Wednesday, January 26, 2011

Questions for Anti-Usurers

Questions for Anti-Usurers
Thomas Allen

According to Deuteronomy 23:19, “Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of any thing that is lent upon usury.” Webster’s New International Dictionary of the English Language, second edition, unabridged, 1948, defines “usury” as “a premium or increase paid, or stipulated, for a loan of money or goods.” Usury is a return or income on property without any apparent effort by the property owner. Usury is also called “interest,” “dividend,” “rent,” and “fee.”

The following are questions that opponents of usury need to answer to show that usury is undesirable.

1. Why have not the anti-usurers established loan companies that make interest-free loans? Why do they not put their money where their mouths are? If interest-free loans are economically preferable to interest-bearing loans, would not companies making interest-free loans soon drive companies making interest-bearing loans out of business? A truly interest-free loan would be without fees, etc. With a truly interest-free loan, a person, for example, borrows $10,000 for five years. At the end of five years, he pays the lender $10,000. The lender never receives anything more than $10,000 from the borrower. The borrower does not pay any more than $10,000. If the anti-usurers are not willing to do at least this much, why should they complain?

2. Why do most anti-usurers seek to hide their interest as fees, share-the-wealth, buy out schemes, and the like? Loan fees are merely interest by another name. (Points and fees for mortgages originated as a means to circumvent interest caps when market interest rates for mortgages rose above the statutory ceiling.)

3. Why do anti-usurers want to outlaw savings accounts and certificates of deposits? Savings accounts and certificates of deposits are interest-bearing loans to banks. Why do anti-usurers want to require small account holders to pay bankers to hold their money?

4. As savings are mostly in the form of interest-bearing loans, where will savers put their savings? How will savers earn an income on their savings? Where can the common man, who can save only a small sum, put his money to earn a return? Why are savers to be penalized?

5. Why do anti-usurers want to outlaw publicly traded corporations? Corporative stock is merely an indefinite loan with a highly variable interest rate. From a corporation’s perspective, the primary difference among mortgages, bonds, and stocks is priority of payment. Is not a dividend a return on stock like interest on a loan? Is it not a return on money?

6. Without the ability to earn interest and interest on interest, how will the common man accumulate enough capital (store enough labor) to provide for himself in his old age? Or do the anti-usurers endorse the welfare state and want to force everyone in the community, ultimately under the penalty of death, to support the old?

7. Why do anti-usurers want to push people away from relatively low risk investments like savings accounts, bonds, and dividend paying stock and to commodity speculating and gambling? Besides speculating and gambling, where else can a person earn a return on his meager savings? Most do not have enough to start a viable business, and the anti-usurers seem to want to deny them this opportunity. If they do not, how will someone raise enough capital to start a viable business? If he combines with others to form a viable business, the partnership will have an unwieldy number of partners.

8. Why do the anti-usury people want to keep the poor impoverished? If they do not, why do the anti-usurers want to prevent the poor from earning a return on any savings that they manage to accumulate?

9. Where will the masses live? No one will be able to borrow to buy a house. (The best that a lender could hope for if the borrower failed to pay the loan would be to receive a house in unknown condition and of unknown value. If the value of the house exceeds the loan, the borrower gets the excess. Such high risk lending makes the risk of potentially high rewarding commodity speculating look small.) The anti-usurers have shutoff most avenues, except gambling and speculating, of increasing savings sufficiently to buy a house outright. So, if a person does not inherit a fortune or have parents who will give him the money, where does he get the money to buy a house? Does he have the government steal it from the wealthy and give it to him? He cannot rent a place to live because no sane person will become a landlord. Renting a house or apartment is merely lending capital or property as a house or apartment. Rent on a house or apartment is usury (see the definition above). The landlord lends the use of the house or apartment. In return the landlord receives interest, which is commonly called rent. Under an anti-usury regime, the only thing that a renter should be obligated to do is to return the house or apartment to the landlord when his lease expires. Before anti-usurers try to weasel their way out of this dilemma by distinguishing between lending money and lending housing, they must explain why paying a person for the use of his property is acceptable while not paying a person for the use of his property is unacceptable? Why is receiving an increase on lending capital is acceptable while receiving an increase on lending capital is not?

10. At least some anti-usurers are consistent enough to view the renting and leasing of land, dwellings, tools, machines, etc. as the same as renting and leasing money. If one leases a car [money], the owner of the car [money] gets the car [money] back at the end of the lease. Any money paid for the lease is ill-gotten gain made on property that is returned. It is all usury. (See the definition above.) Why do the anti-usurers want to outlaw leasing and renting and rental businesses? If they do not, why are they inconsistent? Will not outlawing rental businesses force people to buy expensive equipment that they will use only once? Does not such outlawry force people to waste their resources and time in buying and selling things? What happens if they do not have the money to buy the equipment and no one will lend it gratuitously? For example, if a person is moving and cannot afford to hire a moving company and cannot afford to buy a truck to move his furniture, what does he do with his furniture? Abandon it? Sell it as a discount to get rid of it quickly?

11. Will not insurance be more expensive if usury is outlawed? As insurance companies earn much of their income via lending (stock, bonds, and mortgages), where will they invest premiums to earn a return to keep down the costs of policies? Will they not be forced to collect the full amount of coverage plus the cost of security from policyholders and hoard the money in vaults?

12. Why do the anti-usurers oppose large scale capital investments like power plants, steel mills, and automobile manufacturing assembly lines? If they do not oppose them, how will sufficient capital be saved and combined to build them—as their system discourages the savings of capital, i.e., the storing of labor? Without resorting to theft via taxation, how will enough funds be accumulated to build extremely expensive undertakings? (Remember that stock is as much of a loan as a bond; so selling stock cannot be used—unless no dividends are ever paid and no capital gains are made. What about capital losses?)

13. Why should a person be forced to risk his capital without hope of compensation, which is what anti-usury laws do? Why would any sane person want to incur the liability involved by letting another use his (the lender’s) property without compensation? Why do most anti-usurers fail to recognize that the lender risks losing his property? Why should a lender risk lose his property without compensation? Why would any rational person want to incur the risk of lending without compensation?

