Saturday, September 19, 2009

Response to Dale’s Analysis of "There Is Enough Gold"

Response to Dale’s Analysis of "There Is Enough Gold"
Thomas Allen

This article is a response to "Analysis of Thomas Allen’s There Is Enough Gold" by Byron Dale. Mr. Dale’s analysis can be found at http://www.

Judging from Mr. Dale’s comments, I failed to explain myself adequately on several points. On the other hand, Mr. Dale’s comments are colored by his obsessive hatred of interest, dislike of bankers, conviction of the inadequacy of gold, and love of paper money if the government issues it instead of banks. (Of coarse, one could say that my disdain of fait money and monopolistic control of the monetary system and adoration of freedom and liberty distort my views.) I could include his abhorrence of our current debt-based monetary system, but I loathe it even more than he does. After all, he wants to maintain a fiat monetary system run by bureaucrats and politicians whereas I do not.

To understand Mr. Dale’s comments better, one needs some knowledge of his reform. He proposes that the U.S. government print and spend paper money into circulation to build and maintain roads. It would not be issued for any other purpose. He writes, "The spending of the paper money would be limited to building roads which would be of equal benefit for all. Since roads can only be built by labor, in reality, all that would be done would be to monetize labor. As the money was spent, it would flow into circulation and we would all have debt-free money with which to meet our needs for a medium of exchange based on labor performed."[1]

The reform that he proposes in his book is much closer to the current system than my proposal. He maintains a fiat paper dollar currency. He only changes who issues the money (the government instead of the Federal Reserve and banking system) and how it is issued (direct spending by the government on road construction instead of lending.) My system scraps the current system entirely including abandonment of the paper dollar and a central body managing the money (both retained by Mr. Dale). It replaces the current system with an entirely new system. (Actually, it is not really all that new; it is similar to the system that existed before 1860.) Under my proposal, the government does not create and spend money into circulation. Banks do not create and lend money into circulation. Mr. Dale’s monetary reform makes only superficial changes instead of fundamental changes as I propose. A more detailed discussion of his proposal as presented in his book Bashed by the Bankers can be found in my booklet "Analysis of Byron Dale’s Monetary Reforms as Presented in Bashed by the Bankers."

Mr. Dale seems convinced that all monetary problems relate to charging interest on loans. He seems to believe that most, if not all, monetary problems would vanish if the charging of interest were outlawed. Does this disdain for interest come from the bad experience that he suffered for failure to pay a loan?

One could add that he despises debt-based money. However, that would be a mistake. As he proposes to replace the current interest-bearing debt-based money with non-interest-bearing debt-based money, his problem is with interest-bearing and not with debt-based.

Now, let’s look at his comments to my article.

Mr. Dale errors when he claims that "the markets did not regulate the gold supply. Miners of gold supplied the gold and they, for the most part mined all that they could find as fast as they could."[2] First, smart miners do not necessarily mine all that they can as fast as they can. Smart miners mine at a rate that maximizes their return. Furthermore, the consumer is the final determinant in the quantity of gold mined by his consumption of gold and gold products.

Apparently, I failed to add enough detail here. Under the classical gold standard the markets regulated the quantity of gold coins and gold bullion used as money. If the markets demanded more coins, jewelry, flatware, and other items of gold were converted to coins. Gold dealers and others presented this gold to the mint for coinage. If the markets decided that too much gold was being used for money, people would melt the excess gold coins and use the gold for other purposes, such as gold teeth and jewelry. (The markets are essentially the sum of every individual acting independently according to his economic contribution.)

Several times Mr. Dale used one of the favorite arguments against the gold standard: The gold mining industry decides how much gold is available. Mr. Dale is correct that the desire for profit drives gold miners. However, gold miners are not particularly concerned about the monetary needs of the country. This argument that gold miners decide the amount of gold available for money fails on at least four accounts.

"First, current mining of gold provides only a small fraction of gold available for monetary use. Nearly all the gold ever mined is available.

"Second, when the real bills doctrine and decentralized banking accompany the gold standard, the quantity of paper money (credit money) available does not correspond to the quantity of gold available. Bank notes and checkable deposits can expand and contract to meet the needs of commerce independently of the quantity of gold. Gold mining does not have a monopoly on gold-based money. [Mr. Dale rejects this fact.]

"Third, gold’s monetary value depends on the integrity of the monetary unit and its issuer and not just the quantity of money. Having a definite fixed monetary unit is more important than the actions of gold miners.

"Fourth, the profit motive guides gold miners. They have an incentive to provide their customers as much gold as they demand in a cost-effective way. Profits of gold mining increases as output increases and production cost decreases."[3]

Gold miners may influence the quantity of gold available, but they do not decide how much of the available gold is used as money.

Mr. Dale claims that using real bills of exchange as money is using paper debt-based money. Like most people, Mr. Dale confuses a debt-credit instrument, i.e., a loan, with a market-clearing-credit instrument, i.e., a real bill of exchange. Real bills are not loans.

"Real bills should not be confused with loans. They are not loans; they are deferred payment. They are used ‘as means of payment [that] have the effect of making commodities [i.e., goods] circulate more rapidly, without the use of money.’[4] They are claims to future money and, as such, evidence of credit transactions. The holder of a bill redeems it on the date specified on the bill for money paid by the person on whom the bill is drawn. Real bills are short-term credit that matures into gold or silver within 90 days.

