THE DISCOUNT AND CIRCULATION BANK
The opposition’s objections could not prevent the law regarding the establishment of a bank of discount and circulation from being voted or promulgated, as they could not prevent the redemption of the railways.
The unexpected success of the redemption transaction is due to the mortgaging of tobacco income, an income of 10 millions corresponding to a capital of 200 millions, rather than to the skillfulness with which the redemption contract was drafted. It is clear that by orderly mortgaging all state revenues, by finding ourselves in Egypt's or Turkey's position, and by exposing ourselves to the possibility of having an international financial institution within our treasury, we will be able to conclude more similar transactions.
A loan does not necessarily imply mortgaging all income and belongings as a way of getting money. An efficient debtor is one who, through strategic transactions, proves that he is not as irresponsible as to risk losing all of his belongings or to squander them on falderals. Only someone who tirelessly saves money can have credit. Dr. Platter, a professor at the University of Chernovtsy, in his booklet entitled Usury in Galicia and Bukovina, provided highly documented information supporting the idea that owning real estate does not make a man eligible for a loan. Owning a real estate worth hundredfold the credited loan does not lower the usurious interest rates, making it possible that thousands of francs be mortgaged for a capital of 6 or 7 francs due to high interest rates and penalty clauses. By mortgaging real estates and revenues, the illusion of credit is produced, thus its true meaning is misinterpreted.
Therefore, the success of the redemption transaction is due, on the one hand, to the mortgaging of tobacco income, which was not enlisted in the Strasberg nor in the Bleichroeder Convention, and, on the other hand, to the exceptional stipulations made to shareholders, namely that they will hold a better position in the company than before. To prove this, we have only to compare the stock prices before the proclamation of the redemption with the stock prices we see today.
Nothing is easier to produce, and harder to maintain, than the economic illusion. Once we will have nothing more to mortgage, the financial management of the liberal party will prove its ineffectiveness, although the party is in the habit of withdrawing from power, letting others manage and fix their wrong-doings when the situation looks dire. The Discount and Circulation Bank is as problematic, from an economical point of view, as the redemption itself.
The so-called aridity of economic and financial capital consists in the fact that contracts are drafted using an abstract and complex language instead of a day-to-day one, so that the one reading the contract does not understand the terms and conditions written within. He is so deluded by the splendid outlook which seem to emerge from the contract’s abstractions that he overlooks the supreme principle, namely that any theory, even if presented in the most abstract way possible, needs to be reduced to something practical and concrete. Physical content is evidence for any truth. Otherwise, it is all a scam.
What do economic terms such as manufacturing, consumption, production, exchange, trade, etc., materially amount to?
What is production?
It is the act of modifying an object, either by hand or through the use of instruments, with the goal of manufacturing a valuable item.
What is consumption? It is the act of wearing out an instrument through labor. This category includes all resources that can be consumed and used. Food, shelter, clothes - these are all are necessary for the best and most durable labor instrument, namely manpower.
What is money, furniture or real estate then, if not savings?
It is a fact of life that the one who works the earth, having to plough, sow, thresh and cultivate wheat, will barter the result of his work with another item, for instance, with clothing, which is the product of the woolen manufacturer, of the weaver, the dyer and the tailor. An array of services is bartered for another, thus it is fair to conclude that not only is merchandise exchanged for merchandise, but in the end, labor is exchanged for labor.
However, one does not directly barter merchandise with a needed item, for the trade would be cumbersome. Therefore a commodity, one that is difficult to extract and rare in relation to its usage, was sought in order to pay for all kinds of services; one that can be divided and subdivided without losing its value. One that has easily distinguishable qualities such as constant weight, the distinct sound it makes, the ability of recognizing its alloys and that it does not tarnish. Gold and silver are the noble metals that meet all the required quality conditions.
We have the tendency of converting labor in quality and durable items, as such a great deal of labor can be amassed and exchanged for objects made from these metals, which do not lose their value even if they are melted, whereas other objects deteriorate and wear out.
Hence, these metals are merchandise, like any other.
Are banknotes also merchandize? Can you make something out of a banknote which produces a profit of at least one thousand part of the original printed worth?
The answer is no, because that piece of paper has no value on its own and is used as a way of showing the worth of one's labor. Banknotes were issued in order to be redeemed for a legal tender, either gold or silver, of the same value as the provided service, a somewhat cumbersome process. Therefore metal money is the valuable representative of the commercial banknotes. When do we need banknotes, a currency which has opposite qualities of metal money? One is a commodity, the other is not; the first can be divided without losing its value, while the other one can be nullified by cutting it with a pair of scissors; the first serves as a labor instrument used in a myriad of industries, while the other is not. The first is money and the second is void. Be it issued by the state, by the national bank or by a simple merchant in Venice, banknotes are simply notes that show that whoever issues them will receive, by all means, the legal tender with a value equal to that which is printed on the note when the universal commodity, namely precious metals, is not at hand. Hence, banknotes are credit contracts.
