In Part I we elaborated on the thesis of the German economist Heinrich Rittershausen that the appalling world-wide unemployment of the 1930's was caused by the coercive legal tender laws of 1909. The chain of causation is as follows: the French and German governments, in preparation for the coming war, wanted to concentrate gold in their own coffers. They stopped paying civil servants in gold coin.
To make this practice legal they had to enact legislation that gave bank notes legal tender status.
Scarcely did these governments realize that in doing so they set a slow process into motion which, in the end, destroyed the wage fund out of which workers could be paid even before merchandise has been sold to the ultimate consumer. In this second part we examine in greater detail how the wage fund was financed before 1909.
We shall see that the bill market is just the clearing system of the gold standard. If disabled, sooner or later the gold standard will collapse as a result.
We hope that detractors of the Real Bills Doctrine will read this analysis with an open mind, and give their best effort to find a weak point in the argument (if they can), to refute our conclusion, which is as follows.
If the victorious powers had allowed the bill market to make a come-back, and they had rescinded legal tender laws at the end of hostilities in 1918, then the gold standard would not have collapsed in 1931, and there would have been no world-wide unemployment and no Great Depression.
Previous to 1909 circulating capital for the production of consumer goods in urgent demand had been financed, not out of savings, but through discounting real bills at a commercial bank, which would then rediscount them at the bank of issue that supplied the country with bank notes. To be sure, these bank notes represented self-liquidating credit.
They were merely a more convenient form of the bill of exchange from which they derived their potency. They came in standard denomination round figures. Unlike the bill of exchange they could without hassle and loss be broken up into smaller units.
The great convenience they offered was valued by the public so much so that people were willing to pay for it in the form of forgone discount.
When the bill matured and was paid, the bank note was retired. For this very reason it was not inflationary.
The bank of issue would under no circumstances prolong credit beyond the maturity date of the rediscounted bill. If the underlying merchandise could not be sold in 91 days, then it would not be sold in 365 days, certainly not before the same season of the year came around once more. But by that time the merchandise would be stale and could only be sold at a loss, if at all.
Prolonging credit on a mature bill would violate the letter and spirit of the law governing central banking in
Could a commercial bank, nevertheless, roll over a real bill at maturity?
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