Economists have failed to find the root cause of
unemployment. Keynesians have looked for it in the paucity of government
debt. Friedmanites have tried to blame it on the
inadequacy of central bank credit. Both orthodoxies were promoted, one after
another, as state religion in the United States, with appalling results:
destabilizing foreign exchanges, interest rates, prices; wiping out nine-tenth
of the purchasing power of the dollar; even more of the value of bonds; not
to mention the triggering of an avalanche of debt.
The Austrian school maintains that unemployment is
the result of the high-wage policies of governments such as minimum-wage legislation
and granting monopoly power to trade unions. However, this policy is more the
effect than the cause. It prices less productive labor
out of the market. We are looking for causes that hits
the high-productivity end of the spectrum as well.
The root cause of unemployment is the coercive
legislation making bank notes legal tender. It initiated a slow process that
ultimately destroyed the wage fund out of which wages were paid to workers
before the underlying merchandise has been sold to the ultimate
Tale of the cuckoo’s egg
1909 was a milestone in the history of money. That
year, in preparation for the coming war, the governments of France and
Germany stopped paying civil servants in gold coins. To make this legally
possible the note issue of the Bank of France and of the Reichsbank had to be made legal tender. Most people did
not even notice the subtle change. Gold coins stayed in circulation for
another five years. It was not the disappearance of gold coins from
circulation that heralded the destruction of the world’s monetary and
payments system. There was an early warning. The German and French
government’s decision to make the note issue legal tender effectively
sabotaged the clearing system of the international gold standard, the bill
European banks of issue were obliged by their
Charter or by legislation to back at least 40 percent of their note and
deposit liabilities by gold, and the rest by short-term commercial bills
drawn on consumer goods moving apace to the ultimate gold-paying consumer.
There was an international bill market trading bills drawn on London. It did
not matter whether trade routes passed through British waters or bypassed
them: financing international trade through London was the hallmark of the
highest reliability. For most banks the use of government paper for the
purposes of backing the note issue was explicitly disallowed by their
charter. The bank had to pay stiff penalties if it could only balance its
book with the help of government bonds in the asset column. Bills on London
Bills drawn on consumer goods in urgent demand
circulated world-wide without let or hindrance before 1909. As goods were
moving to the ultimate gold-paying consumer, bills drawn on them
‘matured into gold coins’ as it were. That is to say, they
matured into a present good. It is evident that the notion of a bill
maturing into a legal tender bank note is preposterous. Both the bank note
and the bill are a future good. Furthermore, ‘legal
tender’ means coercion enforced within a given jurisdiction but
unenforceable outside. Legal tender bank notes were incompatible with the
voluntary system based on trade in bills payable in gold coin at maturity.
They were bound to paralyze the bill market. The monkey wrench has been
thrown into the clearing system of the international gold standard.
Banks of issue continued to use the bill of exchange
as an earning asset to back bank notes. Other subtle changes would, however,
alter the character of the world’s monetary system beyond recognition.
The cuckoo has invaded the neighboring nest to lay
her egg surreptitiously. In addition to bank notes originating in bills of
exchange, bank notes originating in financial bills have made their
appearance for the first time. In due course the cuckoo chick would hatch and
push the native chick out of the nest. In five years the entire portfolio of
the banks of issue consisting of commercial bills would be replaced by one
consisting of financial bills and treasury bills exclusively. The commercial
bill has become an endangered species. Soon it would become extinct.
Biggest job-destruction ever
Let us now see how governments have inadvertently
destroyed the wage fund of workers employed in the sector providing goods and
services to the consumer. The wages of these workers were financed through
the trade in bills. The emerging consumer good they were handling might not
be sold to the ultimate consumer, possibly for another 91 days. Yet in the
meantime workers had to eat, get clad, keep
themselves warm and sheltered. They could, thanks to bill-trading that would
keep their wage fund replenished.
In order to create a job capital must be accumulated
through savings. This applies to fixed capital deployed in making both
producer goods and consumer goods. In case of the former it applies to
circulating capital as well. But if circulating capital had to be accumulated
through savings in the case of consumer goods production as well, then jobs
in that sector would be few and far in between. In the event they were
plentiful, for circulating capital supporting jobs in the consumer goods
sector could be financed through self-liquidating credit that did not tie up
savings. By contrast, jobs in the producers goods
sector could not be financed in this way, explaining why they were not nearly
as plentiful nor as easily available.
Starting in 1909 the governments of France and
Germany stopped paying civil servants in gold coin, and made bank notes legal
tender. Simultaneously, they let their banks of issue dilute the bill
portfolio by admitting finance and treasury bills to back the note liability.
People who are color-blind to the difference
between liquid and non-liquid banking assets see nothing wrong with that.
However, when commercial bills were ‘crowded out’ of the system,
the wage fund was effectively destroyed. Workers in the consumer goods sector
could no longer be paid before merchandise has been sold to the ultimate
consumer. The liquidity of finance and treasury bills was no match for that
of commercial bill. For them, the bank portfolio was a shelter against
“the slings and arrows of outrageous fortune”. They could not
face the music on their own outside of the shelter. At maturity they had to
be rolled over if there were no voluntary takers for them. If they were paid,
it would be at the convenience of the debtor, which had nothing to do with
the needs of the workers. Financial, treasury, and other ‘anticipation
bills’ were unsuitable for backing the wage fund. They served the
convenience of the debtor, not the needs of the creditor, in this case, the
workers. Workers had to eat. Unless bills in the wage fund were
self-liquidating, they might as well go hungry until their products could be
sold for cash.
