The Theory of Money and Credit

The practice of making payments by the writing off or reciprocal balancing of claims is not restricted by the boundaries of states or countries. It was in fact in trade between different areas that the need for it was earliest and most strongly felt. The transportation of money always involves not inconsiderable cost, loss of interest, and risk. If the claims arising out of various transactions are liquidated not by the actual transference of money, but by balancing or offsetting, then all these expenses and dangers can be avoided. This provided an extraordinarily effective motive for developing those methods of making payments over long distances which saved the transference of sums of money. Quite early we find the use of bills established for interlocal payments; then in addition we later find checks, and ordinary and cable transfers, all forming the basis of an interlocal clearing system which worked through the ordinary free play of the market without the help of a special clearinghouse. When making payments within a given locality the advantages for the individual of the method of settling transactions by the clearing process and therefore without the use of cash are smaller than those when making payments between localities, and therefore it was a longer time before the system of reciprocal cancellation came into full operation with the establishment of clearinghouses.

If the clearing system has without difficulty transcursed political boundaries and created for itself a world-embracing organization in the international bill and check system, the validity of the fiduciary media, like that of all money substitutes, is nationally limited. There are no money substitutes, and so no fiduciary media, that are recognized internationally and consequently able to take the place of money in international trade for settling the balances that remain over after the clearing process. That is often overlooked in discussions of the present position of the international system of payments and the possibilities of its future development. Here again, in fact, the confusion creeps in, that has already been criticized adversely, between the system of reciprocal cancellation and the circulation of fiduciary media. This is most clear in the usual arguments about international giro transactions. In domestic giro transactions, payments are effected by the transfer of money substitutes, which are often fiduciary media, namely, the balances of the members at the giro bank. In international transactions, the money substitute is lacking, and even the international clearing system that is recommended in various quarters is not intended to introduce one. Rather it should be pointed out that this so-called international giro system—which incidentally was done away with again by the inflation during the war—while it may have changed the external form of the traditional manner of settling international monetary claims, has not changed in nature. When banks of various countries agree to give their clients the right to undertake direct transference from their balances to the balances of the clients of foreign banks, this may quite well constitute a new and additional method of international settlement of accounts. A Viennese desirous of paying a sum of money to somebody in Berlin was previously able either to use an international money order or to go to the exchange and buy a bill on Berlin and send it to his creditor As a rule he would have made use of the intermediate services of a bank, which for its part would perform the transaction through the purchase of a foreign bill or a check. Later, if he was a member of the check system of the Austrian Post Office Savings Bank and his creditor belonged to that of the German post office, he would have been able to make the transfer more simply by sending the appropriate order on the Vienna office of the Post Office Savings Bank. This might well be more convenient and better suited to the demands of business than the only method that was once usual; but, however excellent a method, it was not a new method of international monetary intercourse. For the balances of this international giro system, if they could not be paid by bills, had to be paid by the actual transference of money. It is not true that the international giro system has decreased the international transportation of money. Even before its introduction, the Viennese who wanted to pay money to somebody in Berlin did not buy twenty-mark pieces and send them to Berlin in a parcel.

The only thing calculated to create international money substitutes and subsequently international fiduciary media would be the establishment of an international giro bank or bank-of-issue. When it became possible to use the notes issued by the world bank and the accounts opened by it for the settlement of money claims of all kinds, there would no longer be any need to settle the national balances of payments by transportation of money. The actual transference of money could be superseded by the transference of the notes issued by the world bank or of checks giving disposal over the issuer’s account with the world bank, or even by simple entries in the books of the world bank. The balances of the international “clearinghouse,” which already exists today although it is not concentrated in any one locality and has not the rigid organization of the national clearinghouses, would then be paid off in the same way as those of the national clearinghouses are at present.

