THIS MONEY MATTER
Says this writer: "A despotism that places the wages of credit above the wages of men is destroying democracy"
G. G. MCGEER
HE MONEY of Canada must be backed by the security of gold.”
“The use of national money is neither practical nor possible. There is no way of controlling it.”
These time-worn expressions of the money-lender and credit dealer take on an added significance when, in time of economic crisis, such as the present, they are reported in the public press as expressing the view of the Prime Minister of a nation such as Canada. If they are to be accepted as final, then the conclusion that Canada’s monetary system cannot be changed seems almost unescapable.
The declaration that Canada’s money must be backed by the security of gold implies that Canada’s money is so backed. Nothing could be farther from the truth. No such security exists in the Canadian monetary system. Canada’s money consists, according to the statistics for 1930, of :
(1) Metal coin issued since 1858..........$32,000,000.
Such coin is legal tender up to the following amounts:
Bronze, 25 cents; nickel, $5.; silver, $10.; gold, unlimited.
Gold coins have ceased to circulate, not as a matter of law but as a matter of international banking agreement.
(2) Dominion currency notes.............$174,000,000
Dominion notes are printed under the authority of
the Dominion Notes Act. and are declared by that Act to be legal tender for an unlimited amount.
(3) Bank note currency..................$160.000,000
Bank notes are printed under the authority of the
Bank Act and are legal tender only at the bank of issue.
(4) Bank deposits.....................$2,000,000,000
That is, the money owed by bankers to depositors
which the banker must pay on demand or notice. This is the money, transferred by cheque, with which ninety per cent of Canadian monetary transactions are completed.
(5) Gold: Canadian Government gold
Monetary gold in the possession of bankers
(estimated average)..................$ 50,000,000
Now, with these statistics before us, let us look at the gold standard as it operates in Canada and observe its mechanism. Dominion notes, as we have already mentioned, are issued as legal tender money in Canada under and by virtue of the Dominion Notes Act. which provides that Dominion notes shall be redeemable in gold. That Act provides that the Minister of Finance shall hold gold to the value of twenty-five per cent of the amount of Dominion notes issued up to fifty million dollars, and thereafter the amount of gold reserves held shall be dollar for dollar of the notes issued. This is the substance of the simple legislation which constitutes and creates Canada’s gold standard.
To the uninitiated, these provisions in the Dominion Notes Act constitute the substance of the Dominion Law that supposedly provides a gold security for the Canadian monetary structure. It does not do that, and it never was intended to perform any such service. It constitutes an adoption of the perversion of the gold-standard monetary theory accepted in Great Britain when the Bank of England Act of 1844 was passed. The change in the application of the goldstandard theory was a trick on the part of the money-lenders and credit dealers who promoted the English Bank Act nearly a century ago. By that law, the purpose of the gold standard was changed from
that of providing security for the value of money to that of restricting the power of the government to issue legal tender paper currency. The Act of 1844 established the power of the credit dealers to substitute bank credit,
transferred by cheque, for money, by assuring a shortage of money. The credit dealers in 1KH were fully aware of the fact that there was not a sufficient amount of gold in the world to support the volume of money that the growing and developing trade and commerce of the world must have. They induced the British Parliament to limit the issue of legal tender paper currency to the available gold reserves, and left the way open to create a substitute for money in the form of bank credit transferred by cheque.
They anticipated correctly the coming use of credit. They made it impossible to use anything else, and Canada adopted the English system in that regard. That is why in Canada in 1930 there was 2,000 million dollars of bank deposits, and only 174 million dollars of legal tender money.
Sir Josiah Stamp, director of the Bank of England and spokesman extraordinary for the international credit dealers, in a recent broadcast address in London succinctly declared the true function of the gold standard. He said:
“The main function of the gold standard is to set an outside limit upon the creation of money and credit, and to put it beyond the caprice of human frailty and political desires.”
He should have added that the caprice and acquisitiveness of the credit dealer were even more dangerous.
THE recent convention of the provincial Liberal Party in British Columbia unanimously voted in favor of monetary reform, national management of credit and the establishment of a national bank.
In the Federal Parliament, Progressives and Liberals are urging similar policies. The Liberal Leader himself has urged a central bank.