"The retailer is not borrowing from the supplier, and the supplier is not lending to the retailer. Moreover, the retailer does not retire a loan if he pays his bill before maturity. Real bills finance the production and distribution of goods without debt.[5] They are a form of credit that is not a debt.

"When a bank buys a real bill, it does not make a loan. When a bank buys a real bill, it is clearing and not lending.[6] Therefore, real bills should be considered clearing instruments instead of credit [debt] instruments."[7]

The real bills doctrine automatically provides the markets with the money to buy new goods at the time those goods are being offered for sale. It saves capital for production by eliminating the need to withdraw savings for market clearing (selling new goods). When the goods have been sold (consumed), the new money is withdrawn from circulation and is permanently retired. The new money withdrawn is either the new money created by this real bill or an equivalent amount created by other real bills.

For a more detailed discussion of the real bills doctrine see Reconstruction of America’s Monetary and Banking System by Thomas Coley Allen (pp. 174-194), Antal Fekete’s lectures on the real bills doctrine at private/fekete.html, and articles discussing the real bills doctrine at http://www.

Like most people, Mr. Dale has little understanding of the true gold standard. He states, ". . . the monetary unit is named the dollar. Let’s say that the monetary unit is specific weight of gold, one grain of gold. The price of gold is then one dollar per grain. Therefore one has fixed the price of gold or no one would know what a dollar is." Mr. Dale claims that I error when I state that "the price of gold is not fixed. The monetary unit is a specific weight of gold." While trying to refute my position, he supports it with his example. He states "that the monetary unit is a specific weight of gold, one grain of gold." Then he erroneously concludes that "the price of gold is then one dollar per grain." No, it is not. If the dollar equals one grain of gold, to say that the price of gold is a dollar is absurd. It is like saying that 16 ounces equals a pound; therefore, the price of a pound is 16 ounces. The dollar has been defined as one grain of gold. The dollar is a unit of weight like the pound or gram. It is just limited to gold. The dollar is fixed in terms of gold; gold is not fixed in the terms of the dollar.

This discussion may seem to be an unimportant discourse about semantics. It is not. The distinction is highly important. Is gold to be fixed in dollars, i.e., gold is priced in dollars? That is, the government declares that the dollar is an abstraction, and it has arbitrarily fixed the price of gold. This notion leads quickly down the road to paper fiat money. On the other hand, is the dollar to be fixed in gold, i.e., the dollar is a unit of weight of gold. The government declares the dollar to be a tangible and defines it as a measurable amount of gold. This notion is the essence of the gold standard; the monetary unit is a weight of gold.

Mr. Dale’s comment on my free coinage statement is absurd. Did I really have to add that the law, Congress, defines the monetary unit, the dollar, as so many grains of gold, e.g., 23.22 grains in the Gold Standard Act of 1900. Using this standard, the mint produced a $10 coin containing ten times the weight of gold as a $1 coin if $1 coins were produced at that time. (This is what the Constitution means by "regulate the value thereof.") If the dollar were an abstraction as Mr. Dale promotes instead of a specific unit of weight, then the amount of gold in a $10 coin need not have any relationship to the amount of gold in a $1 coin. That the weight of gold in a $10 coin is ten times the weight in a $1 coin is further proof that the dollar is (or was) a unit of measure for weight. It evidences that the dollar is defined in terms of gold instead of gold being defined in terms of the dollar.

I write that a component of the gold standard is that "no restrictions are placed on exporting or importing gold." Like many people, Mr. Dale expresses great concern that too much gold would be exported, the country would lose most of its money, and people would lack money with which to trade internationally. (People who express this concern about the exportation of gold have little confidence in the free market—especially with money. Moreover, they never seem to be concerned about the excessive importation of gold. Excessive importation can be more disastrous than excessive exportation as witnessed by its destruction of the Spanish empire.) Although Mr. Dale does not mention it, the same problem can occur between regions in the same country. If a country’s gold stock declines enough to affect its value, i.e., causes the value of the remaining gold to rise (which usually results in general prices declining), gold will automatically begin coming into the country. If barriers are not erected to impede the movement of gold, people from countries with an abundance of gold will come with their gold to buy the bargains in countries deficient in gold. Prices of goods in countries deficient in gold are lower than they are in countries with an abundance of gold. (Prices adjust to the quantity of money available—a fact that Mr. Dale seems not to know.)

I note that a component of the gold standard is that "all paper money is redeemable in gold on demand." Mr. Dale cannot possibly be as ignorant as his comment suggests. He comments, "[I]f gold is the money, what is the paper money he is talking about, where does it come from and how does it get into circulation?" He knows the answer to this question because several paragraphs above he comments on the paper money component of the monetary system that I am presenting and refers the reader to the parts of my article where I discuss this paper money, where it comes from, and how it gets into circulation.

Where does Mr. Dale get this notion that adherents of the gold standard want to outlaw paper money? I have never found one that does. Adherents of the gold standard do disagree about whether all paper money should be warehouse receipts, i.e., all paper money is fully (100 percent) backed by gold, or not fully backed by gold. They all agree that all paper money, whether fully backed or not, should be redeemed in gold on demand and should never be legal tender. (A few adherents of the gold standard would allow issuers of bank notes to delay redemption if the note carried a notice that redemption could be delayed.)

