The Nationalization of Credit?

by
Ludwig von Mises
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Arthur Travers-Borgstroem, a Finnish writer, published a book entitled Mutualism that deals with ideas of social reform, and culminates in a plea for the nationalization of credit. A German edition appeared in 1923. In 1917, the author had established a foundation under his name in Berne, Switzerland, whose primary objective was the conferring of prizes for writings on the nationalization of credit. The panel of judges consisted of Professors Diehl, Weyermann, Milhaud, and Reichesberg, the bankers Milliet, Somary, Kurz, and others. The judges awarded a prize to a paper submitted by Dr. Robert Deumer, director of the Reichsbank in Berlin. This paper was published in book form by the Mutualist Association of Finland.1

From the background material of the paper we can learn why the author is not concerned with the rationale of credit nationalization, but merely with the details of its realization. Dr. Deumer is presenting a proposal, elaborated in its insignificant details, on the nationalization of all German institutions of banking and credit, and the establishment of a national credit monopoly. But his plan can be of no interest to us as no one is contemplating its implementation in the foreseeable future. And if there ever should be such a movement, conditions may be quite different so that the Deumer proposal will not be applicable. Therefore, it would not make any sense to discuss its details, such as article I, section 10, of the "Draft of a Bill Nationalizing Banking and Credit," which reads,

"He who engages in any banking and credit transaction after the nationalization will be subject to a fine not exceeding ten million gold marks, or imprisonment up to five years, or both."2

Deumer's work is of interest to us because of its motives for the nationalization of credit, and its statements on a reform that preserves the superiority of "profit" management over "bureaucratic" management. These statements reveal an opinion that is shared by a large majority of our contemporaries — yes, that is even accepted without contradiction. If we should share this Deumer-Travers-Borgstroem-mutualist position we must welcome a nationalization of credit and every other measure leading to socialism. In fact, we must agree to its realizability and even its urgent necessity.

The public welcomes all proposals designed to limit the sphere of private property and entrepreneurship because it readily accepts the critique of the private-property order by the Socialists of the Chair in Germany, the Solidarists in France, the Fabians in Great Britain, and the Institutionalists in the United States. If the nationalization proposals have not yet been fully realized we must not search for any opposition in social literature and the political parties. We must look to the fact that the public realizes that whenever enterprises are nationalized and municipalized or government otherwise interferes with economic life, financial failure and serious disruption of production and transportation follow instead of the desired consequences. Ideology has not yet taken stock of this failure of reality. It continues to hold fast to the desirability of public enterprises and the inferiority of private enterprises. And it continues to find only malice, selfishness, and ignorance in opposition to its proposals, of which every objective observer should approve.

Under such conditions an analysis of Deumer's reasoning seems to be in order.

1. Private Interest And Public Interest

According to Deumer, banks presently serve private interests. They serve public interests only inasmuch as these do not conflict with the former. Banks do not finance those enterprises that are most essential from the national point of view, but only those that promise to yield the highest return. For instance, they finance "a whiskey distillery or any other enterprise that is superfluous for the economy."

"From the national point of view, their activity is not only useless, but even harmful."

"Banks permit enterprises to grow whose products are not in demand; they stimulate unnecessary consumption, which in turn reduces the people's purchasing power for goods that are more important culturally and rationally. Furthermore, their loans waste socially necessary capital, which causes essential production to decline, or at least their costs of credit, and thus their production costs, to rise."3

Obviously, Deumer does not realize that in a market order, capital and labor are distributed over the economy in such a way that, except for the risk premium, capital yields the same return, and similar labor earns the same wage everywhere. The production of "unnecessary" goods pays no more and no less than that of "essential goods." In the final analysis, it is the consumers in the market who determine the employment of capital and labor in the various industries. When the demand for an item rises its prices will rise and thus the profits, which causes new enterprises to be built and existing enterprises to be expanded. Consumers decide whether this or that industry will receive more capital. If they demand more beer, more beer will be brewed. If they want more classical plays, the theaters will add classics to their repertoire and offer fewer antics, slapstick, and operettas. The taste of the public, not the producer, decides that The Merry Widow and The Garden of Eden are performed more often than Goethe's Tasso.

