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Monday, June 13, 2011

Lucid Money Theory 1935 write-up

JUST READ THE CHAPTER HEADLINES....  very very interesting, maybe even

 Published in English translation as an appendix in E. Milhaud, ORGANISED COMPENSATORY TRADING
  Williams and Norgate Ltd, London, 1937


 By Dr Walter Zander

The subjoined study is the outcome of a lecture delivered by the author on 8 March 1935 before the National Institute of
Geneva (Institut National Genevois).

The devaluation of the belga, which supervened in April 1935, is taken account of here. On the other hand, the May 1935 crisis
of the French franc took place after this study had gone to press. It forms an additional link in the lengthening chain of monetary
difficulties and offers one more illustration of the dangers to which every monetary system, even when supported by an enormous
gold reserve, is exposed under the rule of a forced rate for the notes of central banks. The proposals so far made known for ending
the French monetary crisis do not suggest anything beyond what is implicit in the views generally current to-day.

Berlin, 2 June 1935.

Dr. Walter ZANDER.

1. The Monetary Chaos.  
The States participating to-day in the world economy
may roughly be said to be divided into two groups. One of  
these has abandoned the gold standard and has thus removed
the foundations of its currency. The other has introduced
foreign exchange legislation and has thereby abolished the
freedom of settlement operations. The first group includes  
more particularly England, the sterling bloc countries, the
United States, and Japan; the second group,  Austria,
Germany, Russia and the great majority of the remaining
countries. Placed between these two groups, is the steadily  
disintegrating gold bloc. Italy left it for all intents only
recently and yesterday as it were Belgium followed suit. If  
we bear in mind that since the War France and Poland had
already devaluated their currencies to a fraction of their pre-
war parity, virtually Holland and Switzerland alone may be
said to uphold the pre-war monetary system. However, even
in these two small countries, which represent but a tiny
fraction of the world  economy, certain  restrictions
concerning the convertibility of banknotes  and the gold
market have been introduced, and the general uncertainty as  
to the future of currencies exerts a baleful influence in these
countries also.  
2. Disadvantages of Devaluation.
Whether the abandonment of the gold standard  is
advantageous to an economy, is decidedly problematic. In
most cases the object aimed at has not been attained. So far  
as devaluation is intended to stimulate exports, we should not  
forget that for most countries the magnitude of their export  
:trade compared to that of their total trade is comparatively
insignificant. This alone renders it questionable to embark,  
for the sake of the export trade, on measures which modify
the basis of a national economy as a whole. Moreover, such
measures, if successful, may be imitated by any other
country, thus nullifying their favourable effect. Accordingly,  
the abandonment of the gold standard has led to "a race for  
the worst currency", in which the most powerful States are
participating. It is obvious that in the long run such measures
for the stimulation of the export trade are bound to prove
Moreover, devaluation does not only affect the export
trade of a country. On the contrary, it touches every branch  
of an economy. This holds most especially of imports, since  
these must become dearer to the precise extent that exports  
become cheaper. So far as exporting, like in Germany for
example, presupposes the importing  of raw materials, a
portion of the anticipated gain is thus necessarily lost. But, in  
general,  import restrictions, so popular to-day in many
countries, lead eventually to a decline in exports, for the  
simple reason that in the last resort exports can only be paid  
with imports.  
Furthermore, money debts abroad are augmented by a
devaluation of the currency.  
However, what is of crucial importance is the fact that an  
abandonment of the gold standard involves the devaluation  
of the entire savings of a country, particularly as invested in  
savings banks, State loans, bonds, and mortgages. If the  
effect of a general adjustment of prices to the fall in the value  
of money is not visible at first or is deferred by artificial
devices, eventually prices always rise when a currency has  
been devaluated.  
Thus while the intended advantage for the export trade is  
emphatically dubious and at best only of passing
importance, the loss in savings and capital is certain and
But even if the reason for abandoning the gold standard,  
as in the case of the United States, is the desire to devaluate  
capital savings, - that is, if it is intended thereby to adjust the  
claims  of creditors to fallen prices and to the shrunken
turnover of the debtors - the success is nevertheless more
than doubtful. For what is decisive for the value of a claim is  
not so much its magnitude as the business turnover of the  
debtor. Everything depends therefore on increasing trade and  

this is nowise assured by attacking the rights of creditors, to
say nothing of the moral and economic disorganisation  
which this creates.  
The heavy depletions on the capital market,  the
abrogation of the rights of creditors, the menace to State
credit, and the decline in the standard of living, represent
drawbacks which  ultimately outweigh the transitory
3. Disadvantages of Foreign Exchange Legislation.  
The injuriousness of foreign exchange legislation is even
more patent. Everybody agrees, and the President of the
Reichsbank, Dr. Schacht, has repeatedly expressed himself
to this effect, that foreign exchange legislation constitutes a
great evil, even though in most quarters such legislation is  
considered inevitable.  

Foreign exchange legislation places obstacles in the way  
of settlement operations. These obstacles, in turn, hamper  
trade. But every decline in trading leads necessarily to a
decline in well-being, as the latter, in our age of the division
of labour, depends on commerce. Everything therefore that  
obstructs trading tends to intensify want and unemployment.  
4. Inadequacy of Compensation and Clearing  

