G. G. MCGEER
ONE OF THE most commonly used and possibly the most feared of all expressions in the English language today is that of “inflation.” Yet there are few indeed who really understand what inflation means.
Because there are no two countries whose gold standard legislation is identical, there are no two countries where inflation technically means exactly the same thing. In Canada, for instance, the meaning of “inflation” is governed by our Dominion Notes Act which provides:
That the Minister of Finance shall hold twentyfive per centum of the value of notes issued up to 50 million dollars in gold, and all notes issued in excess of 50 million dollars shall be covered by a dollar for dollar gold reserve.
Inflation in Canada therefore exists when the Minister of Finance issues Dominion notes without possessing the gold reserve established by law.
When the Bank Act of England was passed in 1844 it authorized the issue of Bank of England notes to the value of £14.000,000 without gold. This is what was known as the fiduciary issue. Thereafter, English bank notes could only issue on a pound for pound gold reserve. Inflation wrould have meant any issue of notes in excess of £14,000,000 for which gold in equal amount was not held.
But mark the change that has taken place since 1844. In 1925, under the new Gold Standard Act, the English bank note continued to be legal tender but ceased to be convertible into gold. In 1928, the fiduciary issue was increased by law to £260,000,000, and the Macmillan Committee in 1931 recommended that it be increased to £400,000,000, indicating that Great Britain is recognizing very definitely that the monetary requirements of the people of Great Britain are far more important than gold reserves.
The Power of Inflation
IN MANY instances of grave national crisis, the bankers’ technical inflation has been resorted to, and the gold standard abandoned.
Great Britain defeated Napoleon by resorting to inflation. Lincoln saved the American Republic from disintegration by the issue of national currency, when he used the American “greenback” to finance the Civil War, and Lincoln would have established a national currency and banking system if his life had been spared.
The allied countries adopted inflatiqn as a means of winning the World War. Our own Government met the banking crisis that came with the collapse of the railway exploitations of Mackenzie and Mann by issuing $26,000.000 of legal tender currency on the security of the bankrupt railways.
In 1915 the Dominion Parliament corrected this condition of inflation, not by effecting an increase in the amount of gold reserves nor by withdrawing the paper currency from circulation, but by legalizing the continuation of the circulation of the $26,000,000 of Dominion notes issued. They are still in circulation and no provision has ever been made to support them with a gold reserve. The result is that now, instead of issuing $50.000.000 of Dominion notes, we issue $76,000.000 against the originally provided reserve of $12.500,000 in gold. I have no doubt that if another banking crisis came to pass today, the Government would again resort to inflation to save the situation. Strange, is it not, that inflation, though possessed of the power to save nations from destruction and bankers from bankruptcy, should be treated as anathema when
its power to relieve unemployment is considered?
The German Mark
VW’HEN properly underW stood, much of the argument against inflation becomes obviously a part of the technique of the propaganda by which the banker and credit dealer maintain the gold standard deception. In this propaganda, in recent times, the “crazy career” of the German mark in the post-war period has been chiefly relied upon by the owners and operators of the banking system to prevent governments from resorting to national non-interest-bearing credit to relieve unemployment.
The results that followed the policy of the German Government may be projx?rly cited as illustrating the ultimate limits to which the inflation of currency can be carried, but beyond that the illustration is valueless. The inflation of German currency to the point of wiping out the value of the German mark
THE recent action of the Dominion Government in releasing $35,000,000 of new money for use by the banking system of the country with a view to bringing about "easier money" conditions, has taken the controversy over the current and credit question out of the realms of theory and made it a matter of practical economics.
In a previous issue Maclean's commenced a discussion of the monetary problem with an article by G. G. McGeer, K.C., on the gold standard. In this issue Mr, McGeer continues the discussion with a statement of the case for inflation. In a subsequent issue, A. F. W. Plumptre, of the Department of Economics, University of Toronto, will examine critically the arguments advanced by Mr. McGeer.—The Editor.
was the result of a monetary policy definitely designed to achieve the very purpose that was accomplished. In the hope of meeting the impossible international obligations that could not at that time be repudiated, the German Government resorted to inflation to liquidate her internal debts, which were payable in marks. To accomplish this purpose, it operated its presses night and day, printed German marks in denominations not only of thousands, millions and billions, but in trillions. When the value of the mark was wiped out, a new currency was established.
Lenin, in the hope of destroying the money wealth of the bourgeoisie and the aristocracy of Russia, did the same thing.
To declare that the destruction of the value of the Russian rouble and the German mark by a designed policy of inflation proves that national credit cannot lx* issued without disaster, is tantamount to saying that because an automobile may be driven over a cliff it should not lx* driven at all. It would be equally absurd to say that because electricity is abundantly supplied with potential danger, it should not be used as an instrument in the service of mankind.
