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Essay 2: Credit Limits Under The Valun System
(1943)
The essence of credit under a true monetary system is not a promise to pay money but a promise to receive money.
The crux of the valun proposal lies in the determination of the limit to be placed on each individual's money issuing power. The stability of the valun and, therefore, the viability of the entire valun system, rests upon finding this limit. If we are to create a working monetary unit to replace the inherently unsound politically based monetary units now in existence, we must be assured that inflationary instability is not implicit in the structure of the valun system at its inception. To do this we must examine how real value is created, and how the exchange process assists society in realizing the maximum gain from this created value.
Monetary exchange is indispensable to all of us because we are interdependent. We are interdependent because we have discovered that we can exploit ourselves fully only through others. If we were each only able to consume that which we individually produced, we would have a low standard of living indeed. In other words, we as individuals cannot make everything we would like to have. If, on the other hand, we exchange our output for the output of others, our standard of living is limited only by our ability and by the efficiency of the exchange process.
To date, the most efficient methods of exchange that have been devised utilize money. There is nothing sacred, however, about money or the monetary system on which it is founded. A monetary system is not an end in itself; it is a means to an end. It is a device for facilitating exchange and, hence, a means of exploiting our own wealth-producing capacity.
Each of us is but a very small part of the vast mechanism of production. Many of us apply our minds and hands directly to none of the things that we use or consume. Yet all we acquire is, indirectly, of our own making. Regrettably, most of us have made more than we have acquired. Our unfair political monetary system, through its distortion of the process of exchange, has allowed others to appropriate some of our production.
Ideally we make all we consume and consume all we make, however indirect the process may be. It follows that each of us is his own customer and that a true exchange system is one that permits us to buy from ourselves everything we produce and nothing more. If I am a shoemaker and desire an automobile, then when I have made an adequate number of shoes, I should come into possession of the automobile that I desire. The transformation of the shoes into an automobile is the service that exchange renders me. Similarly, the transformation of the automobile into shoes and other things is the way exchange serves the automotive worker. The function of exchange is to transform our production into the things that we want.
If exchange plays no tricks on us, we are really all working for ourselves; we are all buying from ourselves; we are all selling to ourselves. But just what is it that we are buying and selling? In the final analysis, it is simply human energy, mental and physical. Infinite varieties of human energy have appeared in physical form to be exchanged in the market place, but, basically, there is only one commodity exchanged, and that is human effort. Labor is the basic or virgin commodity. It has no quality of obsolescence, for it is always associated with the latest and therefore the most timely products. It is the only value.
Others have comprehended this, and from this premise, that all value is labor, and additionally from the premise that money is based on value, they have reached the conclusion that money must be based on labor—and rightly so. The fatal error that labor money planners have made is that they set a measure of labor, such as an hour, as a unit of value. While it is true that labor, both physical and mental, is the only value, and therefore the sole commodity that passes through exchange, it does not follow that all labor is equally valuable. Indeed, labor may be so unintelligently applied that it is completely worthless.
We are all laborers and, therefore, fountains of wealth, because we all emit human energy. We must, however, direct that energy to meet the demands of our fellow laborers. By the measure to which we respond to this demand, will our energy be valued. It will not be by the hours we have spent projecting our energy, nor by the sweat and toil we have put forth. In turn, our fellow exchange participants must use their energy to our liking. The process of evaluating this released energy is the function of exchange, and, after evaluation has been completed, money can be used to express this evaluation. But money itself, if it is to be of maximum utility, should have no influence whatever in determining values. Money is not a measure of value, it is a method of stating a value that has already been determined by exchange.
To be of maximum utility, money must be available to all who wish to increase the value of their output, but who can only do so through an investment of capital. Traditional banking credit practice is based on the idea that the creditworthiness of the individual (or entity) seeking to establish a line of credit derives from that individual's possession of material resources. This is an outgrowth of old aristocratic attitudes by which an individual was judged by his social status rather than by his ability. To be sure, this idea of creditworthiness that exists in the banker's mind is reinforced by the shortcomings of the politically based monetary system which force him into a conservative posture. Nevertheless, the whole attitude is basically one that has been inherited and to which our minds have become habituated. We must take care that we do not borrow this counterproductive mental habit in the construction of the valun system.