All attempts to surmount the difficulties involved  in
foreign exchange legislation have hitherto proved abortive.  
This is especially true of the different forms of compensatory
trading and is evident as regards its earlier developments. It  
could  happen then, for instance,  that an instrument  
manufacturer had to accept in exchange coffee and was thus
compelled to become a produce dealer. In principle, later
developments left matters unchanged. It is the very essence  
of a compensatory transaction that there is properly speaking
no money payment involved and that the goods themselves  
have to fulfil this function. That is, every such transaction
represents a barter operation.  
Whilst  it is agreed that movements of goods (in the
broadest sense) underly all settlements, nevertheless as much
as fifteen centuries ago the Roman Emperor Justinian
explained in his Corpus Juris why barter operations are
necessarily inferior to monetary transactions. And yet the  
distinguishing mark  of the present-day international
compensatory trade is the abandonment of the monetary  
system and the falling back on barter. It is evident that a form
of economy which the Corpus Juris deemed obsolete, must  
be unequal to the task of conducting efficiently the exchange
of goods in our highly developed age. A serious effort should
therefore  be made to re-instate the system of monetary  
settlements in international transactions.
Similarly with so-called clearing agreements between  
countries. These have now become very common, but they  
cannot remove the difficulties arising from foreign exchange  
legislation, for apart from the fact that in most cases, as
between Germany and Switzerland,  they have led to a
considerable dislocation  of trade, they are necessarily  
confined to transactions between two countries, while the  
realities of life demand  freedom  of movement in every
direction and rebel against bilateral arrangements. They lack  
therefore  the necessary  fungibility and the attempts to
supersede the monetary system in this way have hence failed.  
The  League  of Nations  Committee for inquiring  into
international  clearing agreements has accordingly  drawn  
attention recently to their disadvantages and recommended
their abolition.  
5. Need for Stable Standards of Value and for Removing  
Restrictions' to Settlement Operations.  
Shrinkage of international and of intra-national trade,
want and unemployment, heavy investment losses, and a
general uncertainty and loss of confidence, characterise the  
present situation in most countries. It is imperative to create  
once more reliable and stable standards of value and to
secure  the removal  of the impediments to settlement  
operations between countries. The solution of these closely  
related problems has become a question of life and death for  
our social order.  
6. Falsifying the Gold Standard through Banknotes  
being Legal Tender.  
Whatever the monetary system of a country, it is essential
that the measure of value  should  be clearly and
unequivocally determined. Thus where  there is a gold
currency, a silver currency, or an index currency, the value  
should be measured by gold, silver, and the index
respectively. This basis of measuring economic values, and  
therefore of any monetary system, is destroyed when in the  
case of a gold or silver currency the notes of the bank of issue
are made legal tender, for this compels everybody to accept  
these notes in payment regardless of their real value.
Compulsory acceptance renders it even impossible  to
measure the notes by the unit of value and thus to ascertain  
their value within the country. Indeed, it establishes a legal
fiction on the basis of which note and unit of value are  
identical. For this reason, the names of the units of value -  
e.g., the terms dollar, mark, pound - become ambiguous in
that they mean now a fixed weight of gold and then the note  
of a bank of issue. Accordingly, the measure of value, on the  
unambiguity of which everything depends, comes to have  
two definitions.  This  renders  impossible any real
measurement and thus the whole  monetary system  is

This falsification is generally hidden from the public so
long as the central bank is legally obliged to redeem its notes.
This, however, only masks the reality, since convertibility
introduces in the measurement of value an alien element.  
Indeed, the fact that convertibility becomes a decisive factor,
shows how the whole problem  has assumed  a different
Where convertibility is suspended, we have only a pure
paper  currency,  this despite strenuous  legislative and
administrative efforts to keep the value of the paper at a
certain definite level, for what counts now is no longer the  
value of the gold, but the question whether the note of the  
central bank, measured by gold, changes its value. In fact,  
the system that has been in general use since the beginning
of the World War, including the so-called gold standard or
nominal gold currencies,  may be described as paper

7. Compulsory Acceptance a Relative Novelty.  
Although the compulsory acceptance of banknotes  
appears to-day so natural that most people cannot imagine a  
means of payment not having that character, this system has  
in reality only come into general use in recent times. Here are
two illustrations  
Par. 2 of the German Bank Law of 1875, provided :  
Payments statutorily required to be made in money need
not be accepted when tendered in banknotes and the
constituent States cannot enact such an obligation for the
State treasuries.

This provision was only replaced by its converse in 1909.
Article 3 of the Act of 1 June 1909 decreed :  
 The notes of the Reichsbank are legal tender.  
The course of development was similar in Switzerland.  
Here article 39 of the Federal Constitution of 1874 prohibited  
once  for all the compulsory acceptance of banknotes.
However, already in 1891 the Constitution was amended and  
they became legal tender in 1914.  

