Sunday, February 27, 2011

Do We Really Need to Return to Hamilton?

Do We Really Need to Return to Hamilton?
Thomas Allen

[Editor's note: Footnotes in the original are omitted.]

Two contrasting articles appear in the December 2010 issue of Chronicles. They are “Back to Hamilton” by William J. Quirk and “Prosperity” by Clyde Wilson. Quirk’s article reviews Paul Craig Roberts’ book How the Economy Was Lost: The War of the Worlds. Quirk focuses on Roberts’ promotion of protective tariffs as the means to revitalize America’s economy and increase the standard of living standard of middle class Americans. Quirk seems to agree with Roberts.

Quirk does observe that when the dollar was connected with gold, prices remained fairly stable over time. However, under the true-gold standard, general prices should decline over time because productivity rises faster than the money supply. Quirk also notes that gold disciplines politicians and checks governmental expenditures much more effectively than the supposedly independent Federal Reserve. (Where Roberts stands on the gold standard, I do not know. Based on some comments that he has made in his columns and in radio interviews, he does not appear to be a adherent of the gold standard.)

Roberts blames “globalization” for America’s economic problem. He is probably right. However, globalization has nothing to do with free trade. Trade as administered through the World Trade Organization (WTO) and other trade agreements is managed trade. An international bureaucracy answerable to no government manages world trade, which extends to local trade, for the benefit of the international corporations.

That people call these agreements free trade is a travesty. They prevent free trade instead of allowing it. The Thought Police are living and operating. To call WTO, NAFTA, and the like free trade agreements is like calling war, peace; freedom, slavery; and ignorance, strength.

Based on his paraphrase of Pat Buchanan’s statement, Roberts is aware that these agreements are not trade agreements — much less free trade agreements. Their objective is to stripe the American worker of his wealth and transfer it to the elite, who control the international corporations.

Quirk shows that the median income rose from 1947 to 1973 and declined from 1998 to 2008. Actually, median income has been declining since 1973. This decline has much more to do with severing gold’s last hold on the dollar in 1971 than with trade agreements.

The common myth that big industry and especially big banks (because they supposedly control the world’s gold) love the gold standard is false. They abhor it because it inhibits their unbridled greed. They love fiat money, especially paper fiat money and its electronic equivalent.

Bankers can create fiat paper money and its electronic equivalent out of nothing. They cannot create gold out of nothing. That is why the gold standard was abandoned.

Big business likes fiat money because they are first in line to get it. Thus, they are first to spend the new money, so they use it before it loses its value. Then they use it to repay their loans after it has lost its value and with that cheat their creditors.

Roberts does not object to managed trade. He objects to who is managing it and how they are managing it. Roberts does not want to replace the current system of managed trade with free trade. He wants to replace it with another system of managed trade.

Quirk (or Roberts, the article is not clear about whom) points to Hamilton’s arguments. Hamilton offered two arguments, which are still used, to promote protective tariffs. (1) They are necessary to build and maintain the industrial base for war. Hence, adherents of protective tariffs fear that the military-industrial complex will not develop and mature unless protective tariffs are imposed. (2) Capital used in industry produces more wealth than that used in agriculture. Today’s proponents also claim that it produces more wealth than that used in services.

If the proponents of protective tariffs want to impose tariffs to protect the military-industrial complex, they should prohibit the importation of strategic metals and rare earths. These materials are essential to modern warfare. Therefore, the country should not depend on foreign sources. The prohibition of their importation, which is the ultimate objective of a protective tariff, would force the extraction of these metals from the oceans and land sources where their concentrations may be as high as micrograms per megatons. Consumer goods that used these materials would no longer exist because no one could afford them. Inferior products would replace items that used these materials. The computer age in America except for the U.S. government, which can manufacture and steal all the money that it needs, and multinationals, which can move their computer work to other countries, may die. No sacrifice is too great for the benefit of the military-industrial complex.

