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.

Friday, March 26, 2010

Analysis of Richard Cook’s Monetary Reforms Part III

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

Thomas Allen

This paper is Part III 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 claims “that the program would free mankind from the control of the monetary elite which has unjustly usurped the fruits of the labor of society” (p. 67). It does do that. However, it does so by putting them under the control of the political elite, who will then unjustly usurp the fruits of the labor of society. Mr. Cook’s program does not set the people free. It merely changes their master, who in reality is probably the same elite.

Mr. Cook expresses his underlying fascist tendencies when he suggests that the government is a better regulator of the economy than are the markets (p. 81), which he seems to hold in utter contempt. Mr. Cook errs when he claims that the attitude of deregulation and letting the markets regulate the economy instead of the government began in the Reagan administration (p. 81). Keeping the government out of the economy was the general attitude until the progressive Wilson administration. The major exceptions were federal subsidizes of infrastructure, such as canals and railroads, and protective tariffs, which lead to Southern secession. If President Reagan and the following presidents truly believed in nongovernmental intervention, why did the Code of Federal Regulation grow, not only unabated, but often at an accelerated rate?

Mr. Cook asks, “But if market-based economics is so wonderful, why do we have stagnating employee incomes, rapidly increasing control of wealth by the very rich, a middle class in decline, growing poverty collapse of our manufacturing job base, a bursting housing bubble, resurgent commodity inflation, shaky stock prices, trillion dollar war in the Middle East financed by runaway deficit spending, and capital markets dominated by predatory equity and hedge funds” (p. 82)? The answer is that we have a heavily governmentally manipulated market as Mr. Cook advocates. The problems that Mr. Cook identifies are the results of the conflict between the government trying to control the markets and the markets trying to free themselves from that control. Many of these problems result from the government creating and protecting a banking cartel. These problems will not go away if Mr. Cook’s program is adopted. They will become worse as he advocates evermore governmental control of the economy.

Mr. Cook condemns ever growing debt in the United States and blames it on the markets (p. 82). His solution is not to reduce debt. It is to replace one form of debt with another. He would deny this because he fails or refuses to see government notes as a noninterest bearing, nonrepayable form of debt. As it is never payed down, his debt always grows.

Mr. Cook is convinced that banks derive their power from free market ideology (p. 84). They do not. They derive their power from governments. Governments gave them this power through the creation and maintenance of central banking and governmental regulations. (Central banks are not creatures of the markets. They are creatures of governments. The markets did create them. Governments did. Markets have never created a central bank.) The last thing that most bankers want to do is to operate in a free market. If they had to operate in a truly free market, they would lose the power that Mr. Cook ascribes to them. (President Bush’s bailout of the banks was Mr. Cook’s governmental intervention and not the markets operating. President Roosevelt’s suspension of the bankers’ obligation to redeem their notes in gold as they had contracted to do was Mr. Cook’s governmental intervention and not the markets operating.)

Like most fiat monetary reforms, Mr. Cook fondly quotes Benjamin Franklin’s admiration of paper money (p. 89). Franklin admired paper money because he made a small fortune printing it. By the time of the U.S. Constitution’s adoption, he had seen the destructive effects of governmentally issued paper money, i.e., governmentally issued credit. By then he had lost much of his enthusiasm for paper money. Thomas Jefferson, Thomas Paine, James Madison, and most of the founding fathers abhorred paper money. This hostility toward paper money appears in the U.S. Constitution where Congress was stripped of the power to emit bills of credit, i.e., to issue paper money, that the Articles of Confederation granted it. (Thus, Mr. Cook’s program requiring the U.S. government to issue paper money and its electronic equivalent is unconstitutional in spite of what any court may declare.)

Mr. Cook shows his ignorance of monetary history when he writes, “Because the colonial notes were spent directly into circulation not issued by a central bank through lending at interest, they did not inflate” (p. 90). Colonial notes were highly inflationary.[1]

Mr. Cook notes that by 1811 when the charter of the First Bank of the United States expired, state-chartered banks “had begun to issue paper money through fractional reserve banking” (p. 94). He also notes that lending was “confined mainly to commercial transactions under the ‘real bills’ doctrine” (p. 94). Some points of clarification are needed. First, under the real bills doctrine, banks do not really lend when they buy a real bill of exchange. Real bills are commercial money. They can be and were used to discharge debt. When a bank buys a real bill, it merely converts commercial money (the real bill) to bank money (bank notes and checkbook money). Second, the discount rate (the difference between what one pays for a real bill and its value at maturity) is not an interest rate. Savers determine rates. Consumers determine discount rates. (This does not mean that governments do not intervene to fix rates. When governments fix rates, they create excesses or shortages.)

Like most fiat monetary reformers, Mr. Cook expresses admiration for President Lincoln (pp. 96-97). Does he admire Lincoln because he did more than any other president to destroy the U.S. Constitution? He does admire Lincoln’s issuance of the unconstitutional greenback (p. 96) to fight his war to destroy the Constitution.

Like nearly all monetary economists, be they hard-money folks or easy-money folks, Mr. Cook claims that “silver was demonetized by the Coinage Act of 1873” (p. 97). This is not exactly true. This Act did not demonetized silver. It ended the silver standard. Silver continued to be used in subsidiary coins (dimes, quarters, and halves). Between 1878 and 1900, silver as silver dollars was used as fiat money. Congress and the Secretary of the Treasury instead of the markets decided the quantity to issue. Moreover, the value of silver in a silver dollar was less than a dollar. In 1900 with the Gold Standard Act, silver dollars became subsidiary coins for gold.

Mr. Cook is probably correct when he claims that the Coinage Act of 1873 “was in line with a worldwide banker-sponsored shift toward a gold standard” (p. 97). The elimination of the silver standard was necessary to eliminate the gold standard, which occurred in the 1933.

Mr. Cook errs when he writes, “In creating it [the Federal Reserve System], Congress ceded its constitutional authority over the nation’s monetary system to the private financiers” (p. 98). With the Federal Reserve Act, Congress did create a banking cartel, but it has no constitutional authority to do so. The Constitution grants Congress no authority to act as a bank. Therefore, it can give no entity such authority. Just as importantly, the Constitution grants Congress no authority over the country’s monetary system. Its only authorities on monetary matters are defining the monetary unit and coining all the gold and silver presented to the mint for coinage. Thus, it ceded none of its constitutional authority. What it ceded was authority that it had usurped.

Originally, the Act prohibited the Federal Reserve from buying treasury securities and using treasury securities as collateral for note issuance. When World War I broke out, the Federal Reserve and the U.S. government ignored this prohibition. The Federal Reserve bought treasury securities (p. 98). Later, Congress legitimized this illegal activity.

