part two
(will be corrected later)
written in the early thirties by Prof. Heinrich Rittershausen
(Translated by G. Spiller, London.)
Reprinted with permission of the Director of the "Annals of
Collective Economy by the Monetary Freedom Network 1987; see *part 1*
for blurb on that now dormant if not defunct bunch of enthusiasts; they did manage to do a thing like my first guest appearance batch way before me though; see:
Professor of Economics in the University of Geneva.
VOLUME 10 — 1934

 For these (A and B) preceding parts press here
A Banks of Issue end Banknotes as Means for Organising Mutual Markets
 B The Gradual Destructon of the Classical Systee from 1909 to 1932 as Cause of the Dlfficulties encountered in Reintegrating the Workless
This file starts with the following points.
footnotes are integrated in this colour
some comments in this one and this one
11. The unnecessary sacrifice of the gold and foreign exchange holdings of the Reichsbank intensified unemployment. _
12. From what quarter does inflation threaten to-day ?
13. Aggravation of the situation through the mistaken expectation of devaluation.
    (a) The Bank maintains its traditional end statutory gold purchasing rate.
    (b) Now as to the altemative way.
14. Is the Central Bank system or are free banks more favourable to increase in employment and trade recovery
15. Decline of the credit system and aggravation of the unemployment problem as the outcome of an unhealthy development during severol decades.
C The Coopensation Principle end the "Vier Gesetzent-wuerfe' (Four Draft Laws) for Reintegrating the Work- less in the Economic Process        30

I. From Payment to Compensation
II. Draft Law concerning Compensation Banks    34
III. Draft Law concerning the Issue of Treasury    40
 IV. Draft Law concerning the Raising of Annuity Rates end the Lowering of Real Interest Rates through the Introduction of Coopensation in Loans
 V. Draft Law concerning Calculating in Stabilised Values    46
D Results 49
1. Principal conclusion: need of not fixing a limit to means of payment.
2. Practical part solutions: The system of Central Banks and the future of our banking and settlement systems.—
3. Limits of thc significance of turnover credif for thc solution of the unemployment problem._

Tripod tool Nedstat installed end of nov 98 but not correctly till july 99  Nedstat Counter File created in nov, last changed in dec 98
Go see what else poetpiet can puzzle us with here
............................or here..........................
or check the intro to this file and all the others
in my first batch of guest appearances which happens to concern all sorts of currency issues.

11)  The unnecessary sacrifice of the gold and foreign exchange holdinge of the Reichsbank intensified unemployment. _ The sacrifice of the gold and foreign exchange holdinga, proved to be a serious blunder, to rectify which, Dr. Schacht, with his extraordinary energy end expert knowledge will have to Iabour for years. Since the few large-scale deposit banks that were heavily burdened with short-term foreign debts no longer possessed considerable quantities of good bill material, which the Reichsbank, liberally interpreting its duties, might have been morally constrained to discount, there was no reason why the Reichsbank should take over the dubious asseta of those banks and hand to them in exchange gold end foreign exchange to the tune of thousands of millions, which were later urgently needed for sound business. After the Reichabank's gold end foreign exchange holdings had been thus aimlesaly squandered, it was found that only a portion of the debts had been repaid; that the calamity had not been averted teut had apread to the German banks generally, threatening the Reichabank itself end the stability of the currency. To link the fate of a bank of issue with an unsound banking group and unsafe induatrial concems, is impossible without jeopardising the currency end foreign exchange position. Thereby the bank of issue takes over the debts of others. It needlessly stands security for others' liabilities, to meet which it has to surrender its gold holdings. The resulting deficiency in gold end foreign exchange ia not the outcome of an unfavourable balance of trede, but of the existence of matured foreign debts of private firms which have been, without good reason, declared as quasi Germany. Thia deficiency in foreign exchange and the difficulties associated therewith, have served for years as an excuse for not adopting measures tending to reduce unemployment. The mistakes here involved represent a scarcely recognised chief cause of the mounting unemployment figures.

12. From what quarter does inflation threaten to-day ? — Against the inflation argument,—with which the naturel securing of work by means of tumover credit is constantly combated,— one may simply contend that the cart is put before the horse when the private financing of fresh sales is stigmatised as dangerous end when the granting of credit through the creation of prohibited financial bill money on the basis of time extensions, is uncritically passed over. Manifestly, the right course would be to facilitate turnover credit and to attack the old frozen and inflationary means of payment which are to a 25 dangerous degree hoarded, by abolishing their compubory market rate end thus withdrawing them. Prof. Lexis, the adviser of the Reichabank at that time, had made similar observationc during the depression of 1907. Let it not be asserted that a slight inflation is the inevitable remedy; that the proposals here made also amount to a slight inflation; and that this should be frankly admitted. On the contrary, an inflation is destructive in its effects. It owes its approval in certain business circles to the fact that it renders possible the prolongation of unsound credits at the expense of the normd demand for turnover credit and that it blurs the real cause of the malady.

13. Aggravation of the situation through the mistaken expectation of devaluation.—Successfully to combat the esisting widespread unemployment, the foreign exchange crises, illiquidity, and fictitious values end prices, we ought boldly to have returned to the simple and solid principles of the old banks of issue. This return, however, would have brought to light grave abuses in many well-reputed firms more especially. Hence in England, in the United States, end in many other countries, it was decided to proceed a step further in the path reading to destruction and artificiality and thereby reach bottom rock in the degeneration of the banks of issue system: devaluation. The rate of the foreign exchange on foreign marketa was left free, thus apparently meeting the healthy demand for the re-opening of markets. But at the same time a trick was played, nullifying the good effects of a free market rate. This method of the single or continuous change in the gold purchase rate of the Centrd Banks was discovered by Irving Fisher and, unfortunately, also by J. M. Keynes. These scholars, well-known for their contributions to science, have now added the questionable merit of having increased by one link the number of degenerative symptoms of the bank of issue system. They achieved this by a method which formerly was only known to exist through the legal proceedings taken against insolvent banks of issue.
          Devaluation and free market rate are not to be confused. Where there is a pure gold currency and a free market rate for paper money, a free gold market and no control of foreign eschange, the notes of the Reichsbank, for esample, could be freely exported and valued. ln these circumstances, the notes might be at a heavy discount for a few days. As their redemption in gold had been revoked, their sole value would consist in that they could be used for making purchases in Germany. That would greatly stimulate the German esport trede. The customs barriers encircling the country could be partly or wholly sur. mounted. The market rate of the notes would be in a sense a function of. the level of the customs dutjes of the countries where the German banknotes are to be found. Given absence of dutjes end the notes would be probably valued abroad at par; given prohibitive dutjes, theorctically at zero. It would be then entirely a problem for foreigners end their Governments to assign value or withdraw it from German notes had by them. Endeavours to reduce duties would probably be made particularly in those countries where hitherto prohibitive dutjes against German goods , and simultaneously a favourable trade balance against Germany, prevailed; where therefore there was a claim to accept, without goods. This holds of all debtor countries; hence particularly of most South American States. Their creditors would therefore approach their own Governments with a request to reduce the dutjes in order that South American goods might be allowed to enter in repayment of debts. An abuse for dumping purposes need not be feared, for only the export of debtor countries to the extent of the balance they are owing, becomes feasible; no more. The par value of the German banknotes on foreign markets would be presumably soon reestablished. Nor could a deficiency in foreign exchange occur, e. g., in the case of Germany the "misfortune" consists precisely in that foreigners acquire more payment claims against us, than we against them. Hence in the portfolios of foreigners, German banknotes, commercial bills, etc., accumulate which becorne only useful when goods are bought with them. An increase in exports follows necessarily, unless indeed foreigners proceeded to burn or hoard the German banknotes. That is, the free market rate would convert the German banknotes into Milhaud's "purchasing certificates". (See 'A Gold Truce', by Prof. Edgard Milhaud, in Annals of Collective Economics, 1933 (also seperately published by Williams and Norgate, London); also the papers by Zander end Beckerath in Analls, etc., 1933, 1934.) They help to adjust the trede balance, without the Reichsbank having to trouble about it.
             To what extent this system of a free rate, which prevailed in almost all countries before the War, contrasts with present-day devaluation we gather from the following considerations. When the bank of issue grants long-term credits «internally» end particularly "externally", payments are no longer due from abroad; little comes in teut much goes out. This is called deficiency in foreign exchange. In that case redemption in gold is moatly suspended. Where legal tender exists, the control of foreign exchange is then introduced. On the other hand, if the banl~notes have a free market rate—beyond the frontiers that is always so—, the notes are quoted lower. In such case the Bank can choose one of two ways.

