- - N .3 A League of Nations What Are Fighting For ? DEMOCRACY vs. AUTOCRACY By JOHN RAYMOND CUMMINGS Author ~of Natural Money The Peaceful Solution Published by CHITTENDEN CO., CHICAGO Copyright 1918 Chittenden Company PREFACE *+&>i J,/?, "A League of Nations," as set forth in the following pages, is a simple working plan whereby the peoples of the world can realize what is now almost universally recognized as the only real guaranty of permanent peace between na- tions. This, of course, is in that province of statecraft which we may call internationalism. But if the war settlement results only in establishing permanent peace between nations we may find that there is little improvement, or none at all, in the condition of the mass of humanity. To improve inter- national relations without improving intranational conditions might prove a step backward by giving oppressive govern- ments a sense of security against interference. Had a cohe- sive League of Nations been formed ten or fifteen years ago it is probable the Hohenzollern autocracy would have been guaranteed permanence for centuries to come. "What Are We Fighting For?" deals with this intranational diplomacy, which must be complemental to "A League of Nations" unless we are content to look forward to conditions in other nations such as have prevailed in Russia the past year; un- less the victory (now seemingly near at hand) is to prove a sore disappointment to the millions of heroic men and women who have made it possible. "Democracy vs. Autoc- racy" deals with the fundamentals of these opposing princi- ples, and shows how autocracy works its sinister designs in the disguise of political democratic forms. Except "A League of Nations," this booklet is an abbre- viated epitome of a comprehensive system of economic phil- osophy now almost complete. The system is partially set forth in my book, "Natural Money, The Peaceful Solution" (Bankers Publishing Co., New York). JOHN RAYMOND CUMMINGS. 395830 A League of Nations Perpetual Peace and Victory for All UNLESS this world crisis develops some- thing fundamental, bad as it is, it is but the prelude to a more terrible one not far distant in the future. If it does develop the right fundamental, terrible as it is, it will be the cheapest and best war ever waged a war by which the world achieved righteousness. I believe it is almost universally recognized that, whatever the immediate inciting cause, the underlying cause of the war was economic. It is notably a war for world markets, for economic freedom to the extent that it is genuinely demo- cratic, and for economic control to the extent that it is autocratic. Even before the war began, the necessity of a League of Nations to conserve peace had gained wide acceptance in the thought of statesmen, sociologists and the people at large. Interna- tionalism among Socialists and the attempt at concert of action among the wage workers of many nations were expressions of this movement. In its violent forms of syndicalism and sabotage, with which we have had to deal to some extent, it is ominous of an economic debacle that would wreck civilization if such methods should pre- vail. Socialists thought they could prevent war by refusing to participate, but nationalism proved stronger than internationalism, so the Socialists were in the trenches on their respective sides of the national battle lines at the very be- ginning; yet, though nationalism prevailed over internationalism, and though the mass of the peo- ple are resolutely patriotic, even now there is well grounded fear lest the aftermath of the war should be a drastic reorganization, if not a col- lapse, of some of our social institutions which have long been deemed the cornerstones of ma- terial welfare, if not of civilization itself. Lord Northcliffe's leading paper, the London Times, has strongly intimated the necessity of such in- dustrial changes as would have been deemed rev- olutionary before the war, and similar expres- sions are heard on every hand. Not long since, Earl Lansdowne was thought to be paving the way for a compromise peace, with the object of avoiding the internal changes likely to follow in thq wake of a long-protracted war; and there are doubtless many beneficiaries of unjust eco- nomic conditions whose real attitude is, "after us the deluge," whatever position public opinion may force them to assume for the time being. The League to Enforce Peace is doing a noble work, but as yet I have seen no statement in specific and definite details of what the world- embracing League of Nations shall be. It is easy to make the general declaration that we are fighting for democracy as against autocracy. This is true, but the boys at the front want to know something more, and the boys behind the boys at the front; that is, the boys at home who are working loyally to sustain the boys at the front, and the fathers, and mothers, and sisters, and sweethearts who are giving their utmost energies to support the war want to know some- thing more than is conveyed in general state- ments. Many