The Prime Minister repeatedly declares that he will never abandon “sound money," by which he means currency backed by gold.
What, in simple terms, are the pros and cons of this currency and credit question?
With this article, Maclean's commences a discussion of the subject. G. G. McGeer, K.C., argues the case for reform of a system which he claims places "The wages of credit above the wages of men." In a later issue, A. F. W. Plumptre, of the Department of Economics, University of Toronto, will take an opposing view.
The law which establishes this form of the gold standard in Canada is the most disastrous legislation to be found in our statutes. By restricting the right of the nation to issue money, it creates a monopoly of credit and places the wealth of the nation in pawn with the credit dealers. It has given the credit dealers practically exclusive control
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and management of “the economic blood stream of the nation.”
The gold standard, as correctly defined by Sir Josiah Stamp, compels governments to maintain the credit dealers’ monopoly by compelling governments to exchange interest-bearing bonds, backed by the ability of the taxpayer to pay, for non-interest bearing credit. The result has been the inflation of interest-bearing debt, the inflation of interest-earning credit, the bankruptcy of government, the ruination of the taxpayer, the bankruptcy of corporations, and the destruction of wealth-producing activity.
As it operates today the gold standard is a credit dealers’ racket, and it serves no other domestic purpose. In fact, it serves no domestic purpose that cannot better be served by national control and management.
The following table graphically portrays the inconsequential part which gold, legal tender money and bank notes now play in Canada’s monetary system. It reveals the extent to which bank credit, transferred by cheque, now takes the place of money as the purchasing and interest-earning medium of both Canadian banks and people.
Canadian Bank Business Summary Deposits PayCanadian Deposits able after Notice Bank Debits. Year Gold Dominion Ä Bank Note Payable on or on a Fixed All Cheque Reserves Notes Circulation Demand day in Canada Transactions ! 1920................ $101,101,970 $292,016,290 $228,800,379 $653,862,869 $1,239,308,076 Not available 193C................ 96,212,102 174.218,634 159,341,085 622,895,347 1,427,569,716 $37,491,301,766
The Use of “Bank Money”
XTOW, keeping these facts in mind, let us -LN analyze the figures for 1930. Upon the total gold in Canada of less than $150,000,000, is built up the Dominion note and the bank note circulation, which totals $333,559.719. and more than $2.000.000,000 of bank deposits.
If we appreciate correctly the necessity for dividing the available gold reserves into domestic currency and foreign balance settlement reserves, we cannot help but recognize that the convertibility of Canadian paper currency into gold is an utter impossibility. But that is not all. The two billion dollars in money that the bankers owe their Canadian depositors cannot be overlooked. Surely it is the height of absurdity to say that two billions of dollars of deposits in the banks “are backed by the security of gold.” when there is considerably less than 150 millions of dollars of gold available for that purpose.
The fallacy that “Canadian money must be secured by gold” becomes even more obvious when we remember that the Canadian people, using cheques transferring bank credit, consummated in the year 1929 monetary transactions to the value of 46,670 million dollars. Ninety per cent of all monetary transactions are now completed by cheque. The plain and simple fact is that Canadians, like the rest of the people of the British Empire and the people of the United States, are getting along with a purchasing power medium of exchange that is not backed by gold. Almost unconsciously we have passed from a money to a credit age. In the change that has taken place, the value of gold as money has been reduced to the limited field of international exchange.
On the facts, there is no ground for stating that even the Dominion note or bank note currency of the Dominion of Canada “is backed by the security of gold.” When such a broad general statement is applied to the “money of Canada,” which must include the depositors’ money on deposit with the banks, the statement becomes wholly unwarranted and untrue.
The English economist, Keynes, describes the gold standard correctly when he says:
“In truth, the gold standard is already a barbarous relic. Advocates of the ancient standard do not observe how remote it now is from the spirit and the requirements of
the age. A regulated non-metallic standard has slipped in unnoticed. It exists . . . While the economist dozed, the academic dream of one hundred years, doffing its cap and gown, clad in paper rags, has crept into the real world.”
