 its fiat, it is able to confer value on valueless
paper. It becomes, however, quickly manifest that the
power of the State is strictly limited in this sphere.
All large-scale monetary devaluations known to history
have referred to means of payment the value of which
rested on a State fiat. This holds, for example, of
the notes which the Scotchman John Law issued, in
France at the beginning of the eighteenth century and
even more so of the assignats of the French
Revolution. In both instances acceptance was at first
not compulsory. But presently the obligation to accept
them was decreed and soon reinforced by penalties. On
11 April 1793 the French Government prohibited the use
of all metallic money on pains of six years in chains,
and in September of the same year the decrying - that
is, the verbal discrediting of the assignats - became
punishable with death and the confiscation of

 These drastic measures proved, however, unavailing.
 exchange value of the assignats declined
steadily. At the close of 1793 it was only 22 % and in
1795 it had fallen to under 1%.


 Not so dramatic, but not less impressive and

were the experiences during the two great American

monetary devaluations on the occasion of the war of

liberation and of the civil wars. There, too, the fiat
of the

 State was unable to prevent devaluation.

 But by far the greatest financial catastrophe of
modern times was the German post-war inflation. It is
common knowledge that the legal obligation to accept
the banknotes of the Reichsbank could not prevent
their complete collapse and it is most significant
that the notes of the Rentenbank, which succeeded in
stopping the inflation, have never been legal tender.

 Nor was it different in the case of the Austrian and
was Russian inflations. Nowhere, in fact, has the
power of the its State been able to prevent

 But this was not only the fate of weak States crushed
by defeat. France and Italy, both victors in the World
War, had to suffer heavy devaluations which
annihilated more than four-fifth of the value of their

 It cannot be therefore the State's fiat which confers
value on inconvertible paper money.

 14. Confidence as a Basis of Value for Paper Means of
Payments ?

 Not even confidence and national enthusiasm,
revolutionary determination and religious belief, can
accomplish this in the long run. One example may
suffice. When during the French Revolution in April
1793 the above- mentioned currency law was
promulgated, the whole population of Metz assembled on
the Place de la Légalité, took a solemn oath, in the
presence of the garrison, the National Guard, and the
administrative and the judiciary staff, not to draw
any distinction between the face value of the paper
money and silver. Similarly, from Toulon, where
analogous ceremonies took place, the Government
received a report stating that. the population would
carry out the law with the religious respect (
"respect religieux") due to it. at However, after a
few days the workmen at the arsenal of Toulon
petitioned that they might have their wages paid in
silver, for, they declared, "try as we may, we cannot
live otherwise". (See Marion, Histoire financière de
la France, vol. 3, p. 47, Paris, 1921.)

 Even the powers of the soul cannot, therefore,
permanently confer value on paper money.

 15. Acceptance by Fiscal Offices as Basis of Value
for Paper Money. The value of inconvertible paper
means of payment has a different basis, clearly
revealed, in the history of German finance. Thus
during the nineteenth century several German States
issued paper money the value of which did not lie in

its convertibility, but in that the State agreed to
accept at its pay offices the notes it issued at their face value,
regardless of their rate of exchange. German financial science
called this the taxation foundation ("Steuerfundation" ).

 This acceptance by the State should not be confused
with the current. obligation to accept, for under-the
regime of compulsory acceptance the taxation,offices,
following the universal custom, accept notes at their
actual and not at their nominal value. Thus the notes
of the Bank of England are worth no more at the
English fiscal offices than anywhere else. The State
accepts them at their paper value and not at the value
of the gold pound. Compulsory acceptance and taxation
foundation are therefore fundamentally different. The
basis of value of this paper money lay in that it
accepted at the fiscal offices of the issuing
authority at nominal value and, accordingly, this
obligation to accept was the important element in the
wording of the warrants. Thus the Saxon fiscal notes
simply read : -

 In conformity with the edict of 1 October 1818, this
 be accepted at the Royal fiscal offices,

and the Prussian money orders of 1835 and 1856
contain, besides the value of the order, only the

 Of full value in all payments.

