Chapter VII: Introduction (4)

3. _The economic scale of the community_, that is, the number of its citizens and the amount of its total wealth at a given time.

When we go into the full meaning of all these three things we shall see how, in combination, they make up the social value of money at any time, and why that value differs so very much between one historical period and another.

1. _The actual purchasing power of the currency._

Given the same currency (and in Western Europe it has, for all practical purposes, been gold for the last two thousand years), we can measure the purchasing value of such and such a weight of gold in any period by what is known as the _Index Number_ of that period.

The Index Number is a thing important to understand, because it comes into a great deal of modern discussion as well as historical discussion; for instance: wages are nowadays largely based upon an Index Number.

A particular year is taken, say the year 1900, and the records of what various commodities were fetching in gold in the market during that year are examined. Thus it is found that an ounce of gold in that year would buy (let us say) four hundred pounds weight of wheat, 600 pounds weight of barley, 80 pounds weight of bacon, 80 gallons of beer, a quarter of a ton of pig iron, and so on. A list is drawn up of all the principal commodities which are used in the community. Suppose that 100 such commodities are taken and between them make up by far the great part--say seven-eighths--of all the values commonly consumed in that community. The next thing to do is what is called to “weight” each commodity, for it is evident that a commodity which is very largely bought--such as bread--must count more in estimating the purchasing power of money than a commodity of which very much less is used--such as tin.

According to the value of each commodity used in any one period of time (say a year) the various commodities are “weighted.” Thus you count bread (let us say) as twelve times more important than lead, because the value of the bread used in the community for one year is twelve times as much as the value of the lead used in the community during that year. Then let us suppose that the value of the leather used is three times that of the lead, the value of the iron five times, etc. You put against each commodity these “weight” numbers.

Next you find out what an ounce of gold would purchase of each of those commodities in that particular year. For instance: you find it would purchase a quarter of a ton of lead, 400 pounds weight of bread, and so on, only you multiply by your weight number the use of gold in each particular article. For instance: you count the gold used in buying bread as twelve times more important than the gold used in buying lead.

You then add up all the prices measured in an ounce of gold in your column; you divide by the number of items in your column, each multiplied by its weight number, and the result is that your ounce of gold for the year 1900 will be found to have a certain _average purchasing power_ which you call, for the sake of further application, arbitrarily, “100.”

Then you take another year, say 1920, and you find what the ounce of gold would purchase in the same conditions, similarly weighted, in the year 1920. You discover that the ounce of gold on the average in 1920 would only purchase half the weight of stuff it purchased in 1900. In other words, prices have doubled, or, what is the same thing, gold has halved in value. You put down for the year 1920 the figure “200,” which means that average prices are twice as great as they were in 1900, and the economist’s way of saying this is: “With the year 1900 as a base, the Index Number for 1920 is 200.”

In the year 1921 he makes the calculation again, and finds that prices have fallen, that is, gold has become rather more valuable as compared with other things, and prices are only three-quarters more than they were in 1900. The economist writes down: “The Index Number for 1921 is 175, with the prices of 1900 as a base.” He goes back to 1880 and finds that in 1880, after making a similar calculation, an ounce of gold would on the average buy five pounds of material where in 1900 it could only buy four. In other words, prices are lower in 1880 by one-fourth. So he writes down: “The Index Number for 1880, with 1900 as a base, is 75.”

These Index Numbers taken for each year with a particular year as a _base_, or year of reference, show the fluctuations in the purchasing value of gold.

To make the process clearer, we will take a simple instance and imagine a community in which there were only three things purchased on a large scale by the citizens--wheat, bacon, and iron. We take for our year of reference, let us say, the year 1880, and we find that an ounce of gold would purchase one ton of wheat, half a ton of iron, and a quarter of a ton of bacon. But the amount spent on wheat was ten times the amount spent on bacon and twenty times the amount spent on iron.

You add up the twenty tons of wheat, the half ton of iron and the half ton of bacon--half a ton of the latter because twice as much is spent on it as is spent on iron, and therefore though it is half the price of iron you must double the amount, because twice as much is bought.

You get 21 tons. To buy this 21 tons of stuff 3 ounces of gold were needed. You divide the 21 tons by 3, and you get 7 tons of material on the average.

Next, as you are taking this particular year for a “base” (or year of reference) you call the 7 “100,” so that you may compare in percentages the rise or fall of prices in other years. You then do exactly the same thing with these three staple commodities in another year--say 1890--and you find that your ounce of gold purchases no longer 7 tons of stuff, but 14 tons of stuff. Taking the year 1800 as your base number, you will see that the Index Number for 1890 is “50.”