of them have walked the streets or tramped the highways in vain search for employment in this democracy of which we are justly so proud when we compare it with autoc- racy. Some of those now in the trenches did this in 1907, and some were doubtless in the breadlines of New York, Chicago and Philadel- phia. Are they fighting in part to assure their places in future breadlines in a democracy, where opportunity is said to be open to all? Some of them may have read Bismarck's words, spoken in the Reichstag in 1884, "The man who is able and willing to work has a right to say to the Government, 'give me work.' I stand for that as long as I stand in this place." In that declaration he "stole the thunder" of the Social- ists, and by adopting the wise policy and craftily or ignorantly applying it in such way as to sub- serve the ends of autocracy, he rapidly built up the Leviathan Frankenstein that is now seeking to wreck civilization. This policy alone ac- counts not only for the vast amount of energy de- voted to war preparations in Germany, but also for the marvelous economic advance, which has been the wonder of the world. I shall deal in the next chapter with the democratic method of applying the principle Bismarck applied in part only and for the support of autocracy, and shall show a simple method of accomplishing for de- mocracy far more than Germany has accom- plished for autocracy, by recognizing the right of men to work, but even before outlining my plan for making A League of Nations a reality, I desire to emphasize the necessity of immediate action by specific declarations instead of general statements. A Diplomatic Offensive As a result of Russia's collapse, we yielded the military offensive to the enemy, and though we have regained that, we are now in imminent danger of permitting him to retain the diplo- matic offensive until the words "too late" be again written in our record of the war's conduct. We have scoffed at the Kaiser's peace drives, but we cannot reasonably assume that his own people see their hollowness and mockery, nor that the danger is ended. Dr. Frank H. Bohn recently said : "Within three months Germany will develop a peace propaganda which will require every force of thought and will which our national in- tellect and character can bring against it." We should not wait for more peace drives, but should forestall all such action by a single counter-drive expressed in terms so plain, so def- inite and so just that even the German people, deluded and spiritually abused as they have been by false teachers, cannot fail to recognize them as just. Such a statement of what we are fight- ing for will be a double drive. It will inspire our owin soldiers and people to years of effort and self-denial, if need be, and such statement will find its way across No Man's Land and sap the power of autocracy more rapidly than the most violent offensive of arms. Let us there- fore at once assure our boys in the trenches, our people at home, and the peoples of all the world even of the Central Powers that we are fighting for a regenerated and rejuvenated world, from which the snobbery and shams shall be eliminated and in which Mr. Schwab's aris- tocracy of merit shall be permanently estab- lished; assure our boys that they are not coming back to be mere hewers of wood and drawers of water in the land they have saved, but are com- ing back to a land where no man shall ever pine in enforced idleness, and where the people who perform useful service shall get all the useful things produced, each in proportion to his con- tribution of service. This, as I shall set it forth, should at once go to the boys at the front and the boys at home, as the solemn pledge of a nation in its hour of danger, that they may be inspired with the vision of a world from which economic injustice, with its poverty and suffering, have been eliminated. The boys will then have re- ceived satisfactory answer to the question, "what are we fighting for?" and the Kaiser, and Luden- dorf, and Hindenburg, and the junkers, will have been dealt a fatal blow. The Allies' Peace Drive The world is in travail. Internationalism is struggling to be born, and humanity is looking to America that this greatest birth of time be not aborted. The failure of all efforts thus far to establish internationalism on a firm basis is due to lack of a world-wide binding interest of sufficient strength to prevent one or more nations from breaking away. Lack of this cohesive element would be a fatal weakness to A League of Na- tions, and internationalism must be a failure un- til the unbreakable bond is discovered and ap- plied. And as the bottom cause of the war is economic, it is obvious that the bond to bind the nations must be economic. Is there such a bond, and is the world ready for its application to the nations? There is such a bond, and the world is ready. Not only is the world ready it is im- patient and there is no time to lose. In one of the morning editorials, under the heading, "America the Hope of Russia," I read: "A Russian