The world crisis - Herman Cahn

We are passing at present through the greatest crisis in human history, a crisis affecting not only Europe, heretofore the theatre of the most decisive historical events, but every part of the world. This situation is faced by various groups of men from their particular subjective points of view. There are those who believe that the culmination of the crisis can be prevented by political and financial measures, and, in the last resort, by repressive force. Then there are humanitarians who offer schemes, sometimes ingeniously elaborated, for a slow, but peaceful transition to a new social order, their purpose being to prevent the crisis from developing into a violent world-wide social spasm. But the scientist faces the question of the crisis, as he does any question, without bias — that is, without any object other than that of learning the truth. He does not start with the question: how can the crisis be handled in order to accomplish a particular purpose, to steer it in a particular direction, but rather with the question : What is the nature of the crisis and what must be its logical outcome? Is such logical outcome independent of interference, like an act of nature ? The only tools of use in such an investigation are materialistically conceived history and fundamental economics. History as a mere suite of stories or even conceived as the working out of an abstract idea, in the manner of Hegel, and economics consisting of nothing more profound than studies of current business affairs, are of no avail.

The outstanding phenomenon of the present crisis is the unemployment or only part-time employment of millions of men in all large industrial countries. But this lack of work running parallel with equally wide-spread want, and disease from want is a contradiction repugnant to sense. How explain the contradiction? Have the technical means of production been destroyed in the war? Only within a comparatively extremely small area. Is it due to the loss by death in the war of so many intelligent and trained industrial leaders? But organizing and inventive genius was never more active than at present. Is it the wasting of human labor during the war? The labor devoted to the war has been compensated by the labor then not devoted to the normal civil consumption.

If, then, the means of production and the technical skill are unimpaired, if the waste of labor is compensated by past privation and human labor power is still so abundant, why were these agencies not turned in full force from war production to peace production? In spite of all the destruction of the most terrible war, human society still disposes of vastly more wealth and natural resources than it ever did. But one thing has been nearly destroyed by the war; a thing which, though of absolutely no reasonable use in itself in the process of production and distribution, is indispensable in our present, the capitalist form of society. The destruction of money lies at the bottom of the world crisis.

The following table of exchange rates rates in New York gives an approximate picture of the depreciation of the principal European currencies :

Quotations of Journal of Commerce, August 8, 1921

country | par | rate | depreciation %

Austria | $ .2026 per crown | .0010 1/4 | 99
Hungary |» » » | .0025 1/2 | 99
Czechoslovakia | » »| .01258/4 | 94
Poland |.2383 » mark | .0005 1/4 | 99
Germany |» » | .0121 3/4 | 95
Rumania |.193 » franc | .0129 | 93
Italy | » » » | .0430 1/2 |78
Greece |» » » | .0545 | 72
Belgium |» » » | .0745 | 61
France |» »» | .0775 1/2 | 60
Spain | » » » | .1283 | 34
England | 4.8662 » pound | 3.60 | 26
Holland | .402 » florin | .3061 | 24

This list, however, might be lengthened to include every country in the world in its exchange relation to the United States which alone may claim that its currency system is unimpaired. The correctness of this claim remains unproven so long as the gold here is withheld from circulation. The question may, however, be very well left in abeyance so long as the country's exports are so largely in excess of its imports and there exists no call on its stock of gold for exportation to settle balances of foreign obligations. This stock constitutes half of the world's supply and is being further increased by constant arrivals from abroad, thus accentuating still more the unbalanced state of world capitalism.

Everybody knows that the degradation of money is due to the enormous issues of paper tokens under stress of war. But that terrible event has really done no more than develop with abnormal rapidity the disease with the germ of which money was born. Even if there had been no war at all, depreciation would undoubtedly have started by this time in many countries. It is a noteworthy fact, at any rate, that even countries which profited greatly by the war, like Holland and Spain, have now considerably depreciated currencies, whatever the particular reasons in each case may be. The economic category Money, like every other human institution, has its period of growth and its period of decay and death, and as the writer has shown prior to the outbreak of the war, the process of decay had even then advanced far and the monetary mechanism could be seen nearing its breakdown with ever increasing momentum.

In a system of production resting on individual responsibility, but in which the products are intended for the use of others, money of a given value is an indispensable necessity. It is obvious nonsense to think, as nevertheless many people do, that the universal exchanges could be affected by direct barter between the individual persons or corporations.

No country can exist as a capitalist state without money. Poland, Austria and Hungary have only the semblance of such and continue merely to vegetate. The capitalist governments may persist in their efforts to render proletarian rule in Russia impossible. They may succeed in replacing it by chaos, possibly by cannibalism, but never by capitalism.

But even before depreciation has reached extremes, the position of capitalism begins to become precarious. Time was when rates of exchange varied only within 1% in the course of years. Every importer knew very nearly what the final cost of his goods would be at maturity of the banker's acceptance, say in six months. Commerce could then be conducted on a legitimate basis. Exporters often were out of pocket the expense of cabling offers at the rate of several dollars per word on account of price differences of less than 1%. Today international commerce is a gamble. In the course of a few months lire have risen from 3% to 5% and then declined to 4 1/14, an advance of 60% from the lowpoint and recession of 20% from the larger sum involved. In March 1920 marks stood at 338.5 to the pound sterling, three months later at 150.

