Wednesday, March 31, 2010

Analysis of Richard Cook’s Monetary Reforms Part IV

Analysis of Richard Cook’s Monetary Reforms as Presented in We Hold These Truths
Part IV

Thomas Allen

This paper is Part IV of my analysis of Richard C. Cook’s monetary reforms as presented in his book We Hold These Truths: The Hope of Monetary Reform (Tendril Press, 2008–2009). His words and my paraphrases or summaries of his words, I have italicized. My commentary is in roman letters. I have provided references to pages in his book and have enclosed them in parentheses.

Mr. Cook expresses utter contempt for such things as “market forces” and “law’s of economics (p. 198). He has to. They predict that his scheme will fail. He has to calm that such things as “markets,” “Say’s Law” (v.i.), and “supply and demand” are fictions. Economic laws must be merely artificial fabrications made for the benefit of the ruling elite (p. 198). Apparently, if the government wants to, it could repeal Say’s Law, which Mr. Cook’s scheme seeks to do, and the law of supply and demand. Mr. Cook seems to believe that the government can prevail over the markets. So far none have—not even Stalin’s or Mao’s regime.

Mr. Cook does admit that the money that he proposes is fiat money. However, he claims that, unlike debt-based Federal Reserve credit, his is not inflationary. Moreover, he claims that greenbacks were not inflationary (p. 201).

Greenbacks decreased in purchasing power until the late 1860s. Then Congress began withdrawing them from circulation, and they begin rising in purchasing power. In 1875, Congress declared that greenbacks would be redeemed in gold at par beginning in 1879. They continued to rise in purchasing power. Mr. Cook does not do any of these. He proposes to increase the money supply indefinitely year after year and probably at an increasing rate.

If Mr. Cook’s money is noninflationary, it is solely because of the skewed way that he defines inflation. He likes to believe that raising interest rates causes inflation (p. 192). Interest rates may rise because of inflation, but they do not cause inflation. Cost inputs do not cause inflation either. Inflation occurs when the money supply grows faster than new goods entering the markets. Mr. Cook’s scheme guarantees inflation because it guarantees that the money supply will grow at a much faster rate than new goods entering the markets.

Mr. Cook recommends restoring “private banking operations in the U.S. to the ‘real bills’ doctrine” (p. 202). With Mr. Cook I agree. However, under his proposed system, the real bills doctrine will not work. For the real bills doctrine to work, it needs to be accompanied by a true commodity money like gold or silver. To function properly, real bills need to mature into something that is no one else’s obligation, such as gold or silver. When a real bill matures into another form of credit money, like federal reserve notes or Mr. Cook’s government notes (treasury certificates as he calls them [p. 203]), the real bills doctrine becomes dysfunctional and ceases to operate. That is why the real bills doctrine died with World War I and is not in use today.

Mr. Cook recommends establishing “a National Price Commission to work toward a system-wide fair pricing policy for the U.S. (p. 203).” In other words, Mr. Cook wants to fix the prices of everything in the country. This is one way to keep his inflation from showing in prices. On what would he blame the resulting shortage? Will a lack of money cause the shortages? That Mr. Cook would suggest price fixing is consistent with his disdain for the markets and his apparent confidence in the infallibility of politicians and bureaucrats. (I am puzzled why he has so much confidence in them as he frequently condemns them for selling out to the bankers.)

Mr. Cook, who considers himself a progressive, describes the progressive perspective on money and related issues (pp. 210-220). He declares that the law created money (p. 210) although people were buying and selling with money before any law ever decreed anything to be money.

Like all progressives, Mr. Cook distrusts and despises freedom. (Many things in his progressive list evidence this.) Progressives are not only convinced that they know how people should live their lives, they are determined to force them to live that way. Fundamentally, progressives differ little from liberals, socialists, communists, fascists, Nazis, neo-conservatives, and the like. All of them contend that the leader, party, politicians, and bureaucrats always know best.

He claims that the financial elite considers money to be a commodity and to have intrinsic value (p. 210). If true, today’s financial elite differs significantly from the financial elite of a few decades ago. Except perhaps for progressives, no one believes that today’s money is a commodity with intrinsic value. Money has had no direct connection with any commodity since 1971 when President Nixon severed its last connection with a commodity, gold.