What you need is highly liquid earning assets that
the bank can sell by payday so that wages may be paid out of the proceeds.
Commercial paper in the portfolio filled the bill. It represented the most
liquid earning assets the bank could have. Banks all over the world were
competing for them as they wanted to exchange their excess gold for liquid
earning assets maturing into gold. Commercial bills were universally
acceptable as backing for bank notes. The wage fund was secure. But as
backing for the note issue was diluted in the wake of legal tender
legislation, the wage fund went up in smoke. This was the biggest
job-destruction in history.
Path of vindictiveness
Unless governments were prepared to assume
responsibility for paying income to wage-earners, there would be unprecedented
unemployment that would spill over to all other sectors and all other
countries as well. Eventually the governments, to avoid undermining social
peace, decided to do just that. They invented the so-called ‘welfare
state’ paying so-called ‘unemployment insurance’.
Note that the unemployed could have found jobs, had
the clearing system of the gold standard, the bill market, been allowed to
make a come-back, and had legal tender laws been rescinded after World War I.
The resurrection of bill-trading would have resurrected the wage-fund as
well. Instead, the victorious powers chose the path of vindictiveness. They
did not want multilateral trade, which might have benefitted their former
adversaries as well. They wanted to punish them with bilateral trade, even if
it meant punishing themselves. What they have forgotten was to calculate the
extent of punishment they were inflicting upon themselves. Their decision favoring bilateral trade and abolishing the international
bill market was the cause of the collapse of the gold standard, and the cause
of the world falling into the abyss of the Great Depression, making
The government started sponsoring ‘job
creation’, mostly of make-belief jobs. But what has been hailed as a
heroic job-creation program appears, in the present light, a miserable effort
at damage control by the same government that has destroyed those jobs in the
first place. Economists share responsibility for the disaster. They have
never examined the 1909 decision to make bank note legal tender from the
point of view of its long-term effect on employment. Nor have they pointed
fingers at the culprit, the decision to stop paying civil servants in gold
coin. After the Great Depression economists should have insisted that,
instead of treating symptoms, governments ought to treat the cause by
reinstating the international gold standard and its clearing system, the bill
market. They should resume paying civil servants in gold. This would have
made it incumbent on business to follow suit and pay all workers in gold
coin. According to Say’s Law there is no unemployment under the regime
of a gold standard cum real bills. Gold in the hands of the workers is
the guarantee that the goods produced by them will stay in demand.
t took 20 years for the chickens of 1909 to come home to roost. Come
home they did with a vengeance. However, by 1929 the memory of the 1909
coercive manipulation of the circulation of gold coins faded. No one realized
that a causal relationship existed between the two events: making bank notes
legal tender, and the wholesale destruction of jobs twenty years later.
The father of revisionist theory and history of
One man who did, and whom we salute here as the
father of revisionist theory and history of money, was Professor Heinrich Rittershausen of Germany. In his 1930 book Arbeitslosigkeit und Kapitalbildung
(Unemployment and Capital Formation) he predicted not only the imminent
collapse of the gold standard but also the wholesale destruction of jobs
world-wide as a result of the explosion of the time bomb planted in 1909,
wrecking the clearing system of the international gold standard, the bill
market. The horrible unemployment Rittershausen
predicted would continue to haunt the world for the rest of the 20th
century and beyond.
If we want to exorcize the world of the incubus of
unemployment with which it has been saddled by greedy governments hell-bent
on concentrating gold in their own coffers in preparation for war, not only
must we rescind legal tender legislation and re-establish the international
gold standard, but we must also rehabilitate its clearing system, the
international bill market. We must also reintroduce gold coin circulation and
payment of wages in gold coin. In this way the fund, out of which wages to
all those eager to earn them for work in providing the consumer with goods
and services can be paid, will be resurrected. Then, and only then, can the
so-called welfare state paying workers for not working and farmers for not
farming be dismantled.
Heinrich Rittershausen, Arbeitslosigkeit und Kapitalbildung,
Jena: Fischer, 1930.
A Spanish translation of this volume including an essay of von Beckerath was published in Barcelona in 1934.
Heinrich Rittershausen, Zahlungsverkehr, Einkaufsscheine
und Arbeitsbeschaffung, published in the Annalen der Gemeinwirtschaft,
vol. 10, p 153-207, Jan.-July, 1934.
translation (apparently of a better
quality) under the title Organisation des échanges et creation de travail can be found in the volume Le
chômage, problême de credit commercial et d’approvisionnement en moyens
de paiement, p 154-214, Paris: Recueil Sirey, 1934.
Antal E. Fekete, Adam
Smith’s Real Bills Doctrine, Monetary Economics 101, Gold Standard
Antal E. Fekete, Detractors
of Adam Smith’s Real Bills Doctrine, July 2005.
The author is grateful to Dr. Theo Megalli of Plattling, Germany,
for bringing the work of Heinrich Rittershausen to
his attention. The biography of H. Rittershausen
(1898-1984) by Dr. Megalli
can be found on the website.
Antal E. Fekete
January 11, 2007.