 Similarly in most other countries. It is true that in
many cases, as in Baden, Austria, and Wurttemberg,
there was, in addition to the obligation to accept by
the fiscal offices -that is, to the fiscal
foundation-a more or less widely current obligation to
redeem the warrants. However, here also the fiscal
foundation was of prime importance and redemption
constituted only a kind of supplementary guarantee.
This is already expressed in the order of the two
undertakings on the notes. Thus we read on the Baden
paper money of 1849:

 Paper money of the Grand-Duke of Baden, which all
Baden fiscal offices accept in payments at its full
nominal value i.e., as equivalent to the gross silver
money struck at the country's standard of coinage-and
is exchangeable at sight for gross silver coins at the
redemption office Carlsruhe.

 Likewise, in the Reich Act concerning the issue of
Reich fiscal office notes of 3,0 April 1874, § 5, we
read :

 Federal fiscal notes are accepted at their nominal
value in  payments made to all fiscal offices of the
Reich and all constituent States. They are redeemable
at any time on demand for cash by the Reich's Central
Fiscal Office on the Reich's account.

 In both cases therefore the fiscal foundation comes
first. It covers all fiscal offices, whilst the notes
can only be redeemed at one fiscal office.

 The Wurttemberg Act of 1 July 1849 makes this
relation still plainer. Article 2, par. 1, provides:

 This paper money is accepted at its nominal value in
 payment at all fiscal offices of the State, as also at
the tax collecting offices. These offices are
instructed to redeem on demand this money, so far as
the available funds permit , and in amounts not under
twenty gulden at a time.

 Here the claim to redeem notes is conditional on
means being available. According to the clear wording
of the Act, the notes are in principle only covered by
the fiscal foundation.

 Later, this principle was further developed in the
Rentenbank notes of 1923. Here no provision at all was
made for direct redemption. Apart from utilising them
in connection with public pay offices, the holder had
only a claim to convert them into annuity bonds, which
fact has played no important part in practice. Lastly,
in recent years the fiscal foundation has been most
conspicuously exemplified in the fiscal warrants of
1932, although these are not intended to be means of
payment proper. They cannot be, either directly or
indirectly, converted into ready money. Nor can they
be exchanged for securities. No redemption fund exists
nor repayments or amortisation. Their value is
entirely due to their being accepted by the fiscal
offices at the indicated value, regardless of their
exchange rate.

 From the Saxon pay office notes to the fiscal
warrants of the Reich, the same principle of a fiscal
foundation is evident.

16. Commercial Bills as Basis of Value for Banknotes.

 The principle of the commercial bill for the Scottish
banknotes corresponds to that of the fiscal foundation
for State paper money. Whilst English banknotes have
their origin in the receipts given by the London
goldsmiths for gold deposited with them (which means
that redemption is of their essence), the Scottish
notes have a different history. In the latter case,
the banks gave in exchange for commercial bills round
sums in notes of small denominations, expressing
themselves at the same time ready to accept the notes
they had thus issued, in payment at their face value
for the commercial bills they had discounted. Thus the
basis of the value of the English notes was the gold
deposited, whereas the value of the Scottish notes was
based on goods sold as expressed in commercial bills.

 It is true that the Scottish banknotes were also
redeemable in precious metal, very much as was
frequently the case with the State paper money, but
redemption played an indifferent part in practice. By
means of a so-called option clause the banks
frequently reserved to themselves the right

of postponing the redemption of the notes several
months after they had been presented. Thus they could
wait until the commercial bills had matured. When, on
the withdrawal of the bills, the notes flowed back,
they disappeared from circulation and the question of
their redemption did not arise. So far as the bill
debtors redeemed their debts in coin or other means of
payment and not in -the notes of the bank, the bank,
without drawing on its reserves, acquired thereby the
necessary means of redeeming any floating notes.