The worst feature of the gold standard as applied in Canada lies in the fact that, while it directly controls and restricts the issue of Dominion notes, it does not apply, except in the remotest way, to bank note currency or to bank deposits. None of the ¡ currency laws, or the Bank Act. require the Canadian banker to carry gold reserves against bank note circulation or the general money liabilities of a bank to depositors. As a result the issue of national money is limited and the door is left wide open to the banks to create bank credit currency as a substitute for money. The gold standard as it operates in Canada is not a security, it is a credit dealers’ deception.
We in Canada still maintain the fallacy of “security.” Britain has abandoned it. The British Gold Standard Act of 1925 specifically provides that both Bank of England notes and currency notes should cease to be convertible on demand into
gold, but should nevertheless remain legal tender. No one can now demand gold for an English bank note, but until 1931 gold in bar form, not to exceed a value of roughly £1,700, could be purchased for export. That was all that was considered necessary to maintain the gold standard in Great Britain —just enough to support a form of international gold standard. The gold standard of Canning and Peel was ended, and in 1931 the “tail went with the carcass.” The international gold standard was also abandoned. If there is no need to secure the British pound with gold, surely the same conclusion is sound for the Canadian dollar.
We maintain a gold standard that prohibits the use of national credit and substitutes a banker standard of credit which ' has developed the most unstable monetary structure and price level that has ever been inflicted on suffering humanity. Under the present system, bank credit -created by the banking system and circulated upon assets which banks either buy with bank credit or secure from borrowers of credit, including the National Government—successfully maintains all the functions of money, including the power to earn interest and the power to acquire securities and all manner of wealth-producing assets. Under this system, interest-bearing debts, not gold or money, constitute the foundation and fabric of our private money system. Under this system the banker, screening his real operations behind the gold standard, has squandered the monetary wealth of the nation in interest and has turned the wealth of the taxpayer into a wilderness of ruin. And he adds insult to injury by describing the outrage as a “sound money policy.”
For this is the policy by which the State denies itself the right to issue any except a very limited amount of money without gold reserves; and at the same time grants to a private monopoly the unfettered privilege of creating and withdrawing bank credit as a substitute for money, after which it pro ceeds to borrow bank credit to the point of bankruptcy. It sounds mad and ridiculous, but it is nevertheless a fact. The situation today is succinctly summed up by Professor Soddv of Oxford when he says:
“We have come to the place where we must recognize that if some people are to be allowed to issue and destroy money at will, all of the others may as well give up at once any idea of economic independence or freedom, and hire themselves out to
those who iiave this power at the best terms they can. There cannot be two heads in one State, and the people have to choose between Parliament and the bankers.”
HPHE problem of settling international exchange balances offers a splendid example of the anomalous nature of the credit dealers’ illogical theories of monetary economy. International exchange balances, if not maintained in equilibrium by trade, must be settled in gold. In the Dominion of Canada, every dollar of gold we can secure is needed to meet our debts payable in foreign countries. What nonsense it must be in the face of such a situation —as the Macmillan Committee which investigated the situation in Great Britain on behalf of the British Government, points out to sterilize gold in Government vaults in order to support domestic currency, whose value comes from the supreme legislative authority of National Government. By maintaining the legal tender currency of the Dominion independent of gold, the entire gold reserves of the nation would become available to sustain the international credit of the nation.
The Macmillan Committee points out very clearly that it is not necessary that the note issue should continue to be regulated, as it is now, by the amount of gold held in reserve. By abandoning the foolish idea that the Bank of England note, Great Britain’s legal tender money, must be convertible into gold, Great Britain has recognized and eliminated that absurdity from her monetary system. By persisting in the idea that our Canadian legal tender money must be convertible into gold in order to maintain the value of our international medium of exchange, we accomplish two results that are the very opposite of what we should be seeking to accomplish:
(1) We needlessly sterilize a portion of the gold we require for international exchange purposes by holding it as a reserve for domestic currency.
(2) By virtue of the requirements of gold for international purposes, we restrict the power of the nation to issue the money and national credit that are needed to relieve unemployment and to maintain the trade and commerce of the nation.
From almost every angle that you view it, the gold standard, like all pagan relics, offers nothing but inconvenience and disaster in this enlightened age. Our intelligence has now risen to the point where governments can create money and credit, which successfully serve as purchasing power.
