Classic Essays

Our Loan-Run Economy

The following is an excerpt from Der Deutsche Staat auf nationaler und sozialer Grundlage (The German State on a National and Social Basis), by Gottfried Feder, originally written in 1923, 17th edition, Munich, 1933. Translation of excerpt 1982, by F.B., Australia.

by Gottfried Feder

“WHEN THE STATE needs money, it has to borrow this money from those of its citizens who have more of it than they, themselves, can use. In order to get this money, it would, of course, have to pay interest, otherwise it would not get the money, having enough trouble as it is to place its loans.”

These were the words used by the former socialist minister Dr. David during a talk with me in Berlin. I have used his phrasing here on purpose, because it reflects downright and in model-fashion the interest-oriented capitalistic way of thinking so typical of our age; that it was a Marxist of all people gives it only added spice.

Now, I know from hundreds of talks and lectures that the above words do so completely reflect our capitalist-interest oriented world of thinking that barely anyone felt how incorrect this reasoning in favor of an economy financed by interest-loaded debts was, let alone that anyone could answer this properly.

There is a very simple psychological reason for this, namely, that the above mentioned reasoning holds absolutely true when a private citizen wants to secure money for himself within our capital-interest bound economic system.

For the individual private citizen, as well as for the private sector of the economy as a whole, there is certainly validity to the sentence: “If someone needs money, he has to take up this money against interest from those who have more of it than they can use.”

Gottfried Feder

But it is time for us, as a matter of principle, to stop trying to answer questions of how to finance the national economy from the point of view of private capital, but, instead, take to statesman-like thinking. I contend that this in itself has been our main calamity that the way of thinking in terms of the private economy has been extended to the national economy without further ado.

After all, the state with its powers and sovereign authority cannot be put on a par with any given private citizen. Three mighty potentialities are there at the disposal of the State, from which, on the strength of its sovereignty, it can meet all its needs for carrying out its tasks. These are the sovereignty to require services, to issue money, and to provide finance.

Sovereignty to require services means the right of the State to call on its citizens to render services free of charge. This sovereignty of the State over the individual is manifested most impressively in compulsory military service and, even more so, in war-service. As against the demands made by the state on its citizens in time of war, all other private considerations have to stand back. The family, the job, the business, and the earning of a living, all have to be silent when the State calls its sons to the colors. But the State may not only call on its citizens for war-service, it may do so for economical projects as well; the Emergency Service Act comes to mind which, however, in stark contrast to military service, unfortunately made provisions for ever increasing remunerations for these services, so that soon a wide gap sprung up between the frontline soldiers, who day after day had to put their lives on the line for their country — at no pay — and those working under the protective shield of the frontline at home for high wages. Just in passing, some mighty achievements of other nations may be mentioned, which were based on the population being required to render services: the Great Chinese Wall comes to mind; the ramparts of our medieval towns. In practise, it would be quite within the sovereign powers of the State to bring back to life and to expand the bondmen’s services of old requiring labor and cartage and to solve in this manner important economic tasks.

The sovereignty to issue money is a second potent source to the State by which it can directly meet its needs for money. No-one disputes the authority of the State to strike coins or to issue treasury notes, indeed, by virtue of its sovereign powers, the State has moreover made money out of all possible things. Out of copper, nickel, iron, porcelain, aluminum, and, above all, out of — paper. I only have to remind you of the time when our Government thought it had the right to issue daily 100,000,000,000,000 Mark and even more of paper money. We do not intend to lose any time here or considering in more detail the question of whether it was proper and permissible to do this, we only want to keep in mind here that the State, by virtue of its money-sovereignty, may well meet its needs for money by itself and that, indeed, it is forced in no way “to borrow the money against interest from those of its citizens who have more of it than they, themselves, want.”

Likewise, I doubt that anyone can dispute the financial sovereignty or the taxing-power of the State, and whoever might feel inclined to dispute it and put it to a practical test just by himself, would soon make the acquaintance of the power of the State in the person of the constable. The financial sovereignty or the taxing-power of the State, i.e., the authority of the State to call on its citizens for contributions in money, are as old as any state-like structures themselves. This is also the most natural and the soundest form, although in this field it was left to our time to turn sensible taxation into a complete nonsense and to turn the taxation system into a means for plundering the people wholesale for the benefit of the Supranational World Money Powers. Here, again, we do not want to dwell on the question of the permissibility of taxes, but only point out the fact that the State knows very well indeed how to meet its money needs by way of taxes, i.e., in a way again not open to private needs, which, however, surely and by all means relieves it from the necessity to satisfy its money needs — as the minister, Dr. David, believed — by taking on the obligation of paying interest to the capitalists.