 Ultimately, in any case, the value of these notes lay
in their being accepted by the bank that had issued

17. Fiscal Foundation and Commercial Bill as Forms of

 The fiscal foundation for State paper money and the
principle of the commercial bill for banknotes are
therefore basically related. In both instances
acceptance by the issuer at their nominal value,
regardless of the exchange rate of the paper, is
decisive. The significance of this acceptance (or
reflux) is manifest. If, for example, the State pays
an official with such a warrant, if the official
passes this warrant on to his baker in payment for
bread, and if, lastly, the baker liquidates his tax
debt with it, the baker clears his debt to the State
with the warrant that the official had passed on to
him. In the last resort we have here a clearing
process, i.e., a balancing of mutual obligations. And
these settlements, unlike in barter or in modern
international compensatory transactions, are not made
without resorting to money. On the contrary, the
exchange is operated by means of a clearing process
cancelling the mutual claims through our monetary

 An inconvertible paper means of payment assumes
therefore a reflux. It represents, in fact, a clearing
certificate and derives its value from the exchange of
economic services. This indicates consequently the
limit to issues of unredeemable notes. Since the value
of freely quoted money, as for instance of the Reich
pay notes of 1874 .or of the Rentenbank notes, is
determined by supply and demand, no more notes may be
issued than there is a demand for, that is, than must
flow back to the issuing centre. Thus in the case of
State paper money, the aggregate sum to be issued must
depend on the aggregate tax claims due or all but due.
Within this limit issues are always justifiable. If,
however, this limit is exceeded by circulating paper
money representing tax claims in the distant future,
depreciation will inevitably follow, even if the State
should promise to accept the notes at their face value
in the future.

 Similarly with banknotes. In principle, only
short-term obligations should be admitted as cover.
The nearer the due date of the bill, the greater is
the demand for means of payment in order to redeem it
and the more assured is the value of the banknotes
issued in connection with the bill. The more distant
the due date and the less assured the payment, the
more in jeopardy are the notes having such a basis.
Rightly, therefore, many bank acts, among them that of
Germany, expressly provide that only sound commercial
bills falling due within three months at most may be
discounted by banks of issue, Indeed, experience
teaches that long-dated financial bills have hurled
whole monetary systems into the abyss.

18. Redemption or Clearing,.

 There exist, accordingly, two entirely independent
and wholly different foundations whereon the value of
paper means of payment may be based : redeemability in
precious metal and clearing. There is no third

 Thus all paper means of payment in every country may
be to-day actually resolved into these two elements of
value. Insofar as notes can be really exchanged for
gold, their value may be attributed to this. So far,
however, as there is no redemption and there is an
inadequate metallic cover, only clearing can confer
value on the notes, and this either by clearing
against commercial bills or against fiscal claims.
Moreover, in order to extend the facilities for
clearing and thus to increase their value, many
countries, at a time when banknotes were not legal
tender, introduced in addition a tax foundation for
the banknotes, statutorily obliging public pay offices
to accept them. (See, e.g., the Federal Act concerning
the Swiss National Bank of 6 October 1905, article

 The difference between the two elements of value,
convertibility and clearing, which latter means here
the clearing of taxes due, is well exemplified in the
Bank of England. Here, since the Peel's Act, the note
circulation is divided into a so-called fiduciary and
non-fiduciary issue. The latter must have a 100% gold
cover. It reflects the pure idea of convertibility.
The fiduciary issue however, which at present amounts
to 260 million pounds, is based exclusively, on "an
eternal debt of the English State". It is not covered
by any redemption fund. It rather embodies the idea of
a fiscal foundation.

 How, then, are these two elements of value related ?
Although in the public mind the idea of convertibility
predominates, what is actually of decisive importance
for the prosperity of a country is clearing.

 The idea of convertibility makes the quantity of
means of payment basically dependent on the gold
reserve available at any time. This is an entirely
impracticable principle. All attacks on the gold
standard, directed against this principle, which more
especially combat the creditor's right to claim from
his debtor directly or indirectly gold, are to that
extent justified, For there is never a possibility of
meeting all liabilities by gold payments. This holds
both of international obligations and of domestic
payments. It was therefore of

momentous importance and evinced profound insight,
when Milhaud in his great work, A Gold Truce, called
for a universal gold truce.

 Whether a country possesses a gold reserve, depends
always more or less on chance. Accordingly, the amount
of the means of payment in circulation should never,
not even under the most orthodox. gold standard
system, be determined by the size of the gold
.reserve. The economic life of a country would have
otherwise to shrink regularly with the shrinkage of
its gold reserve. In reality, the exchange of goods
remains a necessity and possible, even if there is no
gold reserve at all. On the other hand, as the cases
of France and the United States to-day show, not even
the largest gold reserve of a central bank can save a
people from widespread unemployment and poverty,
whilst a monetary system intelligently based on mutual
clearing, can provide a people with work and wealth,
even in the absence of any store of gold.