If the purpose of tariffs is to build and maintain a war machine, wouldn’t it be better to subsidize these industries directly from the Defense Department’s budget? Unlike direct subsidies, tariffs do not guarantee that these industries will be built or maintained. Furthermore, direct subsidies reveal the real cost of building and maintaining these industries. Knowing the real cost, the people can then decide if these industries are worth the cost. (A major reason for using trade restrictions like protective tariffs instead of direct subsidies is to conceal the real cost.)

Hamilton was an agent of the bankers and major industrialists. He was himself a banker and helped to found the Bank of New York. He wanted protective tariffs to transfer wealth from the common American, most of whom were farmers at that time, to his rich northern friends.

Wilson reveals the truth of this objective in his article when he writes, “When tariffs were beneficial to the Northern rich and burdensome on everyone else, the United States had tariffs; when ‘free trade’ is beneficial to the Northern rich and a burden to everyone else, we have ‘free trade.’” (Wilson argues that when discussing issues, such as free trade verse protective tariffs, one must look beneath the surface. One must find out who benefits. One will usually find that the ruling elite, and not the people, is the primary beneficiary. Consequently the power of government needs to be severely restricted to limit the ability of the ruling elite to use it for its benefit.)

According to Quirk, Hamilton intended tariffs to provide temporary protection for America’s manufacturing. How long is “temporary?” The country has had protective tariffs of some sort ever since Congress adopted Hamilton’s proposal. (Yes, the United States still have some protective tariffs and other import restrictions even today with all these so-called “free trade” agreements.)

Do Quirk, Roberts, and other promoters of protective tariffs really believe that Lincoln was right when he sent 600,000 men to their death to impose his protective tariff on the South? Protective tariffs, which enriched the North at the expense of the South, was the major reason for the Southern States seceding. If they do not believe that Lincoln was justified in his action, why? If he were, why? Lincoln was merely doing what they advocate: imposing protective tariffs.

Quirk, Roberts, and other proponents of protective tariffs are victims of Bastiat’s broken window syndrome. They see people being paid to repair the broken window and people selling the material for the repair. They wrongly conclude that breaking the window is good for the economy. They see only the work and selling that it causes. (This mentality misleads people to believe that the massive destruction of capital and labor in war is good for the economy.)

What they fail to see is what Bastiat and any good economist see. A good economist sees the lost of revenue to the people who would have received the window’s owner’s money if he had not had to pay for the broken window. For example, if the owner had wanted a new pair of shoes, a shoe store and manufacturer have suffered a loss. The country as a whole has lost. If the window had not been broken, the owner and the country would have had both a window and a new pair of shoes. After the window is broken, the owner and the country have only a new window. A new pair of shoes has been lost.

Protective tariffs work the same way. They divert money from where the consumer prefers to spend it to pay the tariff or a higher price. Thus, consumers buy less. The economy and country have less wealth.

Hamiltonians like Roberts point to protective tariffs and the economic growth, primarily industrial growth, in America’s history. They conclude that this growth resulted from the tariffs. Without the tariffs, growth would have been much lower — or at least they imply this conclusion. Protective tariff promoters treat “sequences as consequences.”

Wilson notes that treating sequences as consequences is a flawed way of thinking. He writes, “If B follows A, then A was the cause of B. In fact, in understanding the wealth of nations, that is a bad assumption — because there are always multiple variables, some of them unknown, unpredictable, too deep to be observed, and even spirited and unmeasurable.” Because Congress imposed a tariff and the industrial economy of the country grew does not mean that the tariff caused this growth.

Historical examples exist that suggest that the imposition of protective tariffs cause or at least contribute to depressions. Congress enacted the McKinley Tariff Act in 1890. This tariff raised rates and made circumvention more difficult. The country suffered a severe panic in 1893 and a depression that lasted until 1896 or 1897, depending on whose criteria are considered. Did the tariff cause the depression? If everything else is ignored, which the Hamiltonians seem to want to do in promoting tariffs, the answer is yes. Most likely the tariffs were a contributing factor. However, the primary cause was the fiat silver dollar primarily as the Treasury note of 1890.

If protective tariffs really do invigorate the economy as a whole, then apparently it lacks to power to overcome the negative effects of fiat money. If true, then imposing protective tariffs without first eliminating fiat money will not solve the country’s economic problems. It may even make the problems worse.