Mr. Cook objects to the notion that money may be used “for anything the owner desires, including usury and speculation” (p. 210). He implies that money is not the property of the person who holds it. By inference, he is asserting that money always remains the property of the government regardless who holds it. Under the monetary system recognized by the founding fathers in the Constitution, money belongs to and is owned by whomever holds it. The government only gets ownership of the money that it collects in taxes, fees, and fines. It loses ownership when it spends the money.

Mr. Cook states that “the progressive definition of money has prevailed when the government has controlled or strongly influenced the creation of money. The elitist definition has prevailed when private bankers have controlled or strongly influenced the creation of money, particularly during the century since the Federal Reserve was created in 1913” (pp. 210-211). Using Mr. Cook’s criteria, the U.S. monetary system was neither progressive nor elitist before Lincoln’s war to destroy the Constitution. It was the barbaric silver and gold standards. During the greenback era of 1862 to 1879, the monetary system was highly progressive. The exception was the West Coast where the barbaric gold standard remained in use. Between 1879 and 1913, it was a mixture of progressive and barbaric. The barbaric gold standard remained in place. The progressive component was the fiat part: greenbacks, silver dollars, and Treasury notes of 1890. National bank notes should be included in the progressive part as the U.S. government indirectly controlled their quantity. Furthermore, since the government has strongly influenced the creation of money since 1913, that money is also progressive or at least a mixture of progressive and elitist. (The U.S. government has had much more control over money since 1913 than it had anytime before 1860.)

According to Mr. Cook, “the main underlying cause of the American Revolution was refusal by the British Parliament to allow the colonies to issue their own paper money” (p. 211). If true, why did these colonies not only deny themselves the authority to issue their own paper money, but they also denied the U.S. government this authority when they adopted the Constitution? This prohibition cannot be blamed solely on the pro-banker Hamilton and his followers. Anti-banker Jefferson and his followers were even more adamant in their opposition to paper money.

Like all fiat money reformers, Mr. Cook asserts that the Constitution allows the U.S. government to issue money (p. 211). As mentioned above, it does not. The original drafted contained this authority, but the drafters removed it. By removing it, they were convinced that they had denied Congress the authority to print and issue paper money.

Mr. Cook claims that Democrats “have held a more progressive view of money. It has been the Federalists/Whigs/Republicans who have held the pro-bank view” (p. 211). Again, Mr. Cook shows his ignorance of history. Before 1860, most Democrats were staunch supporters of the barbaric gold and silver standards. Under the gold and silver standards, the government does not own or issue money, coins, except perhaps subsidiary coins. Money as coins is created by whomever brings the metal to the mint for coinage, and the coins minted belong to that person, and not the government. Such a monetary system is highly unprogressive. Progressive money was a Republican invention. Greenbacks came into being during under a Republican president. The Republican party dominated the U.S. government during the last part of the nineteenth century when more progressive money as silver dollars and Treasury notes of 1890 came into being. Democratic President Wilson brought in the Federal Reserve System. Democratic President Roosevelt made the federal reserve note legal tender.

Mr. Cook writes, “Until around 1873, banks were required to hold their reserves in specie, i.e., gold or silver, until silver was demonetized by Congress. . . . From 1873-1933, gold was the only metallic reserve allowed” (p. 212). Again, Mr. Cook errs. Banks could and did hold greenbacks as reserves. Like gold, greenbacks were legal tender. Between 1879 and 1933, greenbacks were redeemable in gold on demand and had a gold backing of about one-third to one-half.

Mr. Cook states, “A gold standard cannot prevent bank failures or guarantee the value of the currency” (p. 212). He is correct in that a gold standard cannot prevent bank failures. Neither can his progressive money prevent bank failure. Bank failures even occurred under the greenback standard, a governmentally issued fiat monetary standard. Bank failures depend on how banks operate.

If Mr. Cook means that a gold standard cannot guarantee absolute, never varying value of the currency, he is correct. Neither can his progressive money. Whatever he means, gold will do a much better job of maintaining the value, purchasing power, of the currency than his proposed alternative.