19. Examples of Clearing Money.

 The diverse possibilities of issuing inconvertible
means of payment based on the idea of clearing can
only be adumbrated here.

 In the first place, we may mention the inconvertible
and freely quoted State paper money described above.
In most countries to-day this is to be found in a more
or less disguised form. Besides States, local
authorities may also issue clearing notes for the
imposts they are entitled to raise. Thus in the
nineteenth century Hanover city issued notes which
promoted most effectively the town's prosperity.

 In the economic sphere, railways enter primarily into
account as centres for the issue of special railway
clearing notes. In Germany there is the noteworthy
case of the Leipzig-Dresden Railway founded by
Friedrich List. This Railway issued in the thirties of
the last century railway money to the amount of
500.000 thalers and this money, to the general
satisfaction, freely circulated until the
establishment of the Reich. After the World War, the
German Federal Railway also repeatedly issued its own
means of payment, most of which exhibited the
character of goods warrants, i.e., they were based on
the principle of clearing. Naturally, other
undertakings, for whose goods or services there is a
general and constant demand, would also benefit by
such facilities.

 The clearing principle is most particularly useful in
international settlements. Thus leading firms might
issue purchasing certificates. For instance,
certificates accepted at their face value by the I. G.
Farben Company or by Siemens, could be disposed of in
London, Cape Town, and generally. To make the
certificates more widely acceptable, whole groups of
undertakings concerned with agriculture, export, or
the tourist traffic, might agree to issue purchasing
certificates jointly. Issues might also be undertaken
by special foreign trade banks, whose clients would
bind themselves to accept the certificates in payments
up to a certain amount. Lastly, work provision banks
might similarly be established to combat unemployment
within countries. For particulars on this subject, the
reader is referred to the valuable works of Milhaud
and Beckerath published in 1933 and 1934.

 The central banks existing at present in most
countries ought not to oppose the issue of such means
of payment. In this connection we need not examine
here whether these banks have fulfilled the hopes
placed in them or have not rather aggravated all
financial catastrophes, such as inflations and
deflations. In any case, so long as private enterprise
exists at all, mutual clearing cannot be monopolised
by a single central undertaking. The idea of a
monopoly is most closely associated with the idea of
convertibility. The issue of clearing warrants, which
neither affect the store of gold nor are able, since
they are freely quoted, to modify the average price,
cannot in principle be restricted to central banks. 1t
ought rather, within the limits drawn by the State, to
be allowed to develop freely.

20. Abrogation of Foreign Exchange Legislation.

 Once it is recognised that the value of inconvertible
paper money depends on the likelihood of the issuer
clearing it, the way is open to abolish obligatory
acceptance and to re- establish the gold standard.
This, in turn, would facilitate the abrogation of
foreign exchange legislation, for this, too, is based
in the last resort on the idea of convertibility and
of obligatory acceptance.

 In every country foreign exchange legislation is in
the main identical. The endless number of laws,
regulations, and principles may be reduced to the
following three aims

 (a) Retention of gold;

 (b) Retention of foreign means of payment (foreign
exchange proper) ; and

 (c) Restriction of payments abroad.

 Compared with these, all other provisions are of
secondary importance. And these three aims may be
reduced to one, namely the seizure of gold. The
retention of foreign means of payment and the
restriction of payments abroad are only means towards
attaining that one object. The foreign means of
payment are seized because they are regarded as
substitutes for gold and because it is anticipated
that by their redemption or, at least, by their being
sold on the international market, gold might be
obtained in exchange. Inversely, payments abroad are
restricted as far as possible because it is feared
that through the efflux of means of payment the gold
reserve might be drained and the maintenance of the
parity be thereby endangered. The idea that gold is
not only the standard of value but ultimately the sale
and supreme means of payment lies therefore at the
root of this type of legislation. Hence the efflux of
gold and the associated threat to the redemption fund
have been invariably the direct cause of the enacting
of foreign exchange legislation.

