The Rounds Of Money

Erick S. Hansch

[An unpublished paper written in 1959]

"Such paper, in the place of pearls and gold,
Convenient is, we know how much we hold;
No need for change or barter, each at will
Of love and wine may henceforth drink his fill."

[Mephistopheles in Goethe's "Faust".]

Many of those who have studied Henry George's Science of Political Economy must have felt that the incompleteness of the chapters on money is a severe handicap in the promulgation of his scientific system of economic thought.

This writer is not one to believe, however, that history expressly waited for him to come forward and fill the gap, and thus bring to completion the work left undone by a genius. I am no genius, and I am acutely pained by the fact that so many able man In the field of economics, much superior in detailed knowledge as well as in analytical and critical intelligence to my own, have not produced something of which we could be rightly proud.

An attempt is here made to assemble the elements for a theory of money, and this is done in the thought conceived in all humility, that in our time which stands under the aegis of Michael, we can -- and must -- depend less and less on the leadership of great personalities, and more and more on the utmost exertion of each individual's thought, feeling, and will, in order to bring to fruition the goals -- spiritual as well as secular -- set for our generation.

In the following discussion I have drawn on Silvio Gesell's Theory of Free-Money, Rudolf Steiner's ideas on economics, on a talk by an English banker[1], and, of course, on Henry George. It will be, for the most part, indistinguishable in this expose who said what, but the reader can easily ascertain the source by referring to the authors named.

Following the example of a towering, yet largely unrecognized personality[2], I should not acknowledge and thank those whose writings I have used in an attempt to further my own education and thinking, but rather apologise to those innumerable authors and thinkers from whom I have not learned.

This then is the barest outline:

Money is a medium of exchange. It became indispensable with the widespread adoption of the division of labor, since what one man produces under this system has to be exchanged with the manifold products of others. Barter trade has too many obvious drawbacks; money allows to settle a transaction to a definite measure or amount leaving no doubt as to the strictest fixation of the price. In other words, $35 are $35, while an ounce of gold leaves doubt as to its exact weight, the dependability of scales, the purity of its composition, and its actual price as a commodity in the market according to the law of supply and demand.

Other commodities if used as money would increase the anomalies by the more or less heavy cost which includes storage, deterioration, obsolescence, etc.

A closed system which which in our days is in most cases synonymous with the territory belonging to the same nation or government, will have its own specific money which will exchange with moneys of other such closed economic systems at rates which are largely determined by a comparison of their respective buying powers as well as the general economic and political situation prevailing in and around the territories involved, by the degree of control or direction exercised by the governments in the issue of money in whatever form and in the granting of bank credits, and possibly also by the backing of such money and credit by some precious metal or metals.

In fact, it is mainly the money issue -- apart from tariff walls which exhibit a great deal of a characteristic I would call "economic osmosis" -- which makes an economic system appear as "closed", because inherently economic activity strives to transcend national borders. This tendency, be it remarked in passing, causes not a little of the vexations and conflicts of conscience in those who for entirely valid and admirable patriotic reasons deplore the international and cosmopolitan attitudes of the economic man. Businessmen, industrialists, and labor leaders, are often suspect of being unpatriotic for the dollar's sake.

Better than to advocate world government, however, those conflicts could be solved In a more satisfying manner by instituting the threefold division of human society into three realms, one being the realm of law and government of an entirely national character where the equality of every citizen must be recognized; the second the realm of economic activity which can acknowledge the fraternal aspirations of men (brotherhood) without having to deny that every individual is different and therefore his contribution to society will differ accordingly; and thirdly the realm of spiritual activity (education, art, religion) giving the individual the fullest freedom of self -expression, and thus bring to maturity on a higher plane the only half-understood precepts of the French revolution: egalite, fraternite, liberte.

Each of these three divisions should be set up autonomous in much the same manner as the three systems in the human organism; the sensory-nervous system, the respiratory-rhythmic system, and the digestive system, are distinct the one from the other, yet work harmoniously together. (See appendix,)

Within the "closed" economic territory anything is money which by common consent or disposition in any period of time is accepted as the common medium of exchange and serves as the common measure of value.

The use to which money is put is not that of being consumed, but of being continually exchanged, and the only question anyone asks himself in taking money in exchange is whether he can, in the same way, pass it on in exchange. If there is no doubt of that, he will take it; for the only use he has for money is to pass it on in exchange. If he has doubt of that he will take it only at a discount proportioned to the doubt, or not take it at all.

The ultimate purpose of the exchanges of commodities is not only destructive consumption, but the nature of these commodities is such that if they are not soon consumed, they will wear out or decay.

It was thought at one time that we should seek for the substance used in money materials which are least subject to wear and decay. The precious metals, gold and silver, were held to be the most satisfactory substances to meet this requirement, and also be in sufficient supply.