Again, Mr. Cook harps on deregulation and its destructive effects (p. 103). Again, I ask, “If we have had all this deregulation, why has the Code of Federal Regulation (CFR) continued to grow at an accelerated rate?” (When I first began working with the CFR in the early 1970s, I worked with one or two volumes. When I last worked with the CFR in 2007, I was working with 20 volumes. If all the material incorporated by reference were included, several hundred volumes would be needed. So much for deregulation.) Deregulation is not the cause of America’s financial and economic problems. A lack of deregulation is the cause. At the root of America’s economic problem is excessive regulation.

Mr. Cook blames much of the financial and economic problems of the country on “monetarism” and the resulting erratic expansion and contraction of money supply (pp. 102-104, 171-172). Mr. Cook’s understanding of monetarism differs significantly from mine. According to Milton Friedman, the father of monetarism, the money supply should grow at a known steady rate year-after-year with no regards for interest rates, unemployment, governmental budgetary needs, or anything else. Friedman’s concept differs greatly from Mr. Cook’s description. Like Mr. Cook, I have no use for the monetarist approach to regulating the money supply.

Mr. Cook declares that credit creation should be “through our constitutional system whereby Congress is authorized to create money and regulate its value” (p. 128). The Constitution does not authorize Congress to create money. It authorizes Congress to coin money. To coin money and to create money are entirely two different things. Money cannot be coined until it is created. Mr. Cook’s despises market-created gold and silver money. They can be and have been used as money without being coined. Coining makes their use easier. The Constitution recognizes this fact. Under the Constitution, if no private person brought any gold or silver to the mint, there would be no coins. If the U.S. government undertook to coin gold and silver on its own account, it would first have to steal the gold or silver from someone. (Between 1878 and 1900, it did mint silver dollars on its own account. It could do so because it could buy silver with gold and the silver coins minted contained less silver than the monetary value of the coin.)

Mr. Cook argues that the federal government should control credit instead of private bankers (p. 128). Except authorizing Congress to borrow money, the Constitution does not authorize the U.S. government to become involved with credit. If Mr. Cook wants a constitutional system that removes the control of credit from bankers and international financiers, he should advocate the true real bills doctrine and concomitant gold and silver standards. Such a monetary and credit system can operate without banks although not as efficiently. However, they make the control of credit private by putting it directly in the hands of the people. (Mr. Cook does not trust the people with the control of credit. The government, which he entrusts with the control of credit, is not and can never be the people.) Moreover, they also greatly restrict governmental monetary adventurism. They would prevent governmental control of credit, the establishment of Social Credit and its concomitant fiat money. They are a greater threat to Mr. Cook’s proposal than the current system. His proposal is only a major modification of the current system. The gold and silver standards with the real bills doctrine is a replacement.

Mr. Cook remarks that “under the regime of the world’s all-powerful central banking systems, money is brought into existence only as debt-bearing loans” (p. 145). This may be true today, but it has not always been true. Before President Roosevelt stole the people’s gold, money came into the system whenever a gold smelter cast an ingot of gold and certified its weight and purity.

Thieves like Roosevelt, whom Mr. Cook admires although he was a front man for the big bankers, whom Mr. Cook despises, are the type of people that Mr. Cook wants to entrust with managing the country’s monetary. A banker like a Morgan is despicable, selfish, and greedy when he is a banker. However, if he were to become a politician or a governmental bureaucrat like the head of the Bank of England, he suddenly becomes an altruistic and honorable person of probity and integrity. Although Mr. Cook distrusts bankers, he seems to trust politicians and bureaucrats implicitly.

However, Mr. Cook distrusts governmental officials to manage the current economy or even doubts that they can (p. 146). Yet he not only wants these people to manage the economy under his system, but he advocates that they do. They have to because his program calls on them actively to manage the monetary system and, by that, the economy.

Mr. Cook is correct when he writes, “The fundamental objectives of monetary policy should be to secure a healthy producing economy and provide for sufficient individual income” (p. 148). His proposal fails to achieve this goal. Contrary to his assertion, it is highly inflationary. He also advocates heavy governmental intervention in the economy, which retards economic growth. Mr. Cook displays a strong distrust of freedom.

Mr. Cook is a strong advocate of a guaranteed income (pp. 9, 148). People should be guaranteed a minimum standard of living even if they produce nothing and are as parasitic as bankers and speculators. To give someone a guaranteed income, the wealth has to be forcibly taken from someone else. If an individual forcibly takes another person’s wealth even to give to a third party, he would be called a thief and punished as such. However, if he is shrewd, he steals through the government. Not only does he then get away with his theft, he is considered the victim who deserves what he gets—and more. Mr. Cook conceals this theft with his printing press money and its electronic equivalent. He also cuts everyone in on the deal by giving everyone a bribe. Although he would deny it, he is transferring wealth from producers to nonproducers by depreciating the money.

Mr. Cook believes that everyone in the country has a claim to what everyone else produces (p. 148). Yet this philosophy of “from each according to his production to each according to his need” is not communism. Again, Mr. Cook conceals his communistic scheme with printing press money and its electronic equivalent.

Mr. Cook not only wants the U.S. government to guarantee every American a minimum income, but he wants governments of rich countries through the United Nations to guarantee everyone in the world a minimum income (p. 158). (Mr. Cook appears to be a strong supporter of the U.N. [p. 174].) He is a firm believer in using governments to plunder producers for the benefit of nonproducers. Producers are to be the slaves of nonproducers. He really does support a parasitic society—only the parasites are no longer bankers and speculators.

Mr. Cook is right when he writes, “The U.S. and world economies are on the brink of collapse due to the lunacy of the financial system, not because we can’t produce enough. Contrary to so many doomsayers, the mature world economy is capable of providing a decent living for everyone on the planet” (p. 149). Yet he fails to connect a declining standard of living with fiat money. As the monetary system has moved farther from the gold standard, the standard living for the common man has declined at an increasing pace. Only sound money and minimum governmental oversight can unleash this productive power that will significantly raise the standard of living especially for the poor. Mr. Cook offers neither. To the contrary, he offers an unsound monetary system and massive governmental intrusion.

Mr. Cook refuses to realize that the gold standard, especially when accompanied by the silver standard, protects the common man from bankers and governments by limiting their power over him. Consequently, bankers and governments have been hostile toward the gold standard. Mr. Cook sees the danger of the bankers and wants to protect the common man from them. However, he does not seem to see the greater danger of government—at least not under his system although he vaguely sees it under the current system. This ignorance or deliberate blindness is unexplainable unless he is so blinded by his system, which demands subordination of the common man to the government, that he refuses to see it.

Mr. Cook contents that his recommendations are based on economic ethics (p. 153). The ethics underlying his propose system are the same as those underlying the current system. They are fraud and force. Both force loans on the people in the form of irredeemable legal tender paper money. They deceive people into believing that they can get something for nothing. In both systems, the money is created out of nothing.