Another component of the gold standard that I give is that it is self-regulating and automatically adjusts to meet the demand for metallic money. Mr. Dale asks how this supply would be self-regulating. He is convinced that "the gold miners would regulate the supply of gold by how much gold they found and mined." Gold miners do add to the supply of gold by the amount that they mined. However, unless they are coining their gold, they are not adding to the monetary stock. (The exception is the Rothbard school, which claims that all gold regardless of form—the weight of the metal and not its form makes the money—is part of the monetary stock. I doubt that Mr. Dale is of the Rothbard school.) The markets decide how much gold is being used as money. It decides that by the quantity of gold brought to the mint for coinage and by how many coins are melted for other uses. If the value of gold in jewelry, for example, begins to rise in relationship to the value of gold in coins, people will melt the coins and convert them to the more valuable jewelry until the value of the two are brought back in line. If the value of gold in coins begins to rise in relationship to gold in jewelry, people will convert the gold in jewelry into coins until the value of the two are brought back in line. This example ignores the artistic work of jewelry as is commonly done in India and other countries.

I also note that no monetary policy is necessary and none is desirable. Mr. Dale asks, ". . . if the monetary unit is set by a specific weight of gold isn’t that monetary policy?" I suppose in the broadest sense that defining the monetary unit as a specific weight of gold is a monetary policy in the same sense as defining the pound and foot is a weights and measure policy. However, when people think of monetary policy, they normally think of the government or its central bank manipulating the money supply to achieve some goal, such as interest rates, general price levels, employment, or road construction.

To my statement that "the government does not issue any paper money," Mr. Dale makes another ridiculous comment: "If there is enough gold for a workable money system and the people choose to use that system why would there be any need for any paper money." For some transactions, such as transferring gold from one account to another, which is what a paper check does, or for making large purchases, which is more convenient with paper bank notes, people find paper money more suitable. Mr. Dale knows this. He says so in his book. Why does he make such an absurd statement? Does he want to belittle supporters of the gold standard? He seems to preclude any use of paper money when the standard money is gold coin.

Mr. Dale seems to be almost as obsessed with gold miners as he is with interest. I state that "Gold coins are the property of the individual holding them. . . . No restrictions or controls are placed on the private ownership of gold." He responds, ". . . that sounds good until the miners decided . . . to loan all the gold they mined into circulation as interest-bearing loans." If the gold miners decided to do this, which is highly unlikely, they would only be lending about 2 percent of the world gold stock. The other 98 percent is available for monetary use without borrowing or lending. Are people really going to borrow that 2 percent? Mr. Dale keeps trying to confuse the gold standard with the current federal reserve dollar standard where money is created through the lending process.

Mr. Dale claims that I am contradicting myself when I write, "The government's monetary duties are limited to defining the monetary unit, coining all gold presented to it for coinage and guaranteeing the weight and fineness of such coins. . . ." He asserts that these duties conflict with specifying the monetary unit as a specific weight of gold. What does he think "defining the monetary unit" is? It is specifying (defining) the monetary unit as a specific weight of gold. Where is the conflict? If the government is arbitrary in its declaration of the monetary unit, perhaps a conflict exists. However, if it merely codifies what the markets have already decided as Congress did with the Coinage Act of 1792, no conflict exists.

He also asserts that these duties conflict with free coinage of gold. "Coining all gold presented to it for coinage" is free coinage. I clearly define free coinage as such several sentences earlier. So, I repeat, where is the conflict?

Apparently, in trying to overcome the excessive emphasis that most people placed on the quantity of money while ignoring its quality, I may have over emphasized the quality aspect. As Mr. Dale notes, both are important.

I was trying to stress that the quality of money, i.e., the purchasing power of the monetary unit, is more important than the quantity of money, i.e., the number of monetary units. The more that a given quantity of money can buy, the higher is its quality. The less that quantity buys, the lower is its quality. High quality money can buy a large amount of goods with a small quantity of money. Low quality money requires a much higher quantity of money to buy the same amount of goods. The federal reserve dollar is low quality money, and the gold dollar is high quality money. A gold dollar has the purchasing power 50 times greater than a federal reserve dollar. Fifty federal reserve dollars are needed to do the work of one gold dollar. Thus, a large quantity of low quality federal reserve dollars are needed to do the work of a high quality gold dollar. It is obvious from Mr. Dale’s comments that he thinks in terms of quantity (the more, the better) instead of quality (the higher, the better). Would he really prefer ten million Zimbabwe dollars (July 2008 vintage) to one euro? If he thinks in terms of quantity, he would prefer the ten million Zimbabwe dollars. If he thinks in terms of quality, he would prefer the one euro.

Mr. Dale continues to harp on my not explaining how the markets regulate the money supply. Mr. Dale, you got at least to meet me part way. I explain several times in my article how the markets regulate the money supply. Again, here it is. For metallic money, it is done through free coinage. The mint coins all the gold presented to it for coinage, and the people may melt all the coins that they desire for other usages. The quantity of coins is maintained through minting and melting such that little or no difference exists between the value of gold in coins and gold in other forms. All of this is done without any decision by any political body or governmental bureaucrat.

To this is added the market-driven changes to the money supply through the real bills doctrine or commercial money principle, with which Mr. Dale disagrees. I explain below how money is created under the real bills doctrine.

I have failed to explain myself adequately if Mr. Dale concludes that I am saying "that no one can purchase things with fiat money." People have been buying things with it in the United States since 1933. When I write that "fiat money lack quality," I do not mean that it cannot function as a purchasing medium. I mean that its purchasing power steadily declines over time. Thus, it is a poor store of value. Being a poor store of value, it is a poor measure of value and a poor unit of accounts resulting in arbitrary inflation adjustments being made. Usually, it represents nothing tangible, or at least the issuer is not required to covert it into something tangible on demand.