In agricultural countries, labor is, by its own nature, limited and rigid, being able to produce a definite amount of produce of a precise value. An acre of land can only yield a limited amount of wheat, without the possibility of exceeding that limitation. Manpower is limited and no amount of exercise can overcome that; the same goes for the land, which, no matter the amount of fertilizer, cannot overcome its naturally limited production capacity. Hence, physical work, in which intelligence plays a small role, is characterized by limitation, loss, simplicity and difficulty.
The situation is entirely different where the arts and industries are concerned, an area in which intelligence is of utmost importance and physical work plays a secondary role. In this case utilization is not seen in relation to production, as in order to paint a picture, one only needs a canvas and a few paint colors; in order to tailor a dress one needs a pair of scissors, a quality pattern, thread and lace. The value of industrial work is thus infinitely multiplied. Farm work is burdensome and yields a limited amount of produce, while industrial work implies less effort and has, at least in theory, a limitless profit potential.
Agriculture will always be profitable. Not everybody needs lace for their dresses, but wheat is a necessity. Everybody, be them from India, the Greek islands or from Asia Minor, is forced by necessity to trade precious metals for produce. Thus, a universally necessary product is bartered with another product of equal importance. On the contrary, industrial objects need retail markets, namely places where their necessity is artificially produced. However, these markets are often isolated. It is, however, true that once the products reach the outlet markets, their worth will be translated into precious metal, but until then the producer needs to receive a note that stipulates what his labor is worth, and that note is the banknote.
The principle of the fiduciary issue is that it is directly proportionate with labor; if one doesn’t work, one won't make much money and if ones does work then that person will make money accordingly. It is obvious that the amount of issued banknotes is directly proportionate with the industrial production quantity, which, in turn can be multiplied in disproportion with the existent amount of issued money. An infinitely augmentable production requires an augmentable representative, which can be subjected to the same fluctuations as that of the industry, simultaneously rising and falling.
Thus we see that the difference between metal money and paper money is represented by the differences between the finite row production and the infinite industrial one. Labor is the basis of political economy. We think that our discourse has clearly demonstrated that, on the one hand, banknotes and production should necessary be directly proportionate, and on the other hand, that an exclusively agricultural country does not necessarily need banknotes. The needed industrial products, which are made abroad, cannot be bought with banknotes, and a country’s production shouldn’t be sold for a foreign currency.
An agricultural country sells grains for metal money, and with that money it buys industrial merchandise, and so the economical cycle goes. Administrating an agricultural country and its necessities should be as simple as agricultural labor itself. When market demand is greater than market supply, the country and its citizens will be left in ruins, no matter the temporary alternatives used in order to save the economy.
As far as the industry is concerned, namely the possibility of giving products a hundredfold or thousand fold of their original, row value, it cannot be and never was established without protection. Yet, protection can only be exercised by powerful political states. However, when one is bound by trade contracts and by the necessity of living on the breadline, thus leaving workers unemployed because the laborers from the neighboring countries provide cheaper labor, then a company cannot develop and specialize. On the contrary, it is gradually retrograded and the production is further limited, a limitation that is dictated by the very nature of production.
This theory, that the immanent dualism of money as a unit of account, depends on the dualism of labor, is challenged. The unprocessed production and the industrial one have nothing to do with our bank, as it only issues banknotes based on transactions made within the country. If such transactions are made, the bank will issue banknotes and if they are not being made, it will not.
Indeed, if the bank were a legitimate institution, nothing could be said against it. The bank, be it opportune or not, would be subjected to risk, as the shareholders won't receive the dividends they hoped to get, which, in turn, is due to the lack or limitation of real transactions concluded within the country, thus blocking the flow of private capitals. The bank would unmistakably register losses, but no one would be broke. The capital would be blocked, but safe within the bank.
Does this theory apply to our bank?
The established but provisioned principle is that the bank cannot issue notes that exceed 1/3 of the available metal money value and 2/3 of the amount based on bank bills, transactions, and short-term bank rates.
If this principle were to be followed precisely there would be no risks. But the law requires the bank to redeem the 26 million mortgage notes issued by the government, which, despite the obligation of being paid after the termination of the mortgage note, is not a transaction that the bank alone makes. In a time of crisis, the bank could not account for these 26 million, as such it must make a loan and accept the imposed stipulations. From that moment on, the bank becomes a paper money factory.
That which saddens us the most is that discussions on such delicate matters that can lead to total bankruptcy are not pragmatically led. Instead, they are focused on temporary gains, not keeping in mind the feasibility of their actions.
All companies that based their business strategy on artificially produced illusions, without considering their economic feasibility, had such temporary moments of success. Such companies rose with the thousands only to fall into the abyss of bankruptcy, impoverishing myriads of innocent people.
Only the reality of labor, carried out by following the requirements of political economy, namely by taking into account that the supply should be inversely proportionate to the demand, can weather all crises and upheavals. As such, any professional institution can rely only on the reality of labor.
[April 30, 1880]
Translated by Tatiana Danilova