Then you do the same thing for the year 1920, and you find that with the same ounce of gold you can only purchase 3½ tons of stuff. 7 is to 3½ as 100 is to 200, so the Index Number for 1920 will be 200 as compared with the base year--or year of reference--which is 1880.

You cannot use the Index Numbers without knowing what your base year is and what average prices were in that base year, but, having settled that, your Index Number is nothing more than a statement of _average prices_, or again, the average purchasing power of a fixed weight of gold in the various epochs you examine.

In reality the calculating of an Index Number involves a great many more difficult points than these, and of course the number of commodities taken is very much more than three; but that is the method in its general outline, and if you go over it carefully I think you will not find it difficult to understand.[8]

The first thing, then, in finding out the social value of money at any historical period is to find out the purchasing value of a given weight of gold--say, one ounce. Supposing we are comparing the time when Henry VIII. dissolved the monasteries and took their wealth (1536–9) with our own time, before the War, when our currency was still normal and in gold, you will find that with 100 as your base for prices in 1536–9 the Index Number of 1913 is, according to different calculations, somewhere between 2,000 and 2,400. I have gone into it myself very carefully, and I make it out to be at least 2,400 (though historians some time ago, who had not gone into it very fully, used to make it lower); that is, where one ounce of gold would purchase the things which Englishmen regarded as their staple commodities in 1536, 24 ounces of gold would be necessary to-day.

That is the first thing you have to consider when you are comparing the social value of money at that time with the social value of money in our own time. You multiply right away by 24. You hear, for instance, that a man had £100 a year paid him by the King for looking after the garrison at Dover. You translate it into modern money, and say that he had £2,400 a year paid him _in our money_.

Most people stop there, and that is why they get their answer to the problem all wrong. In reality the _social_ value of money then was _very much more than_ 24 times what it is now, and £100 a year under Henry VIII. meant _a great deal more than_ what £2,400 means now.

In order to see how true this is we have to consider the next two points which I mentioned.

2. _The number of purchasable categories._

Suppose you put a man into a little primitive place like Andorra (which is a tiny independent state shut off from the world in a valley of the Pyrenees), and he is paid there £1,000 a year. He cannot live in a house with more than a small rental, because there are no big houses to be had. Everybody lives in simple, little houses. He cannot spend his money on many things. There are no roads, no use for a motor car; no railways, so he cannot spend money on railway fares; no theatres or cinematographs--none of the hundred things which we have here on every side. He can buy bread and meat, and wine and clothing, and very little else--for there is nothing else to be bought. In other words, the number of _sets of things_ (that is what the word “categories” means--“sets of things”) on which he can spend money is a great deal less than what it would be in London. A man with £1,000 a year in London and a family to keep is, of course, very much better off than a labouring man, but still he is not rich, as rich people use the term. He will live in a house for which he must pay perhaps £200 a year, counting rent and taxes. Then he will--he usually must--travel, and that will cost him perhaps £50 a year. Then his friends will expect to meet him and he must have them at his house, and he will have to spend a good deal in postage and telegraphing--and so on. The man in Andorra with £1,000 a year simply would not know what to do with it. He would be so “well off” that he would have a very large surplus--more than half--to give away, or to help other people with, or to save and invest. But exactly the same sort of man, with the same ideas and bringing-up and necessities, put down in London would certainly not be able to save a penny of his £1,000 a year.

So we see that the social value of £1,000 a year in Andorra is very different from the social value of the same sum in London. Some people might be inclined to laugh at this difference, and to say: “Oh, yes! but the man in London could, if he liked, save, simply by not spending on those various categories, as you call them.” Yes; he as an individual might choose to live an odd life of his own and not do what other people do. But _Society as a whole_--that is, all the community round him--in London is, as a fact, spending upon those various, very numerous, categories, while in Andorra he does not, for he _cannot_, spend upon them; they are not there to be purchased. Therefore it is true that the _social value_ of the same sum, with the same index number, is on the average very much higher in Andorra than in London.

You cannot give this difference precisely in figures as you can an index number, because nobody can precisely calculate the number of categories nor the respective importance of each, but the least knowledge of history shows you that in Henry VIII.’s time, in 1536, the number of categories was very much smaller than it is to-day. So the man to whom Henry VIII. paid £100 a year as salary for looking after one of his castles, though the purchasing value of his income--the amount of rye or pork or what not that he could buy with it--was what we should call to-day £2,400 a year, had a much higher income _relatively to the people of the time_ than has a man with £2,400 a year to-day. He counted much more than a man to-day counts who has five thousand a year.

