Proudhon The Exchange Bank Theory

Pierre Joseph Proudhon; The Exchange Bank Theory

The Revolution of 1848 did not take Proudhon quite unawares, although he considered the outbreak was rather sudden. He was soon convinced that the real problem to be determined was economic rather than political, but he also realized that the education of the masses was too backward to permit of a peaceful solution. Proudhon, in this matter at one with his French confreres, had hoped for such a solution. He thought the February Revolution was a child prema­turely born. In a striking article in the columns of Le Peuple he gave wistful expression to his fears as he foresaw the Revolution impending. Its solution had been delivered to none and its interpretation baffled the ingenuity of all.

I have wept over the poor workman, whose daily bread is already sufficiently uncertain and who has now suffered misery for many years. I have undertaken his defence, but I find that I am power­less to succour him. I have mourned over the bourgeois, whose ruin I have witnessed and who has been driven to bankruptcy and goaded to opposition of the proletariat. My personal inclination is to sympa­thize with the bourgeois, but a natural antagonism to his ideas and the play of circumstance have made me his opponent. I have gone in mourning and paid penance for the spirit of the old Republic long before there were any signs of its offspring. This Revolution which was to restore the public order merely marks the beginning of a new departure in social revolution which no one understands.

But the Revolution having once begun, Proudhon did not feel himself justified in being behindhand. He had been a most severe critic of the existing regime, and he felt that he was bound to attempt a solution of the practical problems which suddenly came to the front. He became a journalist and threw himself wholeheartedly into the struggle. Hitherto he had been content with vague suggestions as to where the evil lay. But now he was anxious to make reform practi­cable and to fill in the details of the scheme; and so he invented the Exchange Bank.

Proudhon's exposition of the scheme is contained in a number 01 pamphlets, in newspapers, and in his books. The explanations do not always tally, and he is not always happy in stating exactly what he thinks. This explains why he has been so often misunderstood. We shall try to give a resume of his ideas before proceeding to criticize them and to compare them with analogous projects formulated both before and after his time. This will help us to understand where the originality of the scheme lay.

The fundamental principle on which the whole scheme rests is somewhat as follows: Of all the forms of capital which allow of a right of escheat to the product of the worker, whether in the form of rent, of interest, or of discount, the most important is money, for it is only in the form of money that these dues are actually paid. If we could suppress the right of escheat in the case of this universal form of capital—in other words, if interest were abolished—the right of escheat in every other case would soon disappear.

Let us suppose that by means of some organization or other money required for the purchase of land, machinery, and buildings for in­dustrial purposes could be procured without interest. Were this the case the required capital would then be obtained in that way instead of by payment of interest or rent as is the case to-day. The suppression of money interest would enable the worker to borrow capital gratui­tously, and would give him immediate control over all useful capital instead of renting it. All attempts to hold up capital for the sake of receiving interest without labour would thus be frustrated. The right of property would be reduced to mere possession. Exchange would be reciprocal, and the worker would secure all the produce of his labour without having to share it with others. In short, economic justice would be secured.

This is all very well, but how can the necessary money be obtained without paying interest? Everything depends upon that.
Proudhon invites us to consider what money really is. It is a mere medium of exchange which is designed to facilitate the circulation of goods. Proudhon, who had hitherto regarded money as capital par excellence, now treats it as a mere instrument of exchange. " Money by itself is of no use to me. I merely take it in order to part with it. I can neither consume it nor cultivate it." It is a mere medium of exchange, and the interest paid merely covers this cost of circulation. But paper money will fulfil this function quite as well and much more cheaply. Banks advance money in exchange for commodities or supply bills which are immediately transferable into cash. In exchange for this service the banker receives a discount which goes to remunerate the shareholders who have supplied the capital. Why not establish a bank without any capital which, like the Bank of France, will dis­count goods with bills—either circulation or exchange notes? The bills would be inconvertible, and consequently would cost scarcely anything, and there would be no capital to remunerate.

The service given would be equal to that given by the banks, but would cost a great deal less. All that would be required to ensure the circulation of the bills would be an understanding on the part of the clientele of the new bank that they would accept them as payment for goods. The bearer would thus be certain that they were always im­mediately exchangeable, just as if they were cash. The clients would lose nothing by accepting them, for the statutes would decree that the bank should never trade in anything except goods actually delivered or under promise of delivery. The notes in circulation would never exceed the demands of commerce. They would always represent goods already produced and actually sold, but not yet paid for.