(a) The Bank maintains its traditional and statutory gold purchasing rate. Then it has no afflux of gold. It cannot therefore augment its shrivelled gold stocks, because gold is at a premium and is therefore too dear. It no longer grants fresh credits, other than those required for short-term goods sales. Something amazing ensues: a run of consumers on the goods in shops, of debtors on creditors (particularly of the bank as ere" ditor of bills), and a run of the taxation pay offices where, as in Germany, the notes are accepted at their face value. The holders can only pass on at per their notes deprecinted for a few days, to three partjes, because all other partjes reckon in gold end demand a premium in payments made with banknotes— in re-payments to the bank, in taxation payments, and in safe establishments (since the turnover credits of the bank of issue are in the last resort concentrated in the shops, where commodities are offered in return for them).
        This 'terrible' run need not be deplored, for it takes an economically desirable direction. It tcrminates in the safe of goods the payment of taxes, end the emptying of warehouses, to the value of some milliards of marke. The banlc of issue thus becomes liquid again because there has been a torrential reflux of notes. This reflux also sets in from abroad for we suppose that the export of banknotes is again permitted and that the holders of notes hurry to make purchases with them in Germany which is excellent for the balance of trade. Thanks to this salutary crisis, the equilibrium in internal end estemal credit operations is reatored within a few days. The notes end the deficiency- in foreign exchange, as welf as the discount, have disappeared. All this has been achieved through stimplating purchases and reflux, whilst retaining the gold purchasing rate. The regulations of at least the continental banks of issue, drawn up on the basis of a uniform esperience of trace depressions during centuries, suggeat this as the only practicable way. (Sec, for instance, § 22 of the German Banking Act.)

(b) Now as to the alternative way. The bank of issue acts like a mismanaged mortgage bank on the day before it closes its doors. It does not trouble about the losses suffered by the holders of its issues. On the contrary, it endeavours even at that stage to tering great numbers of its worthless notes (mortgage 'bonds) into circulabion below per and at falling market rates— in a word, impudently to aggravate its abuses. As the bank is not interested in credit transactions, but sold in gold and in the market gain on gold, and as nobody is willing to accept the depreciated bonds at per, it is bound on this account to increase the atatutory purchase price of gold. It can now purchase quantities of gold,—that is, offer notes at the coat of the speculative losses of note-holders who are defrauded in regard to the automatic return to parity. It then assets vauntingly that it has done much for the (depreciated) currency. In the later period of free banks of issue in Europre (until about 1850 or 1900), embarrassed bank managements always acted in this manner. Exchange of goods and opportunity to work have thua auffered in the long run. The criminal law has dedt drastically with such abuses. (See Banking Acts generally.)
         The new name for this old method is "devaluation". If the Central Banks or the Treasuries of the devaluationg countries had not raised the gold purchase price since 1931, the Bank of England notes, for example, would have stood only for a few days at a heavy discount. After that, the characteristic tendencies towards recovery would have triumphed. Colossal purchases of gold at increased prices—that is, colossal safes of English and other securities at ridiculously low prices,—-were necessary in order to nullify these tendencies which, as is common knowledge, sought in the first few months repeatedly to force a return to the old parity (e.g., the Bank of England was compelled to purchase gold to the value of between 20t) end 400 million gold pounds).
              We are endeavouring in thia paper to combine the advantagea of the free market rate and of the unadulterated gold standerd, the flesible adjuatment of trade balances and the stimulus to export, with the safeguarding of contracts and of capital investments. The sytem of 1909 embodies it. Such beings: the German tradition, it ia no wonder that in April 1924, Dr. Schacht, during an extreme shortage of foreign exchange end its rigid control, rigged the speculatora by de-controlling the rate and keeping to the old gold purchase price as well as by arranging for the compulsory reflux of banknotes. He also restored without delay freedom in external trading end in foreign exchange transactions — an event which was unfortunately not appreciated by an erroneous monetary theory, with the result that public opinion to-day is unaware of that experience. This is probably the sole example in the history of modern crises where a gigantic bank of issue was conducted on exemplary principles.
              With regard to the gold purchase price of the Central Banks, only two systems exist: maintaining a given rate at which the bank of issue buys gold, or de-control and deliberate inanage ment of that rate. The first method is represented by the successfully teated pre-war aystem of the well administered countries (a genuine gold standard with a free rate for notes, but a fixed purchase price of gold), the other, is inflation or devaluation, different aspects of the same reality (compulaory acceptance of notes at home and modification of the gold purchase price by the bank of issue). That the unemployment problem may be passingly solved by means of inflation, at the cost of immense sacrifices and great devastations, is wellknown. Irving Fisher's end Keynes' contribution contains therefore nothing novel, particularly no lasting remedy. It signifies chiefly a further destruction of credit.
               To increase the value of gold, which compels devaluation, serves no purpose, since it is the price of goods which have been driven downwards by the long-continued discouragement of turnover credit and sales, without gold entering in the matter.
                 Nor is the justification of devaluation, allegedly necessitated by the inability to compete abroad and by the fall in exports owing to excessive home prices, valid. The escessive dearness of goods is occasioned in some countrica by the growing price control of trusts, whose price policy know no bounds and who thereby exercise a ruinous effect on employment and the currency. Trust restrictions would lead to a decided drop in prices, without the mess of investors having to pay the penalty of others' excessive profit-seeking. Producers should attend to quality end pricea, for artificial methods are doomed to fail.

14. Is the Central Bank system or are free banks more favourable to increase in employment and trade recovery  On this question Hock already uttered prophetic words that sound like a judgment passed on the bank and currency crises of to-day: "In the case of a monopolised bank, the State is bound to support it in critical times; furnish it advances; stand guarantee for it; twist the laws in its favour, grant it moratoria, and permit the notes which it can no longer redeem to continue in circulation, perhaps conferring on them a forced rate. The State is bound to do all this because otherwise the business operations of the country dependent on the Bank would be of necessity brought to a standstill. With a system of free banks, the collapse of a bank passes as unnoticed, and is dealt with as objectively by the law, as the insolvency of any other firm. In the grave trade depressions of 1837 end 1857 many North-American banks repeatedly suspended payment. However after scarcely a year, the traces of these events had been obliterated. New banks were established or the old ones rehabilitated themselves, and business became brisk again. In Austria, on the other hand, the suspension of payments by the Nationd Bank led to the most deplorable interference of the State with private enterprise and caused a long-continued, paralysing "fluctuation in the currency". (Shortage of foreign exchange I the author.) (Quoted by Leopold Lasker, Bankfretheit (Free Banks), 1871, p. 66.)
       Who can deny that this represents a pregnant description of conditions to-day? That during recent years most countries have pursued the policy of the Austria of that time and that thereby 30 they have protracted, perhaps stabilised, the trade depression end excessive unemployment ?