Mr. Cook is correct in that “human morality should be the common denominator and essential element in making economic policy decisions” (p. 153). Unfortunately, his proposal is no more moral than the current system. He believes that a gang of thugs acting as government has the right to take someone’s property without his consent. He does object to much of this taking under the current system, but he demands such taking under his system. He seems to object to “might makes right” (p. 154). Yet his system relies on this principle.

Mr. Cook is a firm believer in command and control. The government telling (commanding) markets what to do solves financial and economic problems. Mr. Cook distrusts liberty. Freedom and markets cannot be trusted to solve financial and economic problems.

Mr. Cook seems to believe that self-interest governmental bureaucrats acting under the facade of “charity, compassion, or service to mankind” (p. 154) can better direct production and services of the economy than the profit motive. Profit sends a clear signal to entrepreneurs informing them what the people want and when and where they want it. What do nonrisk taking bureaucrats use to guide themselves in providing for the people? Gut feelings? Personal basis? Mr. Cook’s desires?

What happens when people use their money in way that Mr. Cook finds objectionable, such as speculation? Does the government outlaw arbitrarily objectionable spending?

Mr. Cook objects to war (pp. 155, 191-192). Yet his scheme makes financing war easy. Under his system, the government can fight wars with printing press money. It need not finance them with taxes or borrowing. Only gold and silver have been much of an impediment to war. Because they make war so difficult, governments quickly abandon them when they want to fight a war of any significant.

Mr. Cook disagrees with the notion “that money is, or should be, a thing of value in-and-of itself, or that this value is created by ‘market forces’” (p. 178). Commodity money, like gold coins, has value as money because the material of which it is made has value in-and-of itself, i.e., has value because of its nonmonetary use. Supply and demand gives fiat money value, which originally comes from its connection with commodity money. The only other mechanism that gives money value is to fix the price of everything in the economy in terms of the monetary unit. How does Mr. Cook propose that money receive its value?

Mr. Cook claims “that money serves its socially-beneficial purposes only when it is regarded as an instrument of law and an economic medium-of-exchange and when it is regulated by a government which can responsibly direct its benefits to the welfare of all citizens” (p. 179). Apparently, before a governmental edict decreed a certain item to be the medium of exchange, i.e., money, money served no socially-beneficial purpose. If the markets decide what is to be used as money, money can serve no socially-beneficial purposes. Or at least its socially-beneficial purposes are severely limited. (To Mr. Cook, money’s socially-beneficial purposes seem to be the welfare state with socialized healthcare and education.)

Markets easily and efficiently create money and credit when and where it is needed and in the quantity needed. Mr. Cook would have the government regulate money by always increasing its supply regardless of demand. The government would create and issue money to cover most of its operating expenses, to subsidize prices, and to fill the perceived gap between national income and gross domestic product.

Like most fiat monetary reformers, Mr. Cook believes that the Constitution authorizes Congress to print and issue money (p. 179). It does not. The writers of the Constitution thought that they had denied Congress the power to print money when they removed the provision in the draft that authorized Congress to emit bills of credit.

As he states, the Supreme Court did declare that the Constitution authorized the printing and issuance of greenbacks (p. 179). However, the first time that the Supreme Court ruled on the constitutionality of the greenback, it ruled that it was unconstitutional. Only after President Grant did his version of packing the Court did the Supreme Court rule that the greenback was constitutional. What this ruling shows is that when given a choice between political expediency and personal bias verse original intent, the Court nearly always chooses political expediency and personal bias over original intent. This preference is the root of nearly all of the economic problems of the United States. If courts had followed the wording and intent of the Constitution, the Federal Reserve would not exist. Neither would the U.S. government’s micromanagement of the economy and the welfare state.

Mr. Cook claims that “fractional reserve banking under a privately-owned central is not ordained by our Constitution” (p. 179). He is correct. However, based on his premise that the Constitution is highly elastic and that it gives Congress the authority to control and regulate money, the Federal Reserve is constitutional. Congress chose to control and regulate money through “fractional reserve banking under a privately owned central bank.” The Constitution does not prohibit Congress from delegating its powers to private entities or using them to exercise its powers.

Mr. Cook claims that the current system forces people into ruinous debt (p. 179). On the private level, no one is forced to borrow. The way to avoid ruinous debt is not to borrow. Those who run the government can force ruinous debt on taxpayers by their extravagant spending. However, if the people want to avoid this ruinous debt they can vote people into office who adamantly oppose the welfare-warfare state. Mr. Cook’s scheme does not eliminate ruinous debt. It merely changes its form to noninterest bearing, nonrepayable debt.

Mr. Cook is correct about the Federal Reserve’s incompetence and inability to manage the country’s money properly and to influence the economy appropriately (pp. 183ff). Yet he believes that politician and bureaucrats are fully competent and able to manage the country’s money and economy. Unlike the Federal Reserve, the government can at least dictate how individuals are to spend their money and what economic activities are to be undertaken. Did not the Soviet Union and Mao’s China do this?


1. Thomas Allen, "Massachusetts Notes: The Perfect Money" (Franklinton, N.C.: TC Allen Co., 2009).

Copyright © 2009 by Thomas Coley Allen.

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Monday, March 15, 2010

Analysis of Richard Cook’s Monetary Reforms Part II

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

This paper is Part II 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 admits that “a strong, functioning economy is required” for his system to work (p. 37). However, he fails to explain adequately how a strong, functioning economy will continue when people are paid whether they are productive or not.

He is correct in that people need leisure time to pursue spiritual, intellectual, and family activities (p. 37). (As not many people will pursue these activities, especially the first two, is the government going to force its wards to pursue these activities?) They should be relieved of perpetual grueling toil (p. 37). However, his scheme does not achieve these goals in the end. Like all collective schemes, it leads to economic stagnation and decline.

Mr. Cook advocates shifting much of credit creation from banks to the U.S. government. The U.S. government needs to lend more. More governmental lending supports “the concept that credit should really be viewed as a publicly-regulated utility . . . ” (p. 39). First, no where does the U.S. Constitution authorize the U.S. government to lend money or credit to anyone. Furthermore, the U.S. government will breed more corruption as it lends more. Loans will be used to pay and play political favorites. Second, if credit is a public utility and should be regulated as one, no one could lend to friends or relatives without the approval of some governmental bureaucrat. (Most likely, such loans below a specific amount would be exempted from case-by-case approval. However, such exemption is itself a bureaucratic approval that can be revoked.)

Mr. Cook supports the American Monetary Institute’s recommendations of a Monetary Control Board in the Department of the Treasury setting and overseeing monetary targets and other proposals of the American Monetary Institute (pp. 39, 55, 65, 109, 159, 262). Since Mr. Cook’s system demands injections of money into the economy to fund most of the government and to fill the “gap,” the Monetary Control Board seems superfluous. Its only purpose seems to be justifying ever increasing governmental expenditures. As I have discussed in detailed the American Monetary Institute’s proposal in “Analysis of the American Monetary Institute’s American Monetary Act,”[1] I will not go into any depth on its highly flawed despotic scheme. However, it is a good match for Mr. Cook’s proposal.