14. If a person buys a farm for money, to whom does the profits from the crops grown on the farm in subsequent years belong? The buyer or the seller? Does not consistency dictate that they go to the seller? Is not the buyer receiving an increase (interest) on his money (the money used to buy the farm) if he keeps any of the profits?

15. Except for charitable purposes, why should one person forgo his consumption today without compensation by lending to another person so that the other person can consume today? Is not the present value of everything greater than its future value for prisoners of time? If not, why? What are the exceptions and why are they exceptions?

16. Which has more value: a possession today or a promise to pay in the future? Or are they equal in value? If so, why? If not, why should they be treated as equal in value? Why do anti-usurers claim that they are equal in value? (As interest expresses the difference in value between the two and as the anti-usurers would outlaw interest, they in effect are claiming that they are equal in value.) If their values are not equal, then the one who promises to pay in the future is stealing value from the one who is lending what he possesses today. How can this theft be justified?

17. A person lends his gardening tools (or money) to his neighbor to prepare his (the neighbor’s) garden. The neighbor returns the tools (or money) to the lender after the time has past for preparing the garden (using the money as the lender wanted). Although the lender cannot prepare his garden, anti-usurers assert that the lender has suffered no lose as the lent property has been returned and, therefore, should receive no compensation. Why should not the lender be compensated? Has he not sacrificed his welfare for that of his neighbor? Should the neighbor get a free ride for this sacrifice?

18. Some anti-usurers argue that the lender has no claim on any portion of the labor of the borrower. If true, then why does the borrower have a claim on part of the labor of the lender? The lender forgoes the use his stored labor while the borrower is using it. Therefore, the borrower has claimed part of the lender’s labor without compensation. Why the inconsistency?

19. Does any rational person ever borrow money at interest unless he believes that the benefits of the loan outweigh the cost? If so, when and why? Why would a rational person borrow when he believes that the cost of the loan will exceed the benefit? Why would he do with borrowing that which he would never do in any other transaction, economic or otherwise? (A rational person will never undertake any kind of transaction unless he believes that the benefits will exceed the cost.)

20. Anti-usurers argue that a lender’s claim that interest is payment for his service of letting the borrower use the lender’s property is false. The lender has not surrendered any of his wealth, and he does not become poorer making the loan. Does he not become poorer if the loan is not paid back? Moreover, does he not give up the use of his property when he lends it to another? How can two people use the same property simultaneously? Does not the lender forgo the additional wealth that his property could have earned him if he had not lent it? Why should he forgo this income without compensation? Why does not the lender provide the borrower a service with the loan? If no service is rendered, is not the borrower better off without the loan, which becomes an obligation? So why borrow?

21. Why is it unjust and oppressive for a lender to demand payment for the use of his property (including money) as compensation for not being able to use that property while the borrower has control of it? Why should the lender suffer a time-use loss without compensation?

22. Do anti-usurers really believe, as some argue, that the borrower is rendering a real and valuable service to the lender by keeping the property (money) for the term of the loan and returning it to the lender? If true, should not the lender pay the borrower interest on the loan? If the lender should not pay the borrower, why should the borrower be forced to render the service of holding the lender’s property (money) for no fee? Cannot a lender keep his own property (money) more securely than he can by entrusting it to another? Why would he entrust it to another? (The exception may be storing his property [money] at an institution skilled in protecting stored property [money].)

23. Why do anti-usurers not only fail to see that a lender is providing a service, but frequently argue that he provides no service at all? To the contrary, as just discussed, some claim that the borrower is providing a service for the lender. What service is the borrower providing the lender? Is not the lender providing the borrower a service by providing the borrower the use of property that he would not otherwise have? Would not the borrower have to do without the property lent to him if the lender did not lend it? Why should the lender not be compensated for providing the service of lending the borrower the use of the lender’s property?

24. Do anti-usurers really believe as some seem to argue that borrowers borrow money to sit on it and not use it for investment or consumption? Do lenders lend money to borrowers with the thought that the borrower is doing the lender a favor by holding and using the lender’s money for a time as some anti-usurers argue?

25. Interest rates inform savers about where their savings is most needed and about how much savings are needed. If interest is outlawed, what will inform savers about where their savings is most needed and how much is needed?

26. Interest serves as a rationing tool to equalize the supply of lenders to the demand of borrowers. Without interest, will not the demand of borrowers soar and the supply of lenders collapse? Will not borrowers believe that an unlimited amount of money is available for loans? Will not lenders believe that the demand for money by people who really need it is near zero? If this is not true, then why does not the law of supply and demand apply to lending and renting of property? If interest is not used to ration lending, what will ration loans among borrowers?

27. Why do some anti-usurers believe that an exchange between two people is an act of usury if in the minds of the anti-usurers one party receives a thing of value much greater than the other? Do they not realize that no exchange can occur unless each person values what he receives more than what he gives up? Do they not realize that nothing has absolute value? (Things may have absolute value in the mind of God. What man knows the mind of God?) Are not all values subjective and constantly changing? For example, is not the value of a poor meal much greater for a hungry man than an excellent meal is to someone who has just eaten a buffet? If not, why?

28. Do anti-usurers propose to outlaw the selling of bills of exchange? No lending or borrowing is involved with a bill of exchange. When a bill of exchange is sold, it is sold for less than the face amount due. Money today is worth more than money tomorrow is worth today. Thus, no rational person will buy a bill of exchange due in a day, week, or month for full face value. Do anti-usurers propose to void this law of nature? Will they make the selling of a bill of exchange below face value a criminal act?

29. Why was life better during the anti-usury eras of the Dark Ages and Middle Ages than during the usury era of modern times?

30. Where the convoluted loans created during the Middle Ages and Renaissance to circumvent anti-usury laws better than the straight forward interest-bearing loans of today? If so, why?

31. The industrial revolution was built on interest-bearing loans, of which many were interest-bearing small savings accounts (small loans to banks). Why do the anti-usurers promote a system that would have prevented the industrial age from occurring? Was life before the industrial revolution that much better? If so, how and why?