8. Compulsory Acceptance establishes the Dependence
of the Currency on the Central Bank.  
The statutory obligation to accept the notes of the central
bank  in settlement  operations involves  not only the
falsification of the basis of the currency. It also makes the
fate of the currency dependent on that of the central bank and  
frequently on that of the banking system generally. If for any  
reason the central bank can no longer redeem its notes or  
maintain their parity - that is, if the market rate of the bonds
it issues falls - then, owing to the legal equivalence between  
the notes of this bank and the legal standard of value, the
calculation of values generally will be prejudicially affected.
Thus it -was in the main the situation of the Bank of England,  
which led in 1931 to the abandonment of the gold standard  
and, similarly, it was the National Bank of Belgium that
suggested in 1935 the devaluation of the currency.  
Almost a century ago Lord Overstone grasped this
interdependence when he said that if he ruined his private
bank, he would be ruined, but that if the Bank of England  
committed a gross blunder, the Bank could save itself, but the  
whole of the community might have to suffer grievously.  
9. Compulsory Acceptance a Condition of every  
Moreover, compulsory acceptance for banknotes forms  
the legal and conceptual  basis of every inflation, In the
absence of such an obligation, bank crashes, with all their dire
consequences, may occur, but never an inflation, for the
destruction of the standard of value and the falsifying of all  
monetary relations, which are the mark of every inflation, can  
never  result from the collapse of a single bank. This
confusion is only possible when a legal equivalence has been  
established between the notes of this bank and the standard of  
value. It was compulsory acceptance that brought forth the
ominous slogan of the German inflation period : "One mark  
is as good as another" ("Mark gleicht Mark"). History has not  
known an inflation not due to the legal obligation to accept.
10. The Gold Standard as Gold for account.  
If, then, the pre-conditions of an inflation are to be
eliminated and a reliable :and stable currency  is to be
assured,  if more especially the gold standard  is to be
restored, the falsification introduced in recent decades must
be eradicated and the earlier separation between standard of  
value and means of payment must be re-established.  A
compulsory exchange rate excludes  a stable and safe
currency.  No wonder  the distinguished  German  historian
Niebuhr stigmatised compulsory acceptance as "a legislative  
provision both ridiculous and abominable" (Nachgelassene
Schriften nichtphilologischen Inhalts, 1842, p. 485 ff.)
The re-introduction of the gold standard in Germany in
October 1923, after the inflation, offers an impressive and
instructive illustration. The notes of the Reichsbank, which  
were legal tender, had completely collapsed and their value  
could only be stated in astronomical fractions. At long last it
was decided to introduce calculating in gold value. First,
taxes were thus calculated. Then a new institute of issue, the  
Rentenbank was founded, whose accountancy basis was to  
be gold units. There was, and this cannot be too strongly  
insisted on, no legal obligation for the public to accept the  
new notes in payment, and these notes have to this day never
been legal tender, They have therefore never been identified
with the unit of value which was then the gold mark The
system, which lasted from the passing of the inflation in the  
autumn of 1923 until the introduction of the new Bank Act
in the summer of 1924 (which Act formed part of the series  
of Dawes Acts), was therefore a pure system of calculating  
in gold units which was not falsified by any compulsory
 A similar example,  although  confined to one domain
only, is offered by China which recently adopted a gold unit
for its customs  charges. By a decree of the Minister of  
Finance of 15 January  1930, counting in silver in the  
department of maritime customs, the most important for the  
Chinese budget, was replaced by counting in gold. The basis
for these calculations  in gold is a weight  of 60,1866
centigrammes of fine gold and represents the customs gold
unit. This, customs unit is exclusively a calculating unit and
the decree specifically provides that the payment of duties
may, as before, be made in local means of payment, that is in  
silver dollars and in banknotes. Of course, these are only  
accepted in payment at the current exchange irate, this being  
measured by the customs gold unit.  
 In conformity with the foregoing  illustrations, it is
therefore  suggested here to introduce  generally  (whilst
abrogating the statutory obligation to accept the notes of a
central bank) calculating  in gold value and thus to re-  
establish the conditions existing until 19,09 in Germany and
until 1914 in Switzerland.
11. Is the Inconvertibility of Notes incompatible with the  
abrogation of Compulsory Acceptance ?  
 It ,might be objected that before the War compulsory
acceptance could be dispensed with because then, unlike
now, the notes could at any time be converted into gold. The
objection does not hold, for convertibility is not of decisive
importance, as will transpire from what follows.  
12. Convertibility as a Basis of Value for Paper Means  
of Payment.  
 It is generally believed that the value of banknotes resides
in their being convertible into metallic currency, banknotes
being considered in the main a substitute for gold or silver.
Already Adam Smith, in a famous passage in his Wealth of
Nations  (bk.2,  ch.2), declared  that all paper  money
represented only gold or silver. Similarly, the Bullion Report
of the British Parliament of 1810, which was very strongly  
influenced by Ricardo, expressed itself to the same effect.
Probably not a single theory in the whole domain of political
economy has evoked such universal assent.

It is therefore natural that this view should have been
incorporated in legislative enactments. Since paper money is
regarded as a substitute for gold or silver, it must be at any  
time convertible into these. Banknotes and convertibility are
therefore interdependent conceptions and hence all bank acts
the world  over contain  definite provisions concerning
convertibility,  metallic cover, and the ratio of the notes
issued 'to the current gold reserve. Indeed, every monetary
claim is hence regarded as being in the last resort a claim for  
payment in gold, although there is no necessary connection
between this and a gold standard, for a gold standard  
primarily presupposes, apart from calculating in gold, that a
creditor cannot refuse acceptance of a payment in gold, i.e.,  
that there is a general obligation to accept gold, but by no
means the right of a creditor to insist, in any and all
circumstances, directly or-indirectly, on being paid in gold.  
Firmly based, on the one hand, as seems the general  
conviction that convertibility is necessary (and practically
everywhere the ratio of the gold cover is deemed to be of the  
utmost importance), there is, on the other, no doubt that to-
day most banknotes have become legally, or at least actually,  
inconvertible, without thereby losing all their value. In fact,  
for some  notes there exist to-day no provisions  of
redemption, and yet they possess value. Accordingly, there
must be, apart from convertibility, another basis for the value
of paper means of payment.  
13. State Fiat as Basis of Value for Paper Means of  
Payment ?  
All eyes are turned towards the State to see whether, by
its fiat, it is able to confer value on valueless paper. It
becomes, however, quickly manifest that the power of the
State is strictly limited in this sphere. All large-scale  
monetary devaluations known to history have referred to  
means of payment the value of which rested on a State fiat.  
This holds, for example, of the notes which the Scotchman
John Law issued, in France at the beginning of the eighteenth  
century and even more so of the assignats of the French
Revolution. In both instances acceptance was at first not  
compulsory. But presently the obligation to accept them was
decreed and soon reinforced by penalties. On 11 April 1793  
the French Government prohibited the use of all metallic
money on pains of six years in chains, and in September of
the same year the decrying - that is, the verbal discrediting of  
the assignats - became punishable  with death and the
confiscation of property.  
These drastic measures proved, however, unavailing. The
exchange value of the assignats declined steadily. At the  
close of 1793 it was only 22 % and in 1795 it had fallen to
under 1%.  
 Not so dramatic, but not less impressive and instructive,
were the experiences during the two great American  
monetary devaluations on the occasion  of the war of  
liberation and of the civil wars. There, too, the fiat of the
State was unable to prevent devaluation.
 But by far the greatest financial catastrophe of modern
times  was the German  post-war  inflation. It is common  
knowledge that the legal obligation to accept the banknotes
of the Reichsbank could not prevent their complete collapse
and it is most significant that the notes of the Rentenbank,  
which succeeded in stopping the inflation, have never been  
legal tender.  
 Nor was it different in the case of the Austrian and  was
Russian inflations. Nowhere, in fact, has the power of the its
State been able to prevent devaluation.  
 But this was not only the fate of weak States crushed by  
defeat. France and Italy, both victors in the World War, had
to suffer heavy devaluations which annihilated more than
four-fifth of the value of their currency.  