I do not understand why Mr. Dale fails to find me distinguishing between metallic money and credit money. In the sentence following his comment, I make such distinguish. I give a thorough discussion of the gold standard (metallic money) and the real bills doctrine (credit money).
Mr. Dale claims that my statement about the 100-percent gold standard is false. It is not. Under the 100-percent gold standard, all paper money is merely a warehouse receipt for gold, i.e., all paper money is backed 100 percent by gold.

Mr. Dale errors when he says, especially if he claims that I say, that the "real bills doctrine based on bank created money loaned into circulation at interest is a good money system because it is based on production." I do contend that the real bills doctrine creates credit money based on production. I deny that it is "based on bank created money loaned into circulation at interest." A monetary system based on the gold standard and the real bills doctrine can function without banks although not as efficiency. The real bill itself is money, commercial money. It can be used to discharge debt. If the owner of the real bill sells it to an investor, the investor buys it at a discount. The discount, which is not an interest rate, varies with the maturity date of the bill. Like all prices not fixed by the government, the markets fix the rate.

If he sells it to a bank, the bank buys it with bank notes or checkbook money, i.e., credits the seller’s checking account with the amount of the real bill. The bank is not lending, much less lending at interest. Savers fix the interest rate by their propensity to save. Consumers fix the discount rate by their propensity to consume. Moreover, the bank is not creating money in the true sense. The money creation is done when the retailer accepts (signs) the real bill of exchange. What the bank has done is to convert commercial money (the real bill of exchange) to bank money (checkbook money and bank notes). This action is akin to someone depositing federal reserve notes with a bank and having the bank credit his checking account with the amount of the deposited notes. The bank has merely converted one form of money, the federal reserve notes, to another form, checkbook money.

Mr. Dale keeps repeating that I "never seem to be able to tell us just how a person acting in his individual capacity can product [sic] any kind of money." I have already explained how an individual can convert gold into money by having it coined.

Although an individual seldom converts his labor into money acting as an individual, he can do it cooperatively under the real bills doctrine. If he is part of the work force of a factory, his labor is "monetized," so to speak, into commercial money through the real bill of exchange process. To simplify, I assume that the manufacturer sells directly to the retailer. When the manufacturer sells to the retailer, he offers and the retailer accepts a real bill of exchange. Thus, they have created money, commercial money. With the labor of all the individual factory workers, this money has been created. It is a representation of all the individual workers’ contribution to the finished product. As these workers produce more, they cause the creation of more money.

Mr. Dale vehemently disagrees with my characterization of fiat money. I contend that the government or its central bank arbitrarily regulates the money supply. He asserts, ". . . the key distinction between fait money and gold is wealth based money vs. interest-bearing debt based money." His definition of fiat money is unique. (He probably created this unique definition to avoid his proposed fiat money being called fiat money, which it really is, by contending that wealth-based money is not fiat money. He claims that his proposed money is wealth-based because it is issued to build roads.) If it is interest-bearing debt-based money, it is fiat money. If it is wealth-based money, it is not. By his definition, the French assignat was not fiat money as it was based on land. Every economist whom I have read who has commented on the assignat considers it fiat money. I am not sure how Mr. Dale would classify the U.S. note as it was neither interest-bearing debt-based money (although it was debt based) and was not wealth based between 1862 and 1879 and after 1932. (Mr. Dale probably considers it wealth based between 1879 and 1932 when it was redeemable in gold on demand.)

The definition of fiat money used by many monetary economists is that the money supply is controlled arbitrarily instead of being regulated by the markets. This is its most important aspect. Secondarily, the material of which the standard money is made has less value than the money itself. These are the two criteria that I use for mydefinition.

His comment on fiat money was written to my sentence: "The key distinction between fiat money that uses gold and the true gold standard is the way that the money supply is regulated." I am claiming that gold can be part of a fiat monetary scheme. Mr. Dale seems to be arguing that gold, regardless how the quantity of monetary gold is regulated, is not fiat money. (What about gold lent at interest into circulation? Is that fiat money?) Yet he also seems to consider the federal reserve dollar to be interest-bearing debt-based money from its beginning in 1914 and, therefore, is fiat money. Between 1914 and 1933, the federal reserve note was not legal tender and was redeemable in gold on demand. Was it fiat money? I say no because it was not legal tender—no one had to accept it. Through the redemption process, the markets prevented too many from being issued. By Dale’s definition, it seems to be fiat money because most of it came into being via the purchase of treasury notes. However, gold backed at least 40 percent of the federal reserve notes. This 40 percent was wealth-based money. Was this 40 percent not fiat money? In 1933, Congress ended the redemption of federal reserve notes and made them legal tender. I contend that from this point forward federal reserve notes were true fiat money. Mr. Dale probably agrees. However, with his definition, that all federal reserve notes were fiat money before 1968 is questionable. Gold backed at least 40 percent of the federal reserve notes outstanding until 1945. In 1945 Congress reduced the backing to 25 percent and eliminated it in 1968. As this 40 percent and later 25 percent were wealth-based gold, apparently this money was not fiat money by Dale’s definition.

Like most people, Mr. Dale confuses the markets’ demand for money overall with an individual’s desire for money. If everyone had all the money that he wanted, money would be worthless. Most people want an unlimited supply of money.