15. Decline of the credit system and aggravation of the unemployment problem as the outcome of an unhealthy development during several decades.—Accordingly, it is not cursory mistakes in economic policy or defects in the structure of our world economy that have caused the long-continued downward trend of trede. It is rather a question of profound misconceptions that have actively grown during decades and have almost been legalised by custom. The separation of note issues from goods turnover through the separation of the functions of note banks and deposit banks, the monopolisation of the note iasue by central banks, acting always restrictively and tending towards deflation; the passing from banknotes serving sales, which were subject to a free market rate, to inconvertible paper money subject to compulsory acceptance; the inflationary and devaluationary tendencies which are inherent in the system of a semi official Central Bank and in the regime of a forced currency; and the neglect of the tumover end exchange principle in favour of the lending and mortgage principle of security in granting credits—it is there factors that have to a large extent turned our banks from their original purpose of promoting the well-being of the collectivity and increase in employment and have temporarily left most countries with their enormous wealth without a proper organication aiming at securing mutual credit and employment. If the two most important methode of combating unemployment are investment out of latent accumulations of capital end the reintegration of the workless in the so called regular economie process, the grave obstacles to turnover credit above insisted on had as a necessary corollary the impossibility of accomplishing that re-integration.

C) The Compensation Principle and the "Vier Gesetzentwuerfe" (Four Draft Laws) for Re-integrating the Workless in the Economic Process.

1. From Payment to Compensation. (See also the three papers by v. Beckerath and Zander in this issue of the Annals, as well as Prof Edgard Milhaud's two volumes relating to purchasing certificates)
            1. Our analysis has made it clear what are the mistakes to be avoided in the construction of a smoothly working tumover credit system. We are still, however, without the basic print ciple permitting us to raise the new edifice. To discover the principle, it is necessary to continue our analysis a step beyond the last. The question, that is, arises whether the exclusion of all contracts made out in money end involving payment can be at all retained. If not, then the conception of a bank of issue and of banknotes, which thus far has stood in the foreground, will have to be discarded or further developed to a marked extent, if an ideal exchange organisation is to be created. This critique of the principle of payment whereon hitherto all credits and banknotes were based, and this perfecting of the system of banks of issue beyond the classicals scheme, has been attempted scientifically in Germany through the Vier Gesetzentwurfe zur Bekampfung de r Deflation , zur Verhinderung der Inflation, und zur Senkung des Zinses (Four Draft Laws for Combating Deflation, Preventing Inflation, and Lowering the Interest Rate), Berlin, 1932. (Das andere System (The Other System), an economie and financial proposal in four draft laws; Berlin, May 1932.)
            2. The purchases end sales, loens, deliveries, end servicea on credit terms in a country create a system of short term obligations which must be continuously met in order to make room for ever new exchanges of goods and services. The settlement in such a system of short-term obligations can be conceived in a variety of ways. Through payment pursuant to Roman Law, i.e., through bodily delivery of coins or banknotes as legal tender: thee, through the confronting of two reciprocal claims end their compensation, i.e., juridically speaking, through a kind of mutual renunciation; further, through private banknotes, cheques, and clearing, which in most cases, however, leea, bankruptcy, lapse, or ang other cancellaffon of claims.
          Let us disregard the last altemative, which argues complete helplessness end lack of ideas, and turn to the queation of payment. According to the old-style principles of Roman Law, this represents the normal proceas of aettlement. It signifies the delivery of material means of payment, of material articles, end hence the delivery of goods. A loan contract, pursuant to ft, is a contract whereby the debtor is placed in the same position as he who has veld goods on forward terms on the exchange. Through the principle of payment, all monetary obligations in a country are converted into obligations for the forward delivery of goods—that is, on the gold standard, into obligationg for the forward delivery of gold,—end in the case of the so called gold exchange standerd (which ia moatly current to-day), to forward obligations in monopolised paper tokens, i.e.. in the notes of a Central Bank.
In forward dealings on the Exchange, it is customary to protect 32 oneself against the very heavy risks in auch transactions by means of premiums and similar safeguards. In money and payment transactions such sefeguards are unfortunately still lacking. This has been attended by serious results. Moreover, the concentration of the major part of all such forward obligations of a country in a few banks has further complicated the problem. The 1931-1933 crisis, like previous criaea, has ahown that auch forward delivery contracts concluded in great numbers cannot be made good if put to the test; indeed, that they result in a paralysie of the entire economic life for months, in the discharge of millions of workers, and, particularly, in the apparent insolubility of the unemployment problem.
             3. The vele method of avoiding a faulty procedure uch as is involved in our whole banking system is probably to replace to the widest extent payment by compensation. The application of this method is already facilitated by the naturel developments in most countries, for the use of cheques end clearing has grown to such a degree that in most countries to-day 80 to 90 %, and more, of all settlements proceed without the remittance of cash. Formally, it is truc, most payments, even of a non-cash order, imply the delivery of materid means of payment derived from the Central Bank, but this ia only taken advantage of in times of crises.
                4. The statutory conversion of banknotes end of all other paper means of payment into legal tender, as already envisaged by Ricardo, would not signify any progress, for these means of payment, being legal tender, would enjoy a kind of State guarantee. They would have therefore to be issued by authorities or other bodies holding a monopoly, and, in particular, to be economically managed end kept down in numbers. The re-integration of the workless would thus become impossible end there would be an intolerable intensification of fiscal activities. Such a monopolistic system would, in fact, make every business transaction subject to the previous approval of the Central Bank. Furthermore, as shown, no monopolistic syatem of monetary control is conceivable which does not exercise a deflationary effect. In this connection it is noteworthy that already in 1848 Karl Marx's Communist Manifesto (point 5 of his programma) called for the centralisation and monopolisation of credit.
                5. Such is not at all the case in settlements by compensation. (German Civil Code §§ 387-396. In the Civil Codes of other countries: Argentina, 818~31. Austria, 1438-1442 Belgium 1289-1299. Bolivia 12971309; Brazil, 1009-1024 Chile, 1655-1664: China 334-342: Columbia, 1714 !723: Costn Rica, P06-813: France, 1289-1299; Guatemala, 2326-2336 Honduras, 1473-1480; Italy, 1285.1295 Japan, 505-512 Livonian, Esthonian, and Courland private law, 3545-3564 Mexico, 2185-2205 Netherlands, 1461 1471: Panama, 1082-1088 Peru, 2252-2263 Portugal, 765,m; Rumania, 1143-1153: Russia, 1290; San Salvador, 1525~1534, Spain, 1595-1602 Switzerland, 120126; Uruguay, 1497-1514 Venezuela, 1353-1363. In Great Britain end in Anglo Saxon countries generally only the "set off" and clearing exist. whibt compensation proper ia not provided for legislatively.) Nobody who is in debt cen refuse this, which holde generally of our present-day economy. Hence, beside gold and beside banknotes serving as legal tender, compensation represents a third non-refusable means of payment which as such has hitherto been overlooked in monetary theory. As against every vendor of goods or any other creditor, compensation as a mode of settlement is as applicable as if it constituted legal tender; but, of course, only to the amount of the debt involved. It has this advantage, too, of not constituting a monopoly, of not being "managed" by the State, and not being kept scarce, that is of being accessible freely to all. During a trade depression just when credit restrictions (or top down bureaucratic inflation-prone injections like the massive Jap one recently) are the rule, it is at everybody's service.
            6. A credit system, which undertakes to re-absorb the unemployed in the regular economic process even during a trede depression, would therefore not only remove the abovo described historical aloofness from goods transactions, but, beyond this, utilise a settlement procedure which avoids the forward delivery of monopolised end restricted means of payment in the received sense. Apart from bringing back turnover credit to its original end proper functions, the aim ahould be to apply the principle of compeneation to all settlemenb within the country, end this because of ita auperiority to that expressed in Roman Law as regards securing employment. In working towards this goal, it should be noted that the esiating legislation concerning compensation ia far too circumscribed in the civil codes end will have to be broadened. What is of consequence ia not the chance form it assumes to-day, but the principle underlying it and its development. It is also important to note that especially in Germany new forms have developed pasaing beyond cheque and giro operations:
(a) the clearing not only of cheques but of transfer orders in special clearing departments at the Reichsbank,
(b) the recurrent transfer (rucklaufige Ueberweisung) developed by Schoele of Berlin (the so-called "Einzichungsverkehr"), and
(c) scontration. ( See my article, « The Banking Enquiry of 1908 end the Development of Non-Cash Payment ', in Zahlungsverkehr und Bankbetrieb, part 10, 1933, p. 236 ff., as welf as my article in the Deutshce Bergerk Zeitung (German Mining News) of 6 October 1933.) The object of this remarkable development of the technique of non-cash transactions, amounts to this, figuratively speaking, no longer to transfer ("force upon") material objects (means of pay ment) from debtor to creditor, nor to shift balances in that 34 direction, teut to rid the creditor of the debts owing to him, whereby the problem of legal tender, of compulaory acceptance in general, is avoided. This new fine of development in German settlement transactions does not gein its impetus from theoretical monetary considerations, but simply from the fact that these newer methode operate far more efficiently and are decidedly more economical than cheques and clearing— considerations which are of the first importance for banks.
           The effect of the new principle on the diverse branches of non-cash payments could be only adumbrated above.
            Next to the just-mentioned giro end cheque transactions, are those involving ready money. In this last, the payment principle rules absolutely to-day and seemingly cannot be ousted. Yet, strange to say, compensation is not excluded here. Such compensation in cash dealings, assuming the note monopoly to be at the same time abolished, could serve a new type of banks of issue, which we shall now describe. (On this subject, see Prof. Milhauds statements regarding purchasing certificates in the Annals of Collective Economy for 1933, as well as the papers by Zander and v. Beckerath previously referred to) (present at this site)

