And Free Markets A Summary; V. O. Watts

AND FREE MARKETS A SUMMARY .... V. ORVAL WATTS The creature, man, can now help control and direct creation and humans progress only insofar as individuals become aware of this unique opportunity and take ad vantage of it. In other words, hu mans prosper and progress only as they become aware of their powers of choice, self-control, and self direction, and as they learn to exercise these powers crea ti vely. This is what we mean by saying that the human individual must accept responsibility for his own acts. He must learn that he is re sponsible as the primary cause for what he does, and to survive and progress he must gain wisdom and take charge of the process of ac quiring those habits we call "char acter," "virtue," "morality," and "personality." PRIVATE PROPERTY The first condition for this learning process and development is pr'ivate property, or, more sim ply, property, for all true property is private. Individual appropria tion of standing room and of the means of subsistence is necessary for mere existence, and individual appropriation of land and tools is equally necessary for anything more than mere existence, that is, for any degree of prosperity and progress. The prosperity and progress of every human society correspond to its members' respect for the right of the individual to own, control, and use land and the fruits of his labor, thrift, and enterprise in production and ex change.

This individual appropriation and responsibility for finding, de vising, and employing the "means of production" (land, natural re sources, tools, machines, and other forms of capital) is capitalism. It follo,vs from freedom from vio lence and intimidation (threat of violence). Where such freedom, or 49 50 THE FREEMAN January peace, exists, individuals have property in what they find, pro duce, or obtain by voluntary gift or exchange. COOPERATION Equally essential for human prosperity and progress is coopera tjon. Humans need one another. None is sufficient unto himself. One of the most critical problems of human progress, therefore, is to maintain and improve coopera tion while individuals exercise and develop their powers of self-direc tion and invention. These powers are the most important of all qualities distinguishing humans from animals or beasts. They are the qualities which also make a human - at least potentially - far more useful than any domesticated animal or inanimate machine.

But the risks of depending on the cooperation of free persons correspond to the opportunities for progress. Fear of these risks - knowledge that our welfare and even our very Iives depend on the work and service of other persons - tempts us to resort to violence or threat of violence to assure con tinued cooperation or to increase it or improve it. The result of such coercion, however, is increasing antagonism and conflict or irre sponsibility and apathy, which reduce cooperation. We cannot get true cooperation by force or threat of force because humans are self controlling and will exert their peculiarly human powers (e.g., initiative and inventiveness) only in pursuit of self-selected pur poses. In perfect freedom, or pure capitalism, an individual would try to get the help of his fellows only by offering in return an induce ment - something which other persons want and which they do not have or do not have in suffi cient abundance. This inducement might be merely expressions of gratitude. But since man does not live by gratitude or praise alone, inducements in capitalistic (free) societies include offers of rela tively scarce and desirable services and commodities - economic goods. This is the Golden Rule as it applies in the business of mak ing a living.

MARKETS But how can an individual know what goods to produce in order to get what he wants from others who may be distant from him in space or tastes? The answer is to be found in the operation of the market place. Exchange values - wages, interest rates, rents, profits, and losses1966 MONEY AND FREE MARKETS 51 act as signals and incentives to producers. A relatively high price is more than a "trumpet call to production." It provides also an increased opportunity to those getting it to increase the supply of the relatively scarce service or commodity. MONEY For efficient marketing, or ex change, hoth money and credit are essential. Money is necessary as a measure of values and a medium of exchange. Credit is necessary whenever it takes time to complete an exchange. In contrast with economic goods, money is useful only when scarce. Air and water are still useful even when they are so ahundant that no one will pay anything to get n10re, but money becomes useless when everyone has all he wants of it. Gold would still have a use for filling teeth or for plating a man made satellite if we had all we "ranted of it, but it would no longer have use as money, because no one would give anything in ex change for it.