 Here also the obligation to accept the notes of the
central bank plays a. special part. Thus whilst the
State may leave to their fate the freely quoted notes
of a private bank, without the monetary unit being
affected by the bank's exchange losses, the statutory
obligation to accept the notes of the central bank
implies that they are identified with the country's
standard of value. A loss in exchange in the case of
the latter involves therefore a modification in the
monetary basis itself. Accordingly, the State is
compelled to maintain the parity of the notes of the
central bank so long as it is bent on saving its
standard of value from fluctuations.

 The identification of the monetary unit with the
notes of the central bank has, lastly, created another
source of danger which has repeatedly acted as a
decisive factor in the introduction of foreign
exchange legislation, namely its close association
with certain large-scale banks at home. Thus the
collapse of the Kreditanstalt in Austria and the
Darmstadt Bank in Germany instigated the introduction
of foreign exchange legislation in those countries. Of
itself there existed no direct connection between
these banks and the monetary standard, and the example
of Sweden, which did not rush to the aid of the
collapsed Krueger undertakings, shows that in such
emergencies other methods may be applied than those
chosen by Austria and Germany. However, where through
the obligation to accept the notes of a given bank a
statutory bridge has been built between the banking
system and the national currency, the temptation will
always exist to shift the difficulties of the banks
onto the shoulders of the currency.

 All these problems assume a very different complexion
if we take inconvertible means of payment to be what
they really are, namely means of clearing in relation
to an issuer. A fundamentally inconvertible note, the
value of which lies in the issuer accepting it and
which therefore really involves no claim to payment in
gold but a claim to the services of the issuer, can
never lead to a reduction in the gold reserve. A State
paper money based on such principles could be freely
allowed to go abroad without this prejudicially
affecting the currency. It could never entail
liabilities in precious metal. On the contrary, it
would necessarily lead to goods being exported and may
be accordingly even followed by an influx of gold or
foreign exchange. What matters is that the means of
payment shall not be legal tender; in other words,
that it must be accepted by the issuer at its face
value. With this condition satisfied and the
above-mentioned limit to issues being respected, even
the heaviest losses on foreign bourses would involve
no danger, for the lower the market rate falls, the
greater the temptation, would be to acquire the
warrants, inasmuch as the issuer has to redeem them -
at their nominal value, the loss being thus converted
into a gain. Everybody therefore who has to meet his
obligation with these warrants, - in our example, the
taxpayer - will try to benefit by such falls and
thereby produce a steady demand which has the
peculiarity of rising as the market rate falls. This
necessary demand provides the floating power that
imparts value to inconvertible paper money. Such a
means of payment need not dread the throwing open of
frontiers. In the words of a Swiss writer, it will,
"like a carrier pigeon", return always to its point of
departure and necessarily lead to a demand for home
products abroad, in this way furthering the export

 Since such a clearing warrant has by definition a
free market rate and is therefore not linked to the
currency unit, the latter cannot be affected by any
fluctuations in the value of the former.

 For clearing warrants of the type described, foreign
exchange legislation ceases to have any meaning, for
any stipulations relating to convertible money would
lose their point. In all countries, therefore, sound
clearing warrants should be freed from their fetters,
since they were only imposed on them on account of the
unsound ones, and thus at last bestow on the present
the freedom of movement denied them to-day because of
the past. That is, foreign exchange legislation should
be abrogated at least for sound warrants. Given this
first step and the basis for a new economic structure
is laid. Further progress will be thereby facilitated,
for in most countries the inconvertible notes could be
without difficulty converted into State paper money,
thus investing the present state of things in this
matter with its proper form. Should, however, one or
another central bank have transgressed the limits that
would apply to a fiscal foundation, it will not be
difficult to remedy this, without fettering a
country's general economic life by foreign exchange

 Nor can it be objected that the national economy
requires foreign exchange and can therefore not be
satisfied with clearing transactions, for, to begin
with, we should remember that probably in all
countries depending on foreign exchange, the supply of
the latter has shrunk despite the most stringent
legislation and that therefore the object aimed at has
not been fully attained. But a more important point is
that both commercial and financial debts, according to
firmly and universally established views, can only be
liquidated by the goods or services of the debtor, and
it is just these that are offered by clearing
warrants. It must be therefore possible to start again
payment operations on this basis. So far as the
importing of raw materials is in question, this is not
challenged. A clearing warrant, unhampered by foreign
exchange legislation and made out in gold units, is a
fully utilisable means of payment so long as there is
a demand on the world market for the goods and
services of the issuing country. If this condition is
not satisfied, then foreign exchange legislation also
would be of no avail. If an exchange of goods is
actually impracticable, - that is, if the country no
longer plays a part in the world economy, - no debt
can possibly be liquidated. This holds equally of
commercial and financial debts. No one can expect that
a country possessing no gold, should pay in gold.
Every creditor should therefore recognise that a
debtor can only offer a lien on his goods and

