One of E. C. Riegel’s most important published articles is, Money Is the Language of Accountancy, which was published in The Journal of Accountancy, the official publication of the American Institute of Accountants, in November 1945 (pp. 358-360).
In this article, Riegel outlines the benefits of a proposed “Private Enterprise Money” system (which I have highlighted), explains its elegant simplicity, and shows how it can be the key to solving myriad economic, social, and political problems.
The article achieves Riegel’s usual high standards of incisive reasoning and eloquent expression, but there are a few points on which I disagree. I therefore find it necessary to write and publish my critique along with it. While Riegel’s explanation of the nature of money is superb, I have some serious disagreements with him regarding the measure of value and the requirements for implementation of the mutual credit system. We now have the advantage of six decades of actual experience with clearing systems of the sort that Riegel envisioned. I also find it necessary to clarify a few of Riegel’s points. I urge the reader therefore to read both the article, which appears below, and my critique which follows it.
Anyone who truly wishes to understand money and to discover the way forward toward justice, freedom, and economic democracy should study Riegel’s works starting with his book, Fight From Inflation. These can be found at http://www.newapproachtofreedom.info/—t.h.g.
Money Is the Language of Accountancy
By E. C. Riegel
Proceeding from the assumption that the study and comprehension of money is an integral part of accountancy, this author explains his own conception of the function of money and credit, proposes the establishment of a “private-enterprise money” system, outlines it’s operation, and lists some of the advantages which he believes would result from the point of view of accountants, in particular, and the national welfare. Mr. Riegel, who is president of the Valun Institute in New York, describes himself as “a non-academic student of credit and money.” He is the author of several books, including a recent volume entitled “Private Enterprise Money,” which develops the proposal outlined in this article.
SINCE money is the language of accountancy, an unstable unit plagues the accountant with a confusion of tongues. This year’s statement is written in a tongue different from last year’s and perhaps even last month’s. Figures are not merely black and red; they are also gray and pink. Taxes are impossible of estimation because when the government runs a deficit there is a hidden tax that manifests itself in inflation. Depreciation cannot be gauged because property may show appreciation in terms of the changing dollar. Profit-and-loss figures are deceptive. Reserves may depreciate or appreciate in terms of the unit. All is confusion. Is accountancy futile?
The problem is serious enough to challenge the profession. If it is not solved accountancy must suffer. If accountants master the problem the profession will be raised to new levels of prestige in the business world. The study and comprehension of money is an integral part of accountancy and must not be left to the voodooism of monetary economics.
Money can best be understood by inquiring into the purpose of it. In simple or whole barter there is no need of money. When barter is to be split into halves, i.e., one trader is to receive full satisfaction in value, and the other is to receive only a promise of value, there arises the need of an accounting system and money is a system of split-barter accounting. It is essential to remember that in the process of trading by means of money, there is no departure from barter, but merely a facilitation of barter by splitting it into two parts, one half finished and the other half prospective. Values still continue to exchange for values with money acting as an interim device, but itself having no value.
Perhaps the easiest way to comprehend money is to imagine ourselves in a position where we had to initiate a system that would enable us to escape from the rigidity of whole barter to the flexibility of split barter. Let us approach the problem as one purely of accountancy, completely divorced from politics.
The problem would be one of providing the means whereby trader No. 1 could receive value from trader No. 2 by the former giving the latter an order for an equal value which order would be acceptable to any trader at any time. An IOU would not be sufficient; it must be converted into a WeOU. In other words there must be a conversion from private credit to composite credit underwritten by all the participants in the trading circle. Obviously, this calls for a pact of all the traders agreeing to honor the promises of each as if issued by all. Mutual or social or composite credit is, therefore, the foundation of a money system and the device that liberates traders from the limitations of whole barter.
Before such common agreement can be obtained two questions must be determined: (a) what is the promise of each that is to be credited by all? (b) what is the limit of such promises? In other words we must define the meaning of the credit and the limit of it. Since the purpose of money is to split barter in two parts with one trader receiving value and the other “holding the bag,” it is obvious that the money must issue from the former (the buyer) and must pledge not money but value and the buyer-issuer promises to deliver value when any money is tendered to him from whatever quarter. Thus we see that the essence of credit under a true money system is not to promise to pay money but a promise to receive money. To comprehend this is to liberate private enterprise from the control of finance.
As to the limit of the credit of each participant, this can be agreed upon on the basis of the needs of various trades, and industries, and professions rather than passing upon the applications of each member thereof. This being done, each participant would be authorized to draw checks against his assigned credit without giving any note or other instrument. The credit would have no term but would be in the nature of a call credit since the pledge is to deliver value on demand by tender of money.