Want Amidst Abundance
BY ENDORSING the bankers’ propaganda against technical inflation, we deny the possibility of managing national credit, and accept a monojxdistic management of bank credit as the instrument by which the wealth of the nation and the taxpayers is appropriated to the service of the owners of the private money system and a privileged few.
We have allowed the bankers, with their false dogmas and unsound creeds, to establish want in the midst of abundance by denying to governments the right to maintain in equilibrium the following factors:
(1) The production and distribution of wealth.
(2) The consumption of necessities, comforts and amenities essential to a decent standard of living.
(3) The circulation of purchasing power.
The real problem that governments must deal with is that of equating the volume of circulating purchasing power so that man can use the abundance which he can now produce and distribute. That problem cannot be solved by repudiating debts, reducing wages, and wiping out the value of existing investments in all manner of social enterprises. It can only be accomplished by what the banker denounces as “inflation,” attended by intelligent government control. It cannot be accomplished by any further increase in the jxnver of the banker to create and circulate bank credit at interest.
It is now obvious that neither government nor private enterprise can go on indefinitely pyramiding an accumulation of interest-bearing debts by paying interest for credit. The inevitable end of that system is now with us. namely, bankruptcy. The existing situation reveals the present private monetary system to be as unsound as the philosophy of Midas. It has surrounded man’s accumulation of wealth, his instruments of production and distribution, with a desert of unemployment. It is now plain that the obligation to maintain the circulation of an adequate ' medium of exchange, which was assumed by the existing banking system, has not been ; properly discharged.
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The progress of civilization has not only been arrested, but civilization is now retreat! ing in disorder. Banker-managed credit has produced not abundance but disaster. It is not, however, the institution of credit that is at fault. The miracle of starvation in the midst of plenty now appears solely as the result of the bankers’ perverted management of credit. We have farmed out to the bankers the domestic and international credit of mankind, and we are paying the same penalty that the publicani exacted in the days of Rome. The remedy lies in correcting the existing management. No other change in our institution is necessary, and if we do correct the management of credit we, in a country like Canada, can re-establish permanent prosperity.
Mounting Interest Charges
WE ARE no longer in the realm of theory with regard to the result that banker management of credit has developed. Within the comparatively short period of less than a century since its inauguration, nation, corporation and individual are now experiencing bankruptcy under a load of unpayable interest-bearing debt.
Our own position is in point. The Canadian taxpayers have paid on national debt since the commencement of 1920 the sum of $1,450.000,000 for interest, and the debt is
almost as large today as it was a decade ago. That huge payment of interest has accomplished nothing but an increase in the number of drones and paupers that everywhere appear. Our interest charges are increasing. The amount to be paid in 1932 is approximately $130,000,000, an increase of nearly 1,000 per cent in twenty years.
I mentioned in my first article that the design and purpose of the banking policy inaugurated in Great Britain in 1844 by bankers, led by the Rothschilds, w'ere to maintain a shortage of money and increase the volume of interest-bearing credit. That the world’s total volume of money today is less than 25 billion dollars, and the world’s total interest-bearing debts have risen to 450 billion dollars, are witness to the fact that the policy has w'orked out as its promoters intended it should. Such is the result of borrowing credit and agreeing to repay in money. We have come to the end of the credit-usury era.
War Financed by Inflation
NO BETTER understanding of the present situation can be secured than by reviewing the economic policies that obtained during the war and the immediate post-war period and the results that have followed. Between 1914 and 1920 the primary activity of humanity was the destructive enterprise of war. To maintain this activity, national debts increased from 17 billion dollars to more than 130 billion dollars. The national debt of Great Britain rose in the same period from 3,250 million dollars to 40 billion dollars. The debts of France and other European countries, the United States and the nations of the British Commonwealth, increased proportionately. The distribution of the purchasing power that these debts represented, resulted in the increase of bank credit from the world’s total deposits in 1914 of 50 billion dollars to more than 120 billion dollars in 1920. The bank deposits in Canada rose from one billion dollars to 2,400 million dollars, while the interest paid on debt by the Dominion rose from $13,000,000 to $107,000,000, an increase of 830 per cent.
Broadly speaking, there were two definite reactions to these great increases in the taxpayer interest-bearing debt and the volume of bank credit. One was temporary and the other permanent. The permanent reaction was a definite increase in the levy and collection of taxes. This disastrous policy of taxation which by the Treaty of Versailles was in part temporarily transferred to Germany and Austria, resulted in the bankruptcy of those two great nations; and we are now feeling the full force of the repercussions that have followed the failure of the Treaty of Versailles to load the cost of the war upon the taxpayers of the defeated nations.