32. Some anti-usurers cite the historical record of one government after another outlawing usury. As government is usually the largest debtor in any society, does it not have a bias toward interest-free loans? Do not interest-free loans make its wars cheaper and, therefore, make wars more enticing?

33. Why should consenting adults be prohibited from engaging in interest-bearing lending—one as the lender and the other as the borrower?

34. Why should a person with capital who needs income be prevented from agreeing with a person who can produce income but who lacks the capital to do so to exchange capital for income? By all common usury definitions, this income would be considered usury. The person with capital who cannot produce income is usually an older person. The person lacking capital who can produce income is a younger person. Why should the older person be denied a steady stream of income? Why should the younger person be denied the capital to produce income?

35. Who is ever really forced to borrow at interest? How many people have had a legal interest-bearing loan forced on them? Who are they? Can a person avoid paying interest by not borrowing? He can do without for whatever he was going to use the borrowed money; can he not?

36. Those who make a Scriptural argument against usury ought to know that the Scriptures allow interest-bearing loans to strangers, i.e., people of a different race. (“Unto a stranger thou mayest lend upon usury. . . .” [Deuteronomy 23:20]) If they do not have this rudimentary knowledge, they should not be making a Scriptural argument. Does not the prohibition against lending money to people of one’s own race give an incentive to lend to people of other races? If not, why? Do the anti-usury people intend to remove this incentive to lend to people of other races while neglecting their own race by outlawing interest-bearing loans to everyone? If so, why do they want to void what the Scriptures clearly allow? Does not the anti-usury program lead to the absurdity of Asians lending to Europeans to build up Europe while Europeans lend to Asians to build up Asia? Likewise, does it not lead to the absurdity of Europeans having to borrow from Asians to buy their cars and houses while Asians have to borrow from Europeans to buy their cars and houses? Or do the anti-usurers really believe that rational people will risk their property (lend their money) for no chance of reward when they can risk their property where they have a chance of reward?

Copyright © 2010 by Thomas Coley Allen.

More articles on economics.

Sunday, January 16, 2011

Analysis of the Monetary Reform Act — Part II

Analysis of the Monetary Reform Act — Part II
Thomas Allen

This is the second part of a paper analyzing the “Monetary Reform Act” as it appeared on November 3, 2010. This Act and a description of it can be found at

I have italicized words of the Act and its footnotes and my paraphrases and summaries of their words. My commentary is in roman letters.

Section 10, Treasury Deposits, authorizes the use of money placed in Treasury Department Deposits “pursuant to appropriation by Congress, to pay for goods, services, or interest needed by the federal government.” Funds “in excess of federal expenditures not funded by tax revenues” are rebated to individuals via the income tax system. Future monetary growth under Section 7 funds withdrawals greater than receipts. If withdrawals exceed this amount, then tax increases cover the excess. If Congress does not increase taxes sufficiently, the Secretary of the Treasury may add a surcharge to the income tax sufficiently to cover the deficiency.

This Section does not have any more force to constrain using printing press money to fund deficit spending than the other Sections. It puts pressure on the Secretary of the Treasury to act. It authorizes, but does not require, him to place a surcharge on income taxes. Will the President in the absent of Congressional approval choose the unfavorable reaction to a tax increase? Possible, but not often.

What this Section does is to allow Congress to increase taxes without having to vote to increase taxes. It appropriates funds to satisfy its favorites. Then, the Secretary of the Treasury raises the taxes necessary to pay for the deficit. That the Secretary would choose to raise taxes on his own is not likely. Contrary to the intent of the Act, printing press money will cover most deficit spending.

Besides breeding corruption, such action harms the economy. Money is taken from the productive and given to the politically influential. Thus, the economy becomes less productive.

Section 11, Interest, describes paying interest on Treasury Department Deposits. One of Mr. Carmack’s objectives is the elimination of federal debt. Yet the Act allows banks under Section 9 to invest in Treasury Department Deposit accounts. In Section 10, the Act allows Congress to appropriate all the moneys in Treasury Department Deposits — and more. Section 11 describes the paying of interest on Treasury Department Deposits. To me this looks like and sounds like banks lending the government money.

Moreover, Mr. Carmack has reintroduced fractional reserve banking, or at least its essence, that he wants to outlaw. Section 9 allows banks to count money invested in Treasury Department Deposit accounts as reserves for the 100-percent-reserve requirement for checking accounts. Thus, money in these Treasury Department Deposit accounts is immediately available for the checking account depositors to use. Section 10 allows Congress to appropriate funds placed in Treasury Department Deposits. Thus, the Act allows two different parties, Congress and the checking account owner, to use simultaneously the same money. Simultaneous use of the same money by multiple parties is the essence of fractional reserve banking.

Mr. Carmack realizes this problem with banks. He requires 100-percent reserves for banks to prevent simultaneous multiparty use of money. Apparently, he does not realize that the government is acting like a fractional reserve bank when it spends deposits used to back checking accounts. Thus, he defeats himself in trying to outlaw fractional reserve banking.

If he does not intend for the government to engage in fractional reserve banking and wants to end routine governmental borrowing, he needs to prohibit any bank, private individuals, associations, and companies from having Treasury Department Deposit accounts.

Section 12, Lending Institutions, gives the requirements for lending institutions. These include “investment trusts, mutual funds, brokerage or lending houses.” They may sell stock and may receive, borrow, lend, or invest money at interest but only with existing funds, i.e., U.S. notes and Treasury Department Deposits. They cannot be called banks. “[A]t no time may more funds be subject to demand than are presently idle and one hundred per cent (100%) available on demand.” This provision seems to be the Act’s prohibition against borrowing short and lending long. If so, it could be worded better. “For any funds deposited with such associations payable on demand there must be a dollar of United States Notes on hand or deposited in a Treasury Deposit.” This provision seems to be functionally the same as a checking account, “payable on demand,” although this Section prohibits calling them demand account and prohibits lending institutions from providing checking accounts. “No such association may denominate any account a demand account, nor promise immediate availability of any funds which may be invested, deposited or otherwise placed by such association without notice in any instrument or account other than Treasury Deposits.” Thus, this Section seems to be at least partially contradicting itself. Moreover, this Section prohibits the transfer of funds “by check, credit card, electronic transfer or any substitute therefor.” Does the mean that all count withdrawals and loans have to be in currency? It seems so.