Mr. Cook claims that by 1900 the country had returned to the bimetallic standard (p. 213). Again, Mr. Cook is wrong. The Gold Standard Act of 1900 clearly placed the United States on the monometallic gold standard. Bimetallism ended with the Coinage Act of 1873, which closed the mint to the free coinage of silver. With this Act, Congress ended the silver standard—erroneously called demonetizing silver. With the Bland-Allison Act of 1878, Congress began issuing fiat money in the form of silver dollars. Fiat silver dollars lasted until 1900 when silver dollars were made subsidiary coins of gold.

Mr. Cook writes, “Neither banks nor government are needed in order to have money” (p. 214). He is correct. However, he contradicts himself. He has consistently insisted that law creates money. If law creates money, money cannot exist independently of a governmental decree.

Mr. Cook contends that laissez-faire economics “was the basis for the monetarist policies of the 1970s and the ‘Reagan Revolution’ of the 1980s” (p. 214). If so, why did government regulations continue to grow unabated. Laissez-faire economics would have slashed economic regulation into the bone. It would have reduced the U.S. government enormously. Instead the U.S. government continued to grow. Laissez-faire economics would have returned the country to the gold standard. The Federal Reserve System would have ceased to exist. The economic and monetary policies of the 1970s and 1980s and the two following decades are much closer to the interventionist progressive economics, which Mr. Cook calls the “American System” (pp. 214-215), than they are to noninterventionist laissez-faire economics.

Although Mr. Cook would deny it, the Federal Reserve System is a creation of progressive economics, the American System. It is like the other programs that he praises as progressivism and the American System (p. 215).

Mr. Cook contends that money is an abstract concept (p. 228). He is correct about today’s money being an abstraction. His replacement progressive money is also an abstraction. However, money has not always been an abstraction. Under the gold standard, money is not an abstraction. It is a definable tangible. Under the Gold Standard Act of 1900, Congress defined the dollar as 25.8 grains of gold nine-tenths fine, or 23.22 grains of pure gold. The dollar was a unit of weight of gold. Unlike today’s money and Cook’s money, which are vague abstractions, the dollar was a concrete tangible. Under the gold standard, people knew exactly how much a dollar was worth. It had the value of 23.22 grains of gold. With today’s money no one knows how much the dollar is worth without valuing it in terms of itself (a dollar equals a dollar worth of goods). The same is true of Mr. Cook’s progressive money.

Mr. Cook is correct in that the economy of the United States “is not free-market capitalism. Rather it is control by financial and industrial cartels . . .” (p. 229). However, he fails to note that cartels depend on government to survive. Without governmental coercion, they are short-lived. Today’s financial and industrial cartels result from progressive economics, the American System. Many grew out of public-private partnerships, which Mr. Cook supports.

Mr. Cook abhors the control that these cartels have over the government (p. 229). If Mr. Cook really wants to eliminate the control that these cartels have over the government, he would promote severe restriction of the power of government instead of promoting its expansion. Cartels first seek to control government to protect themselves from their competition and the government. Second, they seek to control government to receive subsidizes from it. Stripping the government of its power to destroy a business arbitrarily and its power to reward through subsidies, exclusive grants, and so forth would eliminate cartels dominating government. They would have no incentive to do so. Mr. Cook’s system of heavy governmental intervention and subsidizes gives these cartels plenty of incentive to seek control of the government.

Mr. Cook contends that Say’s Law is a myth (p. 230). “Say's Law states that the production of goods by an economy automatically generates the wherewithal for society to purchase those goods, because earnings from their sale is immediately recycled as purchasing power” (p. 231). “According to Say’s Law, productivity gives people their purchasing power; production is the cause of consumption; people’s consumption depends on their production; products are bought with products.”[1] Thus, a person has to produce something or provide some service in order to buy something. He buys with what he produces; money serves as an intermediary. A person cannot get something for nothing: “There is no free lunch.” Mr. Cook argues otherwise. He wants to enable a person to consume even if he produces nothing. His system eliminates the need for an individual to produce anything in order to buy stuff. Each individual receives a minimum income whether he ever produces anything or not. Although he probably would disagree, he is really advocating taking property from producers and giving it to nonproducers. He conceals his theft via dilution of the currency, i.e., depreciating the purchasing power of the monetary unit. To conceal his theft further, he avers that Say’s Law is a myth.