 Years ago the Economic Committee of the League of
Nations expressed the same idea when it said that
creditor countries must either agree that debtor
countries may directly or indirectly redeem their
obligations in goods or services or they must be
resigned to not receiving any payments. The. clearing
warrants described here indicate the way in which even
heavy liabilities may be in time honestly liquidated,
to the common advantage of creditors and debtors.

 Once the banknotes that had become inconvertible have
been superseded by clearing warrants, the free gold
market can be at last re-established. So soon as gold
has been divested of the property ascribed to it of.
being the exclusive means of payment and representing
the core of money claims, it becomes again a commodity
like any other, Its free movement no longer causes
alarm and may therefore the better fulfil the function
of a standard of value. And this completes the circle
of our proposals, for the free gold market which here
appears as the result of -clearing, at the same time
presupposes it, since the various means of payment can
only be reliably valued when gold may be freely moved.

 It follows, lastly, that under the system above
outlined there would be no objection to gold coins
being minted for private firms and this not, as seems
to be the intention at present in France, as a form of
note cover, but for immediate circulation with a view
to measuring by them at any time the value of all
other means of payment.

21. Summary.

 Accordingly, we propose

1. The introduction of unambiguously determined gold
units of account as a monetary basis, e.g.

 1 mark = 1/2790 kg. fine gold.
 1 franc = y kg. fine
gold. 1 £ = z kg. fine gold.

2. The transformation of the whole monetary system on
 basis of a gold unit of account.

3. The abolition of the statutory obligation of
acceptance for
 the notes of the central banks.

4. The removal of the monopoly of the central banks
and its
 replacement by general regulations concerning
the issue of means of payment.

5. The abrogation of foreign exchange legislation and
 re-establishment of a free gold market.

6. The unrestricted right to mint gold coins.

22. The Practical Realisation of the Proposals.

 a) Through international agreements.

 Everybody is agreed that something should be done to
remove the monetary chaos and the obstacles to
settlement operations. Here also hope is commonly
centred in international conferences. However, the
value of such conferences for the solution of economic
problems is not great. Think in this connection of the
World Economic Conference of 1933. This was eagerly
looked forward to by all peoples and yet,
notwithstanding careful preparation, produced
virtually no practical results.

 However, even if within the near future a monetary
conference could be arranged to meet and if, moreover,
full agreement could be reached among the
participating States, the effect would be at best to
re-establish the parity between the monetary units and
to impose an unconditional obligation on the parties
not to modify deliberately this parity nor to change
it without the consent of the other contracting
parties. But that would only dispose of a
comparatively small part of the present difficulties,
for only most rarely - as in the United States
recently - has the abandonment of the gold standard
been an arbitrary act. In by far the majority of
instances, the gold standard was most reluctantly
dropped. Heavy calls on credit institutes, excessive
claims on the central bank, a rising efflux of gold,
and, finally, the threatening impossibility, despite
all efforts, of maintaining the parity of the
banknotes, were for the most part the really decisive
factors in the abandonment of the gold standard. For
such cases an international agreement on monetary
parities would offer no solution.

 So long as the principle of central banks is retained
and their notes, being made legal tender, are
identified with the standard of value, no
international agreement will be able to prevent the
recurrence of present-day conditions , for under this
system the collapse of a single leading bank, to say
nothing of the collapse of the State finances, may
render impossible the maintenance of parity. However,
even if, to meet such cases, the several countries
concluded a convention providing that the gold
reserves of the diverse central banks should be
automatically mobilised to save the currency of a
country in need, a scarcely credible sup- position,
even this would be insufficient in hard cases, for the
magnitude of the monetary obligations maturing at any
given moment would probably always exceed the quantity
of available gold.