Were it not for the gold standard, the conquest of poverty might well be within the power of government. Certainly the power of government to relieve unemployment could be exercised without the confiscation of the taxpayers’ wealth. The outlandish folly of the Canadian gold standard money system is emphasized by Maynard Keimes in his Essays in Persuasion, in which he aptly describes the power of the state to create and issue money.
“The creation of legal tender has been, and is, a government’s ultimate reserve, and no state or government is likely to decree its own bankruptcy or its own downfall as long as this instrument still remains at hand unused. Money is simply that which the state declares from time to time to be a good legal discharge of money contracts. Gold lias not been the English standard for a century, or the sole standard of any other country for half a century.”
We have, despite this truth, established bankruptcy throughout the land for want of money. It is our sacrifice to usury, our votive offering to Mammon. It is the price we pay for the gold standard.
The Gold Standard and the Price Level
BY FOLLOWING the advice of the credit
dealers, we have allowed the beneficiary of interest-bearing credit to frame our monetary laws, and we have allowed the
beneficiary of interest-bearing credit to maintain his trade as a part of the exclusive privilege of managing the nation’s money and credit. We should not be surprised when, under such circumstances, we find bankruptcy appearing in every department of our social system under the weight of interest-bearing debt that such a system has established. We would have been just as well advised had we turned over to the professional gamblers the power to frame the laws designed to control gambling, and then given to the gambler the exclusive power of administering the system of gambling that his laws had established.
If National Government cannot exercise its prerogative right to issue and circulate national legal tender money, then Government, industry and commerce and the individual farmer and householder are all alike—compelled to use the bankers’ interest-bearing substitute for money that is, bank credit transferred by cheque. No other purchasing medium is available. If commerce and trade cannot convince the banker that borrowed credit, with interest, can be returned from accumulated profits, bank-credit money will not circulate and trade dies. The gold standard perfects and closes the credit monopoly of the private money and credit system.
Furthermore, the gold standard has proved utterly useless as a tool for the stabilizing of the price level. The old 19th Century philosophy of the gold standard presented to the public two assumptions:
(1^ That an increase or decrease of gold in the vaults of central banks would imply a cheap or a dear money policy.
(2) That a cheap or a dear money policy would affect the entire price structure and the level of money incomes.
In practice these conclusions have been proved untrue. Under the gold standard system gold plays no direct rôle in the determination of the price level, because the great bulk of circulating media have been converted into bank deposits transferred by cheque. It is the circulation of this creditpurchasing power, that it is not based on gold, which primarily and directly affects the price level, and not the amount of gold which might be held in reserve. There has been no substantial variation in the gold reserves of Canada in the last three years, but prices have fallen disastrously, and no further inflation of bank credit or interestbearing debts will ever re-establish a normal level.
While the people were led by the bankers to believe that the ultimate outcome of the working of the gold standard would protect the community from sporadic cataclysms of soaring or collapsing price levels, the credit dealers proceeded to plunder the taxpayers and the wealth producers by the manipulation of credit uncontrolled by gold.
The Nature of Bank Credit
TN ORDER to understand the real nature * of the forces that were persistently working to create the present economic collapse, it is essential that the practice under which the banks create bank credit as a substitute for money be understood and appreciated. Few there are who appreciate the tremendous advantage that the combination of the gold standard deception and the substitution of credit for money offers to the owners and operators of the private money system. When the value of the credit system to the banking community is understood, it is a simple matter to appreciate the infinitely greater value that it would have to the nation and to the social order, were it appropriated and managed as a national institution serving the community as a whole. The credit system, once nationalized under proper management, would prove to be mankind’s greatest blessing.
The substitution of credit for money has been the result of the evolutionary progress • of usury. Step by step, the power of the credit dealer to accumulate interest from money has moved to the place where money has gone, and the usurer now accumulates interest by the manipulation of credit.
Under the credit system sustained by the gold standard, usury has attained the ultimate of its possibilities as a means of appropriating wealth.