But this second point is not all. There is again a third point, as we have seen, and we must next turn to that.

3. _The purchasing value of the whole community._

The third factor in the making up of the social value of money is the relation of any sum to the total wealth of the whole community. That of course depends upon two things: the average of wealth of each family in the community, and the number of those families.

Supposing, for instance, with things at their present prices, you consider two communities: (1) the people of Iceland, (2) the people of Australia. In both countries you can get pretty much the same amount of stuff for an ounce of gold, and though there are less categories of purchasable things in Iceland than in Australia, yet most of the things a civilised man requires can be got in Iceland--at least in the capital, or can be imported there by the inhabitants if they need them or can afford to pay for them. Both communities are of our own race and of much the same standard of culture and the same idea of how one should live. But Iceland has only four thousand families, and these families are poor for the most part. Australia has a million families, that is, 250 times as many, and they are much richer than the families in Iceland on the average. There are much worse differences of rich and poor in Australia than there are in Iceland. There are far more miserable and starving people in Australia than there are in Iceland; but the _average_ wealth of a family in Australia is much higher than that in Iceland.

Now suppose that the Government of Iceland were to want to build a new harbour for the capital, which is on the sea, and in order to get the money were either to confiscate the wealth of certain rich people or to tax all the people--supposing it wanted, for instance, £400,000 in order to complete the work. And supposing the people of Australia similarly wanted to build a harbour and also wanted £400,000 to be got in the same way. The index number is the same in both places. An ounce of gold will roughly purchase the same amount of things in both places, for the index number at any moment is much the same all over the white world, measured in gold, and we may imagine the categories of purchasable things to be much the same in both places. Yet the social value of the £400,000 is quite different in Iceland from what it is in Australia. In Iceland it means taking an average of £100 from each of the poor families--if you get it by taxation--or the confiscation of all the wealth of the very few rich men there may be. But in Australia it means no more than the taking of about 8s. from each family, and that from an average family income much higher than the average family income in Iceland. Under this heading the social value of £400,000 in Iceland is enormous and in Australia is small. If Iceland tried to build such a harbour it could hardly do so. The economic effort would be very great, and if it succeeded it would fill a big place in the history of the island. In Australian history it would pass almost unnoticed.

Now let us add the influence of all these three points together, and we shall see that there is a vast difference between the social value of money in the time of Henry VIII., when the monasteries were dissolved, and the social value of the same amount of money to-day. We shall see, for instance, why the King, taking away the annual revenues of the Monastery of Westminster and keeping them for himself, made such a prodigious splash, although the actual amount in pounds, or weight of gold, in which the income of Westminster Abbey could then be measured was only £4,000 a year. In the first place, you must multiply by 24, so that the actual income or annual purchasing value in wheat, beef, rye, pork, beer, which was confiscated, was nearly £100,000 in our money. Then you must remember that it took place in a community where there was a very much smaller number of purchasable categories; that is, where people had a very much small number of “sets of things” upon which to spend money.

And, lastly, you must remember that it took place in an England the population of which was hardly more than a sixth--some people would say it was hardly more than a tenth--of to-day’s, and that population actually a great deal poorer on the average than the present population of England. It is true that there was not then the great herd of starving or half-starving people which we have to-day in England, and that labouring people were then much better off than they are now; but, on the other hand, there was nothing like the same number of very rich people, and therefore the average family income was much smaller. Put all that together, and it is clear what a tremendous business the confiscation of this one Abbey meant. It was somewhat as though the Government to-day were to confiscate one of the smaller railway companies, or to take away the rentals now paid by a northern manufacturing town to the great landlords owning the soil, and put the money into its own pocket.

From this example of the confiscation of the Abbey of Westminster you can argue to all the other expenditure of the time--expenditure on armies and navies, and so on--and in this way you can see _how, why and in what degree the social value of money differs between one period and another_.

It is most important to get this point in Economics clear in your mind if you are reading history, because it helps to explain all manner of things which otherwise puzzle one in the past.

USURY

Usury, the last subject but one on which I am going to touch in this book, is one which modern people have almost entirely forgotten, and which you will not find mentioned in any book on Economics that I know. Yet its vital importance was recognised throughout all history until quite lately, and it is already forcing itself upon modern people’s notice whether they like it or no. So it is as well to understand it betimes, for it is going to be discussed very widely in the near future.