However, a factor of instability is introduced when the substance itself, which is chosen for the base of money, becomes subject to fluctuations in its own market price. This led to government fixing of the standard for the monetary unit, such as in the U.S.A. at present of one ounce of fine gold being equal to $35.

This is a somewhat arbitrary figure, and in practical economic life there are tremendous forces pulling and heaving until the stress becomes so great that another likewise arbitrary figure but somewhat closer to the actual or estimated market price of gold has to be set by government fiat.

The insistence on a backing of money by some commodity such as the precious metals entails further the obvious disadvantage that the economy whose entire money and credit system is based on, say, gold or gold certificates, is seriously jeopardized every time when gold flows out of the country as the result of an adverse trade balance. An appraisal of the merits and demerits of the gold standard, also the wide deviations in all practical cases of currencies from a strict gold standard can be found in any good encyclopaedia.

Many sensible persons have urged that we dispense entirely with the backing of our money by a store of gold or other precious metal, and go to a strictly paper money.

Our money would then become a true common measure of value if we take value to mean the appraisal of the labor or irksome exertion that a commodity will save us and which we would have to undergo as the price for its possession if we could not acquire it by exchange.

Money will then become entirely a credit arrangement, and will come into existence -- as much of our credit does today -- as a consequence of our productive activities. It comes into existence at the moment and point in our economy where new goods and services are continuously brought forth.

This credit extension is somewhat synonymous with the short term loans. These are largely established to facilitate the immediate production processes: pay wages, buy raw materials, meet the general production and overhead expenses, and are -- generally -- repaid and thus wiped out when the produce is sold. This is a circular movement, with perhaps many such circles overlapping until the final one causes the produce to land in the hands of the ultimate consumer.

The sources of short term loans are usually the commercial banks which use the customers' deposits and some bank capital as backing or reserve in a ratio prescribed by the monetary authorities.

Differing in nature from the purpose of most short term loans are those of long duration. A strict separation is perhaps not possible, but essentially long tern loans are sought for the acquisition of production facilities, or: capital assets, and the sources are usually true savings as represented by the funds of such financial institutions as sayings banks , mutual and trust funds, life insurance companies, foundations, etc.

When speaking here of loans and investment, we leave out of consideration our public debt, which has been dealt with elsewhere[3].

Savings play a peculiar role in our economy. They are not only the expression of thrift and the means to provide for unforseen and unexpected calamities, or simply for the unproductive years of old age when living expenses still go on, or for the education of our children, but large savings are indispensable today for the accumulation of capital assets. The process of capital formation as it is at present constituted, and, its concomitant anomalies I have attempted to describe in the paper already referred to above [3]. I also tried there to assess the role that interest plays in the process, and how a market rate of interest as the price for -- or return to -- capital is severely falsified by several factors.

Here I would add only the well-known example of 1 cent laid up at 6% compound interest in the year 1 A.D. which would represent today such an astronomical figure that staggers the innocent imagination. Capital accumulation aids production, it increases labor's productivity, but not at such an unrealistic figure. There is obviously something wrong here in this picture which is distorted out of all proportion.

A clue to the answer must be seen in the following consideration:

As money is a medium of exchange it represents commodities. These commodities, or wealth in the nomenclature of political economy, do not bear much accumulation (we said this before). They tend back to their natural state by going through various stages. A constant war is waged and won by such natural agents -- and some human factors as well -- as heat, frost, rust, breakage, decomposition, obsolescence, wear and tear, friction, dampness, rodents, insects, fire, floods, lightning, accidents, microbes, general and small averages (French: avaries), explosions, acids, earthquakes, oxidation, destruction by rebellions, wars, revolutions, in short, quoting the emperor of Siam: etcetera, etcetera, etcetera.

To make money truly representative of goods (i.e., wealth), it should have incorporated in it a feature paralleling this depreciation. Keynes called it carrying cost, others speak of negative interest in this connection.

But it is really not the interest that needs correction, rather the money itself, and this writer would therefore prefer some such term as limit-money as its designation.

A truth never stands alone. It always can be seen and proven from different aspects.

A conclusion similar to the one just reached in the realm of economics, can be arrived at on moral grounds in the social realm. If we consult our feeling for social justice we would probably have to admit, depending on the strength of such feeling, that inasmuch as, let us say, a certain fortune was acquired in our time and is thus intimately connected with the economic and social activities of our generation, it does not seem defensible to let it be carried forward from generation to generation, increasing out of itself by compounded interest, and make claims on the produce brought forth by the efforts of future generations. Wealth will not bear much accumulation, and there is actually very little useful wealth -- money is by definition in political economy excluded from the meaning of the term wealth -- that is passed on from one generation to the next.