Mr. Cook claims that Say errs because he “overlooked the fact of capitalist economics which is that of retained earnings” (p. 231). Retained earnings are a form of savings. The manufacturer retains earnings today to spend tomorrow to improve and expand his production (p. 231). Unlike the miser, he does not bury his money with the intent of never using it. Mr. Cook seems to disdain saving as much as Keynes. Both view savings as detrimental to the economy instead of beneficial. Both seek to overcome savings by artificially expanding the money supply. Money must be spent as quickly as it is received. The demand for money must be pushed to zero to prevent economic collapse—so Mr. Cook implies. Mr. Cook must argue that Say’s Law is invalid. If it is valid, his system collapses just as the current Keynesian economic system is collapsing. It, like Mr. Cook’s scheme, rests on the presumption that Say’s Law is false. Wealth can be obtained merely by expanding the money supply.

Mr. Cook considers banking “tied to specific commercial activities” (p. 243) to be the “real bills” doctrine. Thus, under the real bills doctrine, banks “provide working capital for commercial transactions, such as stocking of inventory, or for business expansion” (p. 243). This is not the real bills doctrine. The heart of the real bills doctrine is the real bill of exchange. A real bill of exchange (a real bill) is drawn on real goods that are ready to be sold (sitting on the retailer’s shelf) or are on the way to the retailer to be sold. The real bill expires within 90 days or less. It is self-liquidating, i.e., the merchandise that it represents pays the bill when it is sold.

Under the real bills doctrine, a real bill of exchange occurs when the supplier draws a bill on a retailer to give the retailer time, 90 days or less, to sell the merchandise and get the money to pay the bill. If the retailer accepts the bill, a real bill or commercial money has been created. Now the supplier can use the bill to pay his creditors or sell it to a bank. If a bank buys the bill, it converts the bill to banknotes or checkbook money.

Unlike the two examples that Mr. Cook gives, a real bill of exchange is not a loan. No lending or borrowing is involved. Also, unlike Mr. Cook’s example, a real bill is a self-liquidating credit instrument.

If a bank treats loans for stocking inventory and business expansion like real bills, it is operating unsoundly and risks bankruptcy. (Many loans for stocking inventory are for purposes of speculating on future demand. Mr. Cook wants to outlaw loans for speculation. How is he going to distinguish between lending for speculative stocking and lending for nonspeculative stocking?) Bank lending for inventory and expansion should come from savings. Furthermore, the loans should be for a duration of no greater than the time that the savings is required to be deposited at the bank. Such are sound banking practices.

Mr. Cook contends that “credit should belong to the public and be administered by the government in some equitable way” (p. 248). It is amazing how Mr. Cook can trust the government after he frequently describes the disastrous things that it has done. He offers no solutions to prevent the government from doing these things in the future. What would prevent the government from repeating its miscreant deeds of the past in the future? Leaving credit and its creation in the hands of the people individually instead of entrusting it to the government makes more sense.

Mr. Cook does recognize that the monopolistic power that the corrupt banks have over the monetary and credit system comes from government (p. 248). Yet he wants to give the government even more power to corrupt. If political leaders betrayed the trust of the people once, what will prevent them from doing it again? Does not common sense dictate that political leaders, and therefore, government, should be stripped of their power instead of given more as Mr. Cook wants to do?

Like most fiat monetary reformers, Mr. Cook provides a good description of today’s economic and monetary problems. He does a fairly good job of describing the causes. However, he fails to identify the most important ones: fiat money and the concentration of political power. To him these are not part of the problem. They are part of the solution.

Mr. Cook is correct in that the current monetary and financial system is a disaster that benefits a few powerful people. It is in need of a major reconstruction. However, his solution is not the answer. His solution is a disaster that will continue to benefit these few powerful people. Instead of controlling the people through a collaboration of banking and government as they currently do, they would control them solely through the government under Mr. Cook’s reforms. Mr. Cook streamlines the control.

Mr. Cook seems to believe that when government usurped from the markets the prerogative of creating and regulating money and credit, it did so for the benefit of society. (Actually, Mr. Cook implies that money and credit did not exist until some government invented them.) Thus, governments never claimed the prerogative of creating and regulating money and credit for the benefit of the ruler. (Being a statist, Mr. Cook may believe that the ruler and society are the same.)