All codes of law and all writers on morals from the beginning of anything we know about human society have denounced as wrong the practice of _Usury_.

They have recognised that this practice does grave harm to the State and to society as a whole, and must, therefore, as far as possible, be forbidden.

Now what is Usury, and why does it thus do harm?

Modern people have so far forgotten this exceedingly important matter that they have come to use the word “usury” loosely for “the taking of high interest upon a loan.” That is very muddled thinking indeed, as you will see in a moment. The character of Usury _has nothing to do with the taking of high or low interest_. It is concerned with something quite different.

_Usury is the taking of any interest whatever upon an_ UNPRODUCTIVE _loan_.

A man comes to you and says: “Lend me this piece of capital which you possess” (for instance, a ship, and stores of food with which to feed the sailors during the voyage of the ship). “Using this piece of capital to transport the surplus goods from this country over the sea and to bring back foreign goods which we need here I shall make a profit so large that I can exchange it for at least one hundred tons of wheat. The voyage there and back will take a year.”

You naturally answer: “It is all very well for you to make a profit of one hundred tons of wheat in one year by the use of _my_ ship and of _my_ stores of food for sailors who work the ship, but what about me? I grant you ought to have part of this profit for yourself, as you are taking all the trouble. But I ought to have _some_, because the ship and stores of food are mine; and unless I lent them to you (since you have none of your own) you would not be able to make that profit by trading of which you speak. Let us go half shares. You shall have fifty tons of wheat and I will take fifty, out of the total profit of one hundred tons.”

The man who proposed to borrow your ship agrees. The bargain is struck, and when the year is over you make a fifty tons profit of wheat on your capital.

That is _the earning of interest on a productive loan_.

There is nothing morally wrong about that transaction at all. It does no one any harm. It does not weaken the State or society, or even hurt any individual. There is a sheer gain due to wise exchange (which is equivalent to production); everybody is benefited--you that own the capital, the man who uses it, and all society, which benefits by the foreign exchange. Supposing your ship and stores of food were worth a hundred tons of wheat, then your profit of fifty tons of wheat is a profit of fifty per cent., which is very high indeed. But you have a perfect right to it: your capital has produced a real increase of wealth to that extent. If your capital be worth ten times as much, then your profit is only five per cent. instead of fifty. But your moral right to the fifty per cent. is just as great as your moral right to the five per cent. No one can blame you, and you are doing no harm.

Now supposing that, instead of coming to ask you for the loan of your ship, the man came and asked you for the loan of a sum of money which you happened to have by you and which would be sufficient to buy and stock the ship. It is clear that the transaction remains exactly the same. The loan is _productive_. He makes a true profit, that is, there is a real increase of wealth for the community, and you and he have a right to take your shares out of it--you because you are the owner of the capital, and he because he took the trouble of organising and overlooking the expedition.

These are examples of profit on a _productive_ loan.

Now suppose a man to come to you if you were a baker and say: “Lend me half a dozen loaves. My family have no bread and I cannot see my way to earning anything for a day or two. But when I begin to earn I will get another half dozen loaves and see that you are not out of pocket.” Then if you were to reply: “I will not let you have half a dozen loaves on those terms. I will let you owe me the bread for a month if you like, but at the end of the month you must give me back _seven_ loaves”: that would be usury.

The man is not using the loan productively; he is consuming the loaves immediately. No more wealth is created by the act. The world is not the richer, nor are you the richer, nor is society in general the richer. No more wealth at all has appeared through the transaction. Therefore the extra loaf that you are claiming is claimed out of nothing. It has to come out of the wealth of the community--in this particular case out of the wealth of the man who borrowed the loaves--instead of coming out of an increment or excess or new wealth. That is why usury is called “usury”--which means: “wearing down,” “gradually dilapidating.”

It is clear that if the whole world practised usury and nothing but usury, if wealth were never lent to be used productively, but only to be consumed unproductively, and yet were to demand interest on the unproductive transaction, then the wealth that was lent would soon eat up all the other wealth in the community until you came to a situation in which there was no more to take. Everyone would be ruined except those who lent; then these, having no more blood to suck, would die themselves, and society would end.

As in the case of the ship, it matters not in the least whether the actual thing, the loaves of bread, are lent, or money is lent with which to buy them. _The test is whether the loan is productive or not._ The _intention_ of Usury is present _when the money is lent at interest on what the lender_ KNOWS _will be an unproductive purpose_, and the actual _practice_ of usury is present _when the loan, having as a fact been used unproductively, interest is none the less demanded_.