The second and temporary reaction to the great inflation of interest-bearing debts and bank credit during the war period reflected itself in the buying activity that followed the flow of this purchasing power to the consumer. This reaction was most definitely pronounced in France and the United States. The flood of inflated purchasing power created a temporary period of real expansion and prosperity that could only be continued by the adoption of monetary and credit policies that would keep the flow of consumers’ purchasing power not only in circulation, but in circulation in increasing volume.
But, instead of increasing the volume of consumers’ purchasing power and guarding the continuity of its circulation, the forces that were set in motion were definitely designed to accumulate money profit, and they destroyed both the volume and the circulation of consumers’ purchasing power. Interest charges on existing debts, and the increasing power to accumulate profit by the investment of capital in improved methods of business administration and wealth production, tended to centralize the accumulation of credit in the possession of the investing and lending classes, where it now lies in a useless frozen condition. The post-war period shows beyond dispute that what was needed was more national credit in circulation but circulating without cost to the taxpayers.
Instead, the manipulators of credit and the international bankers joined in attacking the inflation that had won the war, with their devastating policy of deflation. By returning to gold, the bankers deliberately set out to reduce the volume of money in circulation.
The results we have seen.
From the moment the Treaty of Versailles became operative, despite every effort that has been made, the problem of raising the taxes to meet the cost of financing the war has been attended by an ever-recurring series of economic disasters that are still persisting. The return to the gold standard advised by the international bankers in 1920 and 1922, the Dawes plan, the Young plan, the Disarmament conferences, the
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Hoover moratorium, the abandonment of the gold standard by Great Britain, the accumulation of gold by France and the United States, the repudiation of debts by Germany, the inflation of bank credit by such legislation as that introduced in the United States known as the Reconstruction Finance Corporation and the Glass-Steagall Bill, the reduction of interest in Great Britain, the British Empire Conference— all these have brought no general relief.
We enter the winter of 1932—the fourth winter of this depression upon the North American continent, the twelfth winter of the depression in Europe with the exception of France, and the sixth winter of the depression in Great Britain—confronted with the fact that our economic problems are still unsolved. We are still hoping that in some way, at the moment unknown, basic conditions will improve, and they are not improving.
It is for these reasons that I say that,, under the existing monetary system, the cost of financing the credit expenditures during the wrar period constitutes a permanent disaster to this civilization. That ' disaster will continue as a permanent blight on human progress until the monetary system is changed and until national governments are privileged to sustain the functions of government by the use of national credit issued without interest payable to a private money system.
It should be remembered that it was the cost of putting credit in circulation and not the inflation of purchasing power that brought disaster. If the allied nations had issued national credit as w'ar time capital free from the charges of commission and interest that bankers, brokers and lenders of credit imposed, the quelling of food riots and the routing of bonus army marchers would not be the sole echo that reminds us of the futility of victory. The credit dealer collects interest while veterans and children starve. That is the tragedy. The price is too high to pay for the bankers’ fears of inflation and banker management of credit.
Less Money Today Than in 1920
/^ANADIAN financial statistics amply ^* demonstrate the effect of accepting the bankers’ technical interpretation of the meaning of the word “inflation.”
In 1890 Dominion notes outstanding totalled $15,000,000. In 1900 the issue had increased to $26,000,000, in 1910 to $89,000,000, and in 1920 they stood at $292,000,000. In 1930 they were reduced to $174,000,000 and in March, 1932, to $116,000,000. Had the rate of progress that was experienced up to 1910 continued, the Dominion notes now in issue would be j more than $500,000,000.
The total of all circulating media—that I is, metal money, Dominion notes and bank j notes—in the hands of the general public ¡ (excluding large denomination Dominion : notes in the hands of the banks) amounted to $65.000,000 in 1900, $115,000,000 in 1910, and $296,000.000 in 1920. It had fallen to $211,000,000 in 1931, and it is still falling. The condition of Canadian finances in 1932 discloses that there is today thirty per cent less circulating medium in the possession of the public than there was in 1920, and fifty per cent less bank deposits and circulating medium in existence than there would have been had the pre-war rate of increase continued since 1915. This is the way we in Canada have avoided the dangers of inflation.
In Canada, as elsewhere, the policy of j Government in returning to, and maintaining, the gold standard has involved the deliberate reduction of the circulation of money and credit purchasing power at a time when the very reverse of such a policy was needed.
Mismanagement of Money and Credit
THE economic collapse that followed the post-war period of prosperity has been brought about because the immediate concern of both statecraft and business has been limited to the financing of the means of producing wealth and making profit. No real attention has been given to the ; problem of financing consumers’ purchasing power or protecting the taxpayer.
We have ignored the necessity of maintaining both an increase in the distribution of wages and a continuity of circulation of purchasing power. We have ignored the problem presented by the displacement of human labor by machine labor. We have forgotten the fact stated by Howard Scott, head of the Research Department of the School of Industrial Engineering in Columbia University, New York, namely:
“Technological improvements have come with such rapidity in the last three years that only fifty-five per cent of the workers thrown out of employment by the current depression could be re-employed if industry resumed operations at the 1929 peak of production.”