Prior to 1844. under the general banking practice, bank note currency was issued on a forty per cent reserve of gold. That is, when a miner went into the hills and took out $40 worth of gold, he brought it to the bank and got $40 worth of bank notes for it. But, under the banker’s interpretation of the gold standard, the banker was thereupon privileged to issue, for his own use. an additional $60 of bank notes, which he could loan at interest or with which he could buy securities. He operated on the theory that he could be short on gold to the extent of sixty per cent of his issued bank-note currency, on the assumption that his clients would never at any one time demand more than forty per cent of his obligations to them in gold. Despite this advantage, the holding of gold reserves was considered a costly business from the bankers’ point of view, so, when they engineered the passage of the Bank Act in England in 1844, the joint-stock banks dropped gold reserves. The Bank of England became the custodian of all gold and the issuer of all legal tender paper currency, which took the place of gold as bank reserves for depositors’ money from then on.
The bankers soon learned, with the development of the use of the cheque, that credit could be substituted for money, and that they did not require to hold more than ten per cent of legal tender cash to maintain the profitable business of banking. Under the practice they established, for every $1,000 of legal-tender money secured from depositors or borrowed from the Bank of England, the joint stock banks could issue and use $9,000 of their own credit for the purpose of acquiring interest-bearing securities or for the purpose of creating new deposits by issuing loans. The old practice of issuing $100 of bank notes against $40 worth of gold, was converted into the practice of issuing $100 of bank credit against $10 in cash reserves. Where the banker formerly went short on gold to the extent of sixty per cent of his gold obligations, he now goes short on legal-tender money to the extent of ninety per cent of his legal-tender money obligations. Under such a system, it should not be a matter of wonder that every one has gone broke except the bankers and their allies, the stock gamblers.
Christian men are shocked, and their sense of decency and justice is outraged, when they hear of usury in India that results in rates of twenty and thirty per cent. They forget that a banking system privileged to loan credit to the extent, of nine times its cash money wealth, is practising the most .violent form of usury ever developed. An understanding of just how bad it is may be gleaned from the bankrupt condition of the government and trade of the countries where the credit dealers’ gold-standard, privatemoney system has been encouraged to thrive and prosper, in the misguided belief that such a system was synonymous with a sound money policy. That system of usury explains why Canadian banks, with a paidup capital of 144 million dollars, after paying dividends of from twelve to fifteen j)er cent, still possess a reserve account of 160 million dollars. It explains the world’s economic crisis. It also explains the world’s interest-bearing debts, and the credit dealers’ loyalty to the gold standard.
The Making of Bank Money
THE fallacy that bankers loan only other people’s deposits is just as pronounced as the fallacy that ‘‘money is backed by the security of gold.” The banker, in the main, does not lend accumulated savings. He converts Government and individual securities into purchasing medium by creating deposits for borrowers, against which he authorizes the borrowers to issue cheques that are never redeemed in money. The banker safely assumes that the cheques issued against the credit advanced will be redeposited, and that his obligation to
redeem them in money will never arise. For this credit service he charges interest in the same way that he would if he had loaned actual money. In describing how bank credit is created and circulated, the Macmillan Committee’s Report, in Sections 71, 74 and 75, gives this illuminating information:
“Since the banks, as a whole, maintain a cash proportion to deposits of from ten per cent to eleven per cent, they are in fact able to increase their deposits by some ten times the cash created by the Bank of England . . .
“It is not unnatural to think of the deposits of a bank as being created by the public, through the deposit of cash representing either savings or amounts which are not for the time being required to meet expenditure. But the bulk of the deposits arise out of the action of the banks themselves; for, by granting loans, allowing money to be drawn on an overdraft or purchasing securities, a bank creates a credit in its books, which is the equivalent of a deposit. A simple illustration, in which it will be convenient to assume that all banking is concentrated in one bank, wall make this clear.
“Let us suppose that a customer has paid into the bank £1,000 in cash, and that it is judged from experience that only the equivalent of ten per cent of the bank deposit need be held actually in cash to meet the demands of customers; then the £1,000 cash received will obviously support deposits amounting to £10,000. Suppose that the bank then grants a loan of £900; it will open a credit of £900 for its customer, and when the customer draws a cheque for £900 upon the credit so opened, that cheque will, on our hypothesis, be paid into the account of another of the bank’s customers. The bank now holds both the original deposit of £1,000 and the £900 paid in by the second customer. Deposits have thus increased to £1,900.”
The bank can carry on the process of lending or purchasing investments, until such time as the credits or investments purchased represent nine times the amount of the original deposit of £1,000 in cash.