The solvency of the French government, with its liabilities of 500.000 million francs (debts, reparations, pensions), depends to a large extent on the solvency of Germany, which country is the pivotal point on which history will turn. Germany's paper money has been increased forty five fold.

Assuming the value of the commodities to be circulated within a given time (not their price, but their value as measured by gold) to be equal to that of the days before the war — a favorable assumption considering the loss of territory — then the value of the paper mark is now 1/45 of the gold mark.

That the exchange rate still maintains itself at around a twentieth of the gold mark is due to an enormous speculation in German money in foreign countries. Should the currency and bonds be returned by the foreigners for realization and their deposits in German banks withdrawn, then the exchange rate in New York, now 1 1/4 cents per mark must fall to 1/2 cent. Germany will then have travelled 98% of the road to the extinction of her money.

J. M. Keynes is one of those who think that somehow a way will be found out of the dilemma without their being able to form any clear ideas on the subject. This Writer in an article dated March 27, 1921, which appeared in the « New York Evening Post », suggests in the case of Germany that the simplest and most sensible way might be to abolish the mark in favor of some new unit. It is fair to suppose that he has in mind a unit of higher value. Possibly he may contemplate a new paper money unit of not only higher, but also of steady value, on a par with gold. It must at once be admitted that such a measure would save much addition, multiplication and division. If, furthermore, the printing on slips of paper of the figure « l » where formerly stood the figure « 100 » will rejuvenate capitalism and, by periodical repetitions, insure it eternal life, that result would rank with the rejuvenation of a man of 100 and the enabling him to begin again to count his age from 1. The idea, as Mr. Keynes says, appears simple enough (on the face of it), but how sensible is another matter. We should like to ask for a few particulars.

Is the new money to be distributed among the German people at so much a head? Is the new money to be redeemable in gold on demand to prove its parity at any moment? How many days will the gold treasure of 1090 million marks be likely to stand the rush? Will the paper remain at par after the promise to pay shall have become impossible of fulfilment? Or is the new money to be issued as an irredeemable legal tender? If so, what will insure its parity even for a day? Is the new money to be issued in exchange for old at a certain proportion although the latter may have become almost worthless at the time ? If so, on what principle is the exchange to be based?

For instance, if done tomorrow would the basis be relative to real value, 1 for 45; to foreign exchange value, 1 for 19; to world market prices, 1 for 25; to home market prices, 1 for 14 (the last two figures according to the London Statist and Frankfort Zeitung); or to the average rate of present wages which have risen even less than home prices? According to the conversion on one or the other principle, must there not ensue dangerous class conflicts in the endeavor to readjust wages, prices, profits and rents to the particular value relation on which the new unit is based?

Supposing, however, that all the difficulties were overcome, the best that can be said of the realization of any such scheme would be that it leaves smaller numerals to be dealt with. But the new paper money cannot help still representing a variable and generally declining value. It would leave the fatal evil untouched. There can be no possible cure for the failure of gold which is final, because its production has lagged woefully behind the industrial expansion. Mr. Keynes may, perhaps, be able to convert back the hundred billions depreciated paper marks into the original two billions of gold value, but in doing so he reduces automatically in the same proportion the sum of the money of account (banking capital and deposits) of which the full volume had been required a few years ago as an equivalent of and substitute for gold. Now this former and by far greatest substitute for the golden substance would be reduced to a sum absurdly inadequate for the economic requirement. This alone shows the utter futility of Mr. Keynes' remedy.

On the other hand any substantial improvement in the value of the currency, no matter how it came about, would imperil the existence of the German banking system as a whole. The banks have made great gains from the rising prices of shares of industrial corporations whose inventories showed unusual gains on paper, but in reality expressing mainly the progressive depreciation of money. A price movement in the opposite direction would have the contrary effect on the banks; they would suffer corresponding losses. The banks of Germany as a whole have now liabilities of more than twenty-five times their own capital and surplus, and this means that a loss of 4 "o on their investments would wipe out their own resources and responsibility, and destroy the German banking system. The substantial improvement of money would be more swiftly fatal than its deterioration has been.