Mr. Cook presents the now defunct Reconstruction Finance Corporation (RFC) and Home Owners Loan Corporation (HOLC) as examples of public credit. He recommends creating programs like these to lend at below market interest rates to state and local governments for infrastructure projects (p. 39). Thus, he wants to make the states evermore dependent on and subservient to the U.S. government. A major cause of the political and economic problems in this country has been the subordination of the creators (the states) to the created (the U.S. government). Today, nearly all political power has been usurped and concentrated in Washington. The states can do little more than what the U.S. government allows them to do. Mr. Cook’s scheme completes this consolidation.

He also supports the U.S. government lending at below market interest rates to banks money for banks to lend at some low rate to consumers, students, and small businesses (p. 40). According to Mr. Cook, when the Federal Reserve, which was created by and exists at the pleasure of the U.S. government, makes low interest rate loans, it distorts the economy, creates inflation, and causes all sorts of havoc. However, when the U.S. government does the same thing through another agency that it has established, it causes none of these problems. At least that is what Mr. Cook would have us to believe. It must be who gets the interest. No, it cannot be that because all the interest earned by the Federal Reserve above its operating costs goes to the U.S. Treasury. What is the difference, Mr. Cook?

Mr. Cook describes the current system with fractional reserve banking—creating money out of nothing (pp. 53ff). He remarks “that because borrowed money pays for labor, commodities, rent, etc., it becomes part of the prices that are eventually charged for goods and services. However, when the money goes back to the bank to cancel a loan, that purchasing power disappears” (p. 54). Labor, rent, etc. may become part of the price, but they do not determine the price. To the contrary, the price that the marginal buyer is willing to pay determines the cost of the product or service inputs. Furthermore, Mr. Cook condemns removing money (purchasing power) from the economy once its work is done. Apparently, once money, purchasing power, enters the economy, it should remain there forever. As noted above, this is highly inflationary.

Mr. Cook seems to believe in a “firm law of prices.” Prices do not move to meet the available purchasing media. Once the seller sets his price, it remains fixed. On the other hand, Mr. Cook seems to agree that prices rise and fall as the purchasing medium is inflated or deflated. Yet for some reason, prices do not want to adjust to meet the income, purchasing power, available for purchases. This lack of adjustment is an essential part of Social Credit. Mr. Cook seems to explain this firm law of prices with cost (p. 61). Because of the costs associated with production, prices cannot decline. What he and most other people fail to realize is that costs do not determine prices. Prices determine costs. The actual selling prices of the final products determine all the costs going into producing these products.

Mr. Cook states “the real purpose of money . . . is to serve as a ticket for the purchase by people of articles they need to survive or otherwise desire to utilize once the demand for survival has been met” (p. 55). No, it is not. The real purpose of money is to serve as a ticket for those who have produced to represent their contribution to what they have produced. Then they can exchange these tickets for things that they need and want.

Mr. Cook is correct when he remarks that the financial system does work “against what should be the real purpose of money” (p. 55). However, the real purpose is not what he claims.

Mr. Cook is hostile toward the notion that money is or should be a commodity. Money should not have value in-and-of itself. Gold and silver money have no intrinsic value (p. 55). If money has no value in-and-of itself or is not descended from money that did, how does one know the value of the money?

Whether or not gold and silver have intrinsic value is debatable even in hard money circles. If by intrinsic value, Mr. Cook means that gold and silver have no absolute value in-and-of themselves, independent of human thought, he is right. Neither gold nor silver nor anything else has such value. When people say that gold and silver have intrinsic value, they usually mean that they have value in-and-of themselves. That is, they have value in their monetary use because they have value in their nonmonetary use. The reason that federal reserve notes have value is that the dollar used to be a definite weight of gold and that the federal reserve notes were once redeemable in gold on demand. If Mr. Cook’s new notes have value, it will be because they are related to federal reserve notes, which were once related to gold.

Mr. Cook is correct when he states “money is anything that a willing buyer and a willing seller agree to exchange for something else” (p. 55). However, no sane person is going to trade a useful product for a worthless piece of paper or an electric blip. That paper or its electronic equivalent can only have value if it is or once was related to something that had value in-and-of itself.

Under today’s system, people accept federal reserve notes primarily because of legal tender laws. They have to accept them for payment of debt. Mr. Cook gives no hint that legal tender laws should be repealed. Without them, people would soon refuse to accept his money—except for their National Dividend stipend that cost them nothing to accept other than their independence and freedom. If no one was forced to accept his money, it would lose its value as it has no intrinsic value.

Mr. Cook errs when he writes that “unless there are goods and services available and for sale, gold and silver are totally useless” (p. 56). No, they are not. They are highly useful even if not used as money. Their nonmonetary uses are what gave them value that enabled them to be used for money. Today, neither are used as a medium of exchange, yet both are highly valuable. Mr. Cook could not have written and published his book with the equipment that he used without them.

Mr. Cook recites the old myth that gold and silver have no value because “you can’t eat them, live in them, or wear them” (p. 56). One cannot eat, live in, or wear electronic blips, which will be the form of most, if not all, of Mr. Cook’s credits. One can eat, live in, and wear gold and silver. Both are taken orally to treat certain aliments. A house can be built with gold and silver bricks. It would be expensive and highly energy inefficient, but it can be done. (I forgot. Gold and silver have no value, so any house built with them will literally be cheaper than dirt.) Clothes can be and have been made with them.

If Mr. Cook believes that gold and silver have no value whereas his electronic blips do, he should go to some poverty-stricken country like Haiti and find out which one really has value. He will have no problem spending his gold or silver coin. He will have extreme difficulty finding anyone willing to sell him something for his electronic blip.

Furthermore, if gold has no value, why do governments expend many more resources guarding their hoards gold than they expend guarding any vault filled with paper currency? If gold and silver have no value, why do people expend their time and resources looking for, mining, and refining gold and silver?