Section 13, Repeal of Conflicting Acts, repeals the National Banking Act of 1864 and amendments and the Federal Reserve Act of 1913 and amendments. It transfers all Federal Reserve System monetary authority along with the Federal Reserves assets, liabilities, and employees to the Department of the Treasury. It greatly restricts the action of the Federal Reserve System during the transitional year. Federal Reserve notes are phased out, but remain legal tenders as long as they are in circulation. If this Act contained only the first sentence of Section 13, the repeal of the National Banking Act and the Federal Reserve Act, it would be a great law.

Like most other fiat money reformers, Mr. Carmack is convinced that fiat money or centralized banking per se does not cause the country’s monetary problems. Who issues the currency and how it is issued cause them.

Mr. Carmack’s proposal does not have a formal governmentally owned and operated central bank like Great Britain does with the Bank of England. (The Bank of England is part of the British government; it is a government agency.) However, the Act requires the Department of the Treasury to act like a central bank in many ways. It holds the country’s banking reserves outside bank vaults. It appears to assume the Federal Reserve’s check clearing activities. It manages the country’s money. About the only activity that the Federal Reserve performs that the Department of the Treasury would not be doing is rediscounting bills.

I do not know what Mr. Carmack intends to do with the Federal Reserve’s large staff of economists. The primary job of many of them seems to be to write scholarly articles for Federal Reserve journals. Perhaps he could use them to write scholarly articles to support his system.

Based on Footnote 8, Mr. Carmack believes that abolishing the Federal Reserve and transferring its power to the Department of the Treasury will eliminate or at least greatly reduce the power and influence of private bankers over the country’s banking and monetary policies. Placing all this power in the Department of the Treasury or any other governmental department, does not solve this problem. Bankers have controlled the Department of the Treasury in nearly every administration since Washington’s administration.

Moreover, if he wants to reduce bankers’ influence, he should fire all employees of the Federal Reserve and forbid the federal government to employ any of them ever. They are all contaminated with banker influence. Yet he wants to move all these pro-banker people to the Department of the Treasury and put them in charge of his system. If he really wants to eliminate the power of the bankers, he needs to eliminate the power instead of transferring it.

Section 14, Penalties, set forth penalties for engaging in fractional reserve banking. Does this mean that the U.S. government is going to fine itself for engaging in fractional reserve banking? Or is it above the law? When Congress appropriates money from the Treasury Department Deposits held as reserves for checking accounts and the President and his bureaucrats spend it, are they going to prison for 20 years? Or are they above the law?

Section 15, Withdrawal from International Banks, requires the U.S. government and the Federal Reserve to end their membership and participation “with the Bank for International Settlements, the International Monetary Fund, the World Bank, and all other international banks” that are “inconsistent with and in direct conflict with the purposes of this Act.” It also directs the President “to take such steps as may be necessary to withdraw the United States from all participation, and membership, in the Bank for International Settlements, the International Monetary Fund, the World Bank, and all other international banks.” The withdrawals must be achieved within one year. He must “recover the original and any subsequent United States subscriptions, contributions and quotas to such organizations, not already fully and lawfully expended, whether in the form of gold, deposits, currency or otherwise” This Section directs the President “to enter into negotiations to establish new exchange facilities” that have “no authority to create money or credit in any form” and that have “no independent authority to establish laws or regulations binding upon the United States or its banks, financial institutions or citizens.”

Withdrawal from these organizations is one of the few positive features of this Act. I question the need to enter “into negotiations to establish money exchange facilities.” Other than giving the U.S. government more control over foreign trade and by extension domestic commerce, what purpose would they serve? Companies that want to engage in foreign trade should bear the expense and risks of making their own deals.

Section 16 Foreign Exchange, directs the Secretary of the Treasury to regulate foreign exchange rates to allow “the external rate of exchange freely to fluctuate, as foreign price levels fluctuate (i.e., in accordance with their respective purchasing power), while utilizing the exchange stabilization fund and foreign currency reserves to counterbalance fluctuations in the exchange rate.” He is to adopt regulations to “1. keep the stable, internal domestic price level established by this Act unaffected by foreign exchange rate fluctuations; 2. maintain imports and exports of capital, in equilibrium.” Under no circumstances are “the foreign exchange rates [to] be allowed to alter the fixed rate of monetary growth set forth in section 7.”

In other words, the Secretary of the Treasury is to intervene in the currency markets and manipulate currencies. He is required to be a currency manipulator. If any individual or consortium attempts to manipulate the currency market, they are condemned and may even be fined or imprisoned. When the Secretary of the Treasury does the same thing, he gets paid. Mr. Carmack’s proposal breeds corruption by not only empowering, but demanding, the government to manipulate currencies.

The people who own the Secretary can make a fortune in currency markets by knowing what the Secretary will do before he does it. They will surely know because they put him in that position to serve and inform them.

Currency manipulation and speculation were not a problem under the gold-coin standard that existed before World War I. It only occurred when the fiat money accompanied the gold standard or when the government allowed banks to suspend redemption.

The Act gets worse. It requires the Secretary to intervene in the capital markets to keep imports and exports of capital in equilibrium. Thus, anyone seeking to transfer money into or out of the country will need the approval of the U.S. government. Capital could be construed to mean much more than money. It could be construed to cover just about every export and import. Thus, the Secretary may have to balance imports with exports. Anyone seeking to import or export things may have to have the approval of the U.S. government. This provision fertilizes corruption.

Furthermore, this Section also makes a false assumption. That is, this Act will achieve stable internal domestic prices. As shown above, this Act is inflationary and cannot maintain stable internal domestic prices regardless of the Secretary’s currency and capital manipulations.