To be sure, Deumer's taste differs from that of the public. He is convinced that people should spend their money differently. Many would agree with him. But from this difference in taste Deumer draws the conclusion that a socialistic command system should be established through nationalization of credit, so that public consumption can be redirected. On this we must disagree with Deumer.

Guided by central authority according to central plan, a socialistic economy can be democratic or dictatorial. A democracy in which the central authority depends on public support through ballots and elections cannot proceed differently from the capitalistic economy. It will produce and distribute what the public likes, that is, alcohol, tobacco, trash in literature, on the stage, and in the cinema, and fashionable frills. The capitalistic economy, however, caters as well to the taste of a few consumers. Goods are produced that are demanded by some consumers, and not by all. The democratic command economy with its dependence on popular majority need not consider the special wishes of the minority. It will cater exclusively to the masses.

But even if it is managed by a dictator who, without consideration for the wishes of the public, enforces what he deems best — who clothes, feeds, and houses the people as he sees fit — there is no assurance that he will do what appears proper to "us." The critics of the capitalistic order always seem to believe that the socialistic system of their dreams will do precisely what they think correct. While they may not always count on becoming dictators themselves, they are hoping that the dictator will not act without first seeking their advice. Thus they arrive at the popular contrast of productivity and profitability. They call "productive" those economic actions they deem correct. And because things may be different at times, they reject the capitalistic order, which is guided by profitability and the wishes of consumers, the true masters of markets and production. They forget that a dictator, too, may act differently from their wishes, and that there is no assurance that he will really try for the "best," and, even if he should seek it, that he should find the way to the "best."

It is an even more serious question whether a dictatorship of the "best" or a committee of the "best" can prevail over the will of the majority. Will the people, in the long run, tolerate an economic dictatorship that refuses to give them what they want to consume and gives them only what the leaders deem useful? Will not the masses succeed in the end in forcing the leaders to pay heed to public wishes and taste and do what the reformers sought to prevent?

We may agree with Deumer's subjective judgment that the consumption by our fellow men is often undesirable. If we believe this, we may attempt to convince them of their errors. We may inform them of the harm of excessive use of alcohol and tobacco, of the lack of value of certain movies, and of many other things. He who wants to promote good writings may imitate the example of the Bible Society that makes financial sacrifices in order to sell Bibles at reduced prices and to make them available in hotels and other public places. If this is yet insufficient, there cannot be any doubt that the will of our fellow men must be subdued. Economic production according to profitability means production according to the wishes of consumers, whose demand determines goods prices and thus capital yield and entrepreneurial profit. Whenever economic production according to "national productivity" deviates from the former, it means production that disregards the consumers' wishes, but pleases the dictator or committee of dictators.

Surely, in a capitalistic order a fraction of national income is spent by the rich on luxuries. But regardless of the fact that this fraction is very small and does not substantially affect production, the luxury of the well-to-do has dynamic effects that seem to make it one of the most important forces of economic progress. Every innovation makes its appearance as a "luxury" of the few well-to-do. After industry has become aware of it, the luxury then becomes a "necessity" for all. Take, for example, our clothing, the lighting and bathroom facilities, the automobile, and travel facilities. Economic history demonstrates how the luxury of yesterday has become today's necessity. A great deal of what people in the less capitalistic countries consider luxury is a common good in the more capitalistically developed countries. In Vienna, ownership of a car is a luxury (not just in the eyes of the tax collector); in the United States, one out of four or five individuals owns one.

The critic of the capitalist order who seeks to improve the conditions of the masses should not point at this luxury consumption as long as he has not disproved the assertion of theorists and the experience of reality that only capitalistic production assures highest possible production. If a command system produces less than a private-property order it will obviously not be possible to supply the masses with more than they have today.

The poor performance of public enterprises is usually blamed on bureaucratic management. In order to render state, municipal, and other public operations as successful as private enterprise, they should be organized and directed along commercial lines. This is why for decades everything has been tried to make such operations more productive through "commercialization." The problem became all the more important as state and municipal operations expanded. But not by a single step has anyone come closer to the solution.