Mr. Cook asks, “So by what right do the bankers bind the economy in such a straightjacket of debt” (p. 56)? They have the right because the U.S. government gave it to them through excessive governmental intervention. (This is the same government that Mr. Cook advocates giving even more power.) It did so through the establishment of the Federal Reserve System, excessive regulation of banking, legal tender laws, and other economic intervention. (Under the gold standard, the government allowed abusive fractional reserve banking by allowing bankers to violate their contract to redeem their notes on demand if enough banks could not do so. It should have imprisoned these bankers for fraud and failure to keep their contracts.) Mr. Cook does not object to excessive governmental intervention into the economy. His objection concerns where and how it is used. Mr. Cook even recognizes that governmentally granted privileges, i.e., licenses and regulatory requirements, e.g., minimum capital requirements, contribute to this problem (pp. 56-57).
Mr. Cook insists that money in-and-of itself has no value. Credit gives money its value. “Without the credit potential of a producing economy, money has no value” (p. 57). If Mr. Cook is correct, then the ancients bought and sold with valueless money. How absurd! Perhaps the most common monetary standard was the cattle standard. People bought and sold based on the value of cattle. Cattle were their purchasing power. According to Mr. Cook, these cattle had no value because the ancients had not developed an economy based on credit. Again, how absurd. People would not have used cattle in exchanges if they had no value in-and-of themselves. They certainly did not used cattle because of credit as most never used credit, and many would have considered such a notion ridiculous.

Mr. Cook’s concept of “credit” differs from most. To him, “credit” is the economic potential of the economy (p. 58). Money is the measure of credit (pp.58-59).
Mr. Cook believes that the government should control money. Naively, he believes that those who really control the government will control the money for the benefit of the people as a whole (pp. 59-62). That is, those who really control the government will put aside their selfish desires and act altruistically for the betterment of the people. If they would do this, they would be doing it now. History offers only few examples of such altruism. To the contrary, those who control the government act to serve their own desires and often to the detriment of the people as a whole. Even if those who control the money under Mr. Cook’s system were purely altruistic with no selfish motivation, they would fail in their job because they are not omniscient. To provide the right amount of money, they have to know everyone’s demand preference for money, which is constantly changing, at every moment in time. No committee or individual can ever achieve this no matter how brilliant they are or how much data they have.

Mr. Cook insists that money, and therefore, credit, should be public property and not private property (p. 59). Thus, any money that a person has in his pocket belongs to the government. Since all credit is public property, i.e., it belongs to and is owned by the government, all National Dividend credit given to a person really belongs to and is owned by the government. Therefore, whatever a person buys with money and credit, which are the property of the government, must belong to the government as its property has been used to get the goods and services. Furthermore, everyone loses ownership, and by that control, of his own credit. As noted above, whenever a person borrows money from a bank, he is lending the bank his credit. Under Mr. Cook’s system, this credit now belongs to the government and not the borrower. And Mr. Cook insists that is not socialism (p. 59)! Under his system, the government surreptitiously ends up owning everything.

The founding fathers did not conceive of money and credit being public property. They were to be private property. The monetary system that they devised ensured that the money, gold and silver coins, would be private property. Then all the credit based on this money would remain private property.

Mr. Cook claims that the productive capacity of the country is credit and that credit should be publicly owned, i.e., governmentally owned, utility (p. 58). Yet he insists that this be not socialism. Under socialism the government owns the means of production or regulates them so heavily that it is tantamount to ownership. The means of production are part of the productive capacity of the country. If the government owns the credit and if credit is the productive capacity of the country, then the government owns the productive capacity. If it owns the productive capacity, it owns the means of production. Is that not socialism?

Mr. Cook states, “It is essential to realize that the central government of a sovereign nation has the right, the ability, and the responsibility to introduce ALL new credit into existence. This is totally different from having the central bank ‘print money’ . . .” (p. 62). Since the Bank of England became a part of the British government in 1946, Great Britain should be an economic paradise instead of the economic disaster that it is. Since 1946 all the money and credit issued by the British central bank, which is an agency of the British government, have been the property of the British government. The British government has been managing the money and credit of Great Britain. Yet Great Britain is financially and economically worse off than the United States. If Mr. Cook is right, Great Britain should be much better off than the United States. It is much closer to Mr. Cook’s system than the United States. The only thing really lacking in the British system is periodically sending everyone a big check to bridge the national income-GDP gap.

Mr. Cook would counter, “Sovereign creation of credit should not be based on debt. It is and should be based on direct lending or spending of money into circulation by the government itself” (p. 63). Where this has been tried, the results have been disastrous and highly inflationary. Massachusetts did this in the first half of the eighteenth.[2] France did it in the 1790s.[3] Both experiments were failures. Whereas these schemes failed, Mr. Cook believes his will succeed by injecting more money into the economy and giving the government more control of the economy through its absolute monopolistic control of credit.

Mr. Cook claims that “it is the job of government to bring that money to where it is needed” (p. 63). How does the government know where it is needed? It has to be omniscient to know. The founding fathers knew that no government is omniscient, and it certainly should not have the power to attempt to obtain such knowledge. Therefore, they left the allocation of money and credit in the hands of the people—the only place it can be if the people are to be free.

Mr. Cook gives an outline of the principles guiding his system. The Social Credit concept discussed above is a key principle (pp. 63-64). They are a mixture of government-private partnerships. Some things are left to private initiative, and some, to government command. In realty, the government decides. In short, Mr. Cook promotes a form of fascism.

While retaining the welfare portion of the welfare-warfare state, he discards the warfare part (p. 64). Welfare and warfare go together like husband and wife in the Biblical sense: They are one flesh. One cannot for long be separated from the other. The exhilarating rush of power that the welfare state gives those who control the government will force it to lust for total power by adding the warfare state. If Mr. Cook wants to abandon the warfare state, he must also abandon the welfare state. Yet he cannot because his system depends on the welfare state mentality.

Mr. Cook advocates spending “sufficient credit into existence to supply the basic operating expenses of government at all levels without recourse to either taxes or borrowing” (p. 65). Then he provides three examples: colonial paper money, the Continental, and the greenback (p. 65). All three of the examples were highly inflationary and highly destructive to the common man’s wealth. They enriched speculators, whom Mr. Cook disdains, and the politically connected. Mr. Cook’s proposal would have the same results. Only his will be more inflationary and destructive. Like them, his new money has no relationship to new goods being offered for sell. Moreover, unlike them, his system makes no pretense of removing excess money. Apparently, he believes that under his scheme, excess money is impossible. (The U.S. note or greenback did not meet the fate of the colonial money and the Continental because Congress ceased issuing more of them and actually reduced the amount in circulation. Furthermore, it set up a mechanism to redeem them in gold. None of these are part of Mr. Cook’s scheme.) Mr. Cook does allow for the collection of some user fees(p. 65), which does nothing to remove any excess.
Unlike some fiat money reformer, Mr. Cook correctly sees that these three types of money were a form of credit money (p. 65). What he does not acknowledge is that they were interest-free, nonrepayable forced loans (although U.S. notes offered payment to the holder between 1879 and 1933).