Quirk begins his article with a discussion of Ben Bernanke and the Federal Reserve. Quirk fails to mention that the Federal Reserve is a child of Hamilton. Hamilton was an advocate of centralized banking. As the United States already have centralized banking, no need exists to go back to Hamilton for that.

Although Roberts disagrees with Bernanke on many issues, the two do agree on one thing. They agree that higher prices are preferable to lower prices. Gasoline at $5 per gallon is better than gasoline at $1 per gallon. Bernanke wants to achieve higher prices through currency depreciation. Roberts wants to achieve them through protective tariffs.

Roberts complains, and rightly so, about the United States “financing its trade and budget deficits by turning over the ownership of existing U.S. assets” and by getting foreigners to buy U.S. Treasury debt with their trade surplus dollars. He claims that dependency on foreigners to finance budget and trade deficits is “beyond the reach of monetary and fiscal policies.” This is not exactly true. If the U.S. government cuts its expenditures to match, or preferably to be below, its revenue, it would not need foreigners to buy its debt. Moreover, reducing the size of the government to match its income would lessen the burden that the economy is currently forced to carry. It would diminish the distortions of the economy that the government’s expenditures cause. It would eliminate agencies whose purpose is to interfere with and thwart economic activity. Or at least it would significantly decrease their intervention. Elimination of debt is a fiscal policy that the U.S. government can undertake to halt the adverse effects described by Roberts.

Once America’s number one export, federal debt, is eliminated, the trade balance becomes self-correcting. If Say’s Law is still valid, and it is, the concern about the trade deficit and the lack of industrial productivity vanishes. If Americans do not produce anything with which to buy imports, foreigners will cease trading with them. Imports will fade away until Americans begin to produce something with which to buy imports. Trade balances automatically correct without governmental intervention. Governmental intervention only leads to more distortion and imbalance.

Based on Quirk’s review of Roberts’ book, Roberts does an excellent job of describing America’s economic problems and much of what has caused these problems. Unfortunately, he offers a false solution.

On the other hand, Wilson identifies the primary cause of America’s economic problems: too much governmental intervention. To solve America’s economic problems, this intervention needs to be drastically reduced.

Wilson begins by giving a good description of a prosperous society. A prosperous society has minimal debt, and its debt is temporary. Only few people are very rich or very poor. Nearly everyone falls around the middle. Society’s wealth distribution is a narrow bell-shaped curve: It has a small standard of deviation. Almost everyone “has an abundance of necessities and access to some small luxuries and leisure.” It has small, unobtrusive governments with the local governments being the most noticeable and important, and the national government, the least. Private patronage supports religion, charity, education, and the arts. Cultural cohesion flourishes.

America has lost most of these aspects of prosperity. Protective tariffs will not bring them back. To the contrary, they concentrate more power in Washington. They concentrate more wealth in the bank accounts of the politically powerful.

Protective tariffs may drive wages up, but this is not a given. However, increase in prices that protective tariffs cause will nullify much, if not all, of the wage increase. Americans may be worse off after the imposition of protective tariffs. Their real income may decline, and they can afford fewer luxuries and probably fewer necessities. (The gold and silver standards are what drove real wages up during the nineteenth century and not tariffs.)

Wilson asserts, and correctly so, that hard work and merit resulting in an appropriate reward has largely vanished in today’s America. Conniving, scheming, and, most important, political connections and being a member of a politically promoted group reward people today. (In turn, the rich and powerful, i.e., the ruling elite, globalists, control most of these people.) After the ruling elite, these are the people who will benefit most from protective tariffs. The ruling elite will use them to control the tariffs and direct the tariffs to protect their interest.
Wilson concludes his article with the following:
Nobody can understand or completely manage a large economy. Surely, there are not many “lessons of history” more obvious and certain than that. But economics is a matter of human thought and action. Human thought and action can be applied to such matters as trade, labor, the money supply, in ways that are better or worse. But better or worse for whom! We need to remember what prosperity is supposed to feel like. But first we must find out who “we” are.
Thus, if improving the prosperity of the people is the objective, America is obviously going in the wrong direction. Evermore government has improved the prosperity of the ruling elite. However, it has diminished it for everyone else. If the people want to regain their lost prosperity, they need to do something different. They need a massive dismantlement of government.

