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Socialized Money-Chapter V

Saturday, October 15, 2005

Incidence of Interest and Taxes Falling Upon
the Poor Man's Wealth Has Placed an
Economic Hobble Upon Society

MOST SOCIALLY HARMFUL of the vices inherent in commercial constitutionalism—or, control of government by those who lend it money—is the discrimination by which wealth at interest grows in the proportion it takes from wealth paying interest.

The sources of these phenomena, lying deep below the surface, and obscured in the maze of economic contradictions, seemingly have escaped analysis. When it is recognized, however, that these divergent processes are of the same source, merely segregated for discriminatory treatment at the point of control—furthermore, that both are parts of the unity composing all exchangeable values, including the medium of exchange specifically and all other forms of legal wealth—their significance is more readily understood.

Analysis of these processes, then, has to do with the discrimination by which one condition of wealth receives interest and another condition of wealth pays interest—or, let us call them wealth at interest and wealth under interest. The study involves consideration of (1) the incidence of interest upon commercial, industrial and governmental indebtedness; (2) the socially-undermining effect of shifting the cost of government and the added burden of the three aforementioned classifications of interest to the mass of society whose wealth consists largely of that which it consumes from day to day; (3) the non-social derivation of excessive accumulations of wealth at interest; and (4) both the chronic and acute phases of the process by which the portion of wealth subject to consumption by the masses is progressively forced lower, while wealth appropriated to surplus by the few grows both in volume and earning power.


LET US FIRST CONSIDER the incidence of interest (or the paying point to which interest ultimately falls) in its relation to commercial, industrial and governmental indebtedness. As can readily be understood, no business could continue to operate if it did not shift its legitimate costs to the purchasers of its goods. These costs include both interest and taxes. In this latter item is included also interest paid by government. Consequently, it should be clear that interest upon loans to commerce, industry and the government and also taxes assessed to commerce and industry finally come out of the hides, so to speak, of consumers. This is made quite plain by Wm. B. Greene1 in his Mutual Banking, when he says: "It is the indirect relation of the bank to the farmer and mechanic, and not its direct relation to the manufacturer and merchant that enables it to make money."

Illegitimate diversions of wealth due to excessive profits also come largely from the stream of wealth which supplies consumptive needs within the margin of a bare living.

In order to avoid misunderstanding, it may be well here to state that wholesale condemnation of the accumulation of surplus wealth, or its use at interest, is not intended. Billions of savings of the people are invested in insurance of one kind or another—and this within proper limits is a notable example of the use to which surplus wealth may be socially devoted.

Again, distinction should be made between surplus wealth in moderate amount, the earnings from which periodically find their way back into channels of consumption, on the one hand, and, on the other, the monstrous accumulations of surplus wealth which become segregated and return with their increase to lay additional liens upon fixed values.

Stated variantly, it is the socially desirable amount of surplus wealth possessed by each individual, and depending also upon whether or not the interest from such surplus is turned back into consumption, that determines its social or non-social character.

In the degree that it possesses the qualities above described, money at interest in savings banks or mutual savings institutions also has more or less the character of socially desirable surplus wealth. And, of course, there will always be need for commercial banking, although controlled and restricted in the interest of society.


THE VEIN OF MONEY and bank credit at interest is year by year comparatively broadening, while the vein of wealth under interest is at the same time comparatively pinching out.

The cause of this divergent trend is that interest and taxes of the classifications heretofore mentioned come largely from wealth under interest, while interest earned from wealth under interest is itself added to wealth at interest. Consequently, the discrimination by which wealth at interest thus escapes the incidence of both interest and taxes, and at the same time receives interest upon its own existence, cannot result otherwise than to upset economic equilibrium within the sphere of its operation.

A logical deduction from the set of circumstances outlined above, considered together with the fact that the masses must depend upon wealth under interest for their consumptive needs, would be that the greater the amount of wealth at interest, the lower will be the consumptive ability per capita of those dependent upon returns from wealth under both interest and taxes.

To account for a condition identical in its exhausting effect upon society with that here analyzed, Mal-thus propounded his famous doctrine on population. This was to the effect, as is well known to students of economics, that population tends to multiply faster than the means of life; and that the lot of the poor is thus rendered hopeless unless war, famine or pestilence intervene to diminish population.

