49. From Paul L. Poirot (September 11, 1952)

It is not clear to me why the details of a valun banking system are included at all in your presentation. Does that not presume an impossible insight into the results of freedom?

Let us say, for example, that I am in theoretical opposition to our public highway system; I would prefer privately owned and controlled roads. Must I presume to know how or where or why or when individuals would voluntarily develop a system of highways? Or shall I leave that development to the voluntary efforts of individuals, some of whom are more facile than others? The question, I suppose, is one of strategy: How can I best persuade others to give private roads a trial?

Private money must be a credit instrument, a promissory note, for which some individual assumes responsibility. I can issue a promissory note without a bank's signature. I cannot circulate it as money except among those who have faith in my productive capacity, in my ability to deliver the promised goods or services. Within the trading circle of my immediate family, we use such a system, based upon unwritten "scrip" and un-worded "promises." Credit is sought and received and honored strictly on the basis of personal acquaintance. Is there any other way of promoting the use of private money within a larger social circle than the family, except on that basis of faith in the individual? A man's money cannot possibly be any better than his word—his honest effort to redeem his promises.

I can see how voluntary credit insurance might be a profitable business adjunct of a private monetary system. I might well elect to patronize a bank which specialized in character reading and insuring the credit of individuals, just as I now buy term insurance to cover my outstanding debts. Certainly, I would prefer to "shop around" among competing bankers for that particular service, just as I now shop for life insurance or any other commodity or service. I would abhor a universally acceptable valun if I thought it depended upon, or might somehow lead to the development of, a single central bank or credit clearing house. I am trying to say that I do not care to know in advance precisely how the valun banking system might develop under private enterprise. But I am sure we could depend upon private competitive enterprise to coordinate and blend into a workable arrangement a series of individually developed and originally highly variable valuns.

I should not attempt to offer an exhaustive list of the means to be followed toward the end of perfecting a private monetary system. For to attempt such a thing would be in itself a denial of faith in individuality and private enterprise. Let the best man work out the best means.

To Paul L. Poirot (September 15, 1952)

If we assume that the money issuer's commitment is a promise, we, of course, involve a moral question. But the money issuing act does not involve a promise, and hence there is no moral element involved. Therefore, there is no need of having the act of money creation underwritten by credit insurance. The reciprocating action of the private enterprise money issuer, i.e. his compulsion to bid for money with his goods or services, as against his bidding for goods or services with money, makes the involvement of a promise entirely gratuitous, and, in fact, irrelevant, since there is no identification of creditor and debtor in the act of creating money. The promissory note that is customarily required by bankers from the "borrower" involves no loan of money. It is but the initial step in the creation of new money, which is not actually created until the "borrowers'" draft upon the "loan" is accepted in the market in exchange for values. Even then, there is no credit since the acceptor of the draft does not know whether it is drawn against black ink or red ink.

There is, in the commercial sense of the word, no credit involved in money creation. Commercial credit involves a specific creditor and a specific debtor, and arises out of the transfer by the creditor to the debtor of goods or services or already existing money. Though it is not recognized by the users of money, there is implicit in the monetary system a faith that none will be admitted to the issue power other than private enterprisers, who, for the reason stated above, keep the redemption power in constant balance with the issue power.

In the valun plan there is free competition among the banks in the system. Some may operate under a broad credit policy, others under a narrow one. Some may operate by the present practice of requiring "borrowers'" notes, some by merely allowing overdrafts. Some may charge interest while others may depend upon service charges, or both. Voluntary associations of workers or other groups might organize a bank. Does this not give the flexibility and freedom of competition that you seek?

The plan not only provides for competition within the system but also recognizes that the system as a whole must be exposed to competition and that it cannot grow into a universal system unless it responds to men's impulses for freedom of action. Other than the exclusive use of the name valun, there is nothing monopolistic about the plan. All its procedures are subject to the crucible of competition; it cannot begin as a universal system but must earn that status.

From Paul L. Poirot (September 16, 1952)

The step of running the valuns through a theoretical bank seems unnecessary to me; all the bank does is to endorse a personal note, giving it negotiability. The original signer is still responsible, as a debtor, to redeem his promise, no matter who finally appears as his creditor. Any responsible person could serve the banking function of insuring the creditor against the debtor's default. That is strictly a business service. Let any enterpriser do it. Call him a banker if you please, but all he really does is endorse a promissory note. I can't see how you get to the point of view that valun holdings do not reflect the extension of credit to the original signer of a promissory note. Either the banker or the ultimate creditor—the person who finally claims redemption —extends the credit. But credit it is, or so it seems to me, involving persons who trust one another.

To Paul L. Poirot (September 19, 1952)

Commercial credit is a relationship of a specific creditor and specific debtor, arising out of the transference of some value. It rests on faith in the moral responsibility and competence of the debtor, whose default inflicts loss on the creditor.