The first step to take toward solving America’s economic problems is to withdraw from WTO, NAFTA, and similar agreements and organizations. (Withdrawal from the United Nations and all is subordinate organizations would also be beneficial.) Next is ending subsidizing off-shoring and oversea relocating along with all other corporate welfare. Closely related to this action is elimination of the military-industrial complex by immediately ending all undeclared wars and closing all bases in foreign countries. An armed force necessary to deter attack on the United States is much smaller than that needed to maintain a world empire. The gold- and silver-coin standards need to be reintroduced to operate parallel with the current federal-reserve-note standard with the intention of ending the latter. Abolishing the Federal Reserve and centralized banking is one of the most important elements toward long-term recover. Eliminating the overly burdensome regulatory environment in which businesses are forced to operate is another necessary component. (This highly regulated environment exists primarily for the benefit of big business as it greatly reduces their competition.) Regulatory agencies that have no constitutional foundation, such as the Environmental Protection Agency (the States are perfectly capable of taking care of their environmental problems), should be immediately eliminated. Most important is a return to constitutional government, which would reduce the size of the U.S. government by 90 percent.

Roberts’ and Quirk’s solution differs significantly from the above. They believe that the solution to the economic problems caused by governmental intervention is more governmental intervention. The correct solution is to remove the governmental intervention that caused the problems.

Jefferson was right when he “objected to using government to encourage manufacturing.” The government should leave the economy alone and let manufacturing develop in its own way and at its on pace. Jefferson said, “[It] can hardly be wise in a government to attempt to give a direction to the industry of its citizens.”

Does the county really need to return to Hamilton? Hamilton supported the concentration of political and economic power into the hands of a few. The country has been operating under his philosophy since 1860. His philosophy has led it to where it is today. Has not the time long past to abandon Hamilton’s philosophy? Has not the time come to adopt Jefferson’s philosophy of decentralizing and dispersing political and economic power?

Copyright © 2010 by Thomas Coley Allen.

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Friday, February 18, 2011

A Review of Rudy Fritsch’s Beyond Mises — Part 2

A Review of Rudy Fritsch’s Beyond Mises — Part 2
Thomas Allen

[Editor’s Note: Any comments about fiat money reformers are solely the author’s. Mr. Fritsch does not mention them in his book. He only refers to the Keynesians and Friedmanites. The author has used remarks that Mr. Fritsch makes to expose the irrationalities, absurdities, and frauds of fiat money reformers. Unless the author specifically mention Mr. Fritsch making the comment, the reader should assume that the comment is the author’s.]

Mr. Fritsch’s inflation discussion set me to pondering. He argues that the quality of money is the underlying cause of inflation instead of the commonly held belief that its quantity is. He also shows that the velocity of money can be as important, if not more so, as its quantity. This suggests that velocity is connected to demand. Although he does not discuss the demand for money in this context, it seems that quality is connected to demand, especially secular demand as opposed to cyclical or seasonal demand like harvest time and Christmas.

His explanation of the quality of money, i.e., the lack of it, causing inflation tells me that a decline in the demand for money causes inflation. I am not sure if that is his intent.

As the demand for money declines, its value, purchasing power, declines. Or as the purchasing power of money declines, the demand for money declines. Is the decline in purchasing power, quality, caused by a decline in the demand for money, or is it the result of a decline in the demand for money? I am not sure which is cause and which is effect.

For fiat money, its supply affects its purchasing power. As Mr. Fritsch shows, so does its velocity, which is related to demand. Higher the velocity of money is; the lower is the demand for money. In the hyperinflation stage the demand for money approached zero, and velocity of money approaches infinity.