One of the many fatal flaws in all fiat money reforms is their slavish reliance on politicians, which the Secretary of the Treasury is. Fiat money reformers have this puerile belief that all political leaders under their system will be statesmen who place the welfare of the country above their own and that of their friends. (Ironically, most fiat monetary reformers are aware that most of the politicians under the current system are slimy, sleazy scoundrels who always place their and their friends’ selfish desires above the welfare of the country. Moreover, bankers and plutocrats own them. Fiat money reform must be something akin to second coming. It turns sinners into saints.)

Mr. Carmack seems to try to prevent this corruption by discouraging “speculative trading in small differentials in interest on exchange rates” by charging a small fee on currency exchanges (Footnote 12). It may affect small private actors. It does nothing to stop the U.S. government or foreign entities from speculating. Is Mr. Carmack so naive that he believes that the administration will not become involved in currency speculation in the name of foreign exchange stabilization if its friends and owners demand such?

Section 18, Severability, is the severability clause typically found in new legislation. It declares if any provision is found unconstitutional, the remainder remains in effect.

Except for repealing laws and with drawing from international organizations, nearly everything in this Act is unconstitutional. However, if Congress ever enacted it, I doubt that any federal court would declare anything in it unconstitutional. Anything that increases the power and prestige of the U.S. government increases the power and prestige of federal courts. If the U.S. government has more power and prestige, so does its judges. Like most people, most judges prefer more power and prestige to less. Therefore, they are not likely to rule against this Act. Besides, seldom does a judge let the Constitution stand in the way of his personal biases and political expediency.

Unlike some fiat money reformers, Mr. Carmack at least recognizes the dangers in allowing the government to own the banks. In Footnote 13, he writes “the power to loan does not properly rest with the government, is most effectively handled at the local free market level, and is easily abused for political purposes as was the case with pre-war Germany’s Reichbank which granted loans to whomever the government chose for political reasons, as do government banks in communist command economies.” He also believes that the setting of interest rates is best left to the markets.

Also, in Footnote 13 is a paraphrase of Ms. Coogan, “[F]or the government to create money as loans is even more vicious than for private banks to create money as loans, carrying with it the power to aid (by granting loans) or destroy (by denying loans) whomever it chooses.” Both Ms. Coogan and Mr. Carmack are so focused on creating money through loans that fail to realize that what they are proposing is tantamount to the same thing. They fail to realize that when the government issues U.S. notes, it is issuing debt and, by that, is creating money by loans. It is forcing everyone to lend to it. It is indiscriminately forcing a noninterest bearing loan on everyone. (In Footnote 7, Mr. Carmack implies that U.S. notes are noninterest bearing loans. He writes “no interest would be paid on currency in circulation.”) Moreover, it never intends to pay this debt unless it pays it with more debt.

In his discussion on Footnote 13, Mr. Carmack recognizes that politics guide government instead of economics. He writes:
Decentralized, private lending agencies generally tend to loan to any creditworthy applicant, their primary motive being profit (or profit-derived power) which is maximized by making more loans; whereas governments replace this profit priority with political ends such as rewarding their supporters, the political value of which is maximized by restricting loans. So government lending tends to arbitrary discrimination for political motives, an abuse generally avoided in a truly free market lending situation.
Yet he wants to entrust the government with the management of the country’s money, which is perhaps the most important aspect of the modern economy. For money issuance, he expects economics to guide the government instead of politics. The government needs only to follow the arbitrary criteria set out in the proposed Act. However, the government can change this Act or any part of it at anytime. As shown above, it can work with and around the provisions in this Act to achieve its political ends.

Moreover, as the Act guarantees inflation, the people who receive the new money first benefit from the losses of the people who receive the new money later. People who receive the new money first have more political influence than people who receive the new money later.

Fiat money is a political creation. It is not, has never been, and cannot be an economic, market, creation. Therefore, it will always function politically. The economy is forced to adjust around it.

Another flaw in Mr. Carmack’s proposal is the inability of his scheme to remove excess money. Whereas some fiat money reformers allow removal of excess money through budget surpluses, Mr. Carmack’s scheme precludes this approach. His Act demands the government to increase the quantity of money by 3 percent per year. If the government does not spend it, it goes to income tax payers.

A monetary system exists that accomplishes Mr. Carmack’s goal of divorcing the creation of money from lending. Furthermore, it divorces the creation of money from politics and government. (No fiat money reformer really wants to divorce the creation of money from government. They need the government to create their money and force it on the people. Thus, they do not really want to divorce money creation from politics in spite of any protestation to the contrary.) It places the creation of money directly in the hands of the people. Banks are desirable, but are unnecessary. As this system uses gold or silver or preferably both, ipso facto, fiat monetary reformers must reject it. Above all else, gold must not enter the monetary system.

Like all fiat money reformers, Mr. Carmack emphatically trusts politicians and bureaucrats to manage the country’s money. He does not trust the people manage the country’s money directly. Most likely, he cannot conceive of them doing so or how they could do it. (Fiat money reformers seem to trust the people always to elect saintly omniscient statesmen to office, who in turn will hire only saintly omniscient bureaucrats to manage the country’s monetary system. Yet they cannot trust the people to manage the country’s monetary system directly, which they can do without the necessity of omniscience or saintliness.)

Except the greenback era, the people managed the country’s money directly and without the government, except as a minter of coins. Between 1789 and 1933, when the government did intervene in the management of money, it did so to the detriment of the people’s management. Its primary intervention during this era was to protect bankers. When enough bankers failed to keep their promise to redeem their notes in specie on demand, the government intervened to relieve them of this obligation. It should have sent them to jail for fraudulently violating their promises.

Like all fiat money adherents, Mr. Carmack seems convinced that not enough gold exists to function as money today. As I show in “There Is Enough Gold” and with additional amplification in “Response to Dale’s Analysis of ‘There Is Enough Gold’” that enough gold exists to accommodate world trade several times over.