2. Bureaucratic Management or Profit Management of Banking?

Deumer, too, deems it necessary "to manage the national banking monopoly along commercial lines," and makes several recommendations on how to achieve this.4 They do not differ from many other proposals in recent years or from those which under the circumstances could and have been achieved. We hear of schools and examinations, of promotion of the "able," of sufficient pay for employees, and of profit sharing for leading officials. But Deumer does not see the essence of the problem any more clearly than do any others who seek to make the inevitably unproductive system of public operations more productive.

Deumer, in step with prevailing opinion, seems to believe erroneously that the "commercial" is a form of organization that can easily be grafted onto government enterprises in order to debureaucratize them. That which usually is called "commercial" is the essence of private enterprise aiming at nothing but the greatest possible profitability. And that which usually is called "bureaucratic" is the essence of government operations aiming at "national" objectives. A government enterprise can never be "commercialized" no matter how many external features of private enterprise are superimposed on it.

The entrepreneur operates on his own responsibility. If he does not produce at lowest costs of capital and labor what consumers believe they need most urgently, he suffers losses. But losses finally lead to a transfer of his wealth — and thus his power of control over means of production — to more capable hands. In a capitalistic economy, the means of production are always on the way to the most capable manager, that is, to one who is able to use these means most economically to the satisfaction of consumer needs. A public enterprise, however, is managed by men who do not face the consequences of their success or failure.

The same is said to be true of the leading executives of large private enterprises which therefore are run as "bureaucratically" as state and municipal operations. But such arguments ignore the basic difference between public and private enterprises.

In a private, profit-seeking enterprise, every department and division is controlled by bookkeeping and accounting aiming at the same profit objective. Departments and divisions that are unprofitable are reorganized or closed. Workers and executives who fail in their assigned tasks are removed. Accounting in dollars and cents controls every part of the business. Monetary calculation alone shows the way to highest profitability. The owners — that is, the stockholders of a corporation — issue only one order to the manager who transmits it to the employees: earn profits.

The situation is quite different in the bureaus and courts that administer the affairs of the state. Their tasks cannot be measured and calculated in a way market prices are calculated, and the order given to subordinates cannot be so easily defined as that of an entrepreneur to his employees. If the administration is to be uniform and all executive power is not to be delegated to the lowest officials, their actions must be regulated in every detail for every conceivable case. Thus it becomes the duty of every official to follow these instructions. Success and failure are of lesser importance than formal observance of the regulation. This is especially visible in the hiring, treatment, and promotion of personnel, and is called "bureaucratism." It is no evil that springs from some failure or shortcoming of the organization or the incompetence of officials; it is the nature of every enterprise that is not organized for profit.

When state and municipality go beyond the sphere of court and police, bureaucratism becomes a basic problem of social organization. Even a profit-seeking public enterprise could not be unbureaucratic. Attempts have been made to eliminate bureaucratism through profit sharing by managers. But since they could not be expected to bear the eventual losses, they are tempted to become reckless, which then is to be avoided by limiting the manager's authority through directives from higher officials, boards, committees, and "expert" opinions. Thus again, more regulation and bureaucratization are created.

But usually public enterprises are expected to strive for more than profitability. This is why they are owned and operated by government. Deumer, too, demands of the nationalized banking system that it be guided by national rather than private considerations — that it should invest its funds not where the return is highest, but where they serve the national interest.5

We need not analyze other consequences of such credit policies, such as the preservation of uneconomical enterprises. But let us look at their effects on the management of public enterprises. When the national credit service or one of its branches submits an unfavorable income statement, it may plead, "To be sure, from the viewpoint of private interest and profitability we were not very successful. But it must be borne in mind that the loss shown by commercial accounting is offset by public services that are not visible in the accounts. For instance, dollars and cents cannot express our achievements in the preservation of small and medium enterprises, in the improvements of the material conditions of the 'backbone' classes of population."

Under such conditions the profitability of an enterprise loses significance. If public management is to be audited at all, it must be judged with the yardstick of bureaucratism. Management must be regimented, and positions must be filled with individuals who are willing to obey the regulations.