As in every other case of right and wrong whatsoever, there is, of course, a broad margin in which it is very difficult to draw the line. A man guilty of usury and trying to excuse himself might say, even in the case of food lent to a starving man: “The loan may not look directly productive, but indirectly it _was_ productive, for it saved the man’s life and thus later on he was able to work and produce wealth.”

The other way about (though there is not much danger of that nowadays), a man trying to get out of interest on a productive loan might say in many cases: “The loan was not really productive. It is true I made a profit on it, but that profit was not additional wealth for the community. It only represented what I got out of somebody else on a bargain.”

In this margin of uncertainty we have only common sense to guide us, as in every other similar case. We know pretty well in each particular example we come across whether a loan is productive of not; whether we are borrowing or lending for a productive purpose, or for a charitable or luxurious one, or for one in every way unproductive.

The proof that this feeling about usury is right is to be found in the private conduct of individuals in their social relations. If a poor man in distress goes to a rich friend and borrows ten pounds, he pays it back when he can; and the rich man would think it dishonourable to charge interest. But if a man borrowed ten pounds of one for the purpose of doing something which was likely to increase its value, and we knew that this was his purpose, we should have a perfect right to share the results with him, and no one would think the claim dishonourable.

Usury, then, is essentially a claim to increment, or extra wealth, _which is not there to be claimed_. It is a practice which diminishes the capital wealth of the needy and eats it up to the profit of the lender; so that, if usury go unchecked, it must end in the absorption of all private property into the hands of a few money brokers.

Now, these things being so, the nature of usury being pretty clear, and both the moral wrong of it and the injury it does to society being equally clear, how is it that the modern world for so long forgot all about it, and how is it that it is forcing itself upon the attention of the modern world again in spite of that forgetfulness?

I will answer both of those questions.

The wrong and the very nature of usury came to be forgotten with the great expansion of financial dealings which arose in the middle and end of the seventeenth century--that is, about 250 years ago--in Europe. In the simpler times, when commercial transactions were open and upon a comparatively small scale, and done between men who knew each other, you could pretty usually tell, as you can in private life, whether a loan were a loan required for a productive or an unproductive purpose. The burden of proof lay upon the lender. It was no excuse in lending a man money to say: “I did not know what he wanted to do with it, so I charged him 10 per cent., thinking that very probably he was going to use it productively.” The courts of justice would not admit such a plea, and they were quite right. For under the simple conditions of the old days the judge would answer: “It was your business to know. A man does not come borrowing money unless he is in either personal necessity or has some productive scheme for which he wants to use the money. If you thought it was a productive scheme you would certainly have asked him about it in order to share the profits, and the fact that you did not trouble to find out whether it were productive or no shows that you are indifferent to the wrong of usury, and willing to do that wrong under the pretence that it was not your business to inquire.”

The attitude of the law on money-lending in the old days was very much what it is to-day with regard to certain poisonous chemicals which may be used well or ill. The seller of those chemicals has to ask what they are going to be used for, and is responsible if he fails to inquire. In the same way the old Christian law said a lender was bound to find out if his loan were intended for production or not. If the law had not done this, then usury would have been universal and would have eaten up the State, to the profit of the few people who lent out their money: as it is doing now.

But as trade became more and more complicated and much larger and lost its personal character, as the banking system arose on a large scale and great companies with any number of shareholders, and as it became impossible to lay the weight of proof upon the lender--when, indeed, most lenders could not know for what their money was being lent, but only that they had put it into some financial institution with the object of fructifying it--then the opportunity for Usury came in, and it soon permeated all commerce.

Suppose a man to-day, for instance, to put money into an Insurance Company. It pays him, let us say, 5 per cent. interest on his money. He does not know, and cannot know--no one can know--exactly how that particular bit of money is being used. It is merged in the whole lump of the funds the Insurance Company has to deal with. A great deal of it will be used productively. It will go to the purchase of steam engines and stores of food, ships, and so on, which in use increase the wealth of the world; and the money spent in buying these things has a perfect right to profit and does no harm to anyone by taking profit. But a certain proportion will be used unproductively. The original investor knows nothing about that, and even the managers of the company know nothing about it.

A client comes to them and says: “I want a loan of a thousand pounds.” They are quite unable, under modern conditions, to go into an examination of what he is going to do with it. He gives security and gets his loan. He may be a man in distress who gets it in order to pay his debts, or he may be a man who is going to start a business. The company cannot go into that. It has to make a general rule of so much interest upon what it lends, under the implied supposition, of course, that the loan is normally productive. But the borrower _can_ use it unproductively, and often does and intends to do so.