Mr. Carmack suffers from an ignorance common to all fiat money adherents. Like them he misunderstands the nature of money. Murray Rothbard describes this ignorance as follows (I have substituted “fiat money adherents” for Prof. Fisher in Prof. Rothbard’s description along with the connecting verbs):
[Fiat money adherents show] a total misunderstanding of the nature of money, and of the names of various currency units. In reality, as most nineteenth century economists knew full well, these names (dollar, pound, franc, etc.) were not somehow realities in themselves, but were simply names for units of weight of gold or silver. It was these commodities, arising in the free market, that were the genuine moneys; the names, and the paper money and bank money, were simply claims for payment in gold or silver. But [fait money adherents refuse] to recognize the true nature of money, or the proper function of the gold standard, or the name of a currency as a unit of weight in gold. Instead, [they hold] these names of paper money substitutes issued by the various governments to be absolute, to be money. The function of this “money” was to “measure” values.[1]
Prof. Rothbard continues:
Under a fiat system, the currency name — dollar, frank, mark, etc. — becomes the ultimate monetary standard, and absolute control over the supply and use of these units is necessarily vested in the central government. In short, fiat currency is inherently the money of absolute statism. Money is the central commodity, the nerve center, as it were, of the modern market economy, and any system that vests the absolute control of that commodity in the hands of the State is hopelessly incompatible with a free-market economy or, ultimately, with individual liberty itself.
Mr. Carmack appears to be blending Milton Friedman’s and Gertrude Coogan’s proposed monetary reforms. Unlike many fiat money reformers, he attempts to restrict the government’s power to issue money. As shown above the government will quickly overcome these restrictions. He recognizes the dangers in allowing the government to have absolute power. Still, he wants to give it absolute power over the country’s money, which it can use to control nearly everything else in the country. Like all fiat money reformers, he trusts politicians and bureaucrats with the management of the country’s money, but he fears the people managing it directly. He trusts paper and promises and distrusts that which is no one’s obligation or promise, i.e., gold and silver. Along with all other fiat money reformer, he can tolerate almost anything monetarily except having gold as money.

1. Murray N. Rothbard, “Milton Friedman Unraveled,” 2003 (from the Journal of Libertarian Studies, Volume 16, no. 4 (Fall 2002), pp. 37–54), rothbard43.html, October 25, 2010.

2. Ibid.

Copyright © 2010 by Thomas Coley Allen.

Part 1 

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Sunday, January 9, 2011

Analysis of the Monetary Reform Act — Part I

Analysis of the Monetary Reform Act — Part I
Thomas Allen

This is the first part of a paper analyzing the “Monetary Reform Act” as it appeared on November 3, 2010. This Act and a description of it can be found at

Footnote 1 identifies Patrick Carmack as the principal author of the proposed Act. For my analysis, the authorship is irrelevant. I am analyzing the Act and not its author. For convenience I refer to the proposed Act as Mr. Carmack’s proposal and use his name.

I have italicized words of the Act and its footnotes and my paraphrases and summaries of their words. My commentary is in roman letters.

The Act presents a two-step plan to national reform and recovery:

Step 1: Directs the Treasury Department to issue U.S. Notes (like Lincoln’s Greenbacks; can also be in electronic deposit format) to pay off the National debt.

Step 2: Increases the reserve ratio private banks are required to maintain from 10% to 100%, thereby terminating their ability to create money, while simultaneously absorbing the funds created to retire the national debt.
Mr. Carmack states that “These two relatively simple steps, which Congress has the power to enact, would extinguish the national debt, without inflation or deflation, and end the unjust practice of private banks creating money as loans (i.e., fractional reserve banking). Paying off the national debt would wipe out the $400+ billion annual interest payments and thereby balance the budget.”

His proposed Act “would stabilize the economy and end the boom-bust economic cycles caused by fractional reserve banking.” As shown below, the proposed Act fails to achieve most of these objectives, and in some instance makes matters worse.

The preamble of the Act reads:

To restore confidence in and governmental control over money and credit, to stabilize the money supply and price level, to establish full reserve banking, to prohibit fractional reserve banking, to retire the national debt, to repeal conflicting Acts, to withdraw from international banks, to restore political accountability for monetary policy, and to remove the causes of economic depressions, without additional taxation, inflation or deflation, and for other purposes.
As shown below, the Act does not stabilize price level, retire the national debt, or remove the causes of economic depression. It is merely another fiat monetary attempt to get something for nothing.

Section 3, Definitions, defines U.S. notes. “United States Notes as used herein shall mean Treasury issue United States currency notes (as defined in 31 U.S.C. Sec. 5115) not bearing any interest, being lawful money and legal tender for all debts, public and private, and which term as used herein shall include Treasury Department Deposits (a.k.a. Treasury Deposits or Treasury book entries) convertible to United States Notes, which may be substituted therefor at the discretion of the Secretary of the Treasury.”

Mr. Carmack intends to flood the country with noninterest bearing debt. Moreover, this debt is nonpayable. According Webster’s New Collegiate Dictionary (1977), a “note” is “3c (1): a written promise to pay a debt (2): a piece of paper money.” Thus, Mr. Carmack’s money, U.S. notes, is a debt circulating as money. As a note is a debt, it implies that something is due the holder. However, Mr. Carmack’s notes are redeemable in nothing. The holder cannot redeem them in anything. All he can do is pass this debt to another person in exchange for some good or serve. Consequently, his notes are noninterest bearing and nonpayable debt.

The Act’s definition of U.S. notes declares them to be legal tender for all debts. By declaring them legal tender, Mr. Carmack is convinced, and rightly so, that people will not accept his U.S. notes as payment unless the government forces them to. Unlike gold and silver, which can stand on their own merits, the military might of the government is necessary to force these U.S. notes on the people.

Based on the footnotes to the Act, Mr. Carmack, unlike most fiat monetary reformers, seems to have some confidence in a market economy — except for money. He does not trust the markets, i.e., the people themselves, to provide a high quality money in an adequate quantity. He is convinced, and correctly so, that his irredeemable fiat paper money cannot compete against real money like gold and silver. If he really believes that government fiat paper money is the superior form of money, he would not need to declare it legal tender. If he believes in monetary freedom, he would let the markets choose what they want for money. He knows that if given a choice, the free market would most likely choose gold and probably silver. It would not choose government fiat paper money. Thus, legal tender laws are needed. Gold must never be allowed to become money.