CREDIT Credit and money are often con fused with one another, but they are actually as different as day and night. Money is a means of payment, credit is only a promise to pay. It arises in connection with an incomplete exchange. Except in the case of simple barter, it is seldom possible or economical to make a simultaneous and complete exchange of services between two persons or to complete payment at the same instant each unit of services is performed. Most exchanges in all societies except the most primi tive take time to complete, and while incomplete, credi t is given and received. From the lender's standpoint, credit involves trust that the bor rower (the person who gets goods or money on credit) will complete the exchange (pay later). From the borrower's standpoint, credit involves a promise to pay - a promise to complete the exchange at some future time by giving value in exchange for the goods or money presently received.

To repeat, credit arises in an incomplete exchange. CREDIT CURRENCY The borrower may give the creditor a written promise to pay, but such records, or credit instru ments, are not credit, and the number or face value of such in struments has only a loose and 52 THE FREEMAN January indirect relation to the volume of credit in actual use. Neither are such instruments money even though they pass from one person to another in settle ment of obligations. Circulating credit instruments, such as private bank notes or bank checks, are a form of currency, but they are promises to pay money rather than money itself. Their usefulness as a medium of exchange, or cur rency, depends on creditors' con fidence in the maker's ability and willingness to pay the money promised when due or to deliver claims of equal value against other credit-worthy producers or prop erty owners. GOLD STANDARD When a debtor promises to pay in gold or some other commodity, he accepts the value of this com modity as the standard (measure) of value for his payment. He does not always or necessarily deliver the standard money (e.g., gold) in payment, but to avoid doing so and yet satisfy his creditors he must deliver goods or claims on goods which the creditor prefers to gold. This means that the debt or must price his goods (or those assets he liquidates in order to get the wherewithal to pay his debt) low enough so that buyers will prefer them to gold and give him gold or its equivalent for them.

In this way, a standard money, such as gold, exerts constant pres sure on individuals to use credit productively and to keep their prices in line with the value of the standard. If the standard com modity, e.g., gold, becomes abun dant and cheap, sellers may cor respondingly raise their prices. But gold has become the generally accepted standard in free markets precisely because - although widely distributed in nature - it has not come on the market faster than the demand for it has in creased, except for comparatively brief periods. BANKING The specialists in credit (e.g., bankers, savings institutions, in surance and investment com panies) record the values ad vanced as loans, or "credits," act as producers' agents in making ad vances and collections, and serve as clearing-houses for drafts, or ders, and other forms of credit currency used as evidences of loans and payments, exchanges, and repayments.

Since a borrower commonly uses a credit from one producer (or from the financial agent of a pro1966 MONEY AND FREE MARKETS 53 ducer, such as a bank) to make fun and satisfactory payment to another producer, it is easy to con fuse credit (especially bank credit) or the evidences of this credit (currency) with money, and to believe that the demand for goods and the supply of credit de pends on the amount· of borrow ing and the spending of borrowed funds. In this limited view, the borrower is a public benefactor merely because he borrows, buys, and consumes. When this limited and fallacious view of credit and of credit currency dominates polit ical policy, it leads to waste of productive resources and to stat ism (governmental restriction of freedom) . In freedom, the borrower is ex pected to repay the loan, and lenders who fail to collect payment suffer losses and find themselves correspondingly deprived of their credit and lending power. To repay the loan, however, the borrower must either reduce his later spend ing by the amount of the loan (in ,vhich case there is no net increase in demand or spending for goods), or he must produce and sell more goods to get the means of pay ment. Since lenders usually charge interest for their loans, thus re quiring repayment of more than was originally loaned, borrowers have a corresponding incentive to use their borrowings to maintain their earning power or to increase it. Hence, in freedom, borrowers and lenders tend to use credit eco nomically and productively.

We should note, too, that cred itors and sellers of goods in free markets tend to reject or discount inferior currencies, i.e., currencies that are inferior in convenience and intrinsic worth. Consequently, in freedom, good money drives out bad money. Or, more precisely, among private currencies in free markets, more trustworthy and convenient forms of currency tend to replace inferior currencies.! FIAT MONEY Governments, and only govern ments, may deClare certain credit instruments (usually government IOU's or the IOU's of banks con trolled by government) to be full legal tender. This means that cred itors can legally demand nothing better or more valuable in payment of debts owed to them. This legal1 Since, so far as I know, this law is my own discovery, stated in my classes and public lectures nearly 20 years ago, friends have named it "Watts' Law of Money." Long study of banking and mon etary history, as well as economic analy sis, convinces me that it is a valid ob servation of an economic uniformity, or law. Therefore I am willing to accept re sponsibility for putting the statement of it into circulation.