The ideal that we must strive for is to keep money neutral in all aspects of the exchange process. To do this, we must, among other things, make the money creating process available to anyone who wishes to utilize it. There are, of course, certain limits which must be observed, and these bounds will not be easy to determine. The best principle can, however, be simply stated thus: Each person or corporation is entitled to create as much money, by buying, as he or it is able to redeem by selling.
Each of us, as noted, is basically his own supplier and his own customer. The exchange process is, in fact, a shuttle movement. The shuttle goes from us laden with our energy and returns this energy to us transformed into the energy of others. Or it comes to us first, and then we return it. In either case, the movement is initiated by money power, and whoever lacks money power is unable to start the shuttle. An economy that restricts its shuttle starters limits its productivity. The power to start the shuttle is really the power to buy from one's self, i.e. the power to create demand for one's own services. A true monetary system must make this power available to all.
While the power to buy induces demand to sell, it does not follow that this reciprocal transaction invariably reacts on a particular buyer, for he may not have the particular value for which a demand has been created. Therefore, we cannot solve the economic problem by merely providing money power and multiplying shuttle-starters. If the problem were as simple as that, we could establish the money creating power for everyone without limit, on the assumption that selling would automatically balance buying in each case. Buying does create demand that reacts on some seller, but not necessarily on the one who created the demand. There is, however, no way of determining in advance whether a particular buyer may create a demand for his own wares or services. Since this is so, it is obvious that exchange can operate only on a trial and error basis. The problem we must solve is how large a margin of error can be allowed to each member of the valun exchange without the cumulative errors of all members being large enough to introduce instability.
The best that we can do is to set up a policy subject to amendment as experience may dictate. Although it is possible that we may underestimate the effect of errors, this should not intimidate us, because greater harm can follow from being too conservative. Creative and productive effort must not be impeded by a lack of adequate financing, even though some banks fail to realize the ideal of a full redemption of credits allowed. It is better to allot too much money power than too little.
The normal experience of business is that income and outgo keep approximately abreast of each other, so that our purpose is merely to provide a margin of working capital. In some industries, due to differences in lengths of turnover, the margin required is larger than in others. Some industries, particularly the farming industry, have net deficits for a long period before returns come in. Others, the retail grocery business, for example, has a lag of only one or two weeks between outgo and income.
A study of the turnover of various industries should be made as a guide for establishing general rules. As a suggestion for the initiation of trading in valuns, the following might be considered:
Each employer would maintain with his bank a list of the names of employees, together with the amount of salary payable to each over a three-months period. This amount would then constitute the debit limit for each such individual. Each would then be authorized to write checks until the stated limit was reached. The amount of the stipulated salary would be credited to the account of the employee as earned, and would be simultaneously debited to the employer's payroll accounts. Checks written by employees would be debited to their accounts. No further payroll process would be necessary. Thus the money-creating process would begin with employees writing checks to cover their needs. If an employee had a salary of 100 valuns per month, his debit limit would be 300 valuns, and he would be entitled to overdraw his checking account by anything up to 300 valuns.
The employer would have two checking accounts, a payroll account and a commercial account. His payroll account would have a debit limit equal to his total payroll for three months. His commercial account would have a debit limit as determined by the class of his industry and his gross sales.
A monetary circle cannot begin until some buyers create money through debits or overdrafts. Therefore, the most essential provision of a monetary system is a debit policy that permits members to draw against a debit in adequate amount to create circulation. To assure that all valun account holders have the necessary debit power, a minimum of, say, a hundred valuns might be provided for every account holder not drawing a salary. These debit limits would not be loans. No instruments would be executed for them, and the actual debit would be the amount of overdraft that had been drawn on the account. There would be no term to these overdrafts, and they might be maintained indefinitely. The reason for this is that they would constitute the money supply and would be necessary to exchange.
Debit balances on some accounts, of course, imply credit balances on others. Therefore, it would be impossible for all members to have debit balances at the same time. Some might start their check writing against a credit balance and never have a debit balance, while others might remain chronically on the debit side.
Under the above proposal, exchange would begin by consumers purchasing at retail and by employers purchasing at wholesale. At the end of the initial three-months period, the employer would find himself with a debit to his payroll account equal to the total earnings of his employees during that period. This would be the limit of the payroll account. For his employees to continue their drafts, he would have to draw on his commercial account—into which would have been deposited all of his receipts.
Each account holder, with his debit limit assigned, could then, within such limit, create fountain-pen money by the mere writing of checks. If he should exceed his debit or over-draft limit, his check would be returned just as it now is when he exhausts his credit balance at the bank.