He cannot conceive of people melting gold coins to use the gold for other purposes. I explain above why people would melt gold. If gold is more valuable in another product than it is in coins, people will melt coins for use in the higher gold-valued product. If people seek to maximize their wealth, as Mr. Dale suggests, why would they not melt coins? If the value of gold in some non-coin form never exceeded the value of gold in coin form, nearly all gold would be coined. As that has never happened, gold must have a great deal of value outside coins.

Mr. Dale contends that federal reserve notes being legal tender is a nonissue because the U.S. Supreme Court and others do not accept federal reserve notes and require checks. He states that checkbook money is not legal tender, which is true. The reason that these agencies refuse federal reserve notes and require checks is that they do not trust their employees. On the other hand, the Post Office requires federal reserve notes and refuse checks for money orders. (Unless a change has been made in the past two years, no State agency in North Carolina can write a rule that precludes payment in federal reserve notes. The Department of Revenue may be an exception as many of its rules are not subject to normal rulemaking.)

Legal tender laws usually do not require a person to sell his goods or services for federal reserve notes. He can sell them in whatever currency that he wants. However, if he sells on credit, the legal tender laws require him to accept payment in federal reserve notes if the debtor so choice to pay with federal reserve notes.

Stripping the federal reserve dollar of its legal tender status is important in returning to the gold standard. If the federal reserve dollar remains legal tender, the debtor could pay a debt contracted in gold with federal reserve notes.

Under my discussion of the real bills doctrine, I write that the bill of exchange allows the retailer time to get the money that he will use to pay for the merchandise from the buyers of that merchandise. Mr. Dale remarks, "If there was enough money in the system the retailer would have the money to pay for the goods." Where does the retailer get the money for his initial stock? Mr. Dale does not say. Presumably, he would have to save enough money to buy his initial stock. (Mr. Dale’s reform is designed to discourage savings.) Thus, he would have to borrow the money from himself, a bank, or someone else to pay for his initial stock. (Mr. Dale does not like people borrowing.) Mr. Dale suggests that the retailer should be buying his next stock from the money earned from selling his current stock. Is it not more economical to pay for the current stock from the selling of the current stock and for the next stock from the selling the next stock? It does eliminate the need to borrow either from oneself or from a bank. Mr. Dale should like that.

At the point of repeating myself again, Mr. Dale is totally confused about the real bills doctrine. His confusion is never more evident than his comment on the simple example that I give about the real bills doctrine.

He sees a long line of lending where no lending is occurring. A real bill of exchange is not a lending instrument. It is a clearing instrument No one is lending. No one is borrowing. Producers and wholesalers are giving the retailer time to sell the final product to the final consumer. By doing this, they free capital for other uses instead of tying it up in stock.

Perhaps Mr. Dale is confusing the real bills doctrine with the current system. The producer, wholesaler, and retailer are dependent on bank loans to operate. The real bills doctrine frees them from this dependency on bank loans. It allows them to operate without banks and loans. Again, Mr. Dale should like this.

Mr. Dale asks where an investor or bank gets the money to buy a real bill and what kind of money is it and how did it get into circulation. Under the system that I am advocating, the investor gets his money from savings. I have already explained how metallic money and commercial money and the bank money into which commercial money is converted get into circulation. (I am not sure where they would get the money under Mr. Dale’s reform as it discourages savings. However, real bills would not exist under Mr. Dale’s reform as all his money is someone’s obligation.)

Mr. Dale asserts that all checkbook money is bank-created money. If one deposits a gold coin in his checking account, the bank takes the coin and appears to do something mysterious with it—Mr. Dale does not state what happens to it. The bank just creates checkbook money out of nothing—so Mr. Dale implies. Apparently, the money in the checking account is not a claim against the gold deposited. In reality, the bank puts the gold coin in its vault and credits the depositor’s checking account with the gold deposited. The depositor can then write a check on his account instructing the bank to transfer the gold to another person. Mr. Dale is an intelligent person and should know this.

Mr. Dale continuously harps that a bank creates money when it credits a checking account even when money is deposited in a checking account or when a bank converts one form of money to checkbook money. I suppose that one could construe that a bank creates money when it converts money from one form to another. When a person deposits a gold coin in his checking account, in a sense the bank does create checkbook money by crediting to the depositor’s checking account. That checkbook money did not exist before. However, that process is more correctly viewed as conversion instead of creation. The new checkbook money enters the money supply, and the deposited gold coin is removed. When a check is deposited redeeming the gold coin, the gold reenters the money supply and the checkbook money leaves it. No change has occurred in the money supply.

Likewise with real bills, a bank removes it from the money supply when it "creates" checkbook money, crediting the checking account of the seller of the bill, to buy the bill. The bank has not increased the money supply. It has removed the bill, which is money in its own right, from the money supply to offset the checkbook money added. Within 90 days that checkbook money, or an equivalent amount checkbook money and bank notes, is permanently removed from the money supply when it pays the real bill. When paid, the real bill is also retired permanently and removed from the money supply as the goods that it represents have been sold.

These processes differ from the current bank lending process. Currently, banks often create new money as checkbook money when it lends. Mr. Dale, does a bank create money when it lends savings deposits? When the Federal Reserve buys treasury bills, it creates checkbook money, that is, it credits a checking account with the price of the treasury bills. It can do this directly or indirectly through local banks by crediting that bank’s reserves. This is not a conversion process because treasury bills were not and are not money. The Federal Reserve is actually adding new money to the economy without offsetting it by removing an equivalent amount of existing money.
I note that "the real bills doctrine generates the money necessary to buy newly produced goods and retires that money when the goods are sold." Mr. Dale responses, "If there was enough gold money there would be no need for the real bills doctrine." Apparently, my lack of clarity again appears. I never claim that there is enough gold without the real bills doctrine for the economy to function efficiently. (It can function, but not efficiently.) Furthermore, I know that Mr. Dale is obsessed with his loathing of charging interest. Commercially created money (real bills) does not involve interest. To repeat myself, the discount rate for a real bill is not an interest rate.

