Market and Productive Organization [ 205 ]
purely economic category, a commodity used for the purpose of indi-
rect exchange. If gold was the commodity so preferred, a gold standard
was in being. (The attribute "international" in connection with that
standard was meaningless, since for the economist, no nations existed;
transactions were carried on not between nations but between indi-
viduals, whose political allegiance was as irrelevant as the color of
their hair.) Ricardo indoctrinated nineteenth-century England with
the conviction that the term "money" meant a medium of exchange,
that bank notes were a mere matter of convenience, their utility con-
sisting in their being easier to handle than gold, but that their value de-
rived from the certainty that their possession provided us with the
means of possessing ourselves at any time of the commodity itself,
gold. It follows that the national character of currencies was of no con-
sequence, since they were but different tokens representing the same
commodity. And if it was injudicious for a government to make any
effort to possess itself of gold (since the distribution of that commod-
ity regulated itself on the world market just as that of any other), it was
even more injudicious to imagine that the nationally different tokens
were of any relevance to the welfare and prosperity of the countries
concerned.
Now the institutional separation of the political and economic
spheres had never been complete, and it was precisely in the matter of
currency that it was necessarily incomplete; the state, whose mint
seemed merely to certify the weight of coins, was in fact the guarantor
of the value of token money, which it accepted in payment for taxes
and otherwise. This money was not a means of exchange, it was a
means of payment; it was not a commodity, it was purchasing power;
far from having utility itself, it was merely a counter embodying a
quantified claim to things that would be purchased. Clearly, a society
in which distribution depended upon the possession of such tokens of
purchasing power was a construction entirely different from market
economy.
We are not dealing here, of course, with pictures of actuality, but
with conceptual patterns used for the purposes of clarification. No
market economy separated from the political sphere is possible; yet it
was such a construction which underlay classical economics since Da-
vid Ricardo and apart from which its concepts and assumptions were
incomprehensible. Society, according to this layout, consisted of bar-
tering individuals possessing an outfit of commodities—goods, land,
[ 206 ] The Great Transformation
labor, and their composites. Money was simply one of the commodi-
ties bartered more often than another and, hence, acquired for the
purpose of use in exchange. Such a "society" may be unreal; yet it con-
tains the bare bones of the construction from which the classical econ-
omists started.
An even less complete picture of actuality is offered by a
purchasing-power economy* Yet some of its features resemble actual
society much more closely than the paradigm of market economy. Let
us try to imagine a "society" in which every individual is endowed
with a definite amount of purchasing power, enabling him to claim
goods each item of which is provided with a price tag. Money in such
an economy is not a commodity; it has no usefulness in itself; its only
use is to purchase goods to which price tags are attached, very much as
they are in our shops today.
While the commodity money theorem was far superior to its rival
in the nineteenth century when institutions conformed in many es-
sentials to the market pattern, since the beginning of the twentieth
century the conception of purchasing power gained steadily. With the
disintegration of the gold standard, commodity money practically
ceased to exist, and it was only natural that the purchasing power con-
cept of money should replace it.
To turn from mechanisms and concepts to the social forces in play, it is
important to realize that the ruling classes themselves lent their sup-
port to the management of the currency through the central bank.
Such management was not, of course, regarded as an interference with
the institution of the gold standard; on the contrary, it was part of the
rules of the game under which the gold standard was supposed to
function. Since maintenance of the gold standard was axiomatic and
the central banking mechanism was never allowed to act in such a way
as to make a country go off gold, but, on the contrary, the supreme di-
rective of the bank was always and under all conditions to stay on gold,
no question of principle seemed to be involved. But this was so only as
long as the movements of the price level involved were the paltry 2-3
percent, at the most, that separated the so-called gold points. As soon
as the movement of the internal price level necessary to keep the ex-
changes stable was much larger, when it jumped to 10 percent or 30
* The underlying theory has been elaborated by F. Schafer, Wellington, New
Zealand.
Market and Productive Organization [ 207 ]
percent, the situation was entirely changed. Such downward move-
ments of the price level would spread misery and destruction. The fact
that currencies were managed became of prime importance, since it
meant that central banking methods were a matter of policy, i.e.,
something the body politic might have to decide about. Indeed, the
great institutional significance of central banking lay in the fact that
monetary policy was thereby drawn into the sphere of politics. The
consequences could not be other than far reaching.
They were twofold. In the domestic field, monetary policy was
only another form of interventionism, and clashes of economic classes
tended to crystallize around this issue so intimately linked with the
gold standard and balanced budgets. Internal conflicts in the 1930s, as
we will see, often centerd on this issue which played an important part
in the growth of the antidemocratic movement.
In the foreign field the role of national currencies was of over-
whelming importance, though this fact was but little recognized at the
time. The ruling philosophy of the nineteenth century was pacifist
and internationalist; "in principle" all educated people were free trad-
ers, and, with qualifications which appear ironically modest today,
they were no less so in practice. The source of this outlook was, of
course, economic; much genuine idealism sprang from the sphere of
barter and trade—by a supreme paradox man's selfish wants were val-
idating his most generous impulses. But since the 1870s an emotional
change was noticeable though there was no corresponding break in
the dominant ideas. The world continued to believe in internation-
alism and interdependence, while acting on the impulses of national-
ism and self-sufficiency. Liberal nationalism was developing into na-
tional liberalism, with its marked leanings towards protectionism and
imperialism abroad, monopolistic conservatism at home. Nowhere
was the contradiction as sharp and yet as little conscious as in the
monetary realm. For dogmatic belief in the international gold stan-
dard continued to enlist men's stintless loyalties, while at the same
time token currencies were established, based on the sovereignty of
the various central banking systems. Under the aegis of international
principles, impregnable bastions of a new nationalism were being un-
consciously erected in the shape of the central banks of issue.
In truth, the new nationalism was the corollary of the new interna-
tionalism. The international gold standard could not be borne by the
nations whom it was supposed to serve, unless they were secured
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