Of course, as with any private citizen, it is an option of the State to cover its needs by incurring — debts. This is a double-edged sword even for the private citizen; however, for the State, this is, frankly and to put it in plain language, the silliest thing it could ever do. But it is not only the silliest thing to do, it is downright criminal in view of the duties of the State as a guardian of the commonweal.

The loan-run national economies have led to the downright ruin of the states and have delivered them into the hands of World Finance; it has delivered the riches of the nations into the hands of the money-powers, and today the government-loans are the dreadful blood-suckers of which the nations cannot rid themselves and from which they will helplessly perish, if we do not bring this nightmare to an end by resolutely breaking this serfdom to usury.

This leads us right into the middle of the field of national finance, i.e., a field wherein the average citizen does not feel at home at all. Even the people’s representatives usually head for the bushes when budget discussions start. What on earth is one to do with all those huge and numerous figures? The ordinary citizen does not follow the budget debates at all, and he holds such a holy respect for the sneaky paths and mazes of the art of finance that he would rather not be bothered at all with these things. Subconsciously, this is surely related to the fact that everyone carries within some sort of nagging awareness of the taxing-sovereignty of the State and the thought of having to part with one’s money is fancied by no one. Only when the tax assessment comes fluttering into the house does our mate realize that these things are of real and considerable concern to him personally, and that he is the one who has to face the music resulting from any wrong financial policies of the state.

Now, it is utterly worth mentioning that at the bottom matters of financial policies are in no way as impregnable and mysterious as they seem to be at first glance, in fact, that they are basically so clear and simple that any average brain can grasp them at least in their outlines.

There is no need, therefore, to give any constitutional arguments to show that the State, indeed, possesses the potentialities outlined above before enabling it to cover its money needs, for everyone knows, and has bodily experienced, what tale there hangs by the State’s sovereignty to require one’s services, the bank notes passed out by the State go through everyone’s hands day after day, and no one can keep clear of taxes. It would, therefore, be the most natural thing for the State to exclusively meet its money needs by these three kinds of procedure.

It is true that these three courses are impracticable for the private citizen, for he would be in no position to successfully recruit his neighbor for any contributions in labor or taxes, nor would it do him really any good if he were to try to print money on his own and bring it into circulation. To him, there is only one way open — to make debts and to pay interest if he is so downright sure that he can make his luck only with other peoples’ money and not by staying clear of debts.

However, that the State, when in need of money, considers only one means to be the appropriate one, namely, to resort to interest-loaded loans — that is to debts — and nowadays makes use of its other sovereign powers only afterwards, in order to squeeze the debt-interest out of the people, this is a state of affairs that defies any justification. Any reasonable justification for this is just not in existence, but only the fact that, with regard to matters of state finances, our whole way of thinking is also completely fashioned, or better, infested, by thinking in private-capitalistic terms. In view of such a complete contamination of public thinking, apparently ‘logical’ justifications of the national loan policy, such as reported by me, are playing an important role, if not to say the dominant one.

With regard to these matters, too, the Jew proved himself a master in psychological inducement. Obviously, one finds it always hard in such cases, or in this connection not to speak rudely of downright corruption on the part of the responsible public figures, but surely, in spite of all that’s said and done, there has not been any corruption involved in most instances, but only the fact of not being sufficiently versed in money and credit matters, of short-sightedness and indolence, that have led to the finance administration’s slow but sure drift into the loan delirium, from which, up to now, they do not know how to escape.

This development was substantially aided by the fact that at first, in the case of big government projects, like railway constructions, etc., there was no harm seen in financing these through loans, as they promised to yield a return. The following conclusions were drawn: Out of the returns from the railways or waterways interest obligations can be met without trouble, as it is us who will lay down the fare policy. The State’s own resources are not sufficient to allow drawing in one stroke all that is required from the own coffers, therefore, the State thankfully accepts the financial assistance of the banks. This saves the government the trouble of having to have new taxes approved by the diet, the liquid assets are left untouched, and the railway can easily pay the interest out of the surpluses. The seducing tricks of loan-capital which, left to itself, would in fact not know what to do with its money, if it failed to find somebody to take it off their hands and, beyond this, pay them interest, had thus succeeded in selling black for white and in making the State itself the interest-collector for private capital.