1. Subjoined is the first Draft Law:—
              11. Draft Law concerning Compensation Banks.
       1  Clearing banks are enterprises whose object is to clear claims end debts.
       2. They may only acquire, or grant credit on, good commercial bills end other claims arising out of sales of goods or services. The due-date of the bills end claims may not exceed 4 months. Their obligors must be known as solvent.  They shall not undertake other classes of banking operations,
      3. (1) Clearing banks shall be entitled to accept cbaring cheques drawn on them, by placing on them a notification to that effect. n
          (2) By accepting, the clearing banks bind themselves towards the holder of the clearing cheque to credit his clearing account. There shall be no obligation to pay cash.
           (3) The clearing bank may free itself from the obligation to clear, if it meets the creditor's claim by the surrender of Reich Bank notes, Reich Treasury notes, or change.
       4. (1) Clearing cheques, within the meaning of this Act, shall be payabie to bearer and shall carry on the front the notification:  "For clearing only". They may be only made out in denominations of 1, 2, 5, 10, 20, or 50 Marks. Moreover they shall be in accord with the provisions of paragraph I of the Cheque Act of 11 March 1908.
           (2) Apart from the signatures of the bank drawn on and also of the danger end apart from the day of issue, clearing cheques shail consist of printed matter. The date of issue may aho he printed. The signatures may he affixed by A mechanical multiplication process,
         5. Clearing banks may only issue such printed forms for clearing cheques carry already the bank's notification of acceptance.
         6. The clearing banks shall be hound to accept at any time at face value clearing cheques accepted by them.
         7.(1) Clearing banks may only issue printed forms for clearing cheques end acquire, or lend on, billa or other claime (§ 1, par. 2), if in the course of the preceding calendar month a fifth of the outstanding bill and other claims at the beginning of that month, have been repaid (reflux).
            (2) Prolongations of an existing indebtednesa, in whatever form, shall not count as repaymenb.
         8 (1) To the extent that the credits granted hy a clearing hank are not repaid by the surrender of clearing cheques of thia bank, teut by other means more particularly by transfers, delivery of Reich banknote. Reich Treasury notes, or change, these means of payment are to be used, or to be kept ready, for the purchase of the clearing chequea of that hank
            (2) A clearing bank shall be entitied to claim from ita debtors a premium so far aa these do not redeem their debt by the surrender of clearing cheques of the said bank. The premium may not exceed 1 % of the amount. redeemed in this way.
       9. The total amount involved in the clearing cheques in circulation and accepted by a clearing bank ahall be at any time covered to the full by bills and other claims (§ 1, par. 2) of an at least equal amount, or by ready money.
      10. There shall be no time limit for the presentation of a clearing cheque at the drawee bank.
      11. (I) Clearing banks shall be attached to an audit centre named hy the Reich Minister for Economic Affairs
           (2) The audit centre shall be entitied to examine the books, vouchers, and other relevant data of the clearing bank concerned.
       12. By the 10th of each month, the clearing banks shall anhmit to the audit centre a statement concerning the business transacted in the preceding month. The statement shall set out:—
         1. the aggregate amount of the hills end claims acquired and debt on, more particularly,
         2. the total amount of issued and not yet returned printed forms of clearing cheques,
          3. the amount involved in the hilb end other claims redeemed during tbe month reported on,
          4. the aggregate amount concerned In the printed forms iasued for clearing cheques during the month under review,
         5. the amount of the means of payment held ready pursuant to § 8, par. 1,
         6. the prolongation of existing debt ohligations.

2. The clearing banks are more especially intended to close the uncompleted circuit of commercial bills end non-cash money where wagea are paid—that is, where hitherto scarce monopolistic meana of payment were indiapensable. The notes of these banks are crossed (clearing) cheques drawn by the account holder on the compensation bank. These cheques are for round, standardised amounts. They are payable to bearer and are accepted by the bank. In some countries this has not been lawful hitherto in the case of ordinary cheques. It would be simpler to choose a banknote with a new legal text, teut the method of standardised end accepted cheques avoids a collision with the monopoly of the Central Bank.
             To free the cramped goods circulation, the compensation banks should offer in abundance end cheaply the required pure turnover credit. Contrary to the proposals of the inflationista, the primary consideration should be not an incréased note circulation, teut the offering of turnover credit to the esteet required for the safe of new goods. Thus the bank customer would only obtain credits or banknotes (forms for standardised and accepted cheques) from these banks if he desired to discount short-term commercial bills end aimilar claims. The limitation to genuine proceeds of sold goods is here fundamental. Advances may never be made on unsold goods or accepted bills not based on goods disposed of. This "cutting up" of genuine goods claims into means of payment can admittedly have no inflationary effect since an increase in the issues of means of payment is conditioned by an equivalent increase in goods offered. Furthermore, the competition of a number of such private banks of issue will provide ample offers of credit at very low rates, thereby, in turn, excluding deflation. The example of the Bank of France, which is to-day the only aound Central Bank in the world, as well as that of the four small private banks of issue in Germany and the Bank of Danzig, all of which remained sound despite the depresaion, kept their gold reserves, and saved business from all restrictions, prove the efficacy of this principle.

3. In Austria (at Woergl), in Germany, and in the United States, compeneation offices of a kind have been established since 1932, which profess to operate according to the above principle. However, they have since been moatly prohibited. neir object, despite the promises they held out, was not the compensation of short-term claims end the bridging of slightly different due-dates. On the contrary, they attempted to foist on their customers long-term, non-interest yielding claims for short term ones, by financing not the proceeds of goods veld, but durable goods, such as road building, houses, and the like. For the documents issued in this way, the shopkeepers were to furnish their consumable goods. These operations have rothing in common with those of compensation banks proper. They make the impossible attempt to sell at 100 % cut-up end noninterest yielding loan bonds, which stand perhaps 50 % below per, since even the high-priced, interest-yielding issues of the same debtors have been often quoted below 80 % on 'Change. Shopkeepers who held their wares for such substitutes, suffered heavily, as there was no demand for them.