expert has demanded in the Lon- don Times that a group of representatives of the Entente Allies gather at some convenient point and agree on what is to be done to prevent Ger- many from controlling Russia after the war. There is no agreement now"; and in H. G. Wells' new book, "In the Fourth Year: Antici- pations of a World Peace," I read: "One can trace week by week, and almost day by day, the Americanization of the British conception of the allied war aims." Yes, it is to America the world is looking, and we must not disappoint the world's expectations. It is Fate's delight to crush that man or nation that trembles at events and fails to ride them to great purposes. We must not fail. Failure would be a cosmic tragedy. But neither must we be misled by the universal chorus of democ- racy into believing that the "autocrat" and "gen- eral staff' of "The Unseen Empire" have sud- 10 denly been converted to true democracy. They have not. Our profiteers prove that. u To prevent Germany from controlling Rus- sia after the war" we all see the vital impor- tance of this. Most of us see also that Germany must be prevented from controlling Austria- Hungary, Serbia, Bulgaria, Roumania and Tur- key after the war, but how many see the whole truth? Let us not deceive ourselves nor be de- ceived. The larger truth is: We must prevent any^ nation from controlling any other nation. In other words, it is not enough merely to pre- vent German domination of other peoples. We must carry out President Wilson's declaration in good faith and make every nation free. To accomplish this we must have an interna- tional organism as definite and positive in its functions as our national government organisms are. Its functions must contact the daily life and interests of the people from day to day, for if the world organism does not do this, it will flounder in helplessness and impotency. No nation is honest enough to be permanently bound against its interests by an unwise agree- ment, and it is doubtful whether peoples ought to be bound except by their true interest. What- ever we may decide as to this, it is evidently desirable to bind nations together in such way that the future interest of each nation shall make it impossible for it to break away without suf- fering more future loss than its present gain. This is the whole secret of a binding League of Nations. Any league that rests solely on the 11 sanctity of a promise will not bind an unscrupu- lous nation, and will bind the scrupulous one to its damage. The Unbreakable Bond Almost as long as I can remember, it has been a widespread belief that a large part of the world's suffering is chargeable to the greed of bankers, and for two or three decades Big Busi- ness has been a co-defendant in the indictment. They have even been charged by radical reform- ers, of whom I am one apart (being a reformed reformer, but not reactionary) , with bringing on war for their 'own profit, and Big Business has often been depicted as a juggernaut that is ruth- lessly crushing humanity. As a matter of fact, Big Business will remodel the world in a few decades if we provide the social mechanism whereby it can work unhampered by legal re- strictions on the one hand and by industrial un- rest on the other. But to realize this condition, the coming new order must provide for all, not merely for Big Business. Big Business will be bigger in just conditions than is now even dreamed of, but all men must rise together. Class government means war sooner or later, though it is seldom consciously a class war. The social mechanism needful is what the war will bring to the world if we settle it right. But if the men "who do things" do not improve the opportunity by seeing that the war is settled on fundamental principles, then it will be settled as many pre- vious wars have been settled by mere tem- porary shifts. 12 President Wilson has set the pace and indi- cated the direction, but as yet I have seen no reference in his messages to any specific mechan- ism, such as I am about to propose, the adoption of which will be the means of realizing the lofty ideals he has set before the world. Perhaps he is reserving details for the future, but if we can formulate a plan so obviously just and impartial that no criticism can be made of it, then it seems advisable to state it fully in advance in order that the world may bear witness, and the high ideals of President Wilson suffer no discount; in order that insincere peace drives by the Kaiser may no longer deceive even his own subjects; in order also that cunning reactionaries, who fear the triumph of true democracy more than they fear autocracy, may not, when the imme- diate danger is past, prevent the world from re- alizing the full fruit of its heroic sacrifice. I believe the following is the mechanism required to bring Perpetual Peace and Victory for All Anyone who knows just a little more than a little about money and banking knows that if the government should reduce the required legal bank reserve from the present average of less than 