John Zube, 7 Oxley St., Berrima, NSW 2577        23 Jan. 89

Kevin Dowd

Dear Kevin, 
            I received today with thanks your paper : The Monetary Economics of Henry Meulen, with your personal note, read it right away and eliminated "beauty spots" on the photocopy with liquid paper while doing so, readying it for the next microfiche.
                                            
You have been busy and productive. I am still working on getting a combined issue of my Monetary Freedom "newsletter" out, Nos. 3/4, 12pp.

Your Meulen essay is probably the longest and most sympathetic description of Meulen's free banking approach that does exist so far. It is the best one, from my point of view, bar for its omission of Beckerath's criticism. Admittedly, this omission is inevitable as long as you persist in holding that the real bills doctrine ( not just some misunderstandings and distortions of it ) is entirely fallacious.

I do not have many comments to make, your description of Meulen's monetary freedom ideas being excellent. On the evaluation of his ideas we will continue to differ, at least for a while.

Page 4 : "...the credit token is intrinsically worthless, and is 'circulated by reason of the reputation of the issuer alone', and because the loan is repaid." - Such a short description does not do justice e.g. to debt foundation, shop foundation, both amounting to debt or demand foundation and achieving a sufficient and sound reflux, i.e. at any time sufficient certificates stream back, pushed by the debtors, wanting to rid themselves of their debts with them and with "legal tender" ( in the meaning of juridical payment ability towards the issuer ), towards the issuing centre, with such a strong, persistent and short term demand for the issues that its exchange rate against any sound value standard used, will keep it at or close enough to par. That is very different from your kind of reflux - for metallic redemption. Trust and confidence play no role in the kind of reflux that I am interested in. Only sufficient market information, publicity and knowledge of the sound issue and reflux technique are required.

The notion of something being "intrinsically" worthless should be applied not only to the medium of private exchange media but also e.g. to marriage certificates, land titles, shares, tickets, bonds, etc., in order to show how intrinsically worthless it is to judge the value of certain claims that are suitable for circulation, purchases, sales and the settlement of debts.

Page 13, last par.: Meulen did simply not go far enough towards achieving independence from the quantity of gold that is locally, nationally or internationally available for payment purposes, while it would remain available and could be used for value standard purposes, without redemptionism by the issue - through gold weight value clearing, within an economic environment based upon free choice of value standards. Under a system of gold for accounting purposes only and for payments only when a debtor is sufficiently supplied with gold, wants to use it for payments and the creditor is willing to accept it, there would be less fluctuations in the price of gold compared with the price of other commodities. Bottleneck crises would be largely avoided avoided - apart from the war and civil war dangers and natural catastrophies that might temporarily boost the demand for physical gold, when the right of creditors to demand physical gold in payment is finally abolished or not reestablished.

Pages 14 and 15 : Meulen did not go far enough in his discussion of the separation between means of exchange and value standards and his "ideal" unnecessarily combines the two again. Not only did he never properly discuss the option of gold for clearing only, no matter how often Beckerath brought up this subject but he did not even discuss, appreciate or fear certain aspects of legal tender. Legal tender is barely mentioned in his book and essays and, it seems to me, never fully comprehended in its nature and consequences. This in spite of his decades of agitation against a forced and fixed exchange rate between national currencies. Among the vast variety of private means of exchange that are possible, he confined his discussion largely to his favourite choice. Well, I guess that is the privilege of any innovator. Maybe the fact that England itself has never suffered under a gallopping paper money inflation has something to do with it, too, in te same way as the development of English goldsmith banks has coloured his - and your own thinking. Beckerath and Rittershausen have distinguished much more and better between "Freikurs" and "Festkurs", the exchange medium and the value standard function and applied the differences much more in their proposals.

Page 19 : Why is it fallacious to say (1909, p.8 ) "that the issue of credit would not increase prices because it 'not only creates a demand for goods but provides a means for supplying such a demand.'"? While true for many cases, it is not true for all. I can think of at least some instances where this statement would be correct. For instance, in the issue of goods warrants covered by ready for sale consumer goods. Then the goods, in abstract, certified, typified, standardized form, freely transferable and in money denominations, using whatever value standard is agreeable to all sides, or corresponding accounts, would establish a demand for the real goods themselves. Goods-side and money-side would be in full balance. Admittedly the mere equivalent supply of goods in the FUTURE would not be enough. The goods ( and service ) cover must be immediate. Goods warrants issues are not suitable to finance the production of future goods directly, although they could be indirecly used for this - based on the ready availability of present goods.

Please, do spell out for me the "fallacies" of the real bills doctrine, as you and others have seen them, point by point. I would then attempt a point by point refutation. I would also like to film all references to the pro and con.

Page 22/23 : "...The price level is indeterminate in the long run." You describe the dynamics of price developments as if they were monetarily exclusively dependent upon the suppliers of money. That makes too much of a concession to the situation where there are only monopolistic money suppliers and the sellers of goods and services have to accept their product at par. Under monetary freedom not only the potential issuers would be liberated but also the potential acceptors. They would no longer be subjected to forced acceptance and forced value. They would have free choice of value standards and would tend to become rather careful in selecting the value standard in which they price out their goods and services, so that their prices and wages would be as little as possible influenced by monetary changes and that largely only changes in the supply and demand for goods and services would affect them. While no absolutely perfect standard is likely to be found or invented and applied, a close enough to perfect standard would be possible and popular among them. Its acceptance would be boosted through the free competition between various private curencies. They would be accepted only their market rating against this standard or such standards. In other words, in terms of these alternative standards, largely set by the sellers of goods and services, the prices would monetarily remain rather unchanged. The issuers of private currencies would be under pressure to adopt such standards for their issues. And their issues, being subject to free market rating, could not deteriorate these standards. In other words, the value standard determination would not be left exclusively to the good will, wisdom, good management, issue technique and competition between the issuers. Consumer sovereignty would be applied to the commodity "money", too.