4. On the other hand, the secret of the compensation banks proper, as of the sound banks of issue, lies essentially in that they create a strong demand for their own issues, which keeps the rate at par. The holders of compensation cheques cen only compensate by handing over cheques if they have not only claims, teut if at least some of the holders have due debts, on the compensation banks. If the bank advances its money on long.term conditions, like the Austro-American compensation offices did it holds no due claims against anybody. Hence the claims cannot be compensated, for only due claims cen be cleared. In such circumstances, cheques are almost worthless. If, however, the bank lends its money on decidedly shott-term conditions, many claims will mature daily and the clearing, and therefore the disposal of cheques at 100 %, becomes possible. It is true that not all holders of cheques are indebted to the compensation bank, but only the few manufacturers end shopkeepers to whom the bank has granted credits. But that does not mean that the cheques, for example, are worthless for staffs receiving them. Cheques held by such private përsons resemble rather the monopolistic banknotes current to-day in most countriea: they may be used for purchases in shops end factories, because the latter badly need them for repaying their debts when they fall due. Thus three-fourths of the national income finds its way to the shops end thence gravitates to the banks. The value of cheques stands then at par.- To achieve this permanently, must be the aim of bank managements, end they will attain this end best, if they regard their group of customers as a private payment corporation ("Zahlungsgemeinschaft", Knapp). Within this corporation every creditor must undertake to permit to count against himself as means of payment his own matuted debt obligations —that is, to agree to compensation. The result is as follows:—

The shopkeepers will mostly have received credit from their suppliers, the manufacturers, and the latter, in turn, from the compensation bank. They have received these credits' in special cheques instead of in banknotes. The grantees of a credit undertook to repay the credits to the compensation bank, not in legal tender, but in the same special cheques. The bank can 38 enforce this by imposing fines when payments are made to it in legal tender. Accordingly, the manufacturers will eagerly accept payment in atandardiaed cheques from their customers, the shopkeepers, and actually espresa a demand for them. Similarly with the retailera: these will post up notices to that effect at their counters. For the retailers, the cheques represent practically their own liabilities, as the notes taken by them closely resemble those that the manufacturers received when they were granted credit by the bank. The like holds of the shopkeepers. Both are bound to accept the cheques in payment when selling their goods, aince they are both in debt. They have undertaken to let their own debt obligations count against them at the bank—that is, to agree to compensation to the amount of their debts. Since the credits fall due after a very brief period, there is an uninterrupted demand for these cheques end hence they stand permanently at 100 %.
            Compensation is multifarious. The customer in the shop, who has received his wages in such cheques, buys goods. He is therefore due to pay a certain amount at the paying counter. He hands in chequea embodying in mobilized form the bank debt of the shopkeeper. He has settled his account. On his part, the shopkeeper owes the bank identical cheques. To settle his own account, he surrenders the cheques to the bank, these chequea representing hia own indebtedness. He compensates debt against credit and becomes thus debt free. In his turn, the manufacturer is also indebted to the bank in such cheques. To cancel his debt, he remits cheques. Cheque credit end bank debt have thus simultaneously disappeared.
            The short-term nature of the credits as well as the restriction to finance only salea of goods in request, create in this way a continuous demand, an unintermittent reflux of cheques. A1though the cheques vield no interest, the keen demand for them keeps them at per, because such cheques, owing to their ready utilisability for making purchases at shops, are equal to the soundest banknotes. They represent, in a way, the prototype out of which banknotes developed. After this, the monopolistic banknotes with a forced market rate started on their downward career.
           The difficulties involved in the differences of the means of payment cen be overcome by instituting clearing centres, as may be observed in Scotland and Canada, where the notes of 9 private banks of issue very successfully circulate side by side— unfortunately, how. ever, since the War, as legal tender. In Germany, apart from the Reich banknotes which are legal tender, change ia in circulation which ia onb legd tender up to 20 marks. There are also five kinda of paper money not` counted aa legd tender, without any difficulties arising there 39 from, namely Rentenbank bonds end the banknotes of respec" tively the private bank of issue of Bavaria, Baden Saxony, end Wurttemberg ( 1933), '
8. (the points between 4 and 8 not specified in my copy) Our historical examination has forced on us the concluaion that deflation is only possible where there is a note monopoly, because a monopoly excludes competition and no alternative arrangements exist. We had to conclude further that inflation only occurs where there is legal tender. The notes of the compensation banks have, however, no fixed market rate, nor are they redeemable in gold. They cen only be used for making purchases in shops (shop foundation), just as in the case of those Central Banks that have suspended the convertibility of their notes. Only that the compensation banks take care th at the shops should really possess the counterpart of the compensation notes in goods. (See §§ 7 end 9.) If financial bills had been discounted, the notes received by wage-earners who desired to make with them purchases in the shops, would have as their counterpart not consumable goods, teut houses, and the like. They could buy nothing end would be saddled with worthless slips of paper. In the case of legal tender, depreciation would, of course, be avoided, teut prices would soar (inflation). Compensation banks thus represent institutions that avoid the four scourges of modem economie life: deflation, since there is no monopoly; inflation, since there is no legal tender; forward risks in bank balances and bank debts, since convertibility is optional; and unemployment as a result of a scarcity of means of payment, since the creation and annulment of credit are closely adjusted to the production end consumption of goods end since from that side therefore no limit is set to the number of workers employed. In a credit system built up on the principle underlying compensation banks, goods as such create their own purchasing means (the instrument wherewith the purchase is made). The goods tumover becomes thus independent of the available amount of gold or monopolised paper means of payment end of the momentary financial situation of the gold mines and the central bank of issue. By rigorously adhering to the quantity theory, a safe solution of the problem of unemployment end the re-integration of the workless in the normal economie process become feasible. Every augmentation in the safe of goods resulting from the re-employment of the workless does not lead to fresh deflation because of the supposed shortage of means of payment, teut rather to an increase ir those means. The means of payment freshly put in circulation atart on their return joumey to the bank the very instant that the purchased goods have been passed over the counter. Therewith the financing process is over. The new notes circuIating as the result of the re-integration of the workless, represent 40 during their stay in the workers' homes a loan which the bank has raised in those homes. These supplementary means are the source whence the increased gooda tumover is financed until the goods are veld end the notes or standardised cheques have found their way back to the bank.

  III. Draft Law concerning the lssue of Reich Treasury Notes.

1. Such is the principle intended to govern the private economic relations between producers, traders, and workers — that is , between the members of a private payment corporation —and embodied in the preceding Draft. However, only a part of the economy would thus cease to suffer from a shortage in the means of payment, for in addition to the private economie circuit there is a kind of second public economic circuit that suffers equally from deflationary effects, namely the money circuit between tax payers, the pay offices of the State and of the municipalities, officials, public undertakings, and suppliers to the State. During the crisis it was just the exasperating money scarcity of the State, the disorganisation of the State's debt service, and the floating State debt, which increasingly aggravated the crisis on the Stock Exchange, in credit matters, on the interest market, end augmented unemployment among the State's salaried end wage-earning employed, as welf as in the supply industries of the State and in the whole economy. According to the laws provided for in the Dawes plan, the German Reichabank was almost entirely a bank serving private enterprise. So long as the Reichsbank remained sound, it was able to a certain extent to supply this part of the economy with means of payment. But the other, the State, part was without means of payment. For the latter, the means of payment had to be collected from the first part. The taxation laws reflected, of course, the taxation demands of the State, teut they did not assure the means of payment required for paying the taxes
             Here a special means of payment was needed—State paper money. This, in contrast to the inflationarily unsafe paper money "proper", must not be in the form of legal tender. Such Treasury notes with a free market rate are indispensable for a sound financial system which is anxious not to disturb the every-day activities of the economie life. Whilst State paper money as legal tender is an uncovered floating State debt, State paper money having a free market rate implies the mobilising of matured taxation claims—that is, a debt fully covered by such claims. Such notes also exemplify the principle of compensation. They are as it were, mobilised taxation claims or standardised taxation cheques, resembling the standardised compensation cheques covered by traders' demands for goods.
The population has to pay large amounts in taxes; The treasure and its officials have to pay large amounts to the population. Between these claims and debts, a clearing process is as practicable as between private claims and debts, by means of the cheque end clearing system. this is effected through Treasury notes, which are really compensation notea. These do not stipulate a promise to pay, but give the assurance that the Stato will at all times accept them at all its pay offices for tasation and customs payments, and this at their full face value ( taxation foundation). On the basis of these scientific labours "taxation warrants" were introduced in Germany in 1932-1933. These, naturally, are not means of payment. Of  these, 1.800 million marks worth were issued.