Even the simplest economical reflection on the part of any responsible government or people’s representative body would lead, one should think, to the following result: If the railways are to be constructed with outside money, and year after year only 5% interest would have to be paid on these monies and everything else connected with it, then within 20 years the equivalent of the entire original amount has been paid back for a start, and twice that amount within 40 years and still the original debt continues to exist. These extraordinary sums, which exceed the original construction costs many times, have to be raised, however, indirectly by the people; to be sure, by the entire population which has to pay higher freight tariffs increased by exactly these amounts of interest. Approaching the nation’s population only one time with a substantial railway levy is, or would be, therefore, far better. Then, for a few years this levy might have been somewhat oppressive, but not much more so than the higher freight costs would have been, and very soon the railways would be a really debt-free state-owned asset, securing a big annual income to the state for years to come. But here again, it is the same old story of knocking off the, dog’s tail a piece at a time, assuming it would hurt him less that way. The opposite is true, of course. No matter along which path one proceeds, in the end the prime costs of such a state-run project will have to be paid by the nation’s population anyway, however, if a loan has been taken out, then inevitably interest will have to be paid on top of all that, adding up over the years to many times the original debt.

In other words, it is financial folly to finance public works of that sort by way of loans. A hint may already be dropped here on how the State is going to be delivered from this loan insanity in the future: No one can prevent the State, in the case of productive projects of this sort, from issuing credit notes, treasury notes, and use these to pay for the work. If the State were to create money in this way, under circumstances where no one would even raise the question of any inflationary effects, because these new money tokens would be backed by newly created assets, this would at once solve all the problems and free the State and the people for all times from interest gobbling debts to private capital.

We shall deal with this problem in more detail later on. An efficient finance administration should manage to arrange things in such fashion, that bigger tasks like these would be provided for out of special tax revenues in conjunction with other sources of government income, and only in part by issuing new money tokens. This possibility would, of course, only come about to some higher degree once all the remaining expenses of the State, particularly the so-called unproductive ones of administration, jurisprudence, and education, etc., could be met out of the surpluses of those public utilities returning an income.

This may sound like irony in view of the present debt-ridden budgets of the railways, the mails, etc., and, yet, we have not been too far away from such a possible state of affairs, as I have already shown in 1919 in my first article, “What Now?”, published by the “South German Monthly” (February issue), under the heading of “The Radical Cure.” From this ideal state of affairs we were only separated by the interest obligations of the State to private capital. The delusion, then already rampant to a high degree, that the State, when in need of money, would indeed simply have to borrow this against interest, has prevented this.

One thing is certain and, I suppose, everyone has been able to follow me this far, namely that the State is in now way dependent on outside money, i.e., on incurring debts, if it wants to undertake anything; it could, for instance, demand that services in labor or cartage be rendered, it could raise special taxes for such a purpose, and finally, it would doubtlessly have the authority to issue treasury notes for such purposes and in this manner to establish the works under planning without making them a burden to the population. Such a procedure would have the enormous advantage to relieve works of this nature right from the start of any interest or tribute obligations; the works would immediately become the unincumbered and debtfree property of the state. Within a short period of time even the treasury notes that might have been issued to begin with could be redeemed and destroyed out of the returns from these enterprises; the price for the products of such enterprises, or for goods or passenger services, respectively, could then be substantially lowered. This would mean doing the entire national economy a good turn in general, the State would have obtained some quite significant sources of income for the benefit of the entire population, and this would have made the State itself completely independent of High Finance. And this is how it should be. For the State is the master of the money system, not High Finance, which means that this is how it will be in the National Socialist State of the future.

The banks have to be blamed for having managed to prevent such an obvious and – once announced – quite self-evident train of thought from getting any hearing at all and to completely befog the government and the economy with the aforementioned cliche and hitch them to the wagon of interest gobbling capital.

I know, although these things are now as clear as the light of day, that many of my readers will continue to distrust their own common sense and simply refuse to believe that such madness was really possible, and they will prefer to think, “This cannot be true. Our government would surely not have been that stupid.” This admission of their inability to judge for themselves how blatantly inefficient the State really is in matters of financial policy is contrasted by their usual readiness to know everything better and to their usual rallying against every governmental measure and, above all, to the fact that these are things that touch on everyone’s sorest spot – their wallet.

I would rather have these people consider one more point, a point which deals with the technicalities of credit granting by the state governments or the Reichstag.