 It cannot be therefore the State's fiat which confers value
on inconvertible paper money.  

14. Confidence as a Basis of Value for Paper Means of
Payments ?  
 Not even  confidence and  national enthusiasm,  
revolutionary determination and religious  belief, can
accomplish this in the long run. One example may suffice.
When during the French Revolution in April 1793 the above-  
mentioned currency  law was promulgated, the whole
population of Metz assembled on the Place de la Légalité,
took a solemn oath, in the presence of the garrison, the
National Guard, and the administrative and the judiciary staff, not to draw
any distinction between the face value of  the paper
money and silver. Similarly, from Toulon, where
analogous ceremonies took place, the Government
received  a report stating that. the population would
carry out the law  with the religious respect (
"respect religieux") due to it. at However, after a few
days the workmen at the arsenal of Toulon petitioned
that they might have their wages paid in silver, for,
they declared, "try as we may, we cannot live  
otherwise". (See Marion, Histoire financière de la
France,  vol. 3, p. 47, Paris, 1921.)

 Even the powers of the soul cannot,  therefore,
permanently confer value on paper money.  

15. Acceptance by Fiscal Offices as Basis of Value for
Paper Money.  The value of inconvertible paper means of
payment has a  different basis, clearly revealed, in
the history of German finance. Thus during the
nineteenth century several German States issued paper
money the value of which did not lie in  

its convertibility, but in that the State agreed to
accept at its

pay offices the notes it issued at their face value,

of their rate of exchange. German financial science

this the taxation foundation ("Steuerfundation" ).

 This acceptance by the State should not be confused
with  the current. obligation to accept, for under-the
regime of compulsory acceptance the taxation,offices,
following the universal custom, accept notes at their
actual and not at their nominal value. Thus the notes
of the Bank of England are  worth no more at the
English fiscal offices than anywhere else. The State
accepts them at their paper value and not at the value
of the gold pound. Compulsory acceptance and taxation
foundation are therefore fundamentally different. The
basis of value of this paper money lay in that it
accepted at the fiscal offices of the issuing authority
at nominal value and, accordingly, this obligation to
accept was  the important element in the wording of the
warrants. Thus the Saxon fiscal notes simply read : -  

In conformity with the edict of 1 October 1818, this
will    be accepted at the Royal fiscal offices,

and the Prussian money orders of 1835 and 1856 contain,
besides the value of the order, only the statement

 Of full value in all payments.  

 Similarly in most other countries. It is true that in
many cases, as in Baden, Austria, and Wurttemberg,
there was, in  addition to the obligation to accept by
the fiscal offices -that is, to the fiscal foundation-a
more or less widely current obligation to redeem the
warrants. However, here also the fiscal foundation was
of prime importance and redemption  constituted only a
kind of supplementary guarantee. This is  already
expressed in the order of the two undertakings on the  
notes. Thus we read on the Baden paper money of 1849:  

 Paper money of the Grand-Duke of Baden, which all  
Baden fiscal offices accept in payments at its full
nominal value i.e., as equivalent to the gross silver
money struck at  the country's standard of coinage-and
is exchangeable at  sight for gross silver coins at the
redemption office Carlsruhe.  

 Likewise, in the Reich Act concerning the issue of
Reich  fiscal office notes of 3,0 April 1874, § 5, we
read :  

 Federal fiscal notes are accepted at their nominal
value in   payments made to all fiscal offices of the
Reich and all  constituent States. They are redeemable
at any time on demand for cash by the Reich's Central
Fiscal Office on the Reich's account.  

 In both cases therefore the fiscal foundation comes
first. It covers all fiscal offices, whilst the notes
can only be redeemed at one fiscal office.  

 The Wurttemberg Act of 1 July 1849 makes this relation
still plainer. Article 2, par. 1, provides:  
 This paper money is accepted at its nominal value in
payment at all fiscal offices of the State, as also at the tax  
 collecting offices. These offices are instructed to redeem  
 on demand this money, so far as the available funds  
permit , and in amounts not under twenty gulden at a time.
Here the claim to redeem notes is conditional on means
being available. According to the clear wording of the Act,
the notes are in principle only covered  by the fiscal

Later,  this principle was further developed in the
Rentenbank notes of 1923. Here no provision at all was made
for direct redemption. Apart from  utilising them in
connection with public pay offices, the holder had only a
claim to convert them into annuity bonds, which fact has
played no important part in practice. Lastly, in recent years  
the  fiscal foundation has been most  conspicuously
exemplified in the fiscal warrants of 1932, although these are
not intended to be means of payment proper. They cannot be,
either directly or indirectly, converted into ready money. Nor
can they be exchanged for securities. No redemption fund
exists nor repayments or amortisation. Their value is entirely
due to their being accepted by the fiscal offices at the
indicated value, regardless of their exchange rate.  
From the Saxon pay office notes to the fiscal warrants of  
the Reich, the same principle of a fiscal foundation  is
16. Commercial Bills as Basis of Value for Banknotes.
 The principle of the commercial bill for the Scottish
banknotes corresponds to that of the fiscal foundation for
State paper money. Whilst English  banknotes  have their
origin in the receipts given by the London goldsmiths for
gold deposited with them (which means that redemption is of
their essence), the Scottish notes have a different history. In  
the latter case, the banks gave in exchange for commercial  
bills round sums in notes of small denominations, expressing  
themselves at the same time ready to accept the notes they  
had thus issued, in payment  at their face value for the
commercial bills they had discounted. Thus the basis of the
value of the English notes was the gold deposited, whereas  
the value of the Scottish notes was based on goods sold as  
expressed in commercial bills.  