Mr. Cook proposes a National Dividend program divided into two parts. “One would be a cash stipend paid to all citizens which would also serve the purpose of eliminating poverty by providing everyone with a basic income guarantee. The remainder of the National Dividend would consist or an overall pricing subsidy, whereby a designated proportion of all purchases, including home building expenses, would be rebated to consumers” (pp. 65-66). Mr. Cook does not explain what will prevent people who are paid whether they work or not from following the historical experience of not working. He also fails to explain why his consumption subsidies, specially when people are paid not to produce, will not lead to shortage. His program increases demand while it decreases supply.

He also sets aside part of the National Dividend to give to all citizens upon reaching the age of 18 to use for higher education, trade school, or business investment (p. 66). Is the government going to force them to undertake one of these endeavors? What happens if a person does not want to undertake one of these activities? If the government does not give him the money, it has withheld part of the National Dividend with presumably disastrous consequences. Will the government allow the students to spend their time at college partying? How will it stop it? It cannot demand the students to return the money because that would remove part of the National Dividend. The only solution is for the government to micromanage student activity at college. Giving people money for business investments presents the same problem. Risk-aversion bureaucrats must micromanage the business investments to prevent them from being spent in undesirable ways from the government’s perspective.

Mr. Cook is correct when he states that his program will not create a Utopia (p. 66). It has to have a highly intrusive government just to collect the data needed to compute the National Dividend accurately. He asserts that his program does not relieve mankind of the need to work, etc. (pp. 66-67). Perhaps, but it certainly reduces their incentive to do so.

1. Thomas Allen, "Analysis of the American Monetary Institute’s American Monetary Act" (Franklinton, N.C.: TC Allen Co., 2009).

2. Thomas Allen, "Massachusetts Notes: The Perfect Money" (Franklinton, N.C.: TC Allen Co., 2009).

3. Thomas Allen, "Assignat: The Nearly Perfect Money" (Franklinton, N.C.: TC Allen Co., 2009).

Copyright © 2010 by Thomas Coley Allen.

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Tuesday, March 9, 2010

Analysis of Richard Cook’s Monetary Reforms Part I

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

This paper is Part I 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 covers many different things in his book. I am limiting my analysis mostly to his monetary reform. As his book contains much repetition, this analysis also contains some repetition. Moreover as various related points of his proposal are scattered throughout his book, this analysis is somewhat scattered.

Mr. Cook is a statist who advocates giving a strong central government absolute control of the country’s money and credit. He seems convinced that America’s financial and economic problems result from too little governmental intervention instead of too much. He also seems to believe that giving those who really control the U.S. government, i.e., the monopolistic cartels, absolute monopolistic control of money and credit will break the tyranny of their monopolistic control (p. xv). Moreover, he is a preacher of envy, who promises the people something for nothing if they would just adopt his scheme.

Mr. Cook believes that the solution to the country’s problems lies in “central control of monetary resources” (p. 9). The financial and economic crisis that the United States face is caused by and is the result of “central control of monetary resources.” Since 1913, the United States have had “central control of monetary resources.”

Mr. Cook contends that the primary problem with the U.S. “financial system is that the creation of new purchasing power through credit—loans, mortgages, credit cards, etc.—is controlled by private financial institutions. The system functions principally for their profit” (p. 13). The implication is that if the government controlled the creation of purchasing power, the country would have no financial or economic problems of concern. If this were true, then the Soviet Union would have been an economic paradise compared to the United States instead of an economic disaster. Its government had absolute control of the creation of new purchasing power and enforced it with an extensive police state.

Like all fiat monetary reformers, Mr. Cook believes that the U.S. Constitution gives Congress “authority over our monetary system” (p. 13). It does not. The U.S. Constitution gives Congress only severely limited monetary authorities. It authorizes Congress to define the monetary unit. At the time of its adoption, people understood this authority to be defining the dollar as the weight of silver in the Spanish milled dollar. This is what the Constitution means by “regulate the value thereof.” It could coin money, i.e., gold and silver. The Constitution gives Congress no authority to print any kind of paper money. It gives Congress no authority to create or issue credit except that it does authorize Congress to use the government’s credit to borrow. The Constitution leaves the creation of money and credit directly in the hands of the people acting in their individual capacities.

Mr. Cook calls for “greater economic democracy” (p. 14). “Greater economic democracy” is euphuism for socialism, fascism, or another form of statism. To achieve this goal, he promotes Social Credit as the replacement for the current “finance capitalism.” Social Credit provides “democratic capitalism” without a collective solution (p. 14). As we shall see, Social Credit is a form of collectivism.

He claims, “The main problem with the U.S. economy today has to do with earnings and prices. People simply do not earn anywhere near enough to buy what the economy produces” (p. 17). He may be correct, but this is questionable. As we will see, his solution is wrong and will fail to achieve this goal.

Using 2006 data, Mr. Cook compares the gross domestic product (GDP) to the total national income. He concludes that the national income or purchasing power is not enough to consume all the gross domestic product. It only accounts for about 75 percent of what is needed to consume the gross domestic product (p. 18). The remainder must come from borrowing, new debt. This borrowing enriches financial institutions as they receive the interest (pp.19-24).
Correctly, Mr. Cook does not believe that more regulation and restrictions in lending will solve the problem. He also rules out keeping interest rates artificially low (although he proposes to do this with his Social Credit system) and cutting the costs of production, which usually means cutting labor costs. Part of his recommendation is higher taxation of upper income brackets and corporations. However, these increases in taxation will not close the gap between GDP and purchasing power, national income (pp. 24-25). Taxation of income and corporations does nothing to close Mr. Cook’s perceived gap. It merely transfers income from one category to another. If this taxation does anything, it will widen the gap as taxation of income often leads to a decline in income. Likewise, taxation of corporations does nothing to narrow the gap. Corporations will pay the tax from its income or collect it from the income of its customers via higher prices.

Mr. Cook describes C.H. Douglas’s Social Credit proposal (pp. 26ff). According to Mr. Douglas, the cause of financial crises is the “gap between the value of manufactured goods and the purchasing power distributed through wages, salaries, and dividends” (p. 26). This deficiency results from “business profits not distributed as dividends (retained earnings); individual savings, i.e., ‘mere abstention from buying’; ‘investment of savings in new works, which create a new cost without fresh purchasing power’; accounting factors, where costs previously incurred are carried over into current prices; and ‘deflation’, i.e., ‘sale of securities by banks and recall of loans’” (p. 26). Mr. Douglas seems to have as little use for savings as does the typical Keynesian. As the industrial revolution has been built on “retained earnings,” “individual savings,” and “investment of savings in new works,” Mr. Douglas must want to return society to a preindustrial revolution era.

To Mr. Douglas’ list, Mr. Cook adds “insurance, . . . maintenance of unused plant capacity, . . . employer retirement contributions, and the cumulative sum of retained earnings and other cost factors when businesses buy from each other” (p. 26). Like Mr. Douglas and apparently all Social Credit adherents, Mr. Cook has little use for savings and investments. He opposes companies assisting their employees with retirement, or at least he considers it detrimental to the economy. Much of the money that ends up in insurance, retirement plans, and retained earnings are used for industrial development and technology advancement. Only that portion that ends up in government bonds is truly wasted. Also, Mr. Cook believes that letting factories and machines decay is better for the economy than maintaining them for future use.