Dr. Malthus, however, presupposed a condition in which productive capacity is outrun by consumptive needs. Today, on the contrary, we have a condition in which consumptive needs are outrun by everything, especially by interest on commercial, industrial and governmental indebtedness, as well as by taxes to support government.

Around the world there is clamor for tariff walls to come down—the other fellow's, of course—possibly in the belief that each nation's particular brand of shrewdness will enable it to unload its surplus goods abroad. At the same time restrictive laws govern production in agriculture. Trade agreements also are being entered into in the attempt to counteract seeming overproduction which really amounts to underconsumption due to artificial restrictions stupidly imposed by society itself.

Do these signs of the times indicate that population is outrunning the means of life? Or, do they indicate that nations employing the system called commercial constitutionalism—which is no different here from that which operates in England, France, Germany, Italy, Japan, or any of the other mercantile nations of the modern world—cannot find markets either at home or abroad because they have selfishly destroyed the larger consumptive ability of the masses among their own populations?

While population may at some remote period outrun sustenance, we dare not shrink from recognition of the fact that economic manipulation is today operating upon the masses in society the same as would a natural diminution in the means of subsistence.

IN FULL AGREEMENT as to the vice of the policy which takes from wealth under the burden of both interest and taxation and gives to wealth at interest is the comment by Prof. F. W. Taussig2 upon inequities in taxation, as follows:

"Take away half the income of the poor man and you exact what is essential for life or meager comfort. Take away half the income of the rich and you take away only the income of luxury and ostentation."

There is no escape from the conclusion that, in the ratio that interest upon commercial, industrial and governmental indebtedness, and also the cost of government, continue to fall in larger measure upon those who live barely within the margin of subsistence, the ability of this class to consume will go lower and lower ; and the pace of production will resultingly slacken with each step in declining consumption. Such a process even enlightened selfishness dare not carry to its logical termination.


THERE ARE THOUSANDS of poor, unsophisticated beings who sincerely believe that the rich are entitled to their enormous wealth—because they have earned it. Let us analyze the proposition. Many moderate fortunes have come from gains in commerce or industry. Incidental to such operations there have been normal accretions due to profits, which, it will be granted, have been earned.

There have also been immense accretions of wealth due to inflation, such as increased valuation based on excessive profits and still further profits upon these excessive valuations, or to the monopoly of natural resources, or to the enjoyment of other special privileges at the expense of society. Such have been taken; they have not been earned.

Finally, as a part of all these transactions, they have profited from year to year by a system which takes largely from the poor man's wealth both the cost of government and interest upon commercial and industrial credits used; and by which the earnings from these profits and privileges reinvested at interest have immunity from both taxation and interest, and come back still further to prey upon the poor man's wealth, and reduce his consumptive ability accordingly.

A few examples of how "big" surplus wealth comes into existence, and thereafter attaches itself parasit-ically upon society, may not here be amiss.

Mere mention will suffice for incidents fresh in the mind of the reader, such as relate to the tragic Krue-ger and the fugitive Insull, or to revelations in the congressional inquiry into bonanza financiering by Morgan and others. Both propriety and limited space preclude, however, a review of rancid high finance and profiteering in the last decade. Rather, let us go back twenty or thirty years into the virgin fields then golden with gleanings from new-era money-making.

The First National Bank of New York furnishes probably the most striking example of approved mon-eymaking in that period. The story was published in the metropolitan press of that day, but has been embalmed for future generations in a book on investment by H. L. Barber.3 Says the writer:

"Once the First National Bank did business in a quiet way on a capital of $500,000. It then paid 100 per cent a year. Every man who had a dollar in (the shares of) the bank got a dollar every year. . . . Then the capital was increased to $10,000,000 seven years ago. On this amount they paid 20 per cent, or $2,000,-000 in dividends each year, until three years ago; then they paid 32 per cent, and now they pay 40 per cent. . . . In 1902, when the capital was increased from $500,000 to $10,000,000, they gave to every stockholder 1,900 per cent on his investment.... They handed them $10,000,000 in exchange for half a million. And now they pay 40 per cent on that ten million. . . . During the four years between 1908 and 1911, inclusive, the dividends of the bank aggregated 226 per cent."