Following the example of other banks, the bank would advance to the seller of the goods a sum of money which it would subsequently recover from the buyer. The merchants and manufacturers would obtain not only their circulating capital without payment of interest, but also the fixed capital necessary for the founding of new industries. These advances obtained without interest would enable them to buy and not merely to rent the instruments of production which they needed.
The consequences of a reform of this kind cannot be easily enu­merated. Not only would capital be freely placed at the disposal of every one, but every class distinction would disappear as soon as the worker ceased selling his products at cost price and government itself would become useless. The aim of all government is to check the op­pression of the weak by the strong. But the moment fair exchange Becomes possible, free contract is sufficient to secure this; there is no
longer anyone who is oppressed. All are equally favoured, for the cause of contention has been removed. "Once capital and labour are identified society will subsist of its own accord, and there will no longer be any need for government." Government has " its origin and its whole being immersed in the economic system." Proudhon's system means anarchy—the absence of government.

Such is Proudhon's plan, and such its consequences. To understand its full significance we must inquire whether (i) the substitution of exchange notes for bank-notes payable at sight is practicable, and, supposing it to be practicable, if it is likely to have the effects anticipated by its author.

Proudhon states that his system merely involves the universal adoption of exchange notes. The Exchange Bank would merely append the manager's signature against the particular commodity discounted.

Rut the issue of bank-notes at the present time involves nothing more than this. Instead of the bill of exchange which it now buys, and which enjoys only a limited circulation because the signatories have only a very limited credit, it is proposed that the Bank of France should substitute a note bearing its own signature, which is universally known andd testifies to an illimitable amount of credit. In what respects, then, does proudhon's circulating medium differ from a bank-note? It differs simply in the fact that the signature of the Bank of France involves a promise of reimbursement in metallic money, a commodity universally accepted and demanded, while Proudhon's Exchange Bank enters into no such definite agreement, but merely undertakes to accept it in lieu of payment.

Theoretically, perhaps, the difference may appear insignificant, since the signatures are the only guarantee of the solvency of the notes of the Bank of France and the Exchange Bank alike. But in practice it is enormous. The certainty that the note can be exchanged for money gives it a wide currency and makes it acceptable to many people who rely implicitly upon their confidence in the bank. They need give no thought to the question of its solvency. A mere circulating medium, on the other hand, in addition to transferring a claim to certain goods belonging to clients of the bank, involves a certain amount of confi­dence in the solvency of those clients—a confidence not always easily justified. A note of this kind will only circulate among the bank's clientele. It will never reach the general public as the bank-note actually does. The clients themselves will keep their engagements just so long as the bank continues to discount goods that have actually been delivered and never refuses payment when it falls due. Failing this, the exchange notes, instead of regularly returning to the bank, will remain in circulation. A slight crisis or a little tension, and many of the clients will become insolvent. The total nominal value of the exchange notes will quickly surpass the actual value of the goods which they represent. There will be a rapid depreciation, and clients even will refuse to take them.

It is just possible to conceive of the circulation of such exchange notes, but the area of circulation will be a very limited one, and it will be utterly impossible if all the clients are not perfectly solvent.

Let us, however, suppose that the practical difficulties have been overcome, and that the exchange notes are already in circulation. Interest will not disappear even then, and herein lies the essentia] weakness of the system.
Why does the Bank of France charge a discount? Is it, as Proudhon suggests, because it supplies cash in return for a bill of exchange, so that "the seigneurial right of discount" would disappear with the adoption of a non-metallic currency? The bank charges discount simply because it gives a certain quantity of money immediately exchangeable in return for a bill of exchange payable some months hence. It gives a tangible commodity in exchange for a promise—a present sum for a future. What the bank takes is the difference between the present value of the bill of exchange and its value when it falls due. It is not the mere whim of the banker or the employment of a particular kind of money that gives rise to discount. It belongs to the very nature of things. Proudhon notwithstanding, a sale for cash and a sale with future payment must remain two different operations,1 at least as long as the immediate possession of a sum of money is judged to be more advantageous than its future possession. Experience of forced circulation has shown this clearly. The Bank of France still charged discount after its notes ceased to be convertible. The dis­appearance of metallic money made no difference to the phenomenon of discount.

To this Proudhon would reply that the clients of the bank, under the terms of their agreement, are debarred from taking any such premiums. Of course, if they remained faithful to their promises interest or discount would be suppressed; but this would result, not from the organization of the Exchange Bank, but because of mutual agreement. This would be a purely moral reform requiring no bank­ing contrivance to aid it, but one in which progress must inevitably be very slow.
The Bank of Exchange failing to suppress discount, or to check the right of escheat in general, Proudhon's other conclusions fall to the ground.