“The process is much the same when we remove the assumption that there is only one bank. The credit granted by one bank may reach the accounts of customers in another bank. There is thus established a claim by the second bank upon the first for cash, and the ability of the second bank to grant loans is improved in so far as that of the first bank is reduced. Over the banking system as a whole, therefore, loans and investments made by the banks increase their deposits. There is, however, a limitation on this process. A bank which is actively creating deposits in this way will naturally find that a considerable part of the cheques drawn against it will be in favor of other banks. It will thus lose part of its cash reserve to those banks, and must proceed to limit its loan operations if its normal cash ratio is to be maintained. In practice, therefore, no one bank can afford to pursue a policy of creating deposits by making loans or investments which is much out of line with the policies of other banks.”
The general practice of the bank credit money system is made plain to almost every one by this analysis. It explains how the banker uses credit to earn interest by financing both government and private enterprise. It explains howr the war was financed and how the enormous load of existing interest-bearing debt has been developed.
It is by a multitude of transactions of this kind that our Canadian banks have built up interest-bearing loans and purchased assets of over two billion dollars on less than 150 million dollars of gold and 116 million dollars of legal tender money (Dominion note issue March 1, 1932).
This is the chimera of sound money that constitutes the existing private money system’s chief means of accumulating the wealth of the taxpayers and of the wealth producers. This is the credit racket that the gold standard money system is designed to create and now maintains.
1 This is the system that has established public and private interest-bearing debts of I the people of Canada totalling the ruinous amount of over 8,(XX) million dollars.
The Growth of Interest-Bearing Debt
! TT IS no matter of theoretical conclusion 1 that our Canadian banks do use bank credit in the manner outlined by the Macmillan Report. Over a period of ten years the Canadian banks have created deposits anywhere from ten to sixteen times : the amount of legal tender cash in existence. It was in this way that during the war ! Canadian bank deposits were increased from I slightly over 1.000 million dollars in 1914 to ; 2,400 million dollars in 1920. We financed i the war with interest-bearing bank credit when we could have used, in a national ! monetary system, both national money and I credit without the cost of interest. We are j still paying the bill, and it looks as though it will remain with us for ever. Despite the power of Government to issue and circulate legal tender cash and non-interest bearing credit if it operated a national banking system, it has declared its own bankruptcy by borrowing a credit inferior to its own.
The private banking gold standard and bank credit money system offers a crude and disastrously expensive method of creating the purchasing power medium that can and should be created by a national banking institution in infinitely greater volume and with infinitely less cost to the nation and to the people. The present banking system is directly responsible for the uneven flow of progress and the unpayable burden of interest-bearing debts now extant. It is far less susceptible to effective and efficient management than a system of national currency and national credit maintained by a national banking system would be.
In our pursuit of health, wisdom and happiness, no institution performs a more important function than does our monetary j system. The cost of providing purchasing
medium by the bank-credit, gold-standard money system offers the one and only real example of ruthless and unnecessary social and governmental extravagance. Under a system where the cost of government administration is sustained by borrowing bank credit, the cost of worthy government is rapidly becoming prohibitive. This is one item of governmental expense that can be successfully dispensed with in this age of credit.
The gold standard fallacy, if continued, will maintain an outrageous system by which the wealth of the workers and the taxpayers is being rapidly transferred to the credit dealers. It has now succeeded in establishing a civilization of “drones and paupers.” The gold standard, when represented to the public as a security for the value of money, is a pure sham and a fraud. When it is represented as a regulating power that can stabilize the trade of a nation or its price level, it is equally a sham and a fraud. When it is represented as a regulating force operated by the credit-dealing community to maintain a shortage of real money, the truth is told. The gold standard in its present form is a device designed to support a soulless despotism of credit that lives in opulence by the unlimited right and privilege of exacting through the instrument of government the unrighteous profits of usury, not from money but from credit. It is a creature of cupidity, conceived by the money lenders of a century ago when they invented the plan of substituting credit for money as their interest-earning stock in trade. It is maintained by the blind and incompetent leadership of modern rulers, who are destroying democracy by placing the wages of credit above the wages of men, and the profits of usury above the rights of the taxpayer.
Editor’s Note—This is the first of a series of articles by Mr. McGeer on the monetary problem. The second will follow in an early issue.