To explain adequately everything to Mr. Dale, I guess that I needed to write another 30 pages or more. Even then, I could not anticipate all his points of confusion. Furthermore, I doubt that I could convince Mr. Dale that the discount rate is not an interest rate and a real bill is not a loan. No matter how articulately I or anyone else expresses this truth, I doubt that Mr. Dale will ever accept it.

Mr. Dale claims that my statement "with their production, the people create money" could "only be true if everyone bartered." I have already described about how people create money under the real bills doctrine. I will not repeat that here. Barter is not necessary. To my statement that "with their consumption, they destroy money," He remarks, "I didn’t know that eggs, bananas, meat, bread, wine, houses and clothes etc. were money." Where did I say that they were money? True, people consume these products. However, they buy them with gold coins, bank notes, or checkbook money. The seller uses these moneys to pay his bill. Payment of the bill retires (destroys) it. If the owner of the bill receives bank notes or checks in payment, he sends them to the bank of origin for gold. The bank of origin removes (debits) gold from the account on which the check is drawn—thus, destroying that checkbook money. It retires (destroys) the bank notes received and redeemed. Thus, "with their consumption, they destroy money."

Mr. Dale asks why gold is needed with the real bills doctrine. The real bills doctrine cannot work without gold (or another commodity functioning as money, such as silver). Real bills must always mature into specie, i.e., gold in our present discussion. Being a future good or obligation, real bills can only mature into a present good that is no one’s obligation, such as gold. (As fiat money is a future obligation, including Mr. Dale’s fiat money, real bills become nonfunctional under fiat monetary systems.) Moreover, gold functions as the governor or regulator for the whole system. If real bills overestimate or underestimate the value of new goods being offered for sale, gold notifies sellers, bankers, and others that errors are occurring and corrective action is needed. It also prevents inventory speculation, which is discussed below. Moreover, gold is also needed for things that do not qualify to be covered by a real bill of exchange, e.g., things that typically take more than 90 days from production to final consumer, such as houses and factories.

Mr. Dale continuously insists that bankers are earning "all that ‘nice’ interest as profit for not really producing any thing" in connection to real bills. Must I repeatedly rebut that real bills pay no interest? Its discount rate is not an interest rate. I explain this above.

Furthermore, real bills are not loans. They are claims to future money and evidence of credit transactions. They are clearing instruments and not lending instruments. I explain this above.

I state, "Banks merely convert it from one form (real bills or commercial money) to another (bank notes and checkable deposits)." Mr. Dale remarks, "Then why don’t we all just write our own real bills and go deposit in our checking accounts." He has got to be kidding. Is this a serious question? I give the obvious answer: Most of us are not doing anything that would qualify for a real bill of exchange. So, if we wrote one, we would need a coconspirator or some ignorant buffoon to accept (sign) it, or we would have to forge a signature of acceptance. If we then tried to unload it on a bank or someone else, we would be guilty of fraud. I am sure that Mr. Dale knows this.

Nelson Hultberg describes real bills as "temporary bills of exchange that appear simultaneously with goods that are being produced to aid such goods in further transportation along the production/consumption chain. These bills of exchange then go out of existence once the goods have cleared the markets."[8]

Most of us are not directly involved in the production of consumer goods expected to be completely sold within 90 days. Therefore, most of us cannot write real bills of exchange. Mr. Dale, I am beginning to believe that you "must not live in the same world as the rest of us."
Mr. Dale continuously harps on real bills being loans. As I explained above, they are not loans. No one is borrowing. No one is lending. Furthermore, no one pays interest on a real bill. The discount is not interest. If the retailer pays the supplier on delivery instead of 90 days later, he receives the discount. He pays less if he pays at the time of delivery than he would pay if he pays 90 days later. Does that mean he has collected interest from the supplier? Mr. Dale seems to think so.

About the real bills doctrine, Mr. Dale claims that it is "based on the theory that gold was the only real money, money that neither the farmers, nor the businessmen, nor the bankers had." Why would no farmer, businessman, or bank have any gold? That any of them would have been in business without at least at some time possessing gold is incredulous.

He also states, "The real bills doctrine was where the banks could finance industry based on commercial paper guarantees." This is not exactly correct. Not all commercial paper is acceptable for discounting under the real bills doctrine. The only commercial paper eligible for discounting under the real bills doctrine is a real bill of exchange or a promissary note that is functionally the same as a real bill of exchange. Other commercial papers, such as bills of acceptance and bills of accommodation, are really lending and not clearing instruments. A bank may say that it is discounting them, but it is really lending and charging interest.

Mr. Dale is correct when he states that government bonds and broker loans are ineligible. However, he claims that inventory speculation is acceptable under the real bills doctrine. It is not. A function of gold under the real bills doctrine is to prevent inventory speculation. Bank notes and checkbook money created for inventory speculation result in bank notes and checkbook money exceeding the demand for money to buy new goods. The excessive credit money would be redeemed for gold. As people redeem the excess bank money for gold, the bank risks not having enough gold in its vaults to honor these claims (its credit money). If it fails to redeem all its bank money presented for redemption, the government should send the banker to prison for fraud. If the government would imprison every banker who failed to redeem his notes and checks drawn on his bank’s accounts (assuming the account is credited for more than the check), bankers would be strongly discouraged from discounting (buying) any bills based on inventory speculation.