Mr. Cook firmly believes that market forces do not decide the price of a product. He seems to believe that company executives dictate prices. They “force consumers to pay for the costs of capital depreciation, [but] they do not give them credit for appreciation of the value of the business that will appear through future capital gains” (p. 26). A company may propose a price, but it cannot fix the price unless the government stands ready to enforce that price. The marginal buyer determines the price.

To Mr. Douglas, the solution to the problem is credit (p. 27). He identifies two forms of credit: “real credit” and “financial credit.” Real credit is “the total ability of a nation to produce goods and services through increasingly efficient use of science and technology. Another way to define ‘real credit’ is to view it as ‘productive potential’” (p. 28). Loans by banks are financial credit (p. 28). Are savings accounts, certificates of deposits, and checking accounts, which are loans to banks, “real credit” or “financial credit?” Whichever they are, neither Mr. Douglas nor Mr. Cook seems to have much use for the first two.

Mr. Cook claims that in the United States, banks have a monopoly on credit (p. 28). That is not exactly true. Anyone who lends is creating credit. If someone lends a coworker money for lunch, he has created credit. Banks have a monopoly (or more correctly a cartel as more than one is included) in creating credit that also functions as a circulating medium of exchange. If Mr. Cook’s definition of credit as the productive capacity of the country is used (p. 58), it is definitely not true—at least not yet. Some private concerns still operate independently of bank credit.

Moreover, bank lending is not as one-sided as often presented. When a bank lends a customer electronic checkbook money, it is lending its credit. On the other side of the loan, the customer is lending an equivalent amount of credit to the bank when he accepts the bank’s promise to pay. The bank promises to pay in federal reserve notes the checkbook money lent to the customer when returned for redemption. Thus, the bank and its customer are mutually indebted to each other. Both owe each other the money represented by the loan. Fractional reserve banking is “the manufacture of currency out of mutual indebtedness.”[1]

Not only is the bank lending its credit to the borrower, the borrower is leading his credit to the bank. One may ask, “Why doesn’t the borrower print and spend his own notes and eliminate the bank?” If the law did not prevent him, he could. Whether anyone would accept these notes is doubtful.

Mr. Cook’s National Dividend program (v.i.) obviates this voluntary aspect of lending. He wants to force every legal resident to lend his credit to the government. He does this by forcing the government’s credit on each individual.

Mr. Cook writes, “Critics may ask why, if Douglas's analysis is correct, is it not generally recognized and accepted? The answer is that it IS recognized and accepted, but only by the monetary reformers on the one hand and the financiers on the other. But the financiers, who own the mass media, are not telling the rest of us, because it’s what makes them so rich and powerful” (p. 29). A large segment of monetary reformers rejects Mr. Douglas’ and Mr. Cook’s solution of Social Credit. They believe that the problem is fiat money and not who creates and issues it or how it is created and issued. Markets are vastly superior to any committee or individual in deciding how much money and credit to create and issue and when and where. On the other hand, Mr. Douglas and Mr. Cook believe that the problem is not fiat money. It is who creates and issues it and how. A committee or individual can do a better job of creating and issuing money and credit than the markets. That is a part, the committee, is greater than the whole, the markets, i.e., the sum of every individual on the planet.

Both Mr. Douglas and Mr. Cook are correct in that the current system is highly flawed. The flaws arise from governmental intervention and granting special privileges to certain groups. Most monetary reformers agree with Mr. Douglas and Mr. Cook that the special privileges granted to banks need to be removed. However, Mr. Douglas and Mr. Cook want the government to have the power to grant special privileges. They favor strong governmental intervention. Their program depends on it.

Mr. Douglas claims that his system is neither Marxism nor socialism. “Marxism, like finance capitalism [his term for the current system], assumes an economy of scarcity” (p. 29).
Mr. Douglas believes that as machines do more work, “workers’ wages would fade away as a source of societal purchasing power” (p. 30). “. . . abundance could be distributed to those who needed and deserved it only if society took back its rightful prerogative of credit creation from the banks and made that credit available without hindrance to individuals” (p. 30). History has shown that automation has lead to an explosion in jobs and often higher paying jobs. In this respect, Mr. Douglas errs. Automation frees labor to undertake more productive tasks.

The key part of Mr. Douglas’ plan is the National Dividend. It is a “cash stipend paid to all citizens” (p. 30). Do illegal aliens receive a payment? Mr. Cook does exclude illegal aliens (p. 33). Therefore, are people required to prove their citizenship? Does this require a national identification card or chip?

For the National Dividend program to work, the government has to outlaw anonymity for all citizens. (Only illegal aliens have the right of anonymity. Once again illegal aliens have more rights than citizens.) It must know about their existence and presumably location, so it can force its loans on them. Everyone has to participate in the program whether he wants to or not so that a sufficient quantity of money is injected into the economy and everyone receives a minimum income.

Moreover, the government would have to prevent the saving or investing of any money or credit paid through the National Dividend program. More than that, it would have to prevent using the National Dividend stipend from being used to allow the saving or investing of funds that would not have been saved or invested without the National Dividend. Saving and investing cannot be allowed to be increased. If they do increase, part of the purpose of the National Dividend, which is to overcome the negative aspect of saving and investing, has been defeated.

“Because the dividend would be an expression of the sum total of the producing potential expressed as the ‘real credit’ of the nation, it would be distributed as a book entry on a government ledger, not as a budget expenditure paid for by tax revenues. And the right to the dividend would not be tied to whether or not a person had a job” (p. 30). In other words, the U.S. government would directly create money out of nothing instead of creating money out of nothing through the Federal Reserve as it currently does.

Mr. Cook does acknowledge that the government may be creating money out of nothing as banks do now. However, “the difference is that bank loans must be repaid, while payments under a National Dividend system would not” (p. 31). Thus, money created under the National Dividend program nonrepayable. At least under the current dysfunctional system, money is eventually withdrawn from the economy once its work is done. Under Mr. Cook’s scheme, it is not. Once money is injected into the economy, it remains there forever. Thus, the purchasing power of money will continuously be driven down.

Alternatively, the National Dividend could be distributed “through price rebates paid to consumers as partial compensate for purchases” (p. 30). Mr. Douglas’ plan, which Mr. Cook endorses, does create many new jobs through the bureaucracy needed to implement it. His system may not be pure socialism, but it is a redistribute-the-wealth program.