The quantity theory focuses on the supply of money. He notes that the quantity theory of money is the dominant explanation of inflation. According to the quantity theory of money, the value of money is inversely proportional to the quantity of goods in the market — the more money and less goods, the lower the value of the money. Considering the succinctness of his explanation, he does a good job of exposing the weakness in relying on the quantity theory to explain inflation.

He argues that the quality of money offers a better explanation. The quality theory focuses on purchasing power of a unit of money and how long it will retain that purchasing power. The value of money depends on material of which it is made. High valued material, such as gold, results in high quality money. Low valued material, such as irredeemable paper, results in low quality money.

As these two theories of money are interrelated if quality is related to demand as I surmise, both should be considered. Although I have no statistical studies to support my conclusion, at least for fiat money, demand or quality seems to dominate at the beginning when people realize their money has lost its quality and at the end when they begin to lose confidence in their money. Supply seems to dominate most other times. Supply probably also dominates when the rate of inflation, i.e., currency depreciation, is low. At least in the United States, that seems true. In the 1970s when the dollar had obviously lost any pretense to quality with the closing of the gold window, inflation, currency depreciation, erupted. In the early 1980s, the rate of currency depreciation subsided. It even appreciated against gold. The quantity of money appeared to dominate as much of the money’s poor quality had been discounted. Now we are probably entering an era when people are again recognizing the massive loss of quality that has occurred during the last 25 years. Soon quality will again dominate. If the U.S. dollar hyperinflates, as it may do, quality will become the sole determiner of inflation.

The greenback, U.S. note, supports quality theory of inflation. The U.S. government issued the greenback as irredeemable paper money. It was low quality money. Its value quickly fell. After the enactment of the Resumption Act in 1875, the value of the greenback rose rapidly in 1877 and 1878. By January 1, 1879, it was at par with gold when redemption began.

It also adds some support to the quantity theory of inflation. When Congress froze the quantity of greenbacks and began reducing the supply, the greenback rose in value.

If Mr. Dale is correct, this argument about quantity and quality is irrelevant. According to Mr. Dale, interest causes inflation. The quantity and quality of money are immaterial, or so he seems to imply.

Other fiat money reformers also present arguments that make the quantity and quality of money irrelevant. According to them, inflation, or its lack, depends on who issues the money, and not on its quantity or quality. If private banks, and by inference other private parties, issue the money, then inflation occurs — apparently even if all that they issue are full-weight gold and silver coins whose excess can be melted and used for other purposes. If the government issues the money, then inflation, currency depreciation, is impossible regardless of the quantity issued or the quality of the money. They argue that money issued by government is of the highest quality, especially if it is irredeemable paper money.

The quality theory of inflation is new to most people. Mr. Fritsch should add more explanation and examples. As he ties the quality of paper money to gold, he provides a weakness that the quantity theory folks, the antigold folks, and the fiat money reformers can use to attack his argument. For example, by 1980 when the dollar price of gold peaked, it was obvious to all that the dollar would never again be redeemed in gold and would never again be officially backed by gold. Yet the dollar price of gold declined for the next 20 years. The quality theory would have predicted a continuous increase in the dollar price of gold because the quality the paper dollar was in a state of decline.

The example that he gives about the debasement of coins is true. A loss of quality does lead to a loss of purchasing power, inflation. However, the quantity folks can and have argued that debasement leads to an excessive increase in the money supply and that the increase causes the inflation. Which is it? Does quality or quantity cause the inflation? I suspect both contributed. However, even the quantity folks use quality to judge if inflation is occurring. In the final analysis, one can only determine if inflation, currency depreciation, is occurring by observing a loss in the money’s purchasing power, that is a loss in the money’s quality.