Thus, with a very large volume of impersonal business, the presence of usury is inevitable. But though inevitable, and though therefore the practice of it, being indirect and distant, cannot be imputed to this man or that, usury inevitably produces its disastrous effects, and the modern world is at last coming to feel those effects very sharply.

A few pence lent out at usury some twenty centuries ago would amount now, at compound interest, to more wealth than there is in the whole world; which is a sufficient proof that usury is unjust and, as a permanent trade method, impossible.

The large proportion of usurious payments which are now being made on account of the impersonal and indirect character of nearly all transactions, is beginning to lay such a burden upon the world as a whole that there is danger of a breakdown.

If you keep on taking wealth as though from an increase, when really there is no increase out of which that wealth can come, the process must, sooner or later, come to an end. It is as though you were to claim a hundred bushels of apples every year from an orchard after the orchard had ceased to bear, or as though you were to claim a daily supply of water from a spring which had dried up. The man who would have to pay the apples would have to get them as best he could, but by the time the claim was being made on all the orchards of the world, by the time that usury was asking a million bushels of apples a year, though only half a million were being produced, there would be a jam. The interest would not be forthcoming, and the machinery for collecting it would stop working. Long before it actually stopped, of course, people would find increasing difficulty in getting their interest and increasing trouble would appear in all the commercial world.

Now that is exactly what is beginning to happen to-day after about two centuries of usury and one century of unrestricted usury. So far we have got out of it by all manner of makeshifts. Those who have borrowed the money and have promised to pay, say, 5 per cent., are allowed to change and to pay only 2½ per cent. Or, by the process of debasing currency, which I described earlier in this book, the value of the money is changed, so that a man who has been set down to pay, say, a hundred sheep a year, is really only paying 50 or 30 sheep a year. A more drastic method is the method of “writing off” loans altogether--simply saying: “I simply cannot get my interest, and so I must stop asking for it.” That is what happens when a Government goes bankrupt, as the Government of Germany has done.

If you look at the Usury created by the Great War, you will see this kind of thing going on on all sides. The Governments that were fighting borrowed money from individuals and promised interest upon it. Most of that money was not used productively: it was used for buying wheat and metal, and machinery and the rest, but the wheat was not used to feed workmen who were producing more wealth. It was used to feed soldiers who were producing no wealth, and so were the ships and the metal and the machinery, etc. Therefore when the individuals who had lent the money began collecting from the Government interest upon what they had lent they were asking every year for wealth which simply was not there, and the Governments have got out of their promise to pay a usurious interest in all sorts of ways--some by repudiating, that is saying that they _would_ not pay (the Russians have done that), others by debasing currency in various degrees. The English Government has cut down what it promised to pay to about half, and by taxing this it has further reduced it to rather less than a third. The French Government, by inflation and by taxation, have reduced it much more--to less than a fourth, or perhaps more like a sixth or an eighth.

The Germans have reduced it by inflation to pretty well nothing, which is the same really as repudiating the debt altogether.

So what we see in a general survey is this:--

1. Usury is both wrong morally and bad for society, _because it is the claim for an increase of wealth which is not really present at all_. It is trying to get something where there is nothing out of which that something can be paid.

2. This action must therefore progressively and increasingly soak up the wealth which men produce into the hands of those who lend money, until at last all the wealth is so soaked up and the process comes to an end.

3. That is what has happened in the case of the modern world, largely through unproductive expenditure on war, which expenditure has been met by borrowing money _and promising interest upon it although the money was not producing any further wealth_.

4. The modern world has therefore reached a limit in this process and the future of usurious investment is in doubt.

Though these conclusions are perfectly clear, it is unfortunately not possible to say that this or that is a way out of our difficulties; that by this or that law we can stop usury in the future and can go back to healthier conditions. Trade is still spread all over the world. It is still impersonal and money continues to be lent out at interest unproductively, with the recurring necessity of repaying the debt and failing to keep up payments which have been promised. Things will not get right again in this respect until society becomes as simple as it used to be, and we shall have to go through a pretty bad time before we get back to that.

ECONOMIC IMAGINARIES

I am going to end with a rather difficult subject on which I hesitated whether I should put it into this book or no. If you find it too difficult leave it out; but if you find as you read that you can understand it it is worth going into, because it is quite new (you will not find it in any other book), and it is very useful in helping one to understand certain difficult problems which have arisen in our modern society and which have become a danger to-day. This subject is what I call “Economic Imaginaries.”