10% to a still lower proportion, say 5%, the effect would be a pro rata expansion of bank credit and a further advance of prices, soon fol- lowed as a matter of course by demands for wage increase because of the higher cost of living, and later by petitions from the railroads and other 13 public service corporations for permission to ad- vance their rates because of higher wages and the increased cost of materials. The converse of this is also true; that is, if the government should require bank loans to be contracted from, say ten times the reserve to a smaller multiple, the effect would be a general fall of prices, an increase of the purchasing power of the money unit, a corresponding increase of the burden of all debts and fixed charges, and a final lowering of money wages. It is a vicious circle, and there is no end of our running around it except to fall back and begin over. (The new advance of railway rates was made after this was written.) It is generally known that the enormous inflow of gold from abroad since the war began, being an addition to the required gold reserve without any corresponding increase in the reserve re- quirements, became the basis of several billions of new bank credit, thus constituting a consider- able factor in price advance over and above the advance due to the relative scarcity resulting from the employment of tens of millions of men in war. One who knows and holds fast to these almost commonplace truths will readily see that, in- stead of issuing bonds to meet the expenses of the war, the United States could issue legal tender bills (treasury notes) receivable for all public dues in lieu of gold (not redeemable in gold), and that this money would always be at par with gold provided the bank reserve require- ments 'were increased in parallel 'with the issue of new money and the new money constituted the added reserve. This is self-evident, for if 14 the banks can keep private credits at par with gold, surely they can keep as much national credit at par; that is, to the extent of the volume of bank credit required by the demands of busi- ness. So let us assume that the government notifies the banks to increase their reserve monthly by from five to ten per cent of the reserve existing at the end of each month, until further notice. Of course this will bring a protest from the banks, but if the government furnishes the in- crease of reserve without charge by depositing legal tender treasury notes, and allows the banks to go on making loans as before, but limited by the increased reserve requirements, the banks will be just so much nearer solvent instead of being technically bankrupt, as they now are; and if this process be continued the government will gradually take over the "unsecured credit" part of the banking business, but will not take it over to hold it. The government will draw checks from day to day in payment for services and supplies, and the money will remain in bank as private deposits, just as nearly all bank cred- its now do. The process will be continued until the legal bank reserve reaches 100%, and bankers will thereafter lend money instead of lending credit, and business men will borrow money instead of "selling money short," as they now do, with bankers as underwriters of their promises. But bankers will not lend money which the owners may demand at any moment. It is not sound business policy to lend money that is subject to call, and banking will never be perfectly safe while the practice continues. It is 15 simply legalized "check kiting." Only time de- posits should be loaned, for as lenders of money belonging to others (deposits), bankers are mere underwriters. Probably some thoughtless persons will de- nounce the proposal as high-handed and confis- catory, but a little thought shows such conten- tion to be unfounded. It is not proposed to take a penny of the banks' assets. Their capital, sur- 'us and undivided profits will be unimpaired, hey will collect their loans and pay their de- positors the same as if no change had been made in the banking law. They will even continue to lend mere "bank credit" the same as they now do except that the volume of such loans will be limited by the new reserve requirement; and after the reserve reaches 100%, as combined un- derwriters and lenders, they will lend savings deposits. The competition of the market will equalize the return to bankers with the returns to business in general. But the contention that such law would be an encroachment upon in- dividual rights becomes absurd when we com- pare it with what is now actually being done. The taking over of the railroads and telegraph lines and the proposed assumption of govern- ment control of telephones and other enterprises is far more radical than my proposal. In these cases actual property is taken from private con- trol, but in the case of the banks it would not in- volve any change in the personnel of manage- ment nor even government custodianship of pri- vate property. It is a change which ought to be made even if no war were in progress