Proposals have been made again and again for the creation of international fiduciary media through the establishment of an interstate bank. It is true that this must not be taken to include every project for extending the international giro system in the sense in which this word is commonly used. Nevertheless, in certain writings which demand the foundation of a world bank, or at least of an interstate banking organization, there gleams the idea of an international fiduciary medium.14  The problems of organization raised by the establishment of such an international institution could be solved in various ways. The establishment of the world bank as a special form of organization and as an independent legal body would probably be the simplest form for the new creation. It would, however, also be possible, apart from this, to establish a special central authority for administering and investing the sums of money paid in to open the accounts, and for issuing the money substitutes. An attempt could be made to avoid the obstructions which the susceptibilities of national vanity would probably oppose to the local concentration of the business of the bank by leaving the reserves of the world giro authority and the world issuing authority in the keeping of the separate national banks. In the reserves of every central bank a distinction would then have to be made between two sums: one, which would have to serve as a basis for the world organization of the system of payments, and over which only the authorities of the latter would have power of disposal; and a second, which would continue to be at the service of the national monetary system. It would even be possible to go still further and leave the issue of international notes and other money substitutes to the individual banks, which would only be required in doing this to follow the instructions given by the authorities of the world organization. It is not our task to investigate which of the various possibilities is the most practical; it is its nature alone that interests us, not the actual form it might take.

Special reference must nevertheless be made to one point. If the balances in the books of the world bank are to be acquired only by cash payment of the full sum in money, or by transfer from some other account that has been acquired by cash payment of the full sum in money, and if the world bank is to issue notes only in exchange for money, then its establishment may certainly render unnecessary the transportation of quantities of money (which still plays a large part nowadays in the international payments system), but it would not have the effect of economizing money payments. It is true that it would be able to reduce the demand for money, because transferences would perhaps be completed more quickly and with less friction. But, as before, the payments that were made through the bank would involve the actual use of money. Of course, the money would remain in the vaults of the world bank and only the right to demand its surrender would be transferred. But the amount of the payments would be arithmetically limited by the amount of the money deposits in the bank. The possibility of transferring sums of money would be bound up with the existence of these sums of money in actual monetary shape. In order to free the international monetary system from these fetters the world bank would have to be granted the right of issuing notes as loans also and of opening accounts on credit; that is to say, the right of partly lending out its reserves of money. Then, and not until then, would the interstate system of payments be given a fiduciary medium such as is already possessed by the domestic system; it would become independent of the quantity of money in existence.

The realization of a world-bank project developed in this way is opposed by tremendous obstacles which it would hardly be possible to surmount in the near future. The least of these obstacles is constituted by the variety of the kinds of money that are in use in the individual states. Nevertheless, in spite of the inflation that was created by the world war and its consequences, we are every day approaching nearer and nearer to the situation of having a world monetary unit based on the metallic money gold. More important are the difficulties due to political considerations. The establishment of a world bank might come to grief owing to the uncertainty of its position in international law. No state would wish to incur the danger of the accounts of its citizens being impounded by the world bank in case of war. This involves questions of primary importance and therefore no provisions of international law, however surrounded with precautions they might be, could satisfy the individual states so far as to overcome their opposition to membership in such an organization.15

Nevertheless, the biggest difficulty in the way of issuing international credit instruments lies in the circumstance that it would scarcely be possible for the states that had joined the world-banking system to come to an agreement concerning the policy to be followed by the bank in issuing the credit instruments. Even the question of determining the quantity of them to be issued would disclose irreconcilable antagonisms. Under present conditions, therefore, proposals for the establishment of a world bank with power of issuing fiduciary media attract hardly any notice.16

• 14See Patterson, Der Krieg der Banken, trans. from the English by Holtzendorff (Berlin, 1867), pp. 17 ff.; Wolf, Verstaatlichung der Silberproduktion und andere Vorschläge zur Währungsfrage (Zurich, 1892), pp. 54 ff.; Wolf, “Eine international Banknote,” in Zietscrift für Sozialwissenschaft (1908), vol 11, pp. 44 ff.
• 15These words, written in 1911, need no addition today.
• 16See De Greef, “La monnaie, le crédit et le change dans le commerce international,” Revue economique internationale 4 (1911): 58 ff.