 It is true that the Scottish  banknotes were  also
redeemable in precious metal, very much as was frequently
the case with the State paper money, but redemption played  
an indifferent part in practice. By means of a so-called option  
clause the banks frequently reserved to themselves the right  

of postponing the redemption of the notes several months  
after they had been presented. Thus they could wait until the
commercial bills had matured. When, on the withdrawal of
the bills, the notes flowed  back, they disappeared from
circulation and the question of their redemption did not arise.
So far as the bill debtors redeemed their debts in coin or other
means of payment and not in -the notes of the bank, the bank,
without drawing  on its reserves, acquired  thereby  the
necessary means of redeeming any floating notes.  
Ultimately, in any case, the value of these notes lay in
their being accepted by the bank that had issued them.  
17. Fiscal Foundation and Commercial Bill as Forms of  
The  fiscal foundation  for State paper money  and the
principle of the commercial bill for banknotes are therefore  
basically related. In both instances acceptance by the issuer
at their nominal value, regardless of the exchange rate of the  
paper, is decisive. The significance of this acceptance (or
reflux) is manifest. If, for example, the State pays an official
with such a warrant, if the official passes this warrant on to  
his baker in payment for bread, and if, lastly, the baker  
liquidates his tax debt with it, the baker clears his debt to the  
State with the warrant that the official had passed on to him.  
In the last resort we have here a clearing process, i.e., a
balancing of mutual  obligations. And  these settlements,
unlike in barter or in modern international compensatory
transactions, are not made without resorting to money. On
the contrary, the exchange is operated by means of a clearing
process cancelling the mutual claims through our monetary  
An  inconvertible  paper  means  of payment assumes
therefore a reflux. It represents, in fact, a clearing certificate
and  derives its value from the exchange of economic
services. This indicates consequently the limit to issues of
unredeemable notes. Since the value of freely quoted money,  
as for instance of the Reich pay notes of 1874 .or of the
Rentenbank notes, is determined by supply and demand, no
more notes may be issued than there is a demand for, that is,
than must flow back to the issuing centre. Thus in the case of  
State paper money, the aggregate sum to be issued must  
depend on the aggregate tax claims due or all but due. Within
this limit issues are always justifiable. If, however, this limit  
is exceeded  by circulating paper money  representing  tax
claims  in the distant future, depreciation  will inevitably
follow, even if the State should promise to accept the notes  
at their face value in the future.  
 Similarly with banknotes. In principle, only short-term  
obligations should be admitted as cover. The nearer the due  
date of the bill, the greater is the demand for means of
payment in order to redeem it and the more assured is the  
value of the banknotes issued in connection with the bill.
The more distant the due date and the less assured the payment,
the more in jeopardy are the notes having such a basis.  
Rightly,  therefore, many  bank acts, among  them that of
Germany, expressly  provide  that only sound  commercial
bills falling due within three months  at most may be
discounted by banks of issue, Indeed, experience teaches  
that long-dated financial bills have hurled whole monetary  
systems into the abyss.  
18. Redemption or Clearing,.  
 There exist, accordingly, two entirely independent and
wholly different foundations whereon the value of paper
means of payment may be based : redeemability in precious  
metal and clearing. There is no third possibility.  
 Thus all paper means of payment in every country may  
be to-day actually resolved into these two elements of value.
Insofar as notes can be really exchanged for gold, their value
may be attributed to this. So far, however, as there is no
redemption and there is an inadequate metallic cover, only  
clearing can confer value on the notes, and this either by
clearing against commercial bills or against fiscal claims.
Moreover, in order to extend the facilities for clearing and  
thus to increase their value, many countries, at a time when  
banknotes were not legal tender, introduced in addition a tax
foundation for the banknotes, statutorily obliging public pay
offices to accept them. (See, e.g., the Federal Act concerning  
the Swiss National Bank of 6 October 1905, article 23.)  
 The  difference  between  the two elements  of value,
convertibility and clearing, which latter means  here the
clearing of taxes due, is well exemplified in the Bank of
England. Here, since the Peel's Act, the note circulation is
divided into a so-called fiduciary and non-fiduciary issue.
The latter must have a 100% gold cover. It reflects the pure  
idea of convertibility. The fiduciary issue however, which at
present amounts to 260 million pounds, is based exclusively,  
on "an eternal debt of the English State". It is not covered by  
any redemption fund. It rather embodies the idea of a fiscal  
 How, then, are these two elements of value related ?  
Although in the public mind  the idea of convertibility  
predominates, what is actually of decisive importance for the
prosperity of a country is clearing.  
 The idea of convertibility makes the quantity of means of  
payment basically dependent on the gold reserve available at
any time. This is an entirely impracticable principle. All
attacks on the gold standard, directed against this principle,  
which more especially combat the creditor's right to claim  
from his debtor directly or indirectly gold, are to that extent  
justified, For there is never a possibility of meeting  all
liabilities by gold payments. This holds both of international  
obligations and of domestic payments. It was therefore of
momentous importance and evinced profound insight, when
Milhaud in his great work, A  Gold Truce, called for a
universal gold truce.  
Whether a country possesses a gold reserve, depends  
always more or less on chance. Accordingly, the amount of  
the means of payment in circulation should never, not even
under  the most  orthodox. gold standard  system, be
determined by the size of the gold .reserve. The economic  
life of a country would have otherwise to shrink regularly
with the shrinkage of its gold reserve. In reality, the
exchange of goods remains a necessity and possible, even if  
there is no gold reserve at all. On the other hand, as the cases  
of France and the United States to-day show, not even the  
largest gold reserve of a central bank can save a people from
widespread unemployment and poverty, whilst a monetary
system intelligently based on mutual clearing, can provide a
people with work and wealth, even in the absence of any
store of gold.  
19. Examples of Clearing Money.  
The diverse possibilities of issuing inconvertible means
of payment based on the idea of clearing can only be
adumbrated here.  
In the first place, we may mention the inconvertible and
freely quoted State paper money described above. In most
countries  to-day this is to be found in a more  or less
disguised form. Besides States, local authorities may also
issue clearing notes for the imposts they are entitled to raise.  
Thus in the nineteenth century Hanover city issued notes
which promoted most effectively the town's prosperity.  
In the economic sphere, railways enter primarily into
account as centres for the issue of special railway clearing
notes. In Germany there is the noteworthy case of the
Leipzig-Dresden Railway founded by Friedrich List. This
Railway issued in the thirties of the last century railway
money to the amount of 500.000 thalers and this money, to  
the general satisfaction, freely circulated until the
establishment of the Reich. After the World War, the German  
Federal Railway also repeatedly issued its own means of
payment, most of which exhibited the character of goods
warrants, i.e., they were based on the principle of clearing.
Naturally, other undertakings, for whose goods or services
there is a general and constant demand, would also benefit by
such facilities.  
The  clearing principle is most particularly  useful in
international  settlements.  Thus leading firms might issue
purchasing certificates. For instance, certificates accepted at
their face value by the I. G. Farben Company or by Siemens,  
could be disposed of in London, Cape Town, and generally.  
To make the certificates more widely acceptable,  whole
groups of undertakings concerned with agriculture, export,
or the tourist traffic, might  agree to issue purchasing  
certificates  jointly. Issues might also be undertaken by
special  foreign trade banks,  whose  clients would  bind
themselves to accept the certificates in payments up to a
certain amount. Lastly, work provision banks might similarly  
be established to combat unemployment within countries.
For particulars on this subject, the reader is referred to the
valuable works of Milhaud and Beckerath published in 1933
and 1934.  