We have forgotten that a progressive rise in the standard of living is the only way by which progressive prosperity can be maintained in an age of plenty produced by technological progress.
To quote the Royal Bank of Canada, (bank letter, dated February, 1932):
“The present depression is usually explained in terms of extravagance, overproduction, excessive tariff barriers, etc. In varying degrees, these, as well as other contributing factors, produced situations which were essentially unsound: but, speaking generally, the controlling influence has been the mismanagement of money and credit. The average price level is determined by the relation of goods and services rendered to the volume of the money supply, and the disastrous fall in the general price level would not have occurred had the supply of money been properly regulated.”
The problem of government today is to correct this mismanagement of money and credit, to establish an effective circulation of purchasing power.
The drain of interest and the elimination of wages in industry and commerce must be offset before prices will, or can, carry any real measure of profit. With the present economic outlook nothing can be done. That outlook must undergo a fundamental change. We have accepted the teaching of the orthexiox economist who has worshipi^ed the banking institution set up by the people I of Great Britain. The warning that if governments issued money produced under the power of national government to issue and circulate paper currency not convertible into gold, the increasing volume in circulation would in time injure the purchasing power value of money and would eventually destroy the value of all wealth, has been i accepted as inviolate. We have kept the I world poor in our desire to guard against i the dangers of such a course, j Believing we were acting wisely, we have allowed the bankers to manage the monetary systems of all nations and, blindly accepting their advice, we have allowed them, to their own advantage, to circulate bank credit based upon interest-bearing debts. We were not warned by the bankers against the danger of inflating the volume of interest-bearing debt, although there is more danger in that form of inflation than there is from the inflation of the volume of paper currency. Under the bankers’ management of credit, it is obvious that once the power to pay interest is exhausted the circulation of credit must cease. That is the position we are in today.
Blinded by the intoxicating influence of easy profit and mighty power, the bankers, under their own system, managed by themselves and for themselves, have now, by inflating interest-bearing debt as a basis of
credit issue, destroyed the further possibility of issuing and circulating credit as purchasing power. It is the banker who has forced men to look for a more efficient means of circulating credit as the purchasing power medium of the age.
The independent management of national credit offers the only source from which the volume of exchange now essential to human progress can be secured. In no other way can we avoid the dangers of currency inflation, the disasters of interest-bearing debt or the tragedy of deflation. National management of national credit by men of “unchallengeable independence” whose responsibility to maintain prosperity will not be destroyed by their privileged desire to grow rich and powerful by earning interest with credit created by entries in their own books and manipulated by themselves solely for their own personal advantage, offers the only practical solution.
Solution Not Impossible
CREDIT, bank credit transferred by cheque, has now taken the place of both gold and money to the extent of ninety per cent of our exchange transactions. It is now the means of exchanging both property and services not only among people of one nation, but it serves in an international way as well. Credit, not money, supplies our capital.
Bankers say that we cannot successfully manage credit in the interest of the people; but they cannot say with truth that the bankers have not managed credit as capital for the credit dealers as a class.
If we eliminate the bankers’ privilege of managing and manipulating credit in the interest of a private monopoly, much of the difficulty of managing national credit in the service of both people and nation will disappear.
Many of the technical problems that the use of credit as capital involves, we now know have been successfully solved by banker management. The general use of credit as capital both in war and peace times has now cleared away much of the unwarranted fear founded upon the idea that the use of national credit must for ever remain taboo because such a course conflicts with the outworn theory that purchasing power, to have value, must be limited to the gold counters of our illiterate fathers of a century ago.
Political economy, like law, is not an exact science. The administration of justice, however, demonstrates the possibilities of a practical management even in a realm of monetary economics where the incalculable elements of human psychology play an important part in establishing an interplay of forces extraordinarily complicated and difficult to control. The levy of taxes and the collection of revenue; the departments of the post-office, trade and commerce, public works, health, education, customs and tariffs, finance and the existing banking system, Workmen’s Compensation and Pension Boards, Trade Commissions, Hydro-Electric and Railway Commissions— all represent institutions by which governments have undertaken to manage, either directly or by delegation of authority, the economic well-being of both nation and people.
When the banker and his “pandering sycophants” say that national credit cannot be controlled, they are declaring that something cannot be done that is being done. If you can manage bank credit against mankind successfully, then it cannot be argued that national credit cannot be managed in the interest of both nation and the people. The latter, as we shall see, is by far the easier of the two objectives of credit management.
Editor’s Note:—This is the second of a series of these articles by Mr. McGeer on the monetary problem. The third will appear in an early issue.