A loan bearing 5% interest will have been repaid five times over in the course of 100 years. Plainly and in all fairness, there should be a limit in time as well as in the amount to prevent that stockholders or other investors receive continuous annual tribute from company, state, or community. The benefit to the community would arise in a relief to taxation. In the case of loans to industrial or commercial enterprises, these would not be under perpetual tribute to private ownership for worn-out capital assets.

Long term loans carrying a fixed rate of interest should be altered to an insurance annuuity basis. Perhaps the best would be to make capital value subject to a small annual decrease, say 1% per year. In this way, our hugs national debt could be wiped out equitably and without disturbance to our economy within about 100 years.

It has been said in support of the idea of depreciating money that the owners of manufactured goods or agricultural produce are under pressure to sell because goods will decay, lose weight, quality, etc., while the opossessors of money are under no such compulsion -- except perhaps where continuous price inflation may make it advisable not to delay the use of money possessions in exchange for commodities.

However, in the economy as a whole there is a steady and fairly predictable stream of goods flowing from producers to consumers, and the delayed buying by some does not constitute a forceful argument in favor of our proposition.

The reason that this argument was advanced was the belief that the withholding of capital funds, especially for investment, is the main cause for economic recession. Keynes called this phenomenon "liquidity preference". Those that persist in the indicated belief overlook that something else must have occurred first in the economy that led to the adoption of greater caution in parting with savings for investment purposes. And this something is the speculative advance of the prices for land (this term to be taken in the wide sense of political economy) which caused the market to refuse the further acceptance of the continuously increased prices. Iron and steel, timber, oil, farmland, are examples. The economy comes to a faltering pace, and potential investors are put on guard. Of course, by withholding funds for investment a bad situation is aggravated.

An analogy which we construe as supporting our advocacy of limit-money is the comparison of money circulating in the body economic with the blood circulating in a living organism. Our blood carries assimilated food through our body, and the use of this food is either immediate for the exertion of muscle or brain (i.e., short term), or for the building of flesh, bones, the various organs, etc. (i.e., long term). The body continually creates new blood for the purpose, and withdraws old blood to prevent congestion. Money circulates to distribute wealth for consumption, and capital as building material.

Such analogies have a certain value for our understanding of the life processes involved, but must not be carried too far. However, we might venture one more application of this analogy: to look for an organ in the economic organism which could be compared to the heart. Right here, it becomes apparent that our prevailing materialistic-mechanistic concepts which designate the heart as a pump, are entirely insufficient and unproductive, if not grossly unimaginative. The heart is an organ of feeling, both in the meaning of being a sense organ that perceives feelings, as well as performing the function of feeling, namely feeling the blood, its state of composition, flow, warmth, etc. And in the larger economic organism a corresponding organ has to be provided and inserted that can in some manner feel the sufficiency and velocity of money circulation and can attempt adjustments. She active members of such an organ should a^iin come only from industry, commerce, agriculture, and be unhampered by government.

Keynes, after giving an appreciative appraisal of Silvio Gesell's idea of stamped money, which he said should be extended to all money by analogous methods, expressed concern that such a measure of instituting a carrying cost for money would cause a flight of capital funds into land, since the latter generally has evidenced the characteristic of rather constant appreciation in value due to its limited extent and being increasingly in demand with a steadily augmenting population and ever greater per capita consumption.

However, he disposed of this concern quickly by saying that under Gesell's arrangement -- i.e., Free-Land -- land would be nationalized and thus the possibility of capital funds seeking refuge in land would be forestalled.

Keynes has certainly done a great disservice to his own esteem by not searching further for the correct solution of this dilemma, a solution that squares with all the cherished precepts as well as with historical developments in our Western civilization, and especially with Anglo-Saxon concepts and traditions, and that is: leaving private property untouched, but collecting the rent-of-land for government revenue in lieu of taxes. This would at once do away with the nefarious speculation in land, and bring about a greater stability of our economy through the removal of the prime cause for the continually recurring severe cycles of recessions and boom periods.

May I ask the reader now to direct his attention again to the beginning of this little essay where stands the verse spoken by Goethe's Mephistopheles. The words are truly mephistophelian. The reader who is fortunate enough to have retained in this materialistic age a sense of moral perception will perhaps have felt instinctively that the path we followed from those words on through to the end is a picture of a type of moral imagination here used to bring about a metamorphosis of the concept of money. This writer conceives it as a human task -- in the Steinerian sense -- to bring the moral element into the world through his thoughts, feelings and exertions of will. Who has the courage to travel this path?


  1. D. L. Dawson, at the time Sub-Manager of the Chartered Bank of India, Australia and China, "Some Thoughts of an Amateur Economist," talk before Rotarians in Hong Kong, 1940.
  2. Walther Howard, German musician and philosopher whose unique "Lehre vom Lernen" (Sophia of Learning) is in my estimation and, to my infinite regret, untranslatable into English.
  3. Interest and Capital Formation -- 1959.