An imaginary is a term taken from mathematics, and means a value which appears on paper but has no real existence. It would be too long and much too puzzling to explain what imaginaries in mathematics are, but I can give you a very simple example of what they are in Economics. They mean economic values or lumps of wealth which appear on paper when you are making calculations, so that one would think the wealth was really there, but which when you go closely into their nature you find do not really exist.

The first example I will give you is that of a man who, having a large income, gives an allowance to his son living somewhere abroad. Supposing a man in England has £10,000 a year, and he has put his son into business in Paris, but because the young man has not yet learned his business, and is still being helped from home, he allows that son £1,000 a year to spend.

When the Income Tax people go round finding out what everybody has they put down the rich man in England, quite rightly, as having £10,000 a year, and when the value of all incomes in England is _assessed_, _i.e._, when a table is drawn up showing what the total income of all Englishmen is, this man appears, quite properly, as having £10,000 a year. But when the people in France make a similar _assessment_, to find out what the incomes are of all the people living in France, the rich man’s son in Paris appears as having £1,000 a year. So when the assessments of England and France are added together and some Government economist is calculating what the total income of the citizens of both countries may be, _that £1,000 a year appears twice_. One of these appearances is an _economic imaginary_. In other words, by the method of calculation used, £1,000 every year appears on the total assessment of England and also of France, making £2,000 of £1,000. The extra £1,000, though appearing on paper, does not really exist at all: it is an “Economic Imaginary.”

This is the simplest case of an economic imaginary. It is the case overlap, or counting of the same money twice, and we may put down this case in general terms by saying: “Every unchecked overlap creates an economic imaginary to the extent of that unchecked overlap.”

It looks so simple that one might say, “Well, surely everybody would notice that!” But it is very much the other way--even in this simple case. The more complicated society becomes, the more payments there are back and forth, allowances and pensions and all sorts of arrangements which grow up with increased travel and means of communication and, in general, with the development of society, the more these overlaps come into being and remain unchecked, that is, uncorrected, the greater number there are in which people are not aware that there is an overlap, or if it is an overlap do not remember to mention it, or if they do mention it are not believed. In general the more society increases in complexity the more this kind of economic imaginary by mere overlap increases in proportion to the total real wealth, and the more the total “assessment” of the community is exaggerated.

I will give you one instance, to prove this, which is very striking and which happened in my own experience. A man I knew gave in his income tax returns a few years ago. He had a secretary at home to whom he paid a fairly large salary, and he also used a secretary in town. Their salaries came out of money which he had earned in business but appeared in his taxable general income, for he was not allowed to take it off as an expense. Meanwhile, both the secretary in the country and the secretary in town were paying tax on _their_ salaries, though they came out of a total income which had already paid taxes, and anyone making an assessment of the total income of England would certainly have written down from the official books: “Mr. Blank, so much a year; his secretary A--, so much a year; his secretary B--, so much a year,” and added up the total. Yet it is clear that the money put down to A and B was imaginary.

I cannot tell you the thousands of ways in which this simple case of overlapping goes on in modern England, for it would be too long to explain, and I have only given you very simple instances, but you may be certain that the economic imaginaries of this kind form at least a quarter of the supposed income of the country.

If there were no other form of imaginaries than this it would be very simple to understand them, and perhaps allow for them in making an estimate of total wealth. Unfortunately, there are any number of different forms much more difficult to seize and cropping up like mushrooms everywhere more and more in a complicated and active society.

For instance: you have (2) the economic imaginary due to _luxurious expenditure_.

All over the world where you have rich people spending money foolishly they are asked, for things that they buy, prices altogether out of keeping with the real value of the things. If you go into one of the big hotels in London or Paris and have a dinner the _economic values_ you consume are anything from a quarter to a tenth of the sum you are asked to pay. Thus people who buy a bottle of champagne in this sort of place pay from a pound to thirty shillings. The economic values contained in a bottle of champagne, that is the economic values which are built up by the labour of all sorts which has been expended in producing it, come to about two shillings and sixpence. So when people pay from a pound to thirty shillings for a bottle of champagne they are paying from eight to twelve times the real economic values which are destroyed in consumption. There is an extra margin of anything from seventeen shillings and sixpence to twenty-seven shillings and sixpence, which is an _economic imaginary_ in that one case alone. And remember that this economic imaginary goes the rounds. It appears in the profits of the hotel-keeper, which are assessed in the total national income for taxation. It appears in the rent for his hotel, since a man will pay much more rent for a house in which he can get people to pay these sums than for a humbler hotel of the same size and of the same true economic value in bricks and mortar. It appears in the rates which the hotel pays to the local authorities, and which in their turn appear in the income of humble officials living in the suburbs. That economic imaginary created by the silly person who is willing to pay from a pound to thirty shillings for a thing worth two shillings and sixpence appears over and over again in the various assessments of the country.