As you know, such big national projects are most thoroughly debated in parliament. Then, finally, at the end of these ever so long debates the “credits are granted.” The average citizen now thinks that everything is fine and that the State, who is such a wealthy and mighty fellow as everyone knows, will for sure be in possession of those millions granted. The super-smarties might go on and scratch their heads and grumble that this would cost us new taxes again. But, I think I can boldly claim that – apart from the initiated, who must not necessarily include the members of parliament or the ministers – only very seldom is there anyone likely to realize that these marvellous credit grants of the state or federal governments mean nothing more than the permission to get these “credits” somewhere else against interest. These credit grants by the people’s representatives do in fact merely authorize the minister in question to obtain these credits from the banks against interest. Therefore, the credit grants by the people’s representatives are nothing but a mockery, a side-show; for the whole of the people, even though they will finally have to pay for capital and interest, to be sure, is not considered to be in the position to effectively provide this “credit,” no, this has to be obtained from Big Loan Capital.

Surely, the only logical thing to expect would be that these credit grants by parliament should naturally and automatically contain the authorization for the Central Bank to now actually pay out and transfer these amounts to the contracting firms in accordance with the drafts signed by the departments in charge of the construction project.

The credits have been granted, however, the legal tender has yet to be provided in one way or another; therefore, it does not make any sense whatsoever to – as is now common practice – first float a loan and then to obtain from the capitalists, so to speak, for a second time, the credits just “granted.”

Now, someone might be tempted to contend that, indeed, by going about things in this manner, the State was thus draining away again all surplus money available in the community, which, in general, would have a beneficial influence on the currency, and that the handling of credits in this way would counteract inflation. But this is, of course, not nearly the truth, and that for reasons which cannot be denied or refuted by any banking expert. Admittedly, a very small fraction of the subscriptions and deposits to such loans will really be contributed in cash, its source being mainly the small savings bank depositors who, for a change, had a go at a loan subscription because they had saved a couple of hundred or thousand Mark and now, for once, also wanted to invest them in interest-bearing papers, in such magical papers of which it is enough to cut off a section every year in order to have a certain amount paid out to you, without the papers thereby losing any of their value. The amounts of money that reach the banks in this way are, however, very insignificant. Besides, the banks who receive such payments do not pass these on to the treasury, but the transfer takes place merely by way of bookkeeping entries.

All larger subscriptions to such a loan are, however, immediately effected by the capitalists through their banks, by cashless transfers or by way of business transactions of the banks, etc.

Hence, in reality, no cash comes into the hands of the state and if it should get any, this would, at any rate, have to be spent again immediately for the works in progress. Therefore, the suggested advantage really does not exist. What really happens, however, is this: As we know, the State issues so-called securities or bonds against the amounts borrowed. These I.O.U.’s of the State are more or less fancily decorated papers containing a deed for the amounts received and owing, endowed with all government guaranteed safeguards and, moreover, containing the necessary provisions regarding the terms of interest payments, and, on separate interest-sheets, the coupons on which the State has promised to make quarterly, semi-annual or annual interest payments based on the amount stated in the Deed. Furthermore, there is a renewal coupon added to these interest-sheets which entitles the owner to receive a newly issued interest-sheet when the original will have expired after a certain number of years.

Now, such a paper issued by the State and for which the State with all its assets accepts full liability for capital and interest, surely and without any doubt does constitute nothing less than ‘purchasing power’ in the hands of the holder. The owner of such government bonds can doubtlessly buy something with these bonds at any time, be it by directly using these papers for payment, or by first selling them at the stock-exchange or to his banker and then using the proceeds to pay cash.

Indeed, there cannot be any doubt whatsoever about the fact that the issuing of new bonds or other securities by the State would be anything else but the creation of additional purchasing power – whether or not it is right and proper to do so shall be of no concern to us at the moment – exactly the same thing would happen if the State were to print new money. The only difference would be that in one case securities would have been created that, in addition to the debt, would saddle the State with a continuous interest burden, while when issuing new paper money, there is no question of any interest charges. I think, by now it is not difficult for us to decide which way is the better one for the State and the people.

However, when we look further into this sort of finance, we find that the method of direct finance of public works, i.e., avoiding taking out loans, has enormous additional advantages.

We have seen that the mode of financing government projects now practised leads to the creation of additional purchase power which is represented by the new securities issued. In this case, the total amount of the loan has to be issued in one lump sum, even if the railways, waterways, etc., being built are still only in construction stage and do not yet represent any appreciable material assets.

If financing of such huge public works projects would be handled in the way suggested by me, firstly, all the enormous advertising expenses could be saved. One has to remember what vast sums are gobbled up alone by newspaper advertisements. Furthermore, just to start with, there would be no more rebates to the banks and credit institutes. These, again, go into millions. Furthermore, the loans are usually issued under par, in other words, for a bond with a face value of 1,000 Mark only 970 Mark, more or less, are paid by those acquiring them and, nevertheless, they receive interest on the full face value. These are losses, too, which accrue to the State, or the public works respectively, and benefit the capitalists. In fact, such loans are dressed up with additional ‘attractions’ by holding out prospects of extra benefits amounting to total tax exemption. I should like to remind you here of Erzberger’s ‘Premium Loan’ which proved to be the craziest thing any government ever lent its hand to in the way of such incentives, The lottery and gambling mania was utilized in advertising the loan by promising millions in prize money on a large number of 1,000 Mark bonds; moreover, the prospect for so-called bonuses was held out and, additionally, a 5% return in interest; and on top of this, the Savings Premium Loan provided for tax exemption for a wide range of other taxes!