 The central banks existing at present in most
countries ought not to oppose the issue of such means
of payment. In  this connection we need not examine
here whether these banks have fulfilled the hopes
placed in them or have not rather  aggravated all
financial  catastrophes, such  as inflations and
deflations. In any case, so long as private enterprise
exists at all, mutual clearing  cannot  be monopolised
by a single central undertaking. The idea of a monopoly
is most  closely associated  with the idea of
convertibility. The issue of clearing warrants, which
neither  affect the store of gold nor are able, since
they are freely quoted, to modify the average price,
cannot in principle be restricted to central banks. 1t
ought rather, within the limits  drawn by the State, to
be allowed to develop freely.

20. Abrogation of Foreign Exchange Legislation.

 Once it is recognised that the value of inconvertible
paper money depends on the likelihood of the issuer
clearing it, the way  is open to abolish obligatory
acceptance and to re- establish the gold standard.
This, in turn, would facilitate the abrogation of
foreign exchange legislation, for this, too, is based
in the last resort on the idea of convertibility and of  
obligatory acceptance.  

In every country foreign exchange legislation is in
the main identical. The endless number of laws,
regulations, and  principles may be reduced to the
following three aims  

 (a) Retention of gold;

 (b) Retention of foreign means of payment (foreign  
exchange proper) ; and  

 (c) Restriction of payments abroad.  

 Compared with these, all other provisions are of
secondary importance. And these three aims may be
reduced to one, namely the seizure of gold. The
retention of foreign  means of payment and the
restriction of payments abroad are only means towards
attaining that one object. The foreign  means of
payment are seized because they are regarded as  
substitutes for gold and because it is anticipated that
by their redemption or, at least, by their being sold
on the international market, gold might be obtained in
exchange. Inversely, payments abroad are restricted as
far as possible  because it is feared that through the
efflux of means of payment the gold reserve might  be
drained  and the  maintenance of the parity be thereby
endangered. The idea  that gold is not only the
standard of value but ultimately the  sale and supreme
means of payment lies therefore at the root of this
type of legislation. Hence the efflux of gold and the  
associated threat to the redemption fund have  been
invariably the direct cause of the enacting  of foreign
exchange legislation.  

 Here also the obligation to accept the notes of the
central bank plays a. special part. Thus whilst the
State may leave to  their fate the freely quoted notes
of a private bank, without the monetary unit being
affected by the bank's exchange losses, the statutory
obligation to accept the notes of the central bank
implies  that they are identified with the  country's
standard of value. A loss in exchange in the case of
the latter involves therefore a modification in the
monetary  basis itself. Accordingly, the State is
compelled to maintain the parity of the notes of the
central bank so long as it is bent  on saving its
standard of value from fluctuations.

 The identification of the monetary unit with the
notes of  the central bank has, lastly, created another
source of danger  which has repeatedly  acted as a
decisive factor in the  introduction of foreign
exchange legislation, namely its close association with
certain large-scale banks at home. Thus the collapse of
the Kreditanstalt in Austria and the Darmstadt Bank  in
Germany instigated the introduction  of foreign
exchange legislation  in those countries. Of itself
there  existed no direct connection between these banks
and the monetary standard, and the example of Sweden,
which did  not rush to the aid of the collapsed Krueger
undertakings, shows  that in such emergencies other
methods may be  applied  than those chosen  by Austria
and Germany. However, where through the obligation to
accept the notes of a given bank a statutory bridge has
been built between the  banking system and the national
currency, the temptation will always exist to shift the
difficulties of the banks onto the  shoulders of the

 All these problems assume a very different complexion
if we take inconvertible means of payment to be what
they  really are, namely means of clearing in relation
to an issuer.  A fundamentally inconvertible note, the
value of which lies  in the issuer accepting it and
which therefore really involves no claim to payment in
gold but a claim to the services of the  issuer, can
never lead to a reduction in the gold reserve. A State
paper money based on such principles could be freely  
allowed to go abroad without this prejudicially
affecting the  currency. It could never entail
liabilities in precious metal. On the contrary, it
would necessarily lead to goods being exported and may
be accordingly even followed by an influx  of gold or
foreign exchange. What matters is that the means  of
payment shall not be legal tender; in other words, that
it  must be accepted by the issuer at its face value.
With this condition satisfied and the above-mentioned
limit to issues  being respected, even the heaviest
losses on foreign bourses  would involve no danger, for
the lower the market rate falls,  the greater the
temptation, would be to acquire the warrants,  inasmuch
as the issuer has to redeem them - at their nominal  
value, the loss being thus converted into a gain.
Everybody therefore who has to meet his obligation with
these warrants,  - in our example, the taxpayer - will
try to benefit by such  falls and thereby produce a
steady demand which has the  peculiarity of rising as
the market rate falls. This necessary demand provides
the floating power that imparts value to inconvertible
paper money. Such a means of payment need  not dread
the throwing open of frontiers. In the words of a Swiss
writer, it will, "like a carrier pigeon", return always
to its point of departure and necessarily lead to a
demand for home products abroad, in this way furthering
the export trade.    