 It also remains a moot point how the problem of
foreign exchange legislation could be settled at such
a conference, seeing that the granting of loans,
useful as these would be to those immediately
concerned, in no way solves the problem. And yet
without this, even a fresh determination of parities
would prove unsatisfactory. On the contrary, the
object should be to rebuild on a sound basis the
entire system of international payment arrangements,

 b) Through intra-State legislation.

 From what precedes follows the possibility that each
several State, having made up its mind, may, by
abolishing the obligation to accept and recognising
the reflux principle, re-establish for itself the gold
standard and rescind its foreign exchange legislation.
This may seem fantastic. But the reader should
remember the German inflation period. Then, too, an
escape without external assistance appeared
impossible. "The hole in the West", speculation on
foreign bourses, and similar obstacles, which Germans
could not control, were quite generally regarded as
the causes of the depreciation of the mark.
Eventually, when things were at their worst, when in
some parts of the Reich serious disorders had broken
out, and when external help was out of the question,
the country succeeded, by its own efforts, without the
aid of any foreign Government, without an
international conference or convention, to stabilise
the mark, to safeguard it against all foreign
speculation, and even after a few months to abrogate
the foreign exchange legislation then in force.
To-day, as at that time, the free resolve of any
country may determine the fate of its currency. The
country that first finds the way out, that removes
insecurity, and at the same time re-establishes the
freedom of monetary operations, will march well ahead
of the other countries. It may even be assumed that a
mighty stream of capital for long-term investment will
pour into it from all sides.

 c) Through private initiative.

 Even if, however, no State were for the moment ready
to proceed along this line, there remains the
possibility of finding a way out of the monetary chaos
through private initiative or at least to prepare the
way for this. When in the eighteenth century the
national monetary units, because of alleged State
needs, continually fluctuated and when it was
therefore impossible to rely on the value of
currencies for a measurable time even, Hamburg
merchants, more particularly, discovered a way out. By
founding the famous Hamburger Girobank, they,
following the centuries' old Chinese Tael system, made
themselves independent of the debased State coinage by
adopting as the basis of all their

accounts an unminted definite weight of silver in the
place of State money. This weight, called Mark Banko,
constituted an unchangeable unit of calculation,.
which came to be of the greatest service economically
for the whole of Northern Europe.

 There can be no doubt that the application of the
same principle, with gold instead of silver as the
basis naturally, might exercise a similarly
far-reaching influence to-day. Just imagine that
before the devaluation of the Belgian franc, a Belgian
undertaking of good repute had declared itself ready
to take up a long-term loan at its actual gold value,
regardless of the exchange rate of the franc. The
crowd of would-be investors would probably have broken
through all barriers.

 In this connection the proposed private calculation
in gold should on no account be linked with the
national monetary system. Accordingly, I do not
suggest here the appending of gold clauses (gold
dollar, gold pound, or gold franc) to a country's
currency unit, for experience teaches that such
clauses - which hold permanently before the statutory
means of payment its ideal as in a mirror - only
rarely survive the fate of the national currency. Thus
in Belgium, when the franc was devaluated, the gold
clauses were revoked and only contracts in foreign
currencies were left untouched. Private calculation in
gold, like the erstwhile Mark Banko system, should be
independent of the national currency. It should be
therefore based on a separate unit, for which a simple
calculation in grammes of fine gold suggests itself
here. This, would also serve as a basis for an
international calculating unit, which has. been widely
desiderated for many decades.

 All that would be demanded of the State is not to
prohibit calculating in gold. The State could never
suffer through this, for even if a Government should
deem it expedient to devaluate the national currency,
as was frequently the case already in the seventeenth
and eighteenth centuries, there can be no ground for
imposing a devaluated currency unit on those who had
freely agreed to use for their economic transactions
among themselves another and constant value basis.
Investors in all countries would joyfully welcome such
a solution and there are not a few undertakings which,
under these conditions, would be decidedly ready to
place long- term loans at moderate interest rates.
Once it is demonstrated, however, that the monetary
chaos, which seems to most men the work of an
inscrutable fate, may be overcome, the profoundly
beneficent effects of this for the peoples of the
world will not fail to become apparent.

(Translated by G.Spiller, London.)

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