For coin debasement, reasoning supports the quality theory over the quantity theory as the cause of inflation. For example, the coin of the realm is, say, the banco, which contains 20 pennyweights (dwt.) of silver. This is the standard money. The emperor calls in all the 20-dwt. bancos and mints them into new bancos containing 10 dwt. of silver. The new bancos are denominated the same as the old banco, but they contain half the silver. Now the empire has twice as many coins as before. Yet the silver in circulation remains the same. Quantity theory folks would say doubling the number of coins in circulation causes the inflation, but they are wrong. True, prices have risen in bancos. However, prices have not risen in silver. Under metallic standards, people make exchanges based on the weight of the monetary metal, in this case silver, in the coin. Their exchanges are not based on words engraved in the coin. Consequently, they require two new bancos (two 10-dwt. coins) to buy what one old banco (one 20-dwt. coin) bought. Although the prices in bancos have doubled, the prices in silver remain the same. Thus, a loss of quality causes the inflation instead of the increase the quantity of coins. In his discussion of seigniorage, Mr. Fritsch notes this outcome.

Coin debasement does result in one major loser: creditors or lenders. Lenders suffer a lost if their contracts are written in terms of bancos. For this example, they lose half of their loans. They only receive half of the silver due them. When the borrowers pay back the number of bancos borrowed, they pay only half the silver borrowed.

For fiat paper money, quantity may have a more important relationship to inflation than its quality as the money has extremely little quality. Only when people began to lose confidence in the currency does its quality become highly important. Their loss of confidence leads to a loss of demand. A loss of demand leads to an increase in velocity as people spend money at a much higher rate to get rid if it.

Gresham’s law reveals the relationship between quality and demand. When irredeemable paper money and gold coins circulated and the government prohibits accepting gold coins at a premium or paper money at a discount, the low quality paper money will circulate. It will be used to pay debts. High quality gold coins will be hoarded. People are demanding gold coins more than paper money. People demand high quality money more than they demand low quality money. They spend paper money and keep the gold coins.

Mr. Fritsch does a good job of describing the ultimate debasement of corrupting precious metal money into irredeemable paper money. Evidence of this debasement is seen in the federal reserve note. Originally, federal reserve notes promised the bearer its equivalent in dollars of gold, each dollar of gold equaled to 23.22 grains of fine gold. Now the federal reserve notes declare themselves to be so many dollars, which now equals some unknown depreciating abstraction.

Ultimately, supply and demand fixes the value of money. Commodity money like gold or silver has two utilities: one as money and one as a commodity. Supply and demand of these utilities fixes its monetary value. Fiat money like federal reserve notes or greenbacks has only one utility: money. Its supply and demand as money fixes its monetary value.

Mr. Fritsch identifies a major problem with fiat paper money — at least for people who value liberty. Its value depends on how much wealth the government can steal from the people. In the government’s mind, it owns everything and condescends to allow individuals to posses and use some of its wealth — hence, a tax cut is the government giving the people some of its money.

Some fiat money reformers realize this outcome and rejoice in it. They believe that the government should own everything. Others seem ignorant of or want to ignore this outcome.

I have one major, but unimportant, disagreement with Mr. Fritsch. I disagree with his definition of money.

Mr. Fritsch defines money as “that which extinguishes all debt.” He claims that money functioning as a medium of exchange is use of money. Why is not extinguishing debt as much of a use of money as its use as a medium of exchange? One can just as easily defined money as “that which is used to extinguish all debt.” Mr. Hawtrey and Prof. Klien have defined it as such. Others, such as Prof. Walker and Dr. Ely, include such use as part of their definition of money. (Their definitions in my article “What Is Money.”)

The only difference that I see between the two is that when money is used as a medium of exchange, the action of the buyer and seller occur in the present. With extinguishing debt, money or an item is borrowed in the present, and the debt is paid, extinguished, in the future.

Could not one just as easily define money, as Prof. Mises and many other economists do, to be that which is used to make nonbarter exchanges. Money can be used to make all nonbarter exchanges.

Prof. Dusenberry has one of the best definitions that I have come across. He defines money as “something that people are willing to accept in exchanges, even if they have no use for the thing themselves. . . . [M]oney is something people accept in exchange for goods, in the expectation of passing it on to someone else in a further exchange.”

Mr. Fritsch somewhat contradicts himself with his sugar example. If I borrow a pound of sugar from my neighbor with the understanding that I will repay the debt with a pound of sugar next week, I am obligated to pay with sugar and not money. If my neighbor insists that I keep my promise to repay my debt with sugar, I cannot extinguish this debt with money (assuming no legal tender laws). I must extinguish this debt with sugar. Thus, money cannot extinguish this debt.