The kernel of the present world crisis lies in the fact that money, the prime economic factor in social progress hitherto, has now run its course finally and irretrievably. The yellow metal which has so long ruled men is now reduced to an infinitesimal fraction of the monetary system which consists almost entirely of unsubstantial substitutes — shadowy checks and paper money. The dethronement of gold was written in the stars, as the increasing value of products required an ever greater money supply which the gold mines failed to furnish. Therefore it may be stated as a fact that money has lost its functions of measure of value and of means of deferred payment, and to a great degree lost that of means of circulation. The value of the paper money is only moonshine, a reflection of the light that the value of the commodities, which somehow must be circulated, imparts to the paper. It has no light of its own with which to measure value. Neither can it serve as means of deferred payment (or credit) owing to the unsteadiness of its value. And finally paper money is failing as a means of circulation, because of the fabulous sums ultimately becoming necessary compared with gold. The existing stock of the latter has an intrinsic value historically handed down and readjusted according to the influence exerted upon its value by changed costs of production of the additions of new metal. But augmentation of the paper money beyond its ability to symbolize gold adds not an iota to the value of the sum of the existing issue, while it reduces the value of its units. And not only of its own units, but also of those of money of account, which represents nothing but the debts of the banks, but which far exceeds in volume that of paper tokens in all countries with a developed banking system. It follows that the reduction in the value of the units of paper money is accompanied by a reduction in the value of the sum of the far more voluminous money of account which cannot be added to by the printing press, but depends for its growth on the slower process of accumulation from profits. The fabulous sums of paper money required can never be reached, because of the previous destruction of the value of money of account and therefore of the destruction of the world's monetary mechanism.

The situation created by the failure of money can be illuminated by using as an example figures mentioned already in this article which relate to Germany, but the example holds good for any country with a greatly depreciated currency. While the domestic prices in Germany have advanced fourteen-fold only, (because average wages rose still less), world market prices calculated in German currency advanced twenty-five-fold. The latter prices are at variance with the former owing to unequal degrees of depreciation in different countries or its entire absence in the single case of the United States. It is not possible to finance on a cash basis the enormous sums of the depreciated currencies of the industrial countries necessary for adequate importation from the countries producing raw materials. International trade has never been carried on to any extent on a cash basis, but to finance international trade on the former basis of 3, 6 or 12 months credits, entails the risk either for the exporter or the importer of an expected normal profit turning into a great loss. Nevertheless the capitalists of the United States have granted credits abroad since the armistice estimated by some as high as 7.000 million dollars. But credit is not an unlimited quantity which can be drawn upon ad libitum. The limit is reached when the accumulation of unliquid assets becomes a danger to the banks.

During the present year a great decline in the exports from the United States has set in, notwithstanding lower dollar prices and an easier money market. At any rate, the United States cannot carry all world capitalism on its shoulders. And so it has come about that the cry raised immediately after the armistice for more production, to counteract the inflation of the paper money and of the banks, vanished amid the closing of factories.

The present crisis is not like the crises of the past, of which the end, sooner or later, could be foreseen. It is a social crisis, a great turning-point in history. Capitalism has finally lost control of the means of production, lost the ability to provide the means of life for mankind. The pioneer in large scale production, it has completed its historic mission and must give place to a higher system, that of complete social integration and of a single world-embracing economy.

What stands in the way of the social transformation is not so much the resistance of the bourgeoisie, who still feel rightly that they have something to lose, as the support of the present social system by a majority of the proletariat. The latter class is not aware of the nature of the present crisis, believing it to be merely an adventitious outcome of the war and of temporary nature. It expects a convalescence of capitalism, to effect which it offers its co-operations, hoping for the return of the days of steady employment and good wages. It is conservative-minded, fearing possible hardships during the period of transition. It feels that the social change had better be left to the next generation who might find it easier to effect the same.

But history does not wait for the opinion of any class or of all men. The human race does not act on the strength of intellect primarily, but under the compulsion of economic laws above its head. Men will only try hard to understand, and will only act decisively on the understanding, when the love of life is matched against patient hope. The chief of the American Red Cross has reported that in the city of Budapest in the single month of March 1921 there were 1200 suicides from starvation. No other way out of misery than suicide may seem open to people who feel themselves isolated, but it is not conceivable that European men will lie down en masse by the roadside to die, as the Hindus used to do.

Nobody but wishes that the coming revolution may be peaceable. But that will only be possible with the aid of the bourgoisie and high-salaried intellectual workers. Such a possibility cannot be dismissed as chimerical, but it will not be a matter of proposing shrewdly devised schemes. Schemes will not work. No schemes. When economic conditions shape themselves so that these privileged strata have to economize on their dinners, wear shabby clothes and dispense with even modest luxuries it may not be worth their while to fight for the old order. Then they may rather, or at least many among them, help with their valuable knowledge in facilitating the transition and hastening the oncoming of the inevitable new order.

New York.
HERMAN CAHN

Source: Scientia, rivista di scienza, V. 32 (July-Dec. 1922), pp. 249–57.

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Note

Not much is known about the forgotten Marxist theorist Herman Cahn. He probably lived somewhere between 1850–1930. He migrated from Germany to the United States as a young adult. He was a founding member of the Socialist Party in 1901. His daughter Anita C. Block (1882–1967) helped found the socialist New York Call. He was on the leftwing during the war (i.e. not a pacifist). Cahn's book Capital to-day; a study of recent economic development (1918) was called by Mary Marcy 'the most momentous contribution to an analysis of capitalist society since Marx'. Online at: https://archive.org/details/capitaltodaystud00cahnrich It was translated in Chinese in 1930.

It is like an American version of Hilferding's Finance capital; a study of the latest phase of capitalist development. He further wrote The collapse of capitalism (1919): https://archive.org/details/collapseofcapita00cahn_0 His theory of money was clearly inspired by Hilferding's (which was a revision of Marx's).