Realizing that we have a mutual credit agreement whereunder the credit can be offset only by delivering value (selling goods or services), it is obvious that we cannot afford to admit to our money exchange as a money issuer any factor [entity, ed.] that is not engaged in the business of buying and selling. Ipso facto governments are excluded since they have no way of making good their promise which is implicit in the issue power. This explodes the delusion that governments back money. It is only private enterprisers that back money; governments merely depreciate it by freely issuing it but never backing it by over-the-counter transactions.
Establishing a Monetary Unit
Before we can give meaning to our agreements we must determine the size or power of the money unit. This may seem formidable but is quite simple. Few people realize that our dollar was given its meaning by merely making it par with the Spanish dollar already current in the colonies and the states. Thus we can agree that our unit (I suggest the name “valun” from VALue UNit) shall be equal to the current dollar or some multiple thereof and set our prices in valuns accordingly.
Having agreed upon the three essentials: (a) the definition of the credit, (b) the extent of the credit, (c) the size of the unit, we are ready to set up a clearing house through which our bookkeeping can operate and to provide the means of covering its expenses. This latter can be accomplished by the simple device of a check-clearing charge. No investment is needed, the
Exchange being able to equip itself on credit based upon its prospective income from check-clearance charges. The Exchange itself would have no money-issuing power but could draw only upon accrued income. To provide currency in bills and coins would be very simple. The Exchange would purchase the bills and coins and they would be subject to requisition by members by cashing a check. Such requisition would bring a debit to the account of the check writer and a credit to the account of “the currency controller.”
A deposit of currency would, of course, bring the reverse action. The cost of printing the currency and minting the coins could be charged to each drawer or thrown into overhead and covered by the check-clearing charge just like the cost of printing check books.
These are the general outlines of the establishment and operation of a private-enterprise money system. For details I must refer the reader to my book, Private Enterprise Money. Since the substance of the whole plan is mutual credit there is no occasion for anybody to pay interest to anybody and, of course, there is no place for the promissory note. Check drafts and deposits are the only instruments of record and the “money-makes-money” principle is absent. Money is made the instrumentality of the private profit system but of itself is valueless and profitless. This revolution has tremendous significance in the issue between private enterprise and collectivism because the criticism of the former is due entirely to financism.
The reason a private-enterprise money system assures stability of the unit and gives definite meaning to accountancy is that no units will be issued except for value received since each trader in self-defense must restrict his issue to selfish purposes. There could be no issues for boondoggling, or relief, or subsidy, or war, because the government would have no issue power. There could be no inflation or its reflex, deflation. This does not imply that the government could not carry out any project that the taxpayer approved, but it does mean that such approval would be necessary since the taxpayer would be the sole source of money and the government would be powerless to tax by the deficit process of changing the power of the unit through inflation. In brief, we would have government of government—democracy at last. The private-enterprise money system would accomplish the following:
Provide a stable price level.
End the debt-money system. Credit would be extended solely on the promise to pay with goods and services.
Abolish interest within the system.
Take the money-creating power out of the hands of government and banks and place it in the hands of private enterprisers.
Make government operate on a cash basis; prevent deferred and delusive taxes through inflation.
Assure distribution of goods by distributing money power.
Prevent inflation and deflation.
Defeat bureaucracy, fascism, and communism by taking the money power from government
Defeat hidden money control from any quarter.
Assure full employment and a high standard of living.
Give the people the veto power over war and all government extravagances.
Supply the perfecting element in democracy and private enterprise.
If the accounting profession will interest itself in the establishment of a true money system it will render an incomparable service to business and the public. The study of the subject is not extra-curricular; it is part and parcel of accountancy. No profession can gain so much from its solution; none must suffer so much from its non-solution.
Money and Reconversion
The reconversion problem with which the nation is now engaged is basically a problem of dollar-power conversion from the prewar power to the current power. By rationing and restraints upon spending, the action of demand upon supply has been cushioned. This cushion must be removed and since there are now about eighteen available dollars for each dollar of consumer goods (at 1939 prices) we face a tremendous potential inflationary price rise. If through the self-restraint of the people, or by artificial restraints imposed by government, the accumulated dollars are not permitted to come into the market, industry will stagnate and relief and public-works payments will increase the unbalance between a dollars and goods. When the flood breaks prices will skyrocket into runaway inflation. The dollar must be converted, sooner or later, from its prewar power to its natural current power which will grow progressively smaller and I believe will not be arrested short of complete fade-out.
The creation of a private-enterprise money unit is, therefore, imperative if we are to escape chaos and bloodshed. The subject is one of greatest urgency and I hope that the accountants will actively participate in the project.