There is something else that Proudhon forgets: that even if it is possible to multiply at will the instruments of circulation it is not possible to do the same with the capital that results from saving— i.e., the division of income between consumption and production. The multiplication of exchange notes without any increase in social wealth would have no other effect than to raise all prices—of land, houses, and machinery, as well as of consumption goods. Capital would be lent as before, and being less plentiful the high rate of interest or rent would tend to maintain the high level of prices, and these would in turn be still further increased—a strange outcome of a reform intended to lower them! Proudhon, having exaggerated the evil effects of gold, now accepts Say's formula too literally. J. B. Say allowed himself to be led into error by his own formula that "Goods exchange for goods," and it is interesting to note that the Exchange Bank is the logical, though somewhat paradoxical, outcome of the reaction against the Mercantilist ideas concerning money which can be traced to Adam Smith and the Physiocrats.

This does not imply that Proudhon's idea is devoid of truth. The false ideal of free credit contains the germ of a true ideal, namely, mutual credit. The Bank of France is a society of capitalists whose credit is established by the public who accept their notes. They really deal in public credit. Proudhon saw clearly enough that their notes are ultimately guaranteed by the public. The public are the true signatories of these commercial goods. Were the public insolvent the bank would never recover its advances, which really constitute the security for the bills. The shareholders' capital is only a supplementary guarantee. The Comte Mollien, the Financial Minister of Napoleon I, declared that in theory a bank of issue should be able to operate without any capital. The public lends money to itself through the intermediary, the bank. Why not operate without the intermediary? Why not eliminate the entrepreneur of credit just as the industrial or commercial entrepreneur is eliminated in the case of the co-operative society? Discount would not disappear altogether, perhaps, but the rate of discount for borrowers would be diminished in proportion to the extent to which they stood to gain as lenders. This is the principle of the mutual credit society, where the initial capital is almost entirely superseded, its place being taken by the joint liability of the co-operators. Proudhon's initial conception seems to be reducible to this very simple idea.

It seems that Proudhon was merely following the idea of a co­operative credit bank, just as in other parts of the work he copies other forms of co-operation without ever showing much sympathy for the principle itself.

In addition to a correct conception of the value of mutual credit, there runs throughout his whole system a more fundamental idea which helps to distinguish it from other forms of official socialism which arose either before or after his time. This is his profound belief in individual liberty as the indispensable motive of economic activity in industrial societies. He realized better than any of his predecessors that eco­nomic liberty is a definite acquisition of modern societies, and that every true reform must be based on liberty. He has estimated the strength of spontaneous economic forces more clearly than anyone else. He has demonstrated their pernicious effects, but at the same time he has recognized, as Adam Smith had done, that this was the most power­ful lever of progress. His passionate love of justice explains his hatred of private property, and his jealous belief in liberty aroused his hostility to socialism. Despite his famous formula, Destruam et edificabo, he destroyed more than he built. His liberalism rested on his profound hold of economic realities, and the social problem of to-day, as Proudhon clearly saw, is how to combine justice with liberty.

Proudhon's project for an Exchange Bank must not be confused with analogous schemes that have appeared either before or after his day. All these schemes have a common basis in a reform of exchange as a remedy for social inequalities. Apart from this one idea the resemblance is frequently superficial, and the economic bases differ considerably.

(1) Proudhon's idea has often been contrasted with Robert Owen's labour notes, and with the scheme prepared by Mr Bray in 1839, in a work entitled Labour's Wrongs and Labour's Remedy, as well as with the later system outlined by Rodbertus. Proudhon's circulating notes have nothing in common with the labour notes described by these writers. The circulating notes represent commercial goods produced for the purpose of private exchange. Prices are freely fixed by buyer and seller, and they bear no relation to the labour time, as is the case with the labour notes. The final result, doubtless, was expected to be the same. Proudhon hoped that in this way the price of goods, now that it was no longer burdened with interest on capital, would equal cost of production. This result was to be obtained indirectly. The economic errors in the two cases are also different. Proudhon's error lay in his failure to realize that metallic money is a merchandise as well as an instrument of circulation. The error of Owen, of Bray, and of Rodbertus consisted of a failure to see that the price of goods in­cludes something more than the mere amount of labour which they have cost to produce—an error which Proudhon at any rate did not commit.

(2) Proudhon's bank has also been confused with other banks of exchange which are really quite different. The ideas underlying such schemes had become prominent before Proudhon's days, and numerous practical experiments had been attempted along the lines indicated. These banks aimed, not at the suppression of interest, but at a gradual rapprochement between producer and consumer, the goods offered for sale being bought by the bank, and paid for in exchange notes upon an agreed basis of calculation. Buyers in their turn would come to the bank to obtain the necessaries of life, paying for them in exchange notes. An experiment of this kind was made by a certain Fulcrand Mazel in 1829. In this case the bank was merely an entrepot which facilitated the marketing of the goods produced. Such a system is open to the objection that the value of the notes issued in payment for goods would necessarily vary with the fluctuations in the value of these goods during the interval which would elapse between the time they are taken in by the bank and their eventual purchase by consumers.