or antici- pated. If anyone doubt this, let him make a sin- 16 cere effort to show any sound reason why a pri- vate organization-for-profit should be made quasi-governmental in character and granted the special privilege of monetizing credits to the extent of about ten times its own assets by giving them the quasi-governmental character of "bank credit," which is legal tender for all practical purposes. There will be no loss to the banks by the change I propose. Their assets will not only be unimpaired, but will soon be greatly enhanced in value. I speak of requiring the banks to in- crease the reserve, but really the depositors themselves will increase it, for even if the gov- ernment should pay the money direct to muni- tion makers and others instead of depositing it in the banks, it would immediately go into the banks. The banks will gradually readjust their business to the new conditions, and will get their returns as compensation for performing the true functions of banking; that is, as quasi-official cus- todians of funds, as social accountants, and as ex- changers (transferrers) of credits between distant points. These are vitally important functions of banking, and ought not be confused with the business of lending and underwriting, as they now are. The businesses are closely al- lied, and will not be disjoined under the new order, but will be properly related. The dis- tinction is merely the distinction between a checking bank and a saving bank, and every bank will soon have a savings department, the deposits of which will be loaned, and probably every customer enjoying the advantage of the checking bank will be required either to pay 17 higher charges for its services or to keep a speci- fied balance in the savings department. The proposed change therefore amounts to this: By requiring all deposits subject to check to be actually in bank, the government makes the business of banking absolutely safe, and by pro- viding the additional reserve it accomplishes this without hardship or inconvenience to the banks or to business. By purchasing supplies the government transfers its interest as depositor in the banks to individual depositors, who get no dividends on 'their deposits in bank and will of necessity pay for all the services rendered, prob- ably in part, as suggested, by carrying their sur- plus as savings deposits. Thus the depositors will become owners of the increase of reserve, but will realize no profit except in the benefits of an indispensable service rendered at a nominal cost. The depositors are now owners of all the as- sets of a bank in excess of capital and surplus, and as a lender of credits belonging to its cus- tomers the bank is acting in the double capacity of a loan agent and a guaranty company. An individual's "promise to pay" may be even bet- ter in fact than that of the average bank, yet it will not pass current in trade because compara- tively few people know it is good, whereas even an obscure bank's obligations will be accepted because the banks, being subject to official ex- amination, are impliedly endorsed by the gov- ernment until closed by the bank examiner. I say there will be no loss to the banks by the change I propose. They now perform several necessary functions, the value of which is limited 18 by the volume of production and exchange. If banking is not a monopoly they cannot realize more than the general average return to capital, all things considered (the cost of labor involved, risk carried and the high order of ability re- quired) . If banking is in any sense a monopoly, then the monopoly feature ought to be elimi- nated, but I do not share in the opinion that bankers, as such,* enjoy a profitable monopoly. The greatest fortunes are not made in banking. It is, however, probably true that the banks per- form much service without charge, or below actual cost, and recoup the loss by receiving un- due payment for other service. This will adjust itself and the banking business as a whole will get just what it now gets payment for the serv- ice rendered. But there will be this very great gain to the banker: He will not live in con- stant fear of a general collapse that may make him a criminal bankrupt (a bankrupt in fact, and often imprisoned as a criminal, though his crime may be only technical) ; and because there *Xote "As such" is an important qualification, for during the last few decades there has developed what we may call the "promotion banker." The late J. Pierpont Morgan was the most conspicuous of this type, and The United States Steel Corporation was his most notable achievement. However, he was only one of many in New York, Boston, Philadelphia and Chicago. One of their methods was to get control of the enormous funds of life insurance and trust companies and use them for their enterprises; that is, to gain control of rail- ways and railway systems. As these funds aggregate several billions of dollars, the power thus represented is almost beyond comprehension. It has been common knowledge for some years, that an enterprise requiring even a few million dollars could not be financed in New York against the will of these controllers of credit, and most readers will recall how the government itself was not only intimidated and prevented from enforcing the law in the case of The Tennessee Coal and Iron Co. by threats of a panic, but was actually forced to extend assistance to "Wall Street." Many readers will also recall the fact that these financial titans are sometimes at war among themselves, as in the case when the stock of one of the trans- continental railroads went to something like ten times its normal market value because of the rivalry for control. 