Here is another case (3): _economic imaginaries due to inequality of income_.

Supposing you have a thousand families with £1,000 a year each; that is, a total income among them of £1,000,000 a year. Supposing you put up for competition among those families a very beautiful picture which everybody would like to have; painted, say, by Van Dyck. None of these people with £1,000 a year each could afford to give more than a certain sum for the picture, and probably, when they had competed for it, it would fetch no more than £100. An official estimating that community would say that it had £1,000,000 a year income, such and such values in houses, etc., and that there was a picture present worth £100, and all that would go down in his estimates or “Assessment.”

Now supposing all but two of these thousand families to be impoverished by having to pay rents and interest to these two men. Supposing they were all reduced to just under £500 a year, and that the balance of £500,000 were paid to those other two. Then each of these would have £250,000 a year. The Van Dyck is put up for auction in this community. The poor families, of course, have no show at all. Not one of them can afford more than £50 at the most, however much he wanted the Van Dyck. But the two rich men can compete one against the other recklessly. They have an enormous margin of wealth with which to do what they like, and the Van Dyck between them may be rushed up to £50,000.

There is not a penny more of real wealth in the community than there was before. Yet your Government assessor would come down and assess the community in a very different fashion from the way in which he would have assessed the first community. He will put down the total income at £1,000,000, and the houses, furniture, etc., at so much, and he will add: “Also a Van Dyck valued at £50,000.” Of course in real life, where are great differences of income, this sort of thing is multiplied by the thousand. It is another example of the way in which, as communities get more complicated in a high civilisation, economic imaginaries appear.

I am only introducing this subject as a very simple addition to this little book, and I will not multiply instances too much, though one might go on giving examples almost indefinitely.

Here, then, is a last one (4): _economic imaginaries due to the confusion between services and economic values attached to material things_.

We saw at the beginning of this book that wealth did not consist in _things_, such as coal, chairs, tables, etc., but in the _economic values attached to those things_; that is, their added use for the purposes of human beings up to the point where they were beginning to be consumed. We saw how the coal in the earth has no economic value, how it begins to be of value when it begins to be mined, and how each piece of additional labour put into it to bring it nearer to the point of consumption adds to its economic value, until at last, when it gets into your cellar, from being worth nothing a ton (when it was still in the earth) it is worth thirty shillings or forty shillings a ton.

But when people assess wealth for the purpose of taxation, and in order to find what (in their judgment) the total yearly income of a nation is, they count not only the economic values attached to things consumed by the nation, but also _services_.

For instance: if Jones is a good card player, the rich man Smith may pay him £500 a year to live in his house and amuse his loneliness by perpetually playing cards with him. I knew a case of a man in South Wales who did exactly that. It is an extreme case, but we all of us, all day long, are paying money for services which do not add economic values to things at all, and which yet must appear in assessment.

All the money I earn by writing is of this kind. Now assessment of these services creates an enormous body of economic imaginaries, and to show you how they may do so I will give you an extreme and ludicrous case.

Supposing two men, one of whom, Smith, has a loaf of bread, and the other of whom, Brown, has nothing. Smith says to Brown: “If you will sing me a song I will give you my loaf of bread.” Brown sings his song and Smith hands over the bread. A little later Brown wants to hear Smith sing and he says to him: “If you will sing me a song I will give you this loaf of bread.” A little later Smith again wants to have a song from Brown. Brown sings his song (let us hope a new one!) and the loaf of bread again changes hands and so on all day.

Supposing each of these transactions to be recorded in a book of accounts. There will appear in Smith’s book: “Paid to Brown for singing songs two hundred loaves of bread,” and in Brown’s book: “Paid to Smith for singing songs two hundred loaves of bread.” The official who has to assess the national income will laboriously copy these figures into his book and will put down: “Daily income of Smith, 200 loaves of bread. Daily income of Brown, 200 loaves of bread. Total 400 loaves of bread.” Yet there is only one _real_ loaf of bread there all the time! The other 399 are imaginary.