Seldom, if ever, has any government ever created and regulated money and credit for the benefit of society (the people) as a whole. They have always done it for the benefit of those who really control the government. In many respects, Mr. Cook’s scheme makes the creation and control of money easier for the rulers. As his system gives the real rulers unlimited money and credit, they have unlimited funds for their pet projects including wars. His system frees them from unpopular taxation and the need to borrow. Moreover, his system requires the rulers to bribe the people and make them dependent on the government. Thus, it makes control of the people easier. It gives the rulers total control of the economy. They can favor their toadies, lackeys, and apologists with subsidized loans with below market interest rates. His system breeds corruption.

Mr. Cook must believe that politicians, who are the easiest people on the planet to corrupt, will remain incorruptible. They will always remain altruistic and will never do anything for selfish reasons. He must populate the government with people of high integrity and probity, the likes of which the United States have rarely seen in positions of power since 1860. Even if such saintly people control the government, Mr. Cook’s scheme would fail. For it to work the committee or person in charge has to be omniscient.

Mr. Cook’s scheme makes people dependent on the government. By becoming dependent on the government, they are much less likely to object even to the most egregious actions of the government. His scheme strips them of their freedom and independents by reducing them to the chattel of the ruling elite. It denies them their dignity. It turns them into domesticated animals begging for more handouts.

Mr. Cook’s money like all fiat money is politically driven instead of economically driven. Although he probably would deny it, his money is independent of market needs, i.e., economic demand. If the gap between gross domestic product and national income is of economic importance, the markets would generate the money to fill the gap unless the government intervenes to prevent it. If Mr. Cook believes that the gap is detrimental to the economy, he should find the government’s action preventing closing the gap and work to eliminate it. If the gap needs filling, the markets will do it more efficiently and accurately than any governmental action. His proposal is an artificial political contrivance that will damage the economy and reduce the standard of living of the people.

If Mr. Cook’s perceived gap between GDP and national income is a real problem, it can easily and quickly be solved by returning to the gold and silver standard accompanied by the real bills doctrine (commercial money principle). This system places the creation of money and credit directly in the hands of the people with little governmental oversight. Unlike Mr. Cook’s proposal, the concentration of power in the hands of the U.S. government is unnecessary. Furthermore, it does not make the people wards of the government as does Mr. Cook’s system.

The classical gold standard eliminates the debt-based monetary system that Mr. Cook abhors. Mr. Cook’s scheme does not; it is also a debt-based system. It merely changes the form of the debt-based monetary system. It uses noninterest bearing and nonrepayable debt-based money.

Moreover, under the classical gold standard without centralized banking, interest rates are low with little fluctuation. They do not have to be suppressed to be artificially low as Mr. Cook promotes.
Some day you will see that there is no man so truly disinherited, as the man who once takes a Sate-bribe. – Auberon Herbert[2]
1. Thomas Allen, Reconstruction of America’s Monetary and Banking System: A Return to Constitutional Money (Franklinton, N.C.: TC Allen Co., 2009), p. 49.

2. Leslie Synder, Justice or Revolution (New York, N.Y.: Books in Focus, Inc., 1979), p. 161.

Copyright © 2009 by Thomas Coley Allen.

 Part 3

 More articles on history.

1 comment:

  1. I may have misunderstood Mr. Cook’s comments on the real bills doctrine and the stocking of inventory. So, I have revised two paragraphs and add a new paragraphs about his comments on the real bills doctrine and the stocking of inventory. These paragraphs follow.

    Unlike the one of the examples that Mr. Cook gives, a real bill of exchange is not a loan. No lending or borrowing is involved. Also, unlike Mr. Cook’s example, a real bill is a self-liquidating credit instrument.

    If a bank treats loans for business expansion like real bills, it is operating unsoundly and risks bankruptcy. Bank lending for expansion should come from savings. Furthermore, the loans should be for a duration of no greater than the time that the savings is required to be deposited at the bank. Such are sound banking practices.

    If by “stocking of inventory,” Mr. Cook means a retailer stocking his shelves for immediate sell, a real bill covers such stocking. If he means a retailer acquiring excessive inventory in anticipation of a rise in wholesale or retail price, a real bill would not cover such stocking. (Many loans for stocking inventory are for purposes of speculating on future demand or price changes. Mr. Cook wants to outlaw loans for speculation. How is he going to distinguish between lending for speculative stocking and lending for nonspeculative stocking?)