19 will be no possible danger of collapse, the re- turns to the business of banking will be without the frequently recurring interruptions of panic and ensuing periods of depression. To deposi- tors there will be the gain of absolute security, which will also benefit bankers, for the millions now hoarded will be deposited in savings banks. So I repeat again, there will be no loss to bankers, but a very substantial gain, both financial and in the elimination of anxiety. ***** As bank credits are now some forty billion dollars, the government can meet the war ex- penses to the extent of at least thirty billion dol- lars without any expansion of the currency (bank credits), and if the government's need should exceed this amount it can proceed in the same way after the reserve has reached 100%, when the effect of further increase will be a general advance of prices if the increase of money vol- ume should outrun the increase in production, but not otherwise. Under the 100% reserve law the money volume may be increased to the ex- tent of the increase in production without caus- ing an increase in prices, and conversely, if the money volume does not keep pace with the in- creasing volume of production the general level of prices must fall. Should the situation be such that money must issue in excess of the present volume of bank credit, such excess will be an automatic and equitable tax upon everybody, for everyone gets the bulk of what he consumes by exchanging money for it. The tax is thus auto- matically distributed without being levied, and spread, and collected, with many "fingerings." 20 Money issue is a natural source of revenue for the general government to the extent of the per- manent money volume, and where the need tem- porarily exceeds normal issue, as in case of war, excess issue is a tax perfectly distributed by the automatic action of the natural law, and shows in the advance of prices a tax no man can evade or shift. If we assume the general money-wage level to be fixed (as it will be in the perfect social order) the burden of a general advance of prices due to unusual money issue will fall upon those who are living upon past accumulations of credit (money) the same as upon current producers. Lest it should not be clear that the foregoing is sound, let us state it in other form, thus: Assume that the war is ended, that it was financed largely by the sale of bonds, and that we have a debt of 30 billion dollars bearing an average interest rate of 4^% an annual charge of one billion, three hundred and fifty million dollars. Let the banking law be revised by mak- ing the Federal Reserve Bank a national insti- tution in the sense that it shall be a part of the Treasury Department. Require every individual bank to carry its reserve in the Reserve Bank, increasing it gradually, as previously described, until it reaches 100%, and making the bonds con- stitute the increase of reserve, interest on the bonds to be suspended while so used. This is simply another way of doing the same thing as issuing treasury notes and requiring them to be held as the complement of gold in making up a 100% reserve is monetizing the bonds as bank credit after their issue instead of 21 monetizing bank credit and avoiding bond issue. If anyone thinks this would be inflation in the sense that it would lower the purchasing power of the dollar, let him remember that present bank credit is the equivalent of gold or full legal tender bills, and that in the plan proposed there will be no enlargement of the "currency" volume. Instead, we shall simply "demonetize" present bank credit exactly equal to the bonds monetized. In other words, it will simply be a substitution of the nation's credit for the present bank credit made quasi-national by official su- pervision. I think no one will deny that present bank credit is the equivalent of gold for all prac- tical purposes. Technically it is not legal tender, but when it ceases to be legal tender for all prac- tical purposes the banking system is tottering to its fall. So there is really no need to prosecute a Lib- erty Loan campaign, and with the passage of a single amendment to the banking law the war will be financed without debt, or if we wait till after the war, the bonds will be monetized and thus turned into a perpetual non-interest bear- ing national credit. But important as this is it is only preliminary to and in elucidation