 Since such a clearing warrant has by definition a
free market rate and is therefore not linked to the
currency unit,  the latter cannot be affected by any
fluctuations in the value of the former.

For  clearing warrants of the type described,  foreign
exchange legislation ceases to have any meaning, for
any stipulations relating to convertible money would
lose their  point. In all countries, therefore, sound
clearing warrants  should  be freed from their fetters,
since they were only imposed on them on account of the
unsound ones, and thus  at last bestow on the present
the freedom  of movement denied them to-day because of
the past. That is, foreign exchange legislation should
be abrogated at least for sound warrants.  Given  this
first step and the basis for a new economic structure
is laid. Further progress will be thereby  facilitated,
for in most countries  the inconvertible  notes could
be without difficulty converted into State paper money,
thus investing the present state of things in this
matter with its proper form. Should, however, one or
another central bank have transgressed the limits that
would apply to a fiscal foundation, it will not be
difficult to remedy this, without  fettering  a
country's  general economic life by foreign exchange

Nor can it be objected that the national economy requires
foreign exchange and can therefore not be satisfied with
clearing transactions, for, to begin with, we should remember
that probably in all countries depending on foreign exchange,  
the supply of the latter has shrunk despite the most stringent
legislation and that therefore the object aimed at has not been  
fully attained. But a more important  point is that both
commercial and financial debts, according  to firmly and
universally established views, can only be liquidated by the  
goods or services of the debtor, and it is just these that are
offered by clearing warrants. It must be therefore possible to
start again payment operations on this basis. So far as the
importing of raw materials is in question, this is not
challenged. A clearing warrant,  unhampered by foreign
exchange legislation and made out in gold units, is a fully
utilisable means of payment so long as there is a demand on  
the world market for the goods and services of the issuing
country.  If this condition is not satisfied, then foreign
exchange legislation also would  be of no avail. If an
exchange of goods is actually impracticable, - that is, if the  
country no longer plays a part in the world economy, - no  
debt can possibly be liquidated. This holds equally of
commercial and financial debts. No one can expect that a
country  possessing no gold, should pay in gold. Every
creditor should therefore recognise that a debtor can only
offer a lien on his goods and services.  
Years ago the Economic Committee of the League of
Nations expressed the same idea when it said that creditor
countries must either agree that debtor countries may directly  
or indirectly redeem their obligations in goods or services or  
they must be resigned to not receiving any payments. The.  
clearing warrants described here indicate the way in which
even heavy liabilities may be in time honestly liquidated, to
the common advantage of creditors and debtors.
 Once the banknotes that had become inconvertible have
been superseded by clearing warrants, the free gold market
can be at last re-established. So soon as gold has been
divested of the property ascribed to it of. being the exclusive
means of payment and representing  the core of money
claims, it becomes again a commodity like any other, Its free
movement no longer causes alarm and may therefore the
better fulfil the function of a standard of value. And this
completes the circle of our proposals, for the free gold
market which here appears as the result of -clearing, at the  
same time presupposes it, since the various means  of
payment can only be reliably valued when gold may be
freely moved.  
It follows, lastly, that under the system above outlined
there would be no objection to gold coins being minted for
private firms and this not, as seems to be the intention at
present in France, as a form of note cover, but for immediate
circulation with a view to measuring by them at any time the  
value of all other means of payment.  
21. Summary.  
Accordingly, we propose  
1. The introduction of unambiguously determined gold  
units of account as a monetary basis, e.g.
1 mark  = 1/2790 kg. fine gold.  
1 franc = y kg. fine gold.  
1 £ = z kg. fine gold.  
2. The transformation of the whole monetary system on the  
basis of a gold unit of account.  
3. The abolition of the statutory obligation of acceptance for  
 the notes of the central banks.  
4. The removal of the monopoly of the central banks and its  
 replacement by general regulations concerning the issue  
 of means of payment.
5. The abrogation of foreign exchange legislation and the  
 re-establishment of a free gold market.  
6. The unrestricted right to mint gold coins.  
22. The Practical Realisation of the Proposals.  

 a) Through international agreements.  