In my demonstration showing that enough gold exists, Mr. Dale complains about my expressing gold in dollars. To make the necessary comparisons, I needed to convert everything to a common unit. I could have converted everything to euros or ounces. I chose dollars because most Americans think about money in terms of dollars.

Mr. Dale must have been "grasping at straws" at this point to find faults with my paper. Apparently, he would have understood the comparison better if I compared gold in ounces to trade volume in dollars.

Toward the end of the paper, Mr. Dale describes the real bills doctrine. His description assumes a central bank like the Federal Reserve. Some of the problems that he associates with the real bills doctrine can occur with a centralized banking system. Although I did not discuss the banking system in my original article as it was beyond the scope of the article, I argue against centralized banking and in favor of decentralized banking in my book Reconstruction of America’s Monetary and Banking System. My first recommendation in reconstructing America’s monetary system is to abolish the Federal Reserve.

Mr. Dale claims that "in the 1792 coinage act the dollar was value in wealth owned, a weight, 24.75 grains of pure gold." This is incorrect. Congress defined the dollar as 371.25 grains of silver (.995 fine) or 416 grains of standard silver (0.892 fine). Thus, Congress defined the dollar as a certain weight of silver, which Mr. Dale acknowledges in another comment, and not gold. (It did not fix the price of silver.) "As for gold, Congress adopted the ‘eagle’ and defined it as equal to ten silver dollars. One eagle contained 247.5 grains of pure gold and was equal in value to 3712.5 grains of pure silver. Thus, in terms of gold, one silver dollar equaled 24.75 grains of pure gold, 27.00 grains of standard gold (0.91667 fine). . . ."[9]

When I state that "when accompanied by the real bills doctrine this amount of gold could accommodate more that $425 trillion in trade quarterly or more than $1.7 quadrillion annually," Mr. Dale claims that I am fractionalizing gold. I am not. Under the real bills doctrine with sound decentralized banking, fractional reserve banking does not exist. Specie or commercial money backs all credit money (bank notes and checkbook money) that a bank "creates" (more correctly, converts). The specie and commercial money remains out of circulation. No one has use of it while the bank money representing that specie or commercial money is in circulation or available for use. Thus, if all bank notes and demand deposits (checkbook money) are fully backed by specie (gold and silver) or commercial money (real bills) maturing into specie, fractional reserve banking as such does not exists. I know that Mr. Dale will never understand that this is not fractional reserve banking. For my inability to explain this concept adequately and clearly, I apologize to him.

Mr. Dale writes, "Before one can have gold or silver stamped into coined money one must have the gold and silver, which seems to be something very hard for most people to get their hands on." If Mr. Dale or anyone else who finds it hard to obtain gold and especially silver, he has not bothered to find any. Gold and silver are easily found without hardly looking—try eBay for a starter. Hundreds if not thousands of money changers exist around the country to change federal reserve dollars into gold and silver. Anyone who can acquire federal reserve notes can acquire silver. One can convert a $20 federal reserve note (less than the cost of a meal for two at a moderately priced restaurant) into one ounce of silver and receive change back. If one observes his change, he may occasionally find a silver dime or quarter. Anyone who earns an average wage can easily save enough to obtain gold if he really wants the gold.

I point out that Gresham’s law explains why one does not see people paying their debts with gold and silver. I noted that people are not going to pay a $1000 debt with 20 $50 gold eagles (20 ounces of gold) or 1000 $1 silver liberty dollars (1000 ounces of silver). Mr. Dale remarks, "If all the things he mentioned above where legal tender and the legal tender law were enforced, all those things would have the same purchasing power." Congress has made all them legal tender. As the debtor chooses the legal tender with which to pay his debts, he will choose the cheapest (lowest quality) one, which is the federal reserve note. (Considering Mr. Dale’s predilection for paper money, he probably would use gold or silver coins, if he could find any, for payment and save his paper money.)

They may all have the same debt paying power although the IRS disputes that. The IRS contends that when a person’s wages are paid with gold eagles, for example, for tax purposes the wage is computed based on the value of the coin’s metal content in terms of the federal reserve notes. It is not computed based on the legal tender value stamped on the coin.

Mr. Dale fails to realize that Gresham’s law trumps legal tender laws when high quality money like gold and low quality money like irredeemable federal reserve notes are both legal tenders. People will spend the low quality money and save the high quality money.

Mr. Dale asserts, "The myth is that there ever [sic, I assume he means never] was enough gold for a good general medium-of-change." If there has never been enough gold, why have people chosen it for money when left free from governmental coercion? People have never voluntarily chosen irredeemable paper money, even the paper money promoted by Mr. Dale, as their money without governmental coercion. Perhaps Mr. Dale can provide an example if I am wrong.

