Chapter 7

Credit and Banking Under
Monetary Freedom

The natural law governing monetary exchange must be adhered to by all, but upon whom does the right and duty to invoke this law fall?

["The phrase 'right and duty' of each member to consume seems to justify the introduction of a moral factor which I wish to disclaim. On the other hand, it does not seem to me to be the function of a true exchange system to bias itself in favor of capital accumulation or in favor of anything except free exchange. Capital formation must justify itself as must also money saving. There is nothing in the valun idea to impede or promote either." E. C. Riegel, in a letter to Raymond J. McNally—Editors.]

The answer to this question is all important. Money is potentially the perfect medium of democracy, as will be elaborated in the next chapter. But it will be a limited democracy if money cannot be issued by all who qualify. If those who want money and are willing and able to return value to the market for it are restrained from creating that money, the functioning of exchange democracy will be impaired.

The process of money creation and retirement must go on unimpeded if exchange is to fulfill its function in society. While the use of money benefits both buyer and seller, the responsibility for creating it falls entirely upon the buyer. If the prospective buyer remains away from the market for lack of money, the reciprocal good that he could do by creating money turns into a reciprocal ill, hurting the potential seller as well as himself.

The buyer who merely buys with money in hand, i.e. does not create money, is but a passive supporter of the exchange system. He is a reactor to the stimuli supplied by those who originated the money he spends. It is true, of course, that there must be a greater number of reactors than actors, because every issue of money passes through a number of hands (transactions) before it returns to the issuer and is retired thereby. It is likewise true that those who have money cannot issue money, because to issue money, one must be without it.

We can comprehend the issuance and retirement of money by visualizing a red-ink bottle from which money flows, and a black-ink bottle into which it is retired—destroyed. Money can only flow out of red ink; black ink is sterile. Persons in the black vis-à-vis the banks are powerless to issue money to supply the dynamics of trade. The red-inkers are the dynamos of business. The black-inker may be ever so wealthy, yet he can do nothing to give lifeblood to exchange. The black-inker, if he ever was an issuer, is now sterile. When we realize this, we develop a favorable attitude toward credit. Since money is the lifeblood of business, and only the impecunious can supply this vital element through bank loans, it is adverse to the social welfare to put bars against the borrower.

Those who have money are, to the extent of the sum thereof, creditors of the market, i.e. they have, as evidenced by their black-ink balance, delivered more to the market than they have received, and are in position at any time to requisition values from the market. In other words, they own units of value that are not in their possession but which they are able to requisition at any time. To thus accumulate property without actually possessing it is one of the tremendous benefits of monetary exchange, because it makes possible the saving of values without materializing them and subjecting them to deterioration and obsolescence. In the market these values are always being turned over and the supply kept fresh.

This constant freshness is available to the money accumulator only because there are others who are in the red to the market, i.e. are taking out of the market with the purpose of later bringing fresh production into the market. Black ink exists only because of red ink. Red ink is the sower; black ink is the reaper. Bless the red inker. The greater his number the sounder and safer is the economy.

Since every red-ink entry produces a black-ink entry or a diminished red-ink balance it is, of course, not possible for all enterprisers to exert money credit at the same time. It is not even necessary that there be as many money issuers as money holders, because each issue initiates a number of purchase and sale transactions before it gets back to the issuer and is retired. But the starters of these monetary circles should potentially include every personal enterpriser. If the economy is to be kept fully responsive to purchase stimuli, the power of money issuance must be exerted by everyone who has need thereof.

Every man having something to sell must be able to buy and, if need be, to issue money to start the exchange. One of the virtues of money, if indeed not the greatest, is the generally unrecognized fact that it acts as a boomerang. To buy is to cause someone to sell, and to sell is to be transformed thereby into a potential purchaser. Therefore, by buying from others we create buying power for our own wares or services. In other words, by buying from others, we indirectly buy from ourselves, which is to say, we employ ourselves. Should we, by shortsighted credit practices, veto the right of any man to employ himself? Must the personal enterprise system be hamstrung by our ignorance of the reciprocity of buying and selling?

Since buying and selling are reciprocals, it follows that not to buy for lack of money is to deny another the opportunity to sell. To quit buying because unemployed is to drag someone else into unemployment. Thus a vicious circle is created by the first market boycotter, since the reaction to his negative action is to take another buyer out of the market and thus diminish further the demand for labor services. The function of money is to bridge the gap between buying and selling, and this bridge can be erected only by the buyer. The would-be buyer who is unwilling to build the bridge, therefore, is not fulfilling his function in exchange. Under the political monetary system and the conventional attitude of the banker toward the small tradesman and employee, this failure has largely been due to disbarment.

The obvious maldistribution of benefits derived from the operation of capitalism is due to the malfunctioning of the political monetary system. This system not only permits the state to inject unlimited numbers of spurious monetary units into the money circulation; it also limits the true issue of money. It is not enough, therefore, to eliminate the counterfeit issues by the state. Inequalities in the issue power of money must be abolished as well. For disequilibrium of monetary power leads inevitably to disequilibrium in the distribution of the wealth created. The banking system must not carry into the personal enterprise monetary system the concepts of creditworthiness prevailing under the political.