 Everybody is agreed that something should be done to
remove the monetary chaos and the obstacles to settlement  
operations. Here also hope is commonly centred  in
international conferences. However, the value of such
conferences for the solution of economic problems is not  
great. Think in this connection of the World  Economic  
Conference of 1933. This was eagerly looked forward to by  
all peoples and yet, notwithstanding careful preparation,
produced virtually no practical results.  
 However, even if within the near future a monetary
conference could be arranged to meet and if, moreover, full  
agreement could be reached among the participating States,
the effect would be at best to re-establish the parity between  
the monetary units and to impose an unconditional obligation  
on the parties not to modify deliberately this parity nor to
change it without the consent of the other contracting parties.
But that would only dispose of a comparatively small part of  
the present difficulties, for only most rarely - as in the United  
States recently - has the abandonment of the gold standard  
been an arbitrary act. In by far the majority of instances, the
gold standard was most reluctantly dropped. Heavy calls on
credit institutes, excessive claims on the central bank, a
rising  efflux of gold, and, finally, the threatening
impossibility, despite all efforts, of maintaining the parity of
the banknotes, were for the most part the really decisive
factors in the abandonment of the gold standard. For such
cases an international agreement on monetary parities would
offer no solution.  
 So long as the principle of central banks is retained and  
their notes, being made legal tender, are identified with the
standard of value, no international agreement will be able to
prevent the recurrence of present-day conditions , for under  
this system the collapse of a single leading bank, to say  
nothing of the collapse of the State finances, may render
impossible the maintenance of parity. However, even if, to
meet such cases, the several countries  concluded a
convention providing that the gold reserves of the diverse
central banks should be automatically mobilised to save the  
currency of a country in need, a scarcely credible sup-
position, even this would be insufficient in hard cases, for the
magnitude of the monetary obligations maturing at any given  
moment would probably  always  exceed the quantity of
available gold.  
 It also remains a moot point how the problem of foreign
exchange legislation could be settled at such a conference,  
seeing that the granting of loans, useful as these would be to
those immediately concerned, in no way solves the problem.
And yet without this, even a fresh determination of parities
would prove unsatisfactory.  On the contrary, the object
should be to rebuild on a sound basis the entire system of
international payment arrangements,  
b) Through intra-State legislation.  
From what precedes  follows the possibility that each
several State, having made up its mind, may, by abolishing
the obligation to accept and recognising the reflux principle,
re-establish for itself the gold standard and rescind its foreign
exchange legislation. This may seem fantastic. But the reader  
should remember the German inflation period. Then, too, an
escape  without  external assistance appeared  impossible.
"The hole in the West", speculation on foreign bourses, and  
similar obstacles, which Germans could not control, were
quite generally regarded as the causes of the depreciation of  
the mark. Eventually, when things were at their worst, when  
in some parts of the Reich serious disorders had broken out,
and when external help was out of the question, the country  
succeeded, by its own efforts, without the aid of any foreign  
Government, without an international conference or
convention, to stabilise the mark, to safeguard it against all
foreign speculation, and even after a few months to abrogate
the foreign exchange legislation then in force. To-day, as at  
that time, the free resolve of any country may determine the
fate of its currency. The country that first finds the way out,
that removes insecurity, and at the same time re-establishes
the freedom of monetary operations, will march well ahead
of the other countries. It may even be assumed that a mighty
stream of capital for long-term investment will pour into it
from all sides.  
 c) Through private initiative.
 Even if, however, no State were for the moment ready to
proceed  along this line, there remains the possibility of
finding a way out of the monetary chaos through private
initiative or at least to prepare the way for this. When in the
eighteenth century the national monetary units, because of
alleged State needs, continually fluctuated and when it was  
therefore impossible to rely on the value of currencies for a  
measurable time even,  Hamburg merchants, more
particularly, discovered a way out. By founding the famous
Hamburger Girobank,  they, following  the centuries' old
Chinese Tael system, made themselves independent of the
debased State coinage by adopting as the basis of all their  

accounts an unminted definite weight of silver in the place of
State money. This weight, called Mark Banko, constituted an
unchangeable unit of calculation,. which came to be of the
greatest  service economically for the whole  of Northern

 There can be no doubt that the application of the same
principle, with gold instead of silver as the basis naturally,
might exercise a similarly far-reaching influence to-day. Just
imagine that before the devaluation of the Belgian franc, a
Belgian undertaking of good repute had declared itself ready
to take up a long-term loan at its actual gold value, regardless
of the exchange rate of the franc. The crowd of would-be
investors would probably have broken through all barriers.

 In this connection the proposed private calculation in
gold  should on no account  be linked with the national
monetary system. Accordingly, I do not suggest here the
appending of gold clauses (gold dollar, gold pound, or gold
franc) to a country's currency unit, for experience teaches
that such clauses - which hold permanently before the
statutory means of payment its ideal as in a mirror - only
rarely survive the fate of the national currency. Thus in
Belgium, when the franc was devaluated, the gold clauses
were revoked and only contracts in foreign currencies were
left untouched. Private calculation in gold, like the erstwhile
Mark Banko system, should be independent of the national
currency. It should be therefore based on a separate unit, for
which a simple calculation in grammes of fine gold suggests
itself here. This, would  also serve as a basis for an
international calculating  unit, which  has. been widely
desiderated for many decades.

 All that would be demanded of the State is not to prohibit
calculating in gold. The State could never suffer through this,
for even if a Government should  deem  it expedient to
devaluate the national currency, as was frequently the case
already in the seventeenth and eighteenth centuries, there can
be no ground for imposing a devaluated currency unit on
those  who had freely agreed to use for their economic
transactions among themselves another and constant value
basis. Investors in all countries would joyfully welcome such
a solution and there are not a few undertakings which, under
these conditions, would be decidedly ready to place long-
term loans  at moderate interest rates. Once it is
demonstrated, however, that the monetary chaos, which
seems to most men the work of an inscrutable fate, may be
overcome, the profoundly beneficent effects of this for the
peoples of the world will not fail to become apparent.

(Translated by G.Spiller, London.)

Walter Zander (born June 8, 1898 in Erfurt, died April 7, 1993 in South Croydon) was a German-British lawyer, scholar and writer. He was Secretary of the British Friends of the Hebrew University in Jerusalem 1944-71, Governor of the University 1972-93, Senior Associate Fellow at St Antony's College, Oxford 1971-88 and author of several books and articles, many of them about Israel and its international relations.

The son of a prominent Erfurt lawyer, he studied at the Gymnasium, before being called up for military service in 1916. During World War I, he served as a non-commissioned officer in the German Army and was awarded the Iron Cross. After the war, he went on to study law, philosophy and economics in Jena and Berlin. After a brief period as an assistant to one of the leading lawyers in Berlin, he set up his own practice in the city. In 1929, he took a one year leave from his practice to study economics at the London School of Economics and the Sorbonne University.

He married Gretl Magnus in Berlin in 1931, and they had three sons and a daughter, among them legal scholar Michael Zander and conductor Benjamin Zander.

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