Proudhon's plan was to discount the goods already bought or actually delivered. The bank would only advance what was actually promised, but would make no charge for accommodation. Depreciation could only arise if the buyer were insolvent. It could never result from a fall in price as a result of a diminished demand for the product. Proudhon renounced all dealings with solidarity when he dismissed Mazel's project.

(3) M. Solvay, a Belgian entrepreneur, has recently elaborated a scheme of 'social accounting.' He also proposes the suppression of metallic money and the introduction of a perfect system of payment. Here, however, the analogy ends.
What Solvay proposed was the replacement of metallic money, not by bank-notes, but by a system of cheques and clearing-houses. His plan owes its inspiration to the modern development of the clearing­house system. Solvay thought that the system might be so extended as to make the employment of money entirely unnecessary. To every such clearing-house the State would hand over a cheque-book, cover­ing a sum varying with the amount of real or personal property which the house possessed. This cheque-book was to have two columns, one for receipts, the other for expenditure. Whenever any commodity was sold, the liquidation of debt would be effected by the buyer's stamping the book on the receipt side and the seller's stamping it on the expenditure side. As soon as the total value of these transactions equalled the initial sum which the chequebook was supposed to represent the book would be returned to the State bureau, where each individual account would be made up. "In this way everybody's receipts and expenditure will always be known with absolute clear­ness."

The advantage of such a system would in the first place consist in the economy of metallic money. In the second place it would furnish the State with information as to the extent of everybody's fortune. The State would then be in possession of the information necessary for setting up an equable scheme of succession duties which would gradually suppress the hereditary transmission of acquired fortune. Such gradual suppression would result in the total extinction of the fundamental injustice of modern society, namely, the inequality of opportunity. It would also help the application of that other principle of distributive justice, namely, 'to each according as he produces.' The idea is Saint-Simon's rather than Proudhon's.

The scope of the proposed reform is quite clear. Social accounting, according to Solvay, is a mere element in a more general conception, that of 'productivism,' which in various ways is to result in increasing productivity to its maximum.
In all this it is impossible to see anything of Proudhon's ideas. With the exception of the suggestion of suppressing metallic money the fundamental conceptions are utterly different. M. Solvay makes no pretence to ability to suppress interest, and he never imagines that money is the cause of interest. The cheque and clearing system is a mere device for facilitating cash payment. It has nothing in common with the Proudhonian system, whereby circulating notes are supposed to place credit sales and cash payments on an equal footing.

The most serious objection to Solvay's system lies in the fact that the suppression of money as a circulating medium must also involve its suppression as a measure of value. It seems difficult to imagine that the universal cheque bank with no monetary support would not result in a rapid inflation of prices because of the superabundance of paper. But although the particular process advocated by Solvay is open to criticism there can be no objection to his desire to diminish the quantity
of metallic money or to further the ideal of equal opportunity for all.

The project was never successfully put into practice. Like the cognate ideas of 'the right to work,' 'the organization of labour/ and 'working men's associations,' the idea of 'free credit' has left behind it a mere memory of a sudden check.

On January 31, 1849, Proudhon, in the presence of a notary, set up a society known as the People's Bank, with a view to showing the practicability of free credit. The actual organization differs con­siderably from the theoretical outline of the Exchange Bank. The Exchange Bank was to have no capital: the People's Bank had a capital of 5,000,000 francs, divided into shares of the value of 5 francs each. The Exchange Bank was to suppress metallic money: the People's Bank had to be content with issuing notes against certain kinds of commercial goods only. The Exchange Bank was to suppress interest: the People's Bank fixed it at 2 per cent., expecting that it could be reduced to a minimum of 1/4 per cent.

Despite these important changes the bank would not work. At the end of three months the subscribed capital was only 18,000 francs, although the number of subscribers was almost 12,000. Just at that moment—March 25, 1849—Proudhon was brought before the Seine Assize Court to answer for two articles published on January 16 and 27, 1849, containing an attack on Louis Bonaparte. He was sentenced to'three'years' imprisonment and fined 3000 francs. On April 11 he announced that the experiment would be discontinued, and that "events had already proved too strong for it," which seemed to suggest that he had lost faith in the scheme.

From that moment free credit falls into the background, and political and social considerations obtain first place in his later works.