This article was published in The Journal of Accountancy, November 1945, pp. 358-360. (Official Publication of the American Institute of Accountants).
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A Brief Critique of E. C. Riegel’s article, Money Is the Language of Accountancy
By Thomas H. Greco, Jr.
“Having agreed upon the three essentials: (a) the definition of the credit, (b) the extent of the credit, (c) the size of the unit, we are ready to set up a clearing house through which our bookkeeping can operate and to provide the means of covering its expenses.”
I agree that “the essence of credit under a true money system is not to promise to pay money but a promise to receive money,” but I cannot fully agree with his proposals for b) and c).
Regarding b), he says:
“As to the limit of the credit of each participant, this can be agreed upon on the basis of the needs of various trades, and industries, and professions rather than passing upon the applications of each member thereof. This being done, each participant would be authorized to draw checks against his assigned credit without giving any note or other instrument.”
Surely, the nature of the member’s particular business must be considered, but it cannot be the sole criterion for determining credit limits. I would want each account limit to be based, at least, upon their historical volume of business, plus perhaps one or two additional factors, like their reputation and overall contribution to the welfare of the community. Also, he does not make clear that there must be some formal underlying agreement defining rights and responsibilities of membership in the clearing exchange.
Regarding c), the size of the unit, it is not enough to set its initial value equal to the dollar at the time of commencement, as Riegel suggests. That is only a logical starting point, considering that dollar valuation is what we are all accustomed to. Dollars is the value “language” we understand. But unless the system unit is defined in physical terms, it will simply depreciate along with the dollar as debasement of the dollar by the monetary authorities continues. I’ve written about that before in my books. In order to maintain its value over time, the credit unit (Riegel calls it a valun) must be defined in terms of something other than the dollar. My choice of definition has long been a “market basket” of basic commodities, because that will be the most stable measure over time and is impossible for any group of entities to manipulate.
Further, I think it is naive and inconsistent for Riegel to say that, “No investment is needed, the Exchange being able to equip itself on credit based upon its prospective income from check-clearance charges. The Exchange itself would have no money-issuing power but could draw only upon accrued income.”
I agree that the system should support itself through transaction fees, i.e., what he calls “check-clearance charges,” but if the Exchange itself has no money issuing power, how is it to cover its start-up costs? Either some up-front investment will be needed, or the exchange must be given a credit line. I favor the former as a safer alternative, but if the exchange is given a line of credit it must be strictly limited on the basis of its anticipated near-term revenues.
Regarding Private-Enterprise Money, Riegel is quite correct in saying, “Since the substance of the whole plan is mutual credit there is no occasion for anybody to pay interest to anybody and, of course, there is no place for the promissory note.”
By way of clarification, what he means is that mutual credit does not require that anyone borrow money into circulation. Thus, there is no need for the issuer of credit to sign a promissory note to a bank or anyone else, or to pay interest on negative account balances. There is however the need for each member of a mutual credit exchange to sign a general agreement that outlines the rights and responsibilities of their participation. I have provide a draft of such an agreement in my book, The End of Money and the Future of Civilization.
The key provision, as Riegel states, is that “no units will be issued except for value received.” That means no monetization of government debts or the inflation of credits on the basis of valueless or non-marketable assets. It is Riegel’s objective and mine to deprive government of the power to exceed its budget by debasing the currency, but Riegel’s insistence that “the government would have no issue power,” may be both impractical and overly restrictive, especially with regard to lower levels of government, like counties and municipalities. Nonetheless, government spending at all levels must be strictly limited to their legitimate tax revenues as approved by the people. Their participation in a mutual credit system must limit their credit issuing power to some small fraction of their annual anticipated tax revenues.
Finally, I wish to make a point about one of Riegel’s predictions. In the final section of the article titled, Money and Reconversion, Riegel says, “The dollar must be converted, sooner or later, from its prewar power to its natural current power which will grow progressively smaller and I believe will not be arrested short of complete fade-out.” Obviously, he was wrong about the “complete fade-out” of the dollar in the post World War II era. There was, indeed, a significant increase in prices at that time, but the tremendous increase in productive capacity that America achieved during the war enabled an unprecedented flood of consumer goods to reach the market rather quickly and absorb the very large savings that people had accumulated. While dollar debasement has continued up to the present day, and the purchasing power of the dollar has continued to decline, the monetary authorities have found many ways to forestall an acute crisis—until recently. Now, concerted action can no longer be deferred. The usury-debt-money system must be transcended, the credit commons must be reclaimed, and a decentralized and democratic network of mutual credit clearing circles is within our power to create. Riegel has provided us a torch to light our way.—t.h.g.