The Nationalization of Credit?
Arthur Travers-Borgstroem, a Finnish writer, published a book entitled Mutualism that deals with ideas of social reform, and culminates in a plea for the nationalization of credit. A German edition appeared in 1923. In 1917, the author had established a foundation under his name in Berne, Switzerland, whose primary objective was the conferring of prizes for writings on the nationalization of credit. The panel of judges consisted of Professors Diehl, Weyermann, Milhaud, and Reichesberg, the bankers Milliet, Somary, Kurz, and others. The judges awarded a prize to a paper submitted by Dr. Robert Deumer, director of the Reichsbank in Berlin. This paper was published in book form by the Mutualist Association of Finland.1
From the background material of the paper we can learn why the author is not concerned with the rationale of credit nationalization, but merely with the details of its realization. Dr. Deumer is presenting a proposal, elaborated in its insignificant details, on the nationalization of all German institutions of banking and credit, and the establishment of a national credit monopoly. But his plan can be of no interest to us as no one is contemplating its implementation in the foreseeable future. And if there ever should be such a movement, conditions may be quite different so that the Deumer proposal will not be applicable. Therefore, it would not make any sense to discuss its details, such as article I, section 10, of the “Draft of a Bill Nationalizing Banking and Credit,” which reads,
“He who engages in any banking and credit transaction after the nationalization will be subject to a fine not exceeding ten million gold marks, or imprisonment up to five years, or both.”2
Deumer’s work is of interest to us because of its motives for the nationalization of credit, and its statements on a reform that preserves the superiority of “profit” management over “bureaucratic” management. These statements reveal an opinion that is shared by a large majority of our contemporaries — yes, that is even accepted without contradiction. If we should share this Deumer-Travers-Borgstroem-mutualist position we must welcome a nationalization of credit and every other measure leading to socialism. In fact, we must agree to its realizability and even its urgent necessity.
The public welcomes all proposals designed to limit the sphere of private property and entrepreneurship because it readily accepts the critique of the private-property order by the Socialists of the Chair in Germany, the Solidarists in France, the Fabians in Great Britain, and the Institutionalists in the United States. If the nationalization proposals have not yet been fully realized we must not search for any opposition in social literature and the political parties. We must look to the fact that the public realizes that whenever enterprises are nationalized and municipalized or government otherwise interferes with economic life, financial failure and serious disruption of production and transportation follow instead of the desired consequences. Ideology has not yet taken stock of this failure of reality. It continues to hold fast to the desirability of public enterprises and the inferiority of private enterprises. And it continues to find only malice, selfishness, and ignorance in opposition to its proposals, of which every objective observer should approve.
Under such conditions an analysis of Deumer’s reasoning seems to be in order.
1. Private Interest And Public Interest
According to Deumer, banks presently serve private interests. They serve public interests only inasmuch as these do not conflict with the former. Banks do not finance those enterprises that are most essential from the national point of view, but only those that promise to yield the highest return. For instance, they finance “a whiskey distillery or any other enterprise that is superfluous for the economy.”
“From the national point of view, their activity is not only useless, but even harmful.”
“Banks permit enterprises to grow whose products are not in demand; they stimulate unnecessary consumption, which in turn reduces the people’s purchasing power for goods that are more important culturally and rationally. Furthermore, their loans waste socially necessary capital, which causes essential production to decline, or at least their costs of credit, and thus their production costs, to rise.”3
Obviously, Deumer does not realize that in a market order, capital and labor are distributed over the economy in such a way that, except for the risk premium, capital yields the same return, and similar labor earns the same wage everywhere. The production of “unnecessary” goods pays no more and no less than that of “essential goods.” In the final analysis, it is the consumers in the market who determine the employment of capital and labor in the various industries. When the demand for an item rises its prices will rise and thus the profits, which causes new enterprises to be built and existing enterprises to be expanded. Consumers decide whether this or that industry will receive more capital. If they demand more beer, more beer will be brewed. If they want more classical plays, the theaters will add classics to their repertoire and offer fewer antics, slapstick, and operettas. The taste of the public, not the producer, decides that The Merry Widow and The Garden of Eden are performed more often than Goethe’s Tasso.
To be sure, Deumer’s taste differs from that of the public. He is convinced that people should spend their money differently. Many would agree with him. But from this difference in taste Deumer draws the conclusion that a socialistic command system should be established through nationalization of credit, so that public consumption can be redirected. On this we must disagree with Deumer.
Guided by central authority according to central plan, a socialistic economy can be democratic or dictatorial. A democracy in which the central authority depends on public support through ballots and elections cannot proceed differently from the capitalistic economy. It will produce and distribute what the public likes, that is, alcohol, tobacco, trash in literature, on the stage, and
Article from Mises Wire