Moreover, the U.S. constitution does not authorize the U.S. government to issue any kind of paper money or to declare any kind of money legal tender. (See my book Reconstruction of America’s Monetary and Banking System, pages 72-82, for a discussion on this prohibition.) By implication, legal tender laws reside with the States. It prohibits the States from “making anything but gold and silver coin a tender in payment of debts” (Article I, Section 10). Thus, an honest court would declare Section 3 of this Act, along with most of the rest of it, unconstitutional.

Section 4, One Hundred Percent (100%) Reserve Requirement, requires 100 percent reserves. It sets forth a procedure to achieve this requirement. This is one of the few redeeming features of this Act. Its language does not clearly distinguish between checkable deposits (checking accounts) and savings deposits (savings accounts). Banks receive savings deposits to lend. Unlike money in savings accounts, money in checking account is immediately available to the account holder to use. If a bank lends money from checking accounts, it is borrowing short and lending long — a recipe for disaster. If it uses money in checking accounts for the basis of loans, it is giving multiple parties access to the same money simultaneously — a recipe for disaster. Because fractional reserve banking gives multiple parties access to the same money simultaneously, it is a form of fraud. It should be prohibited.

Section 5, Retiring the National Debt, sets forth procedures for retiring the national debt. The Secretary of the Treasury is to buy all outstanding federal debt held by the public using U.S. notes. In essence, Mr. Carmack proposes to replace interest-bearing debt that is eventually discharged with noninterest bearing debt that is never discharged.

Under the current monetary system and Mr. Carmack’s proposed replacement, debt can never be extinguished. When a debt instrument is paid off with another debt instrument, that debt is discharged by transferring the debt to another. Until a debt is paid off with a commodity like gold or silver that is no one else’s obligation, it can never be extinguished short of bankruptcy.

In Footnote 3, Mr. Carmack does recognize that without ending fractional reserve banking using U.S. notes to buy federal debt would be hyperinflationary — thus, the need to end fractional reserve banking. He is correct in this assessment. However, contrary to his assertion otherwise, his Act would be highly inflationary for two reasons: (1) the large and increasing quantity of money that it creates and (2) the poor and declining quality of that money.

Also, in Footnote 3, he refers to extinguishing the national debt. As discussed above, his scheme does not and cannot extinguish the national debt. It only changes the form of that debt.

Section 6, Stable Money Supply, requires the Secretary of the Treasury to buy with U.S. notes or Treasury Deposits U.S. government debt securities held by the public at the rate of the reserve requirement ratio under Section 4. Section 6 asserts that by buying at this rate, the money supply will be kept constantly stable. It allows the Secretary to buy other U.S. government agency securities with U.S. notes if necessary to provide funds to increase bank reserves to 100 percent.

This Section is primarily a transitional section from the current system to 100- percent reserves. Mr. Carmack is assuming that most of the U.S. notes used to buy U.S. government securities from the public outside of banks will be deposited in banks instead of being spent. If most of this money is not deposited in banks or used to pay loans, some banks may be unable to meet the 100-percent reserve requirement. Even if all of it were deposited in banks, it would not necessarily be deposited proportionally. Thus, some banks still would not meet the reserve requirement and would have to call in loans. This transitional period could cause a recession.

Section7, Future Monetary Growth, requires the Treasury Department to increase the quantity of U.S. notes (outstanding currency plus Treasury deposits) outstanding by 3 percent per year. It accomplishes this goal by paying U.S. notes into economy “first to retire (or purchase) any future war bonds (issued pursuant to section 8. hereof), then any remaining marketable and non-marketable federal debt (e.g., Federal government agency securities, intra-governmental debt, and fully guaranteed obligations of the government), then, pursuant to appropriation by Congress, to pay for goods, services, or interest.” Any new money that Congress does not appropriate is rebated to individuals via the income tax system. This Section also prohibits the sell of U.S. government debt securities except during war.

Mr. Carmack exhibits a childlike trust in the politicians who control Congress. That Congress would fail to appropriate the full 3 percent is highly unlikely. That it would appropriate more than the 3-percent allotted growth is highly likely. With all this apparent free money without the resistance of raising taxes, how could they restrain themselves? By statute, Congress can change the 3 percent to a much higher percentage. It probably would not even have to raise the limit formally. If it appropriates more than the 3-percent limit, the Department of the Treasury has to create additional U.S. notes to pay for the excess. It cannot borrow. That a court would object to exceeding the 3-percent limit is highly unlikely. (Although some federal judges have undertaken the task of writing budgets and appropriating funds for local governments, I am unaware of any judge assuming this authority to write the budget for the entire U.S. government. It would have to do this if it wanted to hold appropriations to 3 percent. If it sent the budget back to Congress, Congress could retaliate by abolishing all federal courts below the Supreme Court — a good first step to reducing expenditures to the 3-percent level.)

He attempts to cover this loophole under Section 10. As discussed below, Section 10 is ineffective at achieving this goal and offers only a weak resistance.

According to Footnote 5, the 3 percent comes from Milton Friedman’s recommendation that money supply should grow at a steady rate year after year. Prof. Friedman recommended a growth rate between 3 and 5 percent. Mr. Carmack’s approach should be more capable of achieving a steady growth rate than Prof. Friedman’s approach. Mr. Carmack’s approach monopolizes money issuance and places it under the control of one, the U.S. government. Prof. Friedman proposed attaching his scheme to the current system with the Federal Reserve administering it with fractional reserve banking. Thus, under Prof. Friedman’s scheme, money creation is dispersed. Unlike Mr. Carmack’s scheme, Prof. Friedman’s scheme continues to allow fractional reserve banking.