Having evolved from pawnbroking, the banker has used wealth as the criterion of credit; the propertied alone being regarded as good "risks." He has been retrospective, whereas money is the instrumentality of the prospective. His attitude has been aristocratic, whereas exchange is democratic. He favors seniority, whereas the dynamic force abides with the juniors. He caters to bigness, which in the aggregate is smaller than the sum of all small business interests. He rates high the materialized and low the potential.

The banker has been so dominated by the state and so intimidated by the consciousness of hazards in the political monetary system that he has functioned more as a subject of the state than as an agency of personal enterprise. So far as he shall operate under the nonpolitical monetary system, however, he will be oriented completely away from the state, with freedom to serve society according to his own judgment. He will acquire a new consciousness of his place and function in the economy. He is destined to be the equilibrator of capitalism.

Under the valun system, or an equivalent system of personal enterprise money, the banker will be free of all restrictive regulations, all stipulation as to capital, surplus, and profits. He will determine his own credit policy and will go as far as he chooses in approaching the fundamental ideas herein discussed. Some bankers will approach them more nearly than others, and thus competition will be the ultimate determinant of the prevailing practice.

The idea that the banker is a credit "grantor" will be dispelled, and with it will go the idea that he creates money. As was noted earlier, to mark a figure, called a "loan," on the banker's books is not an act of credit and, of course, does not constitute a money issue. It merely puts the "borrower" in the way of getting credit from the market at large. The credit, and therefore the money, does not arise until the 'borrower'-buyer purchases something from a seller, and then the credit exists between the buyer and society. In other words, so-called banking credit is social credit. The banker is but the bookkeeper and administrator.

Inasmuch as banking "credit" is social credit, its incidence and volume must be determined by the interests of society. Is it not in the interest of society that exchange be facilitated as fully as possible? To deny the would-be 'borrower'-buyer access to the market is to deny the prospective sellers the opportunity of making sales, and this limits, in turn, the buying of such prospective sellers—a vicious circle.

No banker can be wise enough to judge the potential of a would-be 'borrower'-buyer to redeem his money issue by subsequent sales. That can be determined only in the exchange process of the market. If and when the market refuses to accept the goods or services of the 'borrower'-buyer, a "loss" will appear on the banker's books which will have to be absorbed, not by the banker, but by his customers, since all costs of banking service must be borne by the customers. Such "loss," being accountable, will stand out like a sore thumb. But the loss to society resulting from a refusal by the banker to admit to the market the applicant for credit, though unaccountable, is far more serious. The first of many consequences is that the rejected applicant becomes a potential object for charity, either private or public, and his support is either contributed voluntarily by society or, through taxation, by the "welfare state."

When we contemplate the jams that occur in the distribution of commodities, moreover, and the large advertising and selling effort needed to overcome them, we realize what a cost is incurred by the economy for lack of an adequate money supply, adequately distributed. If we distribute buying power adequately, the products of industry will be drawn by the buyer rather than having to be pushed by the seller. With the equitable distribution of the money power, the distribution of goods and services will no longer be a problem.

It is said that two out of three business enterprises fail in the first two years. Such a shocking record must be due in large measure to the inability of such enterprises to buy and to benefit from the buying of others who are likewise limited. If two out of three business enterprises die before their third year because they are beneath the notice of the banker, is it any wonder that capitalism appears to be a rich man's game, and that by failing to nurture new enterprises it strikes at its own generative process? Does not this exclusion shunt the would-be enterpriser into the labor market, thus making competition therein excessive while curbing competition among the surviving businesses?

Equity between the price of labor and the price of goods and services cannot be attained unless there is ease of entry from one sphere into the other. Whenever inequity appears in either sphere, it must be readily adjusted by the employee going into business or the businessman retiring to the employee sphere. This automatic adjustment must not be impeded by bank credit policy.

The dignity of man requires justice, not charity. Capitalism must operate for all members of society who bring values to the market. There must be no ostracism. When the applicant for banking credit conceives a marketing plan, the banker is confronted with the option of acting as midwife or abortionist. The impersonal experience of the market should be his only guide as to whether, and at what point, such a would-be money issuer should be barred from bank credit.

The money creator is the self starter or spark plug of exchange. His issue starts a chain of exchange, and it is doubtful whether his failure to retire his issue by sales could be as harmful to the economy as his exclusion from bank credit. The economy is dependent upon the initiation of exchange by money creators, and it is manifest that it is better that there should be many such with small issues, than few with large issues. It is also patent that the unemployed man can do more harm to the economy by not buying, than by buying on bank credit, even though his credit remains unliquidated. By the latter process, he isolates the germ of unemployment; by the former, he renders it epidemic.

If capitalism is to be equilibrated and rendered equitable, it must be at the point where the banker functions, and this point is so critical, that the banker must be free to submit himself to the impersonal judgment of the market rather than acting ex cathedra as he is compelled to do under the present system. Under a natural monetary system, the banker, divorced from politics and free to determine his own credit policy, will arrive by the aid of competition at the happy median where the profits from increased business counterbalance his charge-offs. At that point he will become the equilibrator of capitalism, and capitalism will be universally acclaimed.