The National Dividend of Social Credit fills the gap between national income and GDP. It provides the “purchasing power to the residents of the nation as their rightful benefit from creating, operating, and maintaining our wondrous economy. It’s society as a whole which created our economy, and we are the ones who should benefit from it” (pp. 30-31). Apparently, Mr. Cook believes that individual effort had little to do with creating our economy. Mr. Cook’s collectivism shows itself in this statement. At least Mr. Cook sees what Mr. Douglas denies, and, that is, Social Credit is a form of collectivism.

Before comparing national income to GDP, governmental expenditures should be subtracted from GDP because governmental expenditures are a negative on the economy and do not contribute any goods to the economy. (Some of it may be necessary, but it still is a negative.) Governmental expenditures account for about 20 percent of GDP. Removing governmental expenditures reduces Mr. Cook’s gap significantly. If the gap between GDP and national income is as important as Mr. Cook and the adherents of Social Credit believe, they need to focus on reducing governmental expenditures instead of creating more money out of nothing to make everyone dependent on the government.

Removing governmental expenditures leaves a gap of about $1 trillion. If the $1 trillion in savings and investments that Mr. Cook arbitrarily removes from the national income are added back, the gap vanishes.

I have just illustrated a major flaw with Social Credit and the concomitant National Dividend. Calculating the National Dividend is completely arbitrary and is based on arbitrarily selected numbers. What should be included in calculating GDP and national income? The choice is arbitrary. I would exclude governmental expenditures and include savings. Mr. Cook would do the opposite. By removing savings from national income, Mr. Cook admits that the selection of numbers to include or exclude is an arbitrary choice.

Once someone decides what to include, the data need to be collected. (Mr. Cook is vague about whom this someone is although it probably would be done under to auspices of some governmental bureaucracy.) Collection of data requires more bureaucrats, more intrusion, and more cost on business and individuals, and therefore, more drag on the economy, less productivity, and higher prices.

Moreover, the data collected are historical and not contemporaneous. Should not the National Dividend reflect the present instead of the past? If the objective is to close the gap between production and income, should not the gap be covered when it occurs instead of 18 to 24 months later? That is if done annually. If done monthly, the lag is six to 12 months.

An annual approach would require several months after the end of the year to collect, compile, and report data. Several more months are needed for the bureaucrats to review and compile data. Another month or two is needed to populate accounts. A monthly approach would require about the same amount of time to collect, report, compile, and review data and populate accounts.

Furthermore, accurate information requires more than just companies and institutions reporting. It requires each individual to report detailed information about his activities—must not miss any individual sells, off the record payments, or hoarding of cash. The reporting requirements for Mr. Cook’s program to function properly are at least as invasive as income taxes.

A system is available that does inject money into the economy simultaneously with the supply of new goods being offered for sell equal to the cost of these goods. It is the real bills doctrine (commercial money principle). For the real bills doctrine to function, the gold coin standard (the true gold standard) is necessary. We can never again have the gold standard because it greatly restricts the ability of those who really control the government to control the people. So people like Mr. Cook pursue schemes that will give those who control the government more control over the people.

“A Social Credit system would be implemented through simple bookkeeping. The funding of the National Dividend would be drawn from a National Credit Account that would include all factors which give rise to production costs and create new capital assets” (p. 31).

“The National Credit Account could also be used for price subsidies” (p. 31). So, the U.S. government is going to distort the markets by rigging prices. Depending on how the subsidies are applied, they will lead to shortages or surpluses.

What happens when shortages occur? Does the government intervene to solve the problem caused by the first intervention? That is the usual approach. How will shortages make workers better off?

On the other hand, what happens if surpluses occur? Artificial surpluses make production higher than it would be otherwise. The economy is producing more than is being consumed. According to Social Credit, it means that people do not have enough money to buy the governmentally created surpluses. This distortion causes the government to issue even more National Dividend.

Mr. Cook argues that National Dividend money is not “free money” (p. 31). It is free money to the recipient. He exerts no effort to earn it. He risks nothing to get it. Because he exists, he receives it. Parents expend resources on their children, not because the children work for it, but because they exist; they belong to the parents. Likewise, Social Credit reduces people to wards of the government. The government pays them because they belong to the government.

Mr. Cook emphasizes “that Social Credit is not a socialist system. Rather it is ‘democratic capitalism,’ in contrast to the ‘financial capitalism . . .” (pp. 31-32). I guess it depends on how one defines “socialism.” Whether or not it is socialism, it is a form of collectivism and statism. It leads straight to despotic government.

“Under a Social Credit system, banks would continue to function in limited ways, but they would not have the privilege of funding the entire shortfall in purchasing power of the nation” (p. 32). The National Dividend would fund the shortfall (pp. 32-33).
Like all fiat monetary reformers, Mr. Cook claims that his scheme is not inflationary. It merely brings “the total monetary supply of the nation only up to the level of the GDP. It would not result in ‘more dollars chasing the same amount of goods,’ . . .” (p. 33). Contrary to Mr. Cook’s claim, his scheme is highly inflationary. Inflation occurs when new money entering the markets exceeds the value of new goods entering the markets. The value of new goods entering the markets accounts for only a part of the GDP. For example, governmental expenditures, which are a significant part of the GDP, are not goods, either new or old, which is why it should be subtracted from the GDP. Furthermore, under Mr. Cook’s scheme, once new money enters the economy, it is never removed. Thus, each year, ever more dollars are available to chase the same quantity of goods.

Like many people, Mr. Cook errs in identifying rising costs and prices as inflation (p. 34). He also errs when he claims that bank interest is inflationary (p. 34). None of these is inflation. Rising costs and prices result from inflation, which is an increase in the money supply above the value of new goods entering the markets. Furthermore, interest only indirectly causes inflation. If the Federal Reserve keeps interest rates below the natural market rate, people may borrow more. Their increased borrowing can lead to banks creating more credit money than the markets require. Then the result is inflationary, and prices usually rise. Therefore, contrary to Mr. Cook’s assertion, interest is not inflationary because it adds to the cost of business. The cost of producing a product does not fix its price; the marginal consumer does. Moreover, the marginal consumer ultimately fixes the costs of production.

Mr. Cook is correct when he states, “Management of a modern producing economy the way the Federal Reserve does by raising and lowering interest rates is a travesty” (p. 35). However, contrary to Mr. Cook’s assertion (p. 36), low interest rates, i.e., interest rates below the market rates, typically lead to more inflation than high interest rates, i.e., interest rates above the market rate. As noted above, people borrow more when rates are artificially low, which results in more credit money being created. Conversely, they borrow less when rates are artificially high, and thus, less credit money is created. This is why the Federal Reserve pushed interest rates down when it wants more inflation and pushes them up when it wants less inflation.

Endnote1. Hartley Withers, The Meaning of Money (Cheaper ed.; New York, N.Y.: E.P. Dutton and Co., 1921), p. 28.

Copyright © 2010 by Thomas Coley Allen.

Part 2

More articles on money.