Page 29, note 13 : Meulen may here have followed the old failure of the Mutualists to distinguish between interest rates for turnover credits and interest rates for capital investments ( medium and long-term credits ). The former could easily be reduced to the transaction costs. Moreover, seeing that these credits are only short term and how high storage, advertising, sales cost in general and profit margins are in this sphere, even high interest rates were here rarely a deterrent. It was much more imporant to be certain that one could get the required credit when one needed it. Only free competion and its alternative dicounting options could make certain of that. Interest rates for capital investments might develop quite differently under monetary freedom - combined with speeded up technical and economic developments. While saved capital would rapidly increase, too, tending to depress interest rates in this sphere, technical and economic developments might race ahead even faster and increase them. People able to pay them in alternative currencies would not consider them such a burden. Moreover, interst rates would probably come to express more directly and in percentages a fraction of the additional earnings which an investment would make possible : no fixed rate but a lower or higher rate according to the productivity of an investment.

Page 31, note 28 : Well put. Perhaps one should attempt to enumerate all inconsistencies of Meulen.

Page 31, note 31 : Is it in the acceptors' interest to over-accept? Both sides of the coin should be considered when issuers are no longer "at liberty" to force their depreciated or fraudulent issues upon an ignorant and passive public deprived of monetary rights and liberties. The right to refuse acceptance or to accept at most only at the market value, does not appear to be sufficiently dealt with among recent academic articles on free banking. Probably the rare metal redemption obligation, which is almost exclusively discussed, has sidetracked their thinking from the other options.

Page 32, note 32 : "...real bills doctrine, namely, that no issue of debt can raise prices provided it brings forth in an increase in output." - I do not find this a fair statement of the real bills doctrine as I see it. The real bills doctrine was not referring to ALL debts but only to those involved in "real bills", i.e. sound commercial bills. As such, a short term time factor would be involved, not e.g. a bond obligation running over 20 years. Moreover, sound commercial bills would not be speculative "financial bills" but would represent goods ALREADY PRODUCED AND SOLD, usually by a manufacturer to a wholesaler. These goods would be on the way to their final market and, usually reach it and be sold there, by the retailers, by the time the short term bill, representing an actual goods turnover, would be due. It could then be redeemed and this redemption would take place, in most cases, through the very same small segments of it into which it had been cut up by the discounting process, namely by the banknotes. The transaction would not upset but maintain a balance between goods and money issued, between bills and banknotes. Goods output would be increased only insofar as sales would be more certain than they were before. But this increase would not be the basis for the issue. If the discounting bank is a shop association that issues its own goods warrants, while at the same time largely acting as a final distributor for the goods the "real bill" refers to, then the final sale of the goods would be as certain as it could be made. 
Furthermore, your statement does ignore the fact that under freedom not all debt certificates issued have to be accepted by all or have to be accepted at par. Sellers of goods and services, who are not under contractual acceptance at par obligation ( because they are not e.g. members of the issuing bank ), would be at liberty to refuse, or accept only at their market value, any over-issued debt certificates of others. Over-issues would thus not be able to automatically drive up prices.
Moreover, your statement does not clearly indicate that an issue of debt might be accompanied by an equivalent and immediate acceptance obligation. Primitive instance: You are gambling with a barber, who has run out of cash and you need a haircut and some other goodies he has to offer. He issues his IOUs up to an agreeable amount and you accept them.

Naturally, if instead of the "real bills doctrine" as it really is, in my opinion, the "asset currency principle" were applied ( under the name of "real bills doctrine" ) and long term capital assets were issued in form of currency with legal tender power, then even the greatest long term productivity of these capital assets would not give them a sufficient, i.e. equivalent immediate purchasing power towards the existing goods and services. Their legal tender power would drive prices up. But real bills advocates are OPPOSED to such issues and discuss, to my knowledge, only immediately or short-term self-liquidating debt issues accompanied by equivalent acceptance obligations. However, I am all too poorly supplied with literature references on this and largely merely extrapolate from German discussions on this subject which are available to me. Seeing how extensively many basic terms have been misunderstood and misinterpreted and misdefined, I would not be surprise if you could quote me many references which do back up your "strawman" interpretation of the "real bills doctrine".

Your article on Meulen brought much that was new to me and raised points that I had forgotten. It will lead, I hope, to further articles on the strengths and weaknesses of Meulen's analysis and proposals.

P.S. : I do not have my previous letter to you on hand, it being in the stack rady for fiching, but I believe that I wrongly mentioned that I had no copy of Henry Mark Holzer's Government's Money Monopoly, its origin and scope and how to fight it. I did unearth my copy of it recently, while attempting to alphabetize my collection.

Enclosures - if they fit within a reasonable postage weight limit : Symour: The Monomaniacs, LMP supplementary FBlist Jan. 89, letter to Schuler, note to Capie, to Cown/Kroszner, to Dowd, The Gold Standard, LMP-money leaflet.

             PIOT, John.