In the "depression" year of 1914, Mr. Barber recites, "United Cigar Stores of New Jersey made a dividend distribution of 110 per cent. The Farmers and Mechanics Bank of Sharpsburg declared a dividend of 100 per cent, and the stockholders of the Fidelity Trust Company divided a melon of seven million. The First National Bank of Uniontown declared a dividend of 700 per cent, and another ten million melon was cut by the Vacuum Oil Company. The Ford Motor Company made about $25,000,000 profits on a capitalization of $2,000,000; and the mere goodwill of Cluett, Peabody & Co., manufacturing such prosaic articles as shirts and collars, formed a very large part of the $18,000,000 corporation into which it was recently formed. The mere goodwill of Sears, Roebuck & Company was valued at thirty million, or 75 per cent of its common stock issue. The goodwill of the Woolworth Company was valued at fifty million, and of the B. F. Goodrich Company at fifty-seven million."

These are typical of the methods by which large blocks of surplus wealth come into existence. As surplus wealth, such values continue to earn interest payable out of the stream of wealth which supplies the consumptive needs of the masses.


IN THE ENDEAVOR to carry on under continually narrowing markets, the mercantile nations of the world have put forth extreme effort to sell their surplus goods in foreign countries. At the same time their own people, who actually need the goods, have restricted consumption forced upon them from causes identical with those affecting the masses here and everywhere, to wit:

A gradually narrowing stream of wealth—from which appropriations are continually being made for excessive profits in commerce and industry, for taxes to support government, and for interest upon commercial, industrial and governmental indebtedness— flows to and is the sole supply for consumptive needs of 95 per cent of the population.

Coincidently, another stream of wealth, gradually widening, flows to the few who enjoy never-failing profits, evade taxes and receive interest.

It would be strange if this diverted flow of wealth, wherever it might obtain, could result otherwise than in perpetually diminishing markets. The effect of appropriation and diversion upon anything that flows can easily be understood out here in the West, adjacent irrigated areas, where in summer river beds sometimes barely trickle because the flow of water at the point of control has been diverted to other uses.

It is elementary that diminished buying power begets subnormal production; that lower production begets decreased employment, and that the loss of employment reduces people to a lower consumption level. Thus the cycle of malign effects turns in upon society, an insensate process of social destruction.

THIS CHRONIC STATE of social dissolution as evidenced by decreasing employment, diminished buying power, restricted consumption, and subnormal production, is periodically intensified by an acute condition known as a financial crisis. This is caused by whipping the ordinary, every-day race between Wealth at Interest and Wealth under Interest into a wild dash of credit expansion. Of course, the sustaining power of Wealth under Interest being outrun, the result is inevitable.

Inflation thus set up by credit is the most insubstantial thing in the values which compose legal forms of wealth. It is a sort of self-rising element within the system of banking itself, multiplied and perfected in the credit devices supplied by the Federal Reserve in our own country and by central banks generally elsewhere.

Once the structure of deflation which follows the bursting of overexpanded credits hits bottom, the existing non-social monetary system—itself built around "the great principle of currency based on mutual indebtedness"4—is revealed stark naked, stripped of even the fiction of soundness.

Phoenix may rise from his ashes; but in crises a monetary system based on promises to pay lies prostrate in the economic debris surrounding its own weakness and collapse.

THAT THERE MAY BE NO LACK of evidence to support the theory that the economic breakdown is largely due to society's subjection to a universal as well as national money-credit monopoly, objectified in the control of government by those who lend it money, the results of a recent research by a committee of three hundred business leaders of the United States5 is cited. The findings have to do with the status of wealth within the nation; and although the figures are estimates, Mr. J. H. Rand Jr., of Remington Rand Inc., chairman of the committee, is said to entertain no doubt as to their reasonable accuracy.

The findings show, to use the terms employed in this book, that wealth at interest now actually exceeds wealth under interest. The committee's exact figures are that in the year 1933 total indebtedness, representing the interest-bearing claims against wealth within the United States, amounts to $141,900,000,000, and that wealth under and supporting this burden amounts to $138,000,000,000. The probably low estimate of the nation's wealth as here given was based upon deflated valuation.

But, most remarkable from an economic standpoint, this committee of business leaders treats the hundred and forty odd billion dollars of indebtedness as though it had no existence as wealth. Certainly the evidences of this vast indebtedness—such as bonds and the various kinds of notes supported by collateral—are values which must be included in any rational computation of the nation's wealth. Unquestionably these bonds and notes have exchangeable value—and the very essence of wealth is its quality of exchangeability.

Therefore, if the nation's wealth under interest and that at interest be considered together, the total would be $279,900,000,000. But this method of arriving at the true value of the nation's wealth would also be erroneous.