2. Here are the most important provisions of the second Draft law:—
~ 1  The Government of the Reich is hereby empowered to issue Reich Treasury notes in denominationa of 5, 10, 20, 50, end 100 marks.

~ 2.  ( I ) The Reich Tresaury notes will be produced by the Reich Debt Administration
         (2) The Reich Debts Administration shall state on the Reich Treasury notes the day when theae have been handed over to the Rekh Chief Py Off ce.
        (3) It shall replace notes that have been damaged or become useless and charge these to the Reich when the submitted piece is part of a genuine Reich Treasury note and consists of more than half of such a note. In other cases, the Reich Debts Administration shall replace notes at its discretion.
        (4) The Reich Chief Pay Office shall cancel the Reich Tresaury notes flowing back to it and transmit them to the Reich Debts Administration for destruction.

~ 3.  ( I ) The officially approved Cerman Stock Exchanges shall daily fix and publish (listen up mr duitendwerg) a rate in Reich marks for the Reich Treasury notes.
        (2) Until a free gold market shall have been established in Germany the rate shall be fixed by conversion of the London gold rate on the basis of the average rate of the Reich Treasury notes for settlement London.

~ 4.   If for more than two days the average price quoted atands below 95% of the nominal value, fresh Reich Treasury notes will not be produced by the Reich Debts Administration, nor shall they be circulated by the Reich Chief Pay Office, until the price quoted reaches at least 95%.

~ 5.   (1) The German Reichsanzeiger (Reich Gazette) end the Prussian "Staatsanzeiger" (State Gazette) shall daily publish statements regarding the Reich Treasury notes. These statements shall report, by denominations:
     1. the total number of Reich Treasury notes issued,
     2. the stock of Reich Tresaury notes held by the Rekh Chief Pay Office,
     3 . the resulting number of Reich Tresaury notes circulating
     4. the incomings and outgoings of Reich Treasury notes at the Reich Debt Administradon and at the Reick Chief Pay Office,
         (2) The Audit Office of the German Reich shall control the accuracy of the statement and vouch for them in the public announcements,

~ 6.     In respect of paymenta to be made in currency, there shaU be no legal obligation to accept Reich Tresaury notes, either at their face value or at any other value.

~7.    (1) Compulaory acceptance of theae notea only extends to the pay offices of—
1. the Reich,
2 the German Statea
3 the municipalitica end municipal federadons,
4. the Social Inaurance Authority,
5. the German Rekh Post O(fice,
6 the German Reich Railway Company.

          (2) Compulsory acceptance coca not extend to payments made through poatal cheques, savings banks, end banks generally, more pardenlarly not to paymenta made to the pay officea mentioned in par. (1), which only serve the passing on or the administering of the amount paid in.

~ 8.     The pay offices enumerated in ~ 7, shall at all times accept the Reich Treaury notes at their face value.

~ 9.     (1) If the average price quoted at a Stock Exchange stands below 95 ', of the nominal value for more than 6 days, the Reich Minister of Finance shall decree the paying of certain or of ll taxes partiaily or wholly in Reich Treasury notes.
           (2) So far as any payee fails to comply with this obligation, he shall pay I % extra.

~ 10. If the debt is pald by the surrender of Reich Treasury notes, their acceptance ends the debt obligadon.
~ 11.    ?
~ 12.   The Reich Minister of Flnance shall adopt measures to facilltate; particularly through establishing exchange centres—the exchange of Relch Treasury notes paid in at banks, between the Reich Chief Pay Office, the Reichsbank, and the banks, savings banks, and other credit establiahments.

3. During a period when the State claims a quarter to a third of the national income, special means of payment must be created for moving these enormous quantities of values, if the entire economy is not to suffer. During a depression the tax sources tend usually to dry up. Here, therefore, is a method to avoid the deflationary deceleration in the State's circulation of values and to make the tax sources flow once more. This should also relieve the Central Bank of Issue of the leaden weight of the floating State credit, for with the means acquired the State could repay its credit to the Central Bank. The Central Bank of lssue, now overburdened end crushed by State credit, would once more be able to use its issues for afding private enterprise. Even without a monopoly, the financing of large scale industry and of external trade would represent for it a task which the predominantly local compensation benles could not at first very well take over.

4 . The safe guarding of the Reich Treasury notes against abuse would be achieved in analogy to the old Prussian tradition of "Tresorscheine" (Treasury notes) (1810) down to the Rentenbank notes of 1923, as follows:—
(a) By their free market rate end the daily Eschange quotat~ons. Where too many are iasued, they would depreciate, ~vithout the home prices, calculated in gold, being affected. But such depreciat;on, owing to the vigorously enforced reflux would be reatricted to the instance of extreme fiscal mismanagement. For cases of this order, no system haa yet been able to afford protection.
(b) By their taxation basis. Everybody can pay with them his taxes at par. Accordingly, a discount on these notes would lead to taxpayers flooding the tax pay offices.
(c) By the provision that the issue of Treasury notes shall be suspended if a marked discount occurs. Owing to the taxation basis, the reflux diminishes at once the total amount. The remaining demand re-establishes parity.
(d) By the provision that the Minister of Finance is obliged to decree the payment of some or of all taxes solely in Treasury notes, in order to accelerate the reflux of the latter. This leads of necessity to a keen demand.
(e) By the possibility of at any time tendering advance taxation payments to be placed in a blocked gold account. Such a tax balances » would not be reclaimable end could only be used for paying taxes. They bear interest, are transferable, end exempt from taxation. They thua repreaent a kind of longterm gold loan taken up by the Reich. (The Rentenbank Act of 1923 alao recognised the possibility of a loan at stable value by means of such payments). They are made out in gold marks (gold pesetas, etc.), 80 that the holder of State Treasury notes, in the wholly improbable instance of a devaluation, may at any time acquire a claim of the nature of a Reich gold loan, secured by the pledging of the tax revenues. Thus the State becomes the insurer of the people against inflation. (is this what Japan is doing?) It becomes a tax bank. Even in the midst of a confidence crisis, it cen take up a aemi-long-term loan. (The Draft Law on this subject is not reprinted here.) It. lastly, ensures the triumph of honesty.
5. The certainty that the market rate of such State paper money would always remain at par, may be inferred from the fact that with an issue of 1.000 million marks, the total amount circulating would have been twelve times re-bought annually, inasmuch as the tax revenues of the Reich, its component States, and the municipalities amounted annually to 12.000 million. The whole issue would thus pass annually a dozen times through the tax and financial pay offices. A dozen times annually there would have been therefore compensation. Such a huge demand would without doubt keep the market rate at par. Prussia's gratifying experiences during the Napoleonic wars which such Treasury notes, beer this out. It was Freiherr von Stein who, from 1812 to 1815, financed successfully end without inflation the Russian war —after Spain's famous advance— and, later, that of all the allies against Napoleon 1. Most other countries possess analogous traditions. (See Lorenz von Stein, Finanstozesenachaft (Science of Finance), vol. 2, 1886 end De Viti de Marco, Science of Finance, in various languages about 1928 The latter deala predominantly with State paper money. In both volumes the same teaching is expounded in detail.) These historical experiences should serve us as guides in our present-day struggle against the prevailing trade depression.

IV. Draft Law, concerning the Raising of Annuity Rates and the Lowering of Real Interest Rates through the Introduction of Compensation in Loans.