There would be no payroll problem for either employer or employee. The bank would automatically credit the prescribed pay to each employee's account each payday, and the employee would enter his pay in his checkbook.
Under this plan of employee money-creating power, employment is given a stimulus, because each employee brings to his employer his own debit power, and the employer has a three-months deferment of wage payments. This is a vital contribution toward the sale of labor services, because it makes the payroll less forbidding. Each employee becomes a capitalist who brings not only his services, but his own financing.
Once we have established the principle of debit power for all we have released a power for economic stability that does not exist when this power is restricted to certain "creditworthy" individuals. The full benefits of the democratization of the money creating power cannot be forecast, but it is plain that this power could positively prevent depression.
When goods show a tendency to accumulate in warehouses, it indicates that employees have not received wages high enough to purchase the goods they have produced. Reduced production, which means reduced employment, ensues, and this, in turn, implies further reduction in purchasing. Thus the imbalance between goods supply and money supply is accentuated. Perfect competition would, of course, preclude this imbalance between goods supply and money supply, because it would compel adequate wages. But can we hope for perfect competition?
Should there be no other recourse than to introduce a compensatory force to balance the inequities of imperfect competition, the valun system would be found to provide such a force. By the simple measure of continuing the debit power for a discharged employee, the depression spiral would be prevented from forming.
During a period of widespread unemployment, consumption would be able to continue while production would be retarded, thus tending to restore the balance between production and consumption. The employee, in effect, would buy himself back into employment, because his consumption would induce demand for production, just as his previously stinted consumption had brought about his unemployment.
A depression means shortage of employers and surplus of employees. Is it not made less menacing when the money creating power resides on the employee side of the employment line as well as on the employer's side? Since unemployment would no longer mean an immediate drain upon available funds, some employees would be induced to step across the line and become employers, and thus help restore the balance between employers and employees.
The aim of the valun proposal is to establish a true monetary system and to rely on competition to keep the economy on a steady keel. It is not inspired by the notion of establishing a compensatory system for inequities that might exist in the current system of exchange. It should be noted, however, that if a compensatory program were desired, the valun system could effectively provide the basis for such a program.
Since constant employment, with concomitant constant production and constant consumption, is the economic ideal, we should regard the employer-employee relationship as existing between the whole body of employers and the whole body of employees, rather than between individual employers and individual employees. If we do this, valun banks will, of necessity, provide central employment bureaus where employee-account holders are registered. Full information as to their qualifications would, of course, be available to prospective employers. Should any account holder be laid off, he could continue to draw on his account while, at the same time, receiving maximum assistance in locating other employment.
If there are advantages to the valun system's open credit policy, there are also disadvantages. One of these that might loom large in the minds of some people is the possibility of moral delinquency. Yet nothing is expected of anyone who issues valuns through his debit power other than that he will do just what he is in business to do in any case, namely, accept valuns, when tendered, for the goods or services that he sells. If he fails in this, it will soon show up on his account. If he has been willing to deliver his wares or work at competitive prices and has found no takers, the fault is not moral. If he willfully refuses to accept employment or patronage to discharge his debts, he automatically brings upon himself ostracism from the entire valun community. This self-imposed injury is much greater than any harm that will accrue to the remaining, reputable membership, which, after all, will go on functioning without even noticing his departure.
There will be honest failures, since men will continue to be fallible, and the system should provide some way of reestablishing the debit power of such persons. But this is one of the matters that may be left to the common sense of the members to decide.
The question of what becomes of unsatisfied debits that result from failures is not one that is peculiar to the valun system. Losses in business are absorbed in the price of goods, and this is one of the influences that tend to raise prices. Another such influence is the presence of private counterfeits. On the other hand, there are also factors that tend to reduce prices, notably the loss of currency through various causes. None of these factors are serious, and for the purposes of this study may be ignored.
We may assume that every issuer of valuns would redeem with goods and services all the valuns he issued. The failure, for whatever reason, to do so could not be as harmful to the economy as a pessimistic credit policy, which would hamper exchange. It is far better that more money be issued than is redeemed, than that too little be issued. Too little hampers exchange, and this in turn retards the production of wealth. Idle man hours are a more serious loss than unredeemed money and must never be hazarded by overzealously guarding against credit losses. Interrupted production is the only loss that is a net loss.
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