Obviously the correct method, economically at least, would be to show within a joint exhibit the combined net worth (wealth) of the owners of the values represented by $138,000,000,000 and that of the owners of the instruments of indebtedness valued at $141,900,000,000. Such net-worth statement would show that the values listed by the committee of business leaders at $138,000,000,000 are subject to indebtedness of $141,900,000,000, and consequently have neither net worth nor exchangeable value, on the basis of the figures themselves.6

Rightly inter-pretedy the real wealth of the nation, under this statement of condition, is contained in the legal forms of wealth re-presented by the $141,900,000,000 of indebtedness.

THE WHOLE QUESTION of the nation's social maladjustment is here shown befogged in the false theory of economic values comprising wealth. Can it not be realized that, in the modern commercial complex, values no longer are fixed upon the plane of earth-tied tangibles?

Wealth now is pyramided in strata. It starts with ownership of minerals beneath the surface of the earth and includes title to the ground upon which we live, move and have our being. It extends upward through numerous legal forms of value.

Stocks of corporations rise above and hold the values of the physical forms upon which they are issued. Likewise, bonds, notes and numerous other instruments of legal wealth rise above corporation stocks and hold, to the amount of their issue while in effect, the value of the physical and corporate forms upon which they are issued.

In the modern sense, wealth—comprising all things which have exchangeable value—is a composite of values, all of which are interchangeable in an economic sense.

But we continue, for purposes of public revenue and private distribution of society's wealth, to treat wealth as an aggregate of things, rather than as an aggregate of values. That is why three hundred of the nation's business leaders look upon $138,000,-000,000 worth of things devitalized by $141,900,-000,000 of indebtedness as the real wealth of the nation. // is like saying that the value of an orange inheres in its rind, notwithstanding the juice has been squeezed from it.

This age-old fallacy is accepted as gospel truth in the world of public affairs. It is perpetuated by the quackish political formula: c/c (commercial constitutionalism). By this formula one classification of wealth is permitted to impose upon another classification of wealth the bulk of the cost of government and, in addition, interest upon the mountainous heap of commercial, industrial and governmental indebtedness held in its own name.

Can the nation hope for a new formula: r/r (righteous rule), through which society may emancipate itself from commercial constitutionalism and its indispensable adjunct, the money-credit monopoly?

THE FINDINGS of the committee of three hundred business leaders rightly reveal two streams of wealth flowing through the nation; but they conceive, evidently, one of these streams—the River of Indebtedness—to exist only in a Pickwickian sense. Wealth at interest must, however, be sustained by wealth under interest; so we have within the nation these two divergent streams: one (wealth under interest) continually narrowing; the other (wealth at interest) continually widening. That these divergent streams of wealth are respectively narrowing and widening is again supported by the findings of this committee of business leaders. In 1922, they state, the wealth of the nation amounted to $320,800,000,000, and the indebtedness against this wealth at that time was only $116,600,000,000. So, upon any basis of figuring due to inflation or deflation, there has been a notable narrowing and widening respectively of these two streams of wealth.

WHAT, THEN, DO THESE FACTS, having their meaning in the structure of wealth in relation to people, really signify?

They mean that by the operation of the existing non-social monetary-credit system, its beneficiaries have, within considerably less than a century of modern finance, been able to impose upon the nation and its people a volume of permanent indebtedness in excess of the value of the collateral upon which it was loaned.

Again, they mean that, since interest upon commercial, industrial and governmental indebtedness and also the cost of government rest largely upon wealth under indebtedness, the consumptive ability of all who live out of this stream of wealth is continually decreasing, and that lower production and employment levels, at least for home consumption, are being reached.

Finally, growing out of these malign processes, we find the social creation Wealth, which is the physical extension of each human life and the substance underlying society itself, precariously aswirl in a vortex of indebtedness set in motion by a band of highbinders as conscienceless as any who ever got their price—the pioneers among the monopolists of money and credit.

1Mutual Banking, by Wm. B. Greene.
2Princifles of Economics, Vol. 2, by F. W. Taussig (Harvard).
3Making Money Make Money, by H. L. Barber.
4The Meaning of Money, by Hartley Withers.
5Associated Press report.
6The Net-Worth Tax, by the author of this book. This work introduces an equitable system of taxation on the basis of each individual's net worth. Used only as a federal tax, it would prove an indefeasible means to effect the more equal distribution of wealth.


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