1. The compensation principles could also be usefully applied in a third domein where a shortage of means of payment is felt, i. e., in long-term State credit. From 1931 onwards, the Reich, its component States, end the municipalities could no longer pay their debts integrally, or only with difficulty. Similarly, with many who issued private loens, since the largest undertakings, which preferably made use of the money market, were the first victims of the depression. The loan end annuity markets practically collapsed. Some rates dropped below 50 end 30 %, which meent that the real interest rate sometimes rose to over 25%. The enormous interest rates end the obliteration of the rhoney market rendered wholly imposs ble any increase in work. They also interfered with the short-term turnover credit end the shortterm State credit, of which we have just spoken. The latter could not be reorganised, without effectively relieving the longterm State credit end the loan market. It was a matter of restoring the solvency of loan debtors end also of creating on the Stock Exchange such an intensive demand for debenture stocks that the prices quoted ahould rise to 100% and facilitate a conversion of the 6 to 8% nominal loan rates into lower rate series. Otherwise the issue of cheaper loens for converting the large floating indebtedness end for increasing employment would not be feasible. These questions of lowering" the interest rate cannot be examined here in detail. On this subiect the author has, at the instance of an official request, submitted detailed reports, which were published in part in the Bankarchiv of 15 June 1933.
2. The solution of the above problem of a shortage of means of payment as suggested by the compensation principle, lay in removing the difficulties, so far as they were occasioned by the unavailability of monopolised means of payment, by the use of the bonds themselves as a method of settlement. In Germany, as a result of the reports above referred to, this procedure spread widely, encouraged by practical experience. Many large towns had advanced hundreds of millions in connection with mortgages, unpaid purchase money, loans, etc. Although the debtors were for the most part precariously situated a considerable number of, e.g., small house owners, middle class persons, and sound medium-sized businesses were quite able to make repayments, even in advance, when there was sufficient inducement. Thereupon a few, end later growing numbere of, cities agreed to accept at their face value their own debt obligations as a means of payment—that is, to agree to the amortisation of their long-term claims by means of their loan bonds instead of in monopolised forced currency, i. e., to permit the compensation of such long-term city loans with their long-term debts. In reality, this is nothing but a self-evident inference from the principle of honesty.
Accordingly, there was such a keen demand after these municipal loans that the market rates, just when in September 1932 two of the largest cities suspended payment, rose by no less than 10% of the nominal amount. A new possibility of utilising loens had been created. There was no longer any need for the bondholders to view with despair the steadily deteriorating financial situation of their debtors, for they could open up compensation possibilities and thereby progressively ext nguish large portions of their mutual long-term debts. A full 100% return was thus assured to them. Since the German municipalities possess electricity, gas, water, end other works, wh:ch they frequently could place at the d;sposal of the cities' creditors in the shape of joint stock companies, giving thereby rise to immense clearing possibilities, the liquidation of the major portion of the cities debts by this method became possible. (The quest:on of the different due-dates is discussed in my article in the Bankarchiv of 15 |une 1933. )
3. This principle was extended in a draft law to the loan cred:t of the Reich end of ib component States. In this connection a large number of constructive measures were proposed.
The principle was also applied to the issues of mortgage banks, which, as a result, improved their financial position conaiderably. Not less than 400 million marks out of a total of 6.300 million, were thus compensated during 17 months. They relieved the market at a time when all support was absent becanae nobody bought. 46 The principle also found its way into legidative enactments. Bruning's fourth Emergency Decree authorised mortgage debtors to repay their mortgages in mortgage bonds at their nominal value instead of in legal tender. Debtors thus bought mortgage bonds, which stood sometimes at 65 % (the loens of the Reich, its component States, end of the municipalities stood sometimes at 30 or 40% of their nominal value), creating thereby a demand for mortgage bonds, end remitted these bonds to the banks for the purpose of paying off their debts at face value. (see my Enquete-Gutachten: Lage und Gesundungsmöglichkeiten der Hypothekenbanken (Enquiry Report Position of 'Mortgage Banks end Possibilities of their Recovery), Berlin, 1934, Reichsbank.) Finally, the principle was even pro. posed for industrial bonds, where frequently, through the exchange of old stocks of goods for loan bonds that had become almost valueless. a mutual cancellation of debts was accomp]ished.

4. The considerable rise in the loan rates and the revival of the confidence of the loan owners became subsequently the starting-point of the so-called "organic interest rate lowering", systematically furthered by the Reich Government and the Reichsbank — that is, a rate lowering that was not to be realised by a fresh legal spoliation of creditors as by Bruning, but by a rise in the market rates. As Dr. Otto Christian Fischer, the leader of the German bank industry end president of the Central Federation of the German Bank and Bankers' Industry once explained, the demand for lowered interest rates means nothing tbut the demand for higher market prices, since the actual and not the nominal interest rate is decisive. Only a low actual interest rate permitting the obtaining of credits. can lead to the re-employment of the workless, not an artificial lowering of the nominal interest rate at which no credits are available. ( In April 1933. the author was commi ioned to prepare a detailed report on the problem of an "organic interest rate lowering". See Bank archiv of I May end 15 june 1933.)

     V. Draft Law concerning Calculating in Stabilised Values.

The general introduction of the principle of compensation— the dispensing with a monetary monopoly, with inflation, with deflation, end with legal tender, —calls for a return to principles in currency legislation such as were accepted in most countries until the close of the last century. The concepts of currency unit end means of settlement must be separated once more. When there was a pure gold weight currency and a free gold market, this separation was necessary end realiacd, for a free price of gold cen only meen the possibility of fluctuations in the value of paper means of payment. We have seen that this separation had also been abolished in Germany in the course of the last few decades. Thus arose various kinds of paper currency, among them the so-called gold exchange standard, and the banknotes of the Central Bank became legal tender. This led to popular misconceptions of inflation, which were disastrous from the standpoint of re-integrating the workers in the economic process: every kind of increase in the circulating medium was alleged to endanger the stability of the currency. According to the forced currency theoreticians, there existed only the alternative between mess unemployment end inflation. Politicians had to choose between Scylla and Charybdis.
       In our view this fatal alternative only holds where there ia a forced currency. To rid ourselves of this end to ensure an abundant supply of means of payment until the mess of the workless have been re-employed (The author is aware that unempbvment haa many roob besides that of credit shortage. This paper only attempts to remove the obstacles eecuring employment due to auch shortage.) — without running the risk of inflating prices —, the legislation concerning currency, coins, means of payment, and legal tender. which extsted in Germany, would have to be amended end based again on the order end sounder princ:ples on the subject. This was the object of the Fourth Draft, which consists of two parts. The first relates to a new Currenev Act end the second to the re" organisation of the German Central Bank which was then in a parlous condition. Here is the text of this Draft Law:—
~ 1.   In all payment end credit transactions, whatever the market rate of the means of payment, calculations shall be based on stable units of value.
~ 2.   (1) Gold shall be the standard of value. Why not the local and/or regional rate of photosynthesis?.
       (2) The unit of calculation shall be the mark which is divided in. 100 pfennigs.
        (3) The value of the mark shall be that of 1/2790 kibQramme of fine gold.
        (4) By agreement, standerds of value other than gold may be chosen.
~ 3.   Reich gold coins shall be the vele means of settlement that must be accepted in economic dealings to an unlimited extent end at their face value. As obligation to remit gold or coins in settlement of liabilities valued in Marks, does not exist.
~ 3a.    If the debtor offers such, the creditor shall clear at their face value the matured bonds and goods warrants made out in marks, which he has accepted. The creditor shall facilitate the clearing possibilities by producing at the debtor's disposal his goods and services ("shop foundation") and by furnishing the address of his bank. Clearing is the only means of settlement which the creditor must accept to the extent of the debt involved end at ita face value. The provisions of the Civil Code concerning clearing remain unaffected. The clearing restrictions in the case of public debtors are hereby repealed .
~ 4.      (1) In payment which statutorily have to be made in money, there shall be no obligation to accept banknotes.
          (2) ~ 3, par. 2, of the Bank Act of 30 Auguat 1924 is hereby repealed. (This relates to the Reich banknotes passing as legal tender (Dawes Act})
          (3) In § 5 par. 1, sentence (a) of the Coinage Act of 30 August 1924, the words: "and the notes issued by the Reichbank and payable in Reichsmarks" shall be deleted.
~ 5.      (1) The officially approved German Stock Exchange shall daily fix and publish a rate in Reichsmarks for the Reich banknotes. How (ac)cutely conducive for a transition to photosynthesis rate registering (not to mention stimulating and diversifying)
          (2) Until a free gold market shall have been eatabliahed in Cermany, the rate shall be fixed by conversion of the official London gold rate on the basis of the average rate of the Reich banknotes for settlement in London.
~ 6.  In doubtful cases, rate Jeviations of the current means of payment of the nominal value of 1% upwarJs or downwarda ahall be iilaored.
~ 7. Should the fixing or the publication of the market rate of a meana of payment not take place, or should a restricted allotment of gold or foreign exchange occur for a period exceeding 6 exchange days, the creJitor shall be entitled to refuse to accept what is tendered so long as the fixity and publication remains suspended or the restricted allotment continues.
~ 8. Should a settlement be effected by a remittance of Reich banknotes, lts acceptance terminates the debt obligation.
~ 9 The debt obligations existing when this Act comes into force shall be deemed unaffected as to value.