Nobody ever wasted any thought on where those vast sums were to come from, with which to pay for these premiums and bonuses, for these fairy-tale lottery prizes, although it should have been obvious to any serious and prudent person that all these amounts, in turn, had to be, or would have to be, extracted from the pockets of the people. For, indeed, the sums received in this way immediately had to be spent again to meet the most urgent expenses. These are all financial crimes against the people which can only leave us in a state of utter amazement regarding the callous impudence displayed in staging them.

Therefore, by keeping clear of the loan racket right from the start, and by making use of direct money-creation instead, all these heavy and unjustifiable charges to the budget would disappear; indeed, it would not even be necessary to produce in paper money the sums in question all at one time, but this could be done very gradually and in step with the progress of the project. This would have the additional enormous advantage that there would be no money issued without backing, as any new and additional money would only be issued whenever another sizeable portion of the project has been completed. Here, then, we would have money fully backed by material assets, which, then, would mean a stable currency, money counterbalanced by so many hours of work completed. Even this much to be preferred gradual issuing of construction money is not the final stage. For, indeed, it will not be found necessary at all to bring into circulation an amount of new money tokens equivalent to the new works being created, as the newly issued notes keep flowing back into the public coffers and can thus again be issued without any additional series of bank notes having to be brought into circulation. And now we go yet another step further by stating that, on principle, it is not necessary to issue any special new money tokens at all for such extraordinary enterprises of the State, although the concept of special construction notes is quite feasible and has served a good turn in illustrating things, and there is nothing wrong with sticking to this concept when trying to achieve certain ends.

This last step is the one toward a completely cashless financing of such national projects. As shown before, it is in fact wrong to suppose that a loan would put cash money into the hands of the State with which to pay the contractors and workers of the railways or powerstation construction projects. Yet, the contractors will still have to get the cash money for their weekly payrolls from the banks. The banks on their part have to cover these extraordinary demands on their cash-reserves through the banks of issue or the central bank. Now, in normal times, the total of the available liquid funds is quite sufficient to meet the payroll demands of the total work force, and, basically, it does not matter whether temporarily – as for example when the Walchensee Power Station was built – an appreciable portion of the work force was there concentrated locally, for had they not held a job there, they would have been scattered over some other plants or would have been supported by dole money. That means that it is the State’s obligation to provide for the national economy’s total need for legal tender, no matter whether or not a certain number of workers are temporarily employed in certain areas to create projects of national importance.

Providing legal tender for payrolls and effecting the remainder of cashless transfers to the contractors are matters of money transaction and have basically nothing to do with matters of credit.

It would, therefore, be most obvious and natural that, when the people’s representatives approve the credit for some national projects, this should automatically include the granting of authority to the central bank to transact the necessary payments in accordance with the credits approved, after the amounts demanded by the contractors have been properly verified by the various government agencies in charge of the project, and directions have been issued in accordance with contracts and regulations to pay these out.

The entire loan-swindle racket sandwiched inbetween – for it is nothing but today’s way of pulling the wool over people’s eyes – is absolutely useless and only harmful to the nation.

* * *

Source: Liberty Bell magazine, April 1992 and Racial Idealism

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26 May, 2019 5:50 pm

We were all told on our first day at school that”printing money causes inflation!” None of us are told on our last day at university that “Borrowing money and then dumping it on our economy causes the same level of inflation!”

Therefore it seems sensible for governments/Treasuries to ‘print’ their own money and lend it to the people with an interest debt calculated to absorb inflation. When this money is returned to government it should spend it on the people. This creates a circular economy that does not require governments to borrow externally. Who would oppose such a regime – any guesses?

Walt Hampton
Walt Hampton
1 June, 2019 5:34 am

It will be running out of steam when JPMorgan quits
pleasing the Federal Reserve System. They have
already driven certain metals prices below the cost
of production. The central bank has a tiger by the
tail, and they dare not let go!

19 September, 2019 5:37 pm
Reply to  Truthweed
20 September, 2019 4:12 am

Very interesting article.

It appears, where ever they go they create little “FEDS”……….