Mr. Dale writes, "The United States Constitution did not declare what was to be or what was not to be dollars." The Constitution does not define year or mile, either, but it uses year and mile as a unit measure—just like it uses dollar as a unit of measure. Mr. Dale must believe that the writers of the Constitution did not have a clue about what they meant by "dollar." They were going the leave its definition to the whim of Congress. Congress could define the dollar on a whim and could change that definition at anytime on a whim. He also must believe that the people as States adopted a constitution that allowed Congress to levy a duty up to $10 per slave imported without knowing what a dollar was. Without this knowledge, they would not know what this tax would be. Would they have approved the Constitution not knowing what a dollar was or would be? Would they have approved the Constitution if Congress could declare the dollar to be anything that it wanted it to be? If so, for all they knew, Congress would define the dollar as a slave. Thus, the importer of slaves would pay the U.S. government up to ten slaves for each slave imported. Does Mr. Dale really believe this? He does if he believes that the definition of the dollar was left to the whim of Congress. (Mr. Dale must maintain that the definition of "dollar" is left to the whim of Congress to justify the constitutionality of the dollar that he proposes in his monetary reform.)

If Mr. Dale is consistent, he must also believe that the definition of "year" and "mile" is left to the whim of Congress. Congress could lawfully change the definition of "year" from one rotation around the sun to 100 rotations and give themselves lifetime tenure. A two-year term would thus last for 200 rotations around the sun. It could lawfully change the definition of "mile"such that the ten-miles-square district over which it is given exclusive legislation covers the whole country.

Contrary to Mr. Dale’s assertion, people knew what a dollar was. Lawfully, Congress can no more change that definition than it can change the definition of year or mile. The definition of "dollar" was not left to the whim of Congress. Everyone knew that the dollar meant the weight of silver in the Spanish milled dollar. Under the Articles of Confederation, Congress had defined the dollar as the weight of silver in the Spanish milled dollar. It adopted that standard because the Spanish milled dollar was customarily used in commerce and business.

Mr. Dale faults my article for my failure to discuss banking. Such a discussion was beyond the scope of my article. If he wants to read my discussion of banking and how it needs to be reconstructed, he should buy my book, Reconstruction of America’s Monetary and Banking System, and read the 80 pages on banking.

I write, "The founding fathers never intended that the U.S. government should issue any kind of paper money. The Constitutional Convention discussed that issue and the Convention rejected granting the U.S. government the authority to print or issue paper money." Mr. Dale responds, "The Constitutional Convention discussed not using bills of credit." Members of the convention used "bills of credit" and "paper money" interchangeably. They were synonymous. James Madison wrote, "Striking out the words [‘to emit bills on the credit of the United States’] cut off the pretext for a paper currency, and particularly for making the bills a tender either for public or private debts."[10] Oliver Ellsworth, who was also a member of the Constitutional Convention and later chief justice of the Supreme Court, concurred with Madison, "This is a favorable moment to shut and bar the door against paper money."[11]

Mr. Dale claims that "the first thing that the founding fathers did under the direction of Alexander Hamilton . . . [was to] set up a bank and issued bills of credit." The United States Bank was a private corporation chartered by Congress. It was not part of the U.S. government. Like all other banks, it could issue bank notes or, as Mr. Dale calls them, bills of credit. As such, it did not violate the constitutional prohibition against Congress issuing bills of credit. (One could construe that chartering the bank was a way to sneak around this prohibition.) I agree with Jefferson that Congress has no authority to charter a bank. Therefore, the United States Bank, like the current Federal Reserve, was unlawful, and its establishment was unconstitutional.

In conclusion, Mr. Dale habitually confuses the monetary system of the gold and silver standard accompanied by the real bills doctrine (commercial paper principle) that I propose with the current monetary system. He seems unable to think outside the parameters of the current monetary system. Because he cannot free himself from the parameters of the current debt-based fiat monetary system does not mean that others cannot. (He wants to maintain a debt-based fiat monetary system.)

In closing, I offer a comment by Professor Walter E. Spahr, Chairman of the Department of Economics at New York University from 1927 to 1956, "What is the meaning of a gold standard and a redeemable currency? It represents integrity. It insures the people’s control over the government’s use of the public purse. It is the best guarantee against the socialization of a nation. It enables a people to keep the government and banks in check. It prevents currency expansion from getting ever farther out of bounds until it becomes worthless. It tends to force standards of honesty on government and bank officials. It is the symbol of a free society and an honourable government. It is a necessary prerequisite to economic health. It is the first economic bulwark of free men."[12]


1. Byron Dale, Bashed by the Bankers (Pro-American Educational Foundation, 1988), p. 51.
2. Byron Dale, "Analysis of Thomas Allen’s There is enough Gold," print/25550, Aug. 21, 2009. All quoted material whose source is not noted is from this source.
3. Thomas Coley Allen, Reconstruction of America’s Monetary and Banking System: A Return to Constitutional Money (Franklinton: TC Allen Co., 2009), p.130.
4. Charles Rist, History of Monetary and Credit Theory from John Law to the Present Day, translator Jane Degras (1940, reprint; New York: Augustus M. Kelly, 1966), p. 35.
5. Antal E. Fekete, "Monetary Economics 101: The Real Bills Doctrine of Adam Smith," Lecture 6, Aug.5, 2002, http// lecture101-6pvf.htm, Sept. 12, 2007.
6. Antal E. Fekete, "Monetary Economics 101: The Real Bills Doctrine of Adam Smith," Lecture 12, Oct.6, 2002, http// lecture101-12pvf.htm, Sept. 12, 2007.
7. Allen, p. 183.
8. Nelson Hultberg, "Cranks in the Gold Community," July 11, 2005,, July 12, 2005.
9. Allen, p. 84.
10. George Bancroft, A Plea of the Constitution of the United States, p. 40.
11. Ibid., p. 43.
12. The Gold Standard Institute, Newsletter #3, August 24, 2009, p. 1.

Copyright © 2009 by Thomas Coley Allen. 

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