Mr. Carmack supports Prof. Friedman’s proposed constitutional amendment to limit the growth of money. This amendment is in Footnote 14. Prof. Friedman’s amendment does two things. First, it authorizes Congress to issue “non-interest-bearing obligations of the government in the form of currency or book entries.” Second, “the total dollar amount outstanding increases by no more than 5 percent per year and no less than 3 percent.” At least the amendment gives constitutional support to Mr. Carmack’s proposal of the Department of the Treasury issuing U.S. notes. However, his requirement for banks maintaining 100-percent reserves is questionable. A strict constitutionalist would insist that the regulation of reserve requirements for banks lie with the States.

Footnote 14 gives Mr. Friedman’s introduction to his proposed amendment. He correctly notes that the Constitution does not authorize Congress to issue paper money. “[T]he power given to Congress ‘to coin money, regulate the value thereof, and of foreign coin’ referred to a commodity money: specifying that the dollar shall mean a definite weight in grams of silver or gold.”

In defense of his selection of 3 percent, Mr. Carmack writes in Footnote 5:
With population growth and productivity increases averaging approximately one percent (1%) each per year for the last thirty years, a three percent (3%) growth figure will insure stable prices within a vary narrow range and would allow for price-level or cost-of-living adjustments (COLAs) in contracts with a predictable effect to address any slight variation in economic activity from the three percent (3%) monetary growth rate. Further, as perfect fine-turning of monetary growth in a complex economy is not possible, to err on the side of a very slight inflation would at least relieve those burdened by debt of some of the effects of the prior inequity caused by private money creation, whereas to err on the side of deflation would exacerbate such inequity.
He believes that “a fixed rate of growth will provide the needed stability so long lacking [in] monetary policy.”

Mr. Carmack admits that his proposal is inflationary. He is correct. His proposal has no direct relationship with the demand for money or the economy’s need for money. Basing the growth of the money supply on a 30-year average population growth and productivity increases is ridiculous. These numbers, especially population growth, relate only indirectly to the need for monetary growth. Some years more money is needed. Some years less money is needed. Then to avoid the possibility of deflation, he triples these growth rates to derive his monetary growth rate. He prefers money whose purchasing power (quality) is in a perpetual state of decline to money whose purchasing power is generally stable or increases. If he did not intend to destroy the currency, he would not need to discuss allowing price-level and cost-of-living adjustments.

He is right about the lack of stability with the current monetary policy. Unfortunately, his proposal will not bring the stability that he claims to desire.

Inflation is primary cause of instability under the current system. It will cause instability under his proposal. Inflation distorts the economy. It leads to malinvestments. It causes excessive speculation. Savings, and, therefore, investments, decline because it penalizes savers. All these distortions cannot continue indefinitely. Eventually they cause an economic contraction that leads to a panic, recession, or depression.

Apparently, Mr. Carmack, following Prof. Friedman’s lead, is trying to achieve the stability achieved under the gold and silver standards without their discipline to keep governments and bankers in line.

Furthermore, Mr. Carmack’s proposed Act appears to contain a flaw in common with the 100-percent gold standard. It does not automatically adjust the money supply to match the high seasonal demand for money that occurs in December and in rural areas at harvest time. Thus, the system must carry an unused excess of money for most of the year to cover these peak demand periods.

Unlike many fiat money reformers, Mr. Carmack is not proposing, at least in this Act, to eliminate the income tax. Without the income tax system, he would need another mechanism to rebate deficiencies in appropriations to individuals. He is not proposing to replace the income tax with printing press money as some fiat money reformers do.

Section 8, War Exception, allows Congress to exceed the 3-percent limit if Congress formally declares war. It also allows the U.S. government to borrow when Congress formally declares war. The authorization to exceed the 3-percent limit and to borrow ends each year unless Congress extends them for another year. In any event, they end when the war ends.

Anyone who believes that this Section provides any restraint on Congress or the President should not be taken seriously. If this law had been in effect since 1950, only the childishly naive would believe that it would have provided any restraint on Presidents Truman, Kennedy, Johnson, Nixon, Regan, Bush the Elder, Clinton, Bush the Younger, or Obama in their undeclared wars.

If Congress authorized exceeding the 3-percent limit or borrowing to fund these undeclared wars, such law itself would be interpreted as nullifying Section 8. Section 8 is merely a hollow feel-good provision. It restrains Congress no more than Section 7 or 10.

Section 9, Full Reserve Banks, restricts the lending and investing activities of any institution calling itself a “bank.” A bank cannot lend any more than its owners’ capital. All money deposited in a bank is held in trust by the bank for the depositor. For every dollar deposited, the bank must have a dollar in U.S. notes in its vaults or invested in a Treasury Department Deposit account. All deposits in banks are in demand (checking) accounts. “Only bank deposits may be transferable by check, credit card, electronic transfer or any substitute therefor.” Banks may charge fees for their services and may pay interest on deposits.

As banks cannot lend deposits or otherwise use to them to generate revenue except to deposit them in Treasury Department Deposit accounts, it is highly unlikely that they would pay interest on deposits. To the contrary, they will charge fees: fees to hold the money, and fees to transfer the money.

In Footnote 6, Mr. Carmack remarks, “Absent massive fraud or theft, full reserve banks cannot fail, rendering insurance such as F.D.I.C. and F.S.L.I.C. unnecessary.” At least his proposal gets rid of these two agencies.

He is correct in that 100-percent reserves for checking accounts goes along way toward eliminating bank failure. The other component is prohibiting the lending of money in savings account for periods longer than the depositor has surrendered control of his money. That is, if a saver deposits his money in an account from which he cannot withdraw the money for 30 days, the lending institution, as Mr. Carmack calls it, could lend that money for no more than 30 days. Thus, prohibiting borrowing short and lending long also goes along way toward eliminating bank failure. The Act covers this prohibition under Section 12.

Bank failure can be virtually eliminated if banks met these two criteria. First, banks cannot lend or use as the basis for loans moneys in checking accounts — 100-percent-reserve banking. Second, banks cannot lend savings deposits for periods longer than it has full control of the savings — ending borrowing short and lending long.

Copyright © 2010 by Thomas Coley Allen.

Part 2 

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