Banking credit, on the other hand, or money-creating credit, is social—without specific creditor or debtor. It is the money-creating process. It arises from an implicit compact among a group of traders to honor the requisitions of one another that conform to the rules of the monetary system as administered by a central bookkeeper and credit administrator, commonly called a bank. Its operation is as follows:

1. The bank establishes a drawing account for the prospective money issuer by entering a sum on its ledger. This is called a loan, but involves no transfer of money or value by the bank. It involves no deduction from the resources of either the bank or its depositors. In fact, it manifests itself as an increase in total deposits.
2. The "borrower" draws a draft upon his drawing account and tenders it to a trader who delivers value therefore. This exchange constitutes the issuance of money by the "borrower"-buyer and backing of the money by the seller, who becomes a creditor, not of the money issuer but of all the traders in the monetary system. The money issuer becomes debtor to the monetary system.
3. The money circulates, and thus creditor is replaced by creditor until it finds a customer for the issuer, who then returns value in exchange for the value received in the initial exchange. The money is thus retired.

Throughout the whole process, there has been no credit in the commercial sense of the word. The banker gave no money or other value. The "borrower," with the acceptance of his draft by the seller, created the money. If the "loan" should be defaulted, the banker would lose nothing, because he would merely distribute the deficit over the accounts of all his depositors through his charges for service. Nor would this constitute a loss to them because, but for the monetary system, trading would have to be by barter, and that would be a real loss.

All parties to a monetary system are either creditors (those who have surpluses) or debtors (those who have bought more than they have sold) of the whole system, but no individual is creditor or debtor to any other individual. There is no moral factor involved in money issuance, because the issuer acts as a redeemer of money by merely following his acquisitive instincts. He is eager to exchange his goods or services for money, for it is by this process that he gains his profit. To do otherwise would be to boycott himself. He may fail to "make" money and thus fail to act as a money redeemer, but, if so, it is contrary to his intentions.

But does the moral factor enter at no point in a monetary system? It enters very profoundly if the actors know what they are doing. Alas, all participants in the monetary system, as well as the politicians who make the rules, are innocent of infidelity to the basic faith upon which the system rests. This faith is the unwritten and unconscious pact that exists between the banker and the whole group of trader participants. It resides in the observance of the rule that none but private competitive enterprisers be admitted to the money issuing power. This observed, the monetary system automatically functions for good only. Ignored or contempted, it just as automatically miscarries.

From Paul L. Poirot (October 2, 1952)

I’m still confused as to the difference between commercial credit and bank credit. You seem to be saying that it is possible somehow for everyone to trust everybody without your first trusting me, and vice versa. I would concede that a banker might be a highly useful promoter of this ideal of mutual trust, but doesn't his value in this respect depend entirely upon his personal assumption and fulfillment of responsibilities? I can’t see that the mere presence of a banker automatically relieves all debtors of their responsibilities and all creditors of their fears of loss. If obligations are outstanding, it strikes me that they must be assessed against some individual.

To Paul Poirot (October 9, 1952)

Your effort to understand the social nature of money credit as contrasted with bilateral credit may be cleared up if you will ask yourself this question: What becomes of the "losses" or "charge-offs" in the banking business? Are they borne by the bank or included in the costs of doing business and therefore borne by the bank's customers?

To be sure, if these items become excessive, the bank may be unable to pass them on to its customers, since its charges for services might not meet competition. There is an optimum point at which the charge-off percentage is neither too large, reflecting laxity, nor too small, reflecting ultra conservatism. This point can be arrived at only by free competition among banks, a condition that has not existed under the politically controlled monetary system with its many provisions of capital and surplus requirements and, above all, by reason of the limitation of currency supply.

Banks, incidentally, do not fail because of insolvency, but rather because of their inability to meet sudden and enlarged demands for currency. This limitation is purely gratuitous, as there is no sound reason for the distinction between check money and currency money.

From Paul L. Poirot (October 10, 1952)

The multilateral credit media to which you refer means to me that many persons have collaborated in its creation. In other words, a lot of people may agree that it's all right for me to trade with valuns, if I choose. But it seems to me that the multi-lateral arrangement ends there. I can't understand how private money or credit can be anything other than bilateral. One responsible person grants credit which another responsible person has requested. If this credit instrument is then negotiable, that doesn't make it multilateral; it just substitutes one debtor or one creditor for another, still leaving only two persons directly involved. The original credit instrument may go through hundreds of hands in that fashion, promoting one trade after another, but never are more than two persons directly involved at any given stage o f this process.

To Paul L. Poirot (October 18, 1952)

You are quite right in your statement that "The multilateral credit media … means … that many persons have collaborated in its creation … but never are more than two persons directly involved at any given stage of the process."

In other words, monetary media move by the displacement of creditor after creditor until they are retired by the issuer-debtor, there being at all times one creditor and one debtor. But the creditor's claim and the issuer-debtor's are vis-à-vis the market and not between two individuals, both of whose identities are merged in the compound which is called social credit. Failure of the issuer-debtor to retire an equal number of monetary units, by his sale of goods or services, imposes a cost on the whole body of exchange participants. These costs are distributed to all the exchange participants through the charges rendered for banking services.

These costs, however, are not losses to anyone, because they are the price for escaping the much greater cost of doing business by the whole-barter method. The method of finding the optimum of such costs is competition among banks, since they are reflected in the charges that banks must make for their services to their customers.

This virtuous social credit process is inherent in any monetary system; it is, in fact, the criterion thereof. Unseen and unsung, it has gone on raising man’s living standards and will continue to do so unless it be overcome by the antisocial counterfeiting practices of governments, than which there could be no greater calamity.