No matter how we may search, it is impossible to find a form of organization that could prevent the strictures of bureaucratism in public enterprises. It won't do to observe that many large corporations have become "bureaucratic" in recent decades. It is a mistake to believe that this is the result of size. Even the biggest enterprise remains immune to the dangers of bureaucratism as long as it aims exclusively at profitability. True, if other considerations are forced on it, it loses the essential characteristic of a capitalistic enterprise. It was the prevailing etatistic and interventionist policies that forced large enterprises to become more and more bureaucratic. They were forced, for instance, to appoint executives with good connections to the authorities, rather than able businessmen, or to embark upon unprofitable operations in order to please influential politicians, political parties, or government itself. They were forced to continue operations they wished to abandon, and merge with companies and plants they did not want.

The mixing of politics and business not only is detrimental to politics, as is frequently observed, but even much more so to business. Many large enterprises must give thousands of considerations to political matters, which plants the seeds of bureaucratism. But all this does not justify the proposals to bureaucratize completely and formally all production through the nationalization of credit. Where would the German economy be today if credit had been nationalized as early as 1890, or even 1860? Who can be aware of the developments that will be prevented if it is nationalized today?

3. The Danger of Overexpansion and Immobilization

What has been said here applies to every attempt at transferring private enterprises, especially the banking system, into the hands of the state, which in its effects would amount to all-around nationalization. But in addition, it would create credit problems that must not be overlooked.

Deumer seeks to show that the credit monopoly could not be abused for fiscal reasons. But the dangers of credit nationalization do not lie here; they lie with the purchasing power of money.

As is well known, demand deposits subject to checks have the same effect on the purchasing power of a monetary unit as bank notes. Deumer even proposes an issue of "guaranteed certificates" or "clearing house certificates" that are never to be redeemed.6 In short, the national bank will be in the position to inflate.

Public opinion always wants "easy money," that is, low interest rates. But it is the very function of the note-issuing bank to resist such demands, protecting its own solvency and maintaining the parity of its notes toward foreign notes and gold. If the bank should be excused from the redemption of its certificates, it would be free to expand its credits in accordance with the politicians' wishes. It would be too weak to resist the clamor of credit applicants. But the banking system is to be nationalized, in Deumer's words, "to pay heed to the complaints of small industrial enterprises and many commercial firms that they are able to secure the necessary credits only with great difficulties and much sacrifice."7

A few years ago it would have been necessary to elaborate the consequences of credit expansion. There is no need for such an effort today. The relationship between credit expansion and rising goods prices and foreign-exchange rates is well known today. This has been brought out not only by the research of some economists, but also by the American and British experiences and theories with which Germans have become familiar. It would be superfluous to elaborate further on this.

4. Summation

Deumer's book clearly reveals that étatisme, socialism, and interventionism have run their course. Deumer is unable to support his proposals with anything but the old étatist and Marxian arguments which have been refuted a hundred times. He simply ignores the critique of these arguments. Nor does he consider the problems that arose from recent socialistic experience. He still takes his stand on the ground of an ideology that welcomes every nationalization as progress, even though it has been shaken to its foundations in recent years.

Politics, therefore, will ignore Deumer's book, which may be regrettable from the author's viewpoint because he invested labor, ingenuity, and expertise in his proposals. But in the interest of a healthy recovery of the German economy, it is gratifying.

[In Notes and Recollections, Mises revealed that he meant to include this essay — written in 1926 —in the original German edition of Critique of Interventionism (1929). It was left out of that volume through editorial error, but was included in later editions.]

• 1. Die Verstaatlichung des Kredits: Mutualisierung des Kredits (Nationalization of Credit: Mutualization of Credit), Prize Essay of the Travers-Borgstroem Foundation at Berne, Munich, and Leipzig, 1926.
• 2. Ibid., p. 335.
• 3. Ibid., p. 86.
• 4. Ibid., p. 210.
• 5. Ibid., p. 184.
• 6. Ibid., p. 152 et seq.
• 7. Ibid., p. 184.