54 THE FREEMAN January tender act by government trans forms the credit instruments into "fiat money," or "paper money." The purpose of this act is com monly to increase the means for paying debts (including the gov ernment's own debts) and thus make them easier to pay. It there by aids debtors at the expense of creditors. It is to such legal tender money that Gresham's Law ap.plies. Gov ernments compel creditors to ac cept all legal tender money at face value. Yet they sometimes issue new kinds of money having less in trinsic worth than coins of the same stated legal tender value still in circulation. This was the case when the Tudor monarchs were de basing the coinage during the life time of Sir Thomas Gresham, Lon don merchant and government financier. Gresham then noted (as Oresme and Copernicus had before him) that "bad money drives out good money." That is, debtors and buyers of goods make their pay ments in the money of less intrin sic worth, while they hoard, melt down or ship abroad the coins hav ing greater intrinsic worth. 2 2 We have seen this verified in the United States for two years or more as paper dollars replaced silver dollars and half dollars in circulation, as wartime nickels of higher silver content disap peared from circulation, and now as the new "sandwich" quarters and dimes re place coins of much higher silver content.

DEFICIT SPENDING When the fallacious view that borrowing per se is a public ser vice prevails in politics, the gov ernment is likely to manufacture "lawful money" (legal-tender paper, or fiat money) to permit the borrower to avoid a cut in his fu ture spending as he pays his debt. It may then issue paper money to lend or give to "needy," or "de serving," spenders, or to buy the products of favored producers re gardless of the economic value or usefulness of these goods. Such policies waste labor and capital which might otherwise increase the supply of goods (and of credit) in the free markets, and they encourage unproductive bor rowing and consumption of goods. Furthermore, when government gets the authority to print legal tender money , it is likely to use this easy method for increasing its own spending for political pur poses, as, for example, for molding public opinion to support its ex pansion of power, for hiring police, spies, soldiers, and tax col lectors to enforce its multiplying rules and levies, or for buying votes, wholesale or retail.

But as government thus expands its activities beyond those neces sary to· establish freedom (Le., to suppress private coercion, such as 1966 MONEY AND FREE MARKETS 55 banditry, assault, and stealing), it takes from individuals a corres ponding amount of freedom to use their energies and capital accord ing to their own best judgment. It thereby restricts their opportunity to develop their most important powers - those powers which most of all distinguish humans from animals; and so it restricts human progress. This encroachment of government on individual freedom is commonly called "statism." Political constitutions are sys tems of rules by which freedom seeking humans have tried to re strict government activities to those believed necessary for wel fare. In this sense, the state and Federal constitutions of these United States were originally the most restrictive constitutions of which we have record, and until about 1898 they served as effective barriers to the advance of statism in this country. ~ Opportunities to "Do Good"

Too MANY OF us get it into our heads that to "do good" we must go far outside our daily routine interests. Glenn Frank once said: "The rich man's greatest oppor tunity for public service lies inside his private business. That is to say, statesmanship in business is of greater so cial value than philanthropy outside business." A man with the genius for successfully running a busi ness is right where he belongs; the opportunities to "do good" are greater in business than outside business. WILLIAM FEATHER, in The William Feather Magazine, July, 1965 SOME THIRTY years ago surveys of employee motivation were con ducted in great depth by some pretty hard-headed personnel or ganizations, and the eventual re sults were published and widely studied in such magazines as Fortune. To the surprise of everyone con cerned, the primary goal of the employee, both clerical and indus trial, was neither salary nor "se curity" but a sense of personal worth, of achievement in the job, and the desire to receive a fair deal and recognition from the em ployer.