This Draft Law has been reprinted here because it constitutes the most decisive refutation of the objections raised by inflationists end because it seeks to outline in a succinct and pointed form the pure gold standerd without its present defect, i. e., the obligation to tender material means of payment. At the same time it also endeavours to explain the compeneation principle.
                Although these Draft Laws possess only scientific value and cen only offer a bass for decisions to be taken by the competent authorities, the careful elaboration of the scientifically correct principles not abstractly, but in a concrete form, has had a marked influence on business practice(these (highlighted) terms reflect on those aspects of society whence salvage was expected; nowadays one would have to term these measures emotionally intelligent and moderating or something). Whilst all other reform proposals have aimed at copying certain American and English theories, which present practically makeshifts and therefore propose the increase of paper money on the basis of frozen claims and securities, as welf as the extension of the principle of a forced currency to non-cash means of payment, we have here demanded the very opposite in order to create work for the unemployed.

D) Results
1. Principal conclusion: need of not fixing a limit to means of payment.—Our cardinal object has been the re-integratior of the workless in the regular economie process. Our startingpoint was the consideration of the circulation of money and goods in a small payment corporation. We recognised that the costs and expenses involved in the production of goods tum into income in the hands of the wage-earning and salaried workers and the drawers of dividends and rente. We also recognised that production serves either the direct supply of the population with consumable goods  or the making of durable capital goods. In both instances, credit plays an important part. The supply of the population with consumable goods, "the regular economie process" is only possible on condition that the problem of turnover credit is solved. We further recognised that to-day turnover credit has moved far away from its original purpose: the stimulation of the turnover and sale of goods. We recognised, again, that in connection with this separation of money from goods transactions, the questions relating to the organisation of banks, to currency, and to means of payment— more particularly the problem of the note monopoly of a Central Bank and the introduction of a forced currency for paper money —play an important part. A constructive section, wherein, as an illustration, we submitted a few draft langs, showed that the removal of the lava which in the course of historica! development had covered the system of turnover credit in most countries did not as yet offer an adequate solution of the problem of the re-integration of the workless. We therefore dwelt on the principle of compensation which, as a new principle of settlement, promises to solve a large proportion of the hitherto insoluble problems of turnover credit end unemployment.
       As the principal conclusion suggested by our examination of turnover credit and unemployment, we may formulate the demand that trade ahould be as abundantly as possible provided with meana of payment. If an issuing centre issues too many notes, the system of a free market rate will cause their being depreciated by way of discount, whilst, in the same circumstances, the system of legal tender will produce an inflation.
Both a shortage end an excess issue of means of payment should be avoided. The saturation point lies so to speak in the centre. This offers the best safeguard that, so far as turnover credit is concerned, no worker should be prevented to produce and exchange what he and his fellows want to consume.

2. Practical part solutions: The system of Central Banks and the future of our banking and settlement systems.—The above principal conclusion involves certain practical part solutions, e.g. relatively favourable conditions for the re-integration of the workless may be also created by the monopolistic Centrd Bank regime through the following measures: sound management of the Central Bank; restricting the Bank to granting turnover credit, re-linking credit with the exchange of goods; sound management or re-organisation of the State's short end long-terrn credits, refusal to ass st precarious banking and industrial undertak:ngs, since the means required here have to be withdrawn from the sound portion of the economy end since such a policy is followed by credit restrictions or inflation; end cover for bank. notes, not through industrial and State securities end similar frozen stocks, but through liquid commercial bills and cognate claims. That such a time-honoured policy, abandoned by most countries to-day, is economically preferable to the untried methode of the conjunctural end open market policy of recent years,—which strongly remind us of the English bank restriction period before 1844, — is certain. Nevertheless, in our changed circumstances, great difficulties will be experienced here as the ensuing decades will show. They will necessitate further measures.

Better conditions for the re-employment of the workless could be created if statesmen resolved to abolish the monetary monopoly and legal tender end returned to thc freer end more efficient banking end monetary policy of last century, during which Ellro~e extrserd;narily flouriEhed both intellectually end economically, a policy that led to the developmnet of a strong end independent race of men. The workless could be even more effective re-employed and economic crises prevented if the convertibility and re-payment in specie of hanknotes and bank balances were abolished end if, with the aid of intemal end external purchasing certificates, the new settlement principle of compensation were adopted, a principle which also can boast of a long history. Every imaginable precaution would, of course, hete to be taken, of which only few could be mentioned here. ( Note especially the fourfold method of safeguarding the holders of private banknotes in Canada. e.g., by means of a cental Banknote. Insurance Fund which has been sucessafully operating for 70 years end has saved the note-holders from all loss)

3. Limits of thc significance of turnover credif for thc solution of the unemployment problem. However great the significanco of an efficient organisation of-turnover credit might be for the solution of the unemployment problem, however optimistic the practical conclusions we have drawn might seem, yet the partial solutions we have thus far offered must not be overrated. First. unemployment is by no means solely conditioned by monetary causes, as this paper, which confines itself to monetaryend credit aspects, might be thought to suggest. Secondly, at least until recently, turnover credit in Europe was by far the best developed of all credit branches, leaving aside mortgage credit in some countries. Despite this, there was already in 1929 widespread unemployment in moet countries, a phenomenon thatcannot be solely referred to the disorganisation of turnover credit. Only after the collapse of the system of turnover credit in Germany in 1931, and in other countries shortly before or after, did the problems of turnover credit here discussed, become urgent. Nor should it be forgotten that owing to machinery, the output of consumable goods to-day is 90 great that the mess of the workless could not be re-employed even if they all started to consume their full share. There is an excess of productive capacity, e.g., theavailable consumable goods, production, end sales apparatus wouldbe able, with one million additional employed, to cover perhaps the requirements of two million additional consumers. Thus to-day, if undertakings worked to full capacity, a certain proportion of the unemployed would not be reguired in order to ensure the:r beingadequatelv supplied with consumable goods. If this portion of theworkless is also to be employed, they must be set to produce not consumablc but capital goods and be remunerated with the surplus of goods produced by the consumers' industries.
Accordingly, to follow Karl Diehl, (See Karl Diehl. Ueber neuere credit theorien im Lichte der Lehre Mcleod (Concerning Recent Credit Theories in the Light of the Teacher of Macleod), 1928. p. 16 end p. 140) we must beware of exaggerating the importance of the  circulation sphere, inasmuch as equally important causal factors of the trade depression are to be found in the  production sphere. Here, however. weare not concerned with this latter class of problems. (See the author's volume. Arbeitslosigkeit und Kapitelbildung (Unemployment end Accumulation of Capital). Jena, 1930; to appear in a spanish edition in Barcelona in 1934.)