He states that sugar is not money because it does not extinguish all debt. However, debts must be paid in whatever the lender and borrower agree to use (again assuming no legal tender law). Thus, I find his definition of money questionable.

Actually, he does sort of support money as that which is used as a medium of exchange. However, he does so by claiming that a debt has occurred even with cash payment. That is an unusual claim. If I hand the store clerk a 10-dwt. gold coin for an item priced at 10 dwt. of gold, where is the debt? If a debt is occurring, I as the buyer am the lender, and the store as the seller is the debtor. The store gets my 10-dwt. gold coin before I get the item. Thus, the item has extinguished the debt instead of money.

His description of buying with credit cards is correct. If more people realized that a purchase with a credit card merely transfers debt and does not extinguish it, perhaps most would use their credit cards more judiciously.

He implies that only money that is universally acceptable as money can extinguish all debt. Any money or thing that claims to be money that cannot extinguish all debt is not real money. Does this mean that gold did not become real money until all the most primitive tribes on the planet accepted it as extinguishing debt? As I have shown, even gold cannot extinguish all debts — at least not without violation of contracts or being forced on people via legal tender laws.

He states that a debt contracted in U.S. dollars cannot be paid off with Swiss francs. With that I cannot argue. However, he implies that a debt contracted in U.S. gold dollars could be paid off with Swiss gold francs. In his discussion on money, Henry George, who wrote during the era of the gold standard, disagrees with Mr. Fritsch. Mr. George contends that most people would not recognize the Swiss gold franc as money for payment of a U.S. gold dollar debt or transaction. They would insist on payment in gold dollars. Does this mean that gold is not money? When stamped as a Swiss franc, it does not extinguish all debt.

Mr. Fritsch is correct that fiat money fails to extinguish debt. As he remarks, it is an obligation, a debt itself. Being a debt itself, it cannot extinguish debt. It can only transfer debt. A debt can only be extinguished by something, such as gold or silver, that is no one else’s obligation. This is an important point that fiat money folks fail to recognize or acknowledge.

He gives a good concise description of fractional reserve banking. Unfortunately, many people, including most Austrians, consider issuing bank notes to buy real bills as fractional reserve banking. He correctly distinguishes between issuing bank notes to buy real bills, which is not fractional reserve banking, and issuing bank notes in excess of unobligated gold (or under our present system, unobligated federal reserve notes) for loans, which is fractional reserve banking.

He provides a good and simple description of the pernicious effects for bond sellers in particular and the economy in general of governments or their central banks forcing interest rates downward. As he observes, only bond speculators who are long benefit. New bond sellers benefit if interest rates stabilize.

As they drive interest rates lower, fiat money folks refuse to acknowledge the power of the markets. (The government’s other market manipulations also attempt to defeat the power of the markets.) No government or banking system has ever defeated the markets. Markets are too powerful. They are more powerful than the combined political weight of the world. They brought down the Roman empire, the British Empire, and the Soviet empire and are now bringing down the American empire. They will bring down the emerging Chinese empire if China does not cease fighting them.

In summary, Mr. Fritsch has written an excellent and simple book on money. Anyone with an interest in monetary science should read it.

Part 1

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Sunday, February 6, 2011

A Review of Rudy Fritsch’s Beyond Mises — Part 1

A Review of Rudy Fritsch’s Beyond Mises — Part 1
Thomas Allen

The following article is a review of Beyond Mises: Based on the Work of Antal Fekete by Rudy J. Fritsch and published by Hypnonaissance, Canada, 2010. This book may be bought at

Mr. Fritsch has written an excellent book. I enjoyed reading it and learned from it. I especially like his examples and analogies. This is a book that I highly recommend for anyone who is interested in the monetary theories in general and Prof. Fekete’s theory in particular, which is the true gold-coin standard accompanied by the real bills doctrine. It is an excellent introduction to the Prof. Fekete’s theory. For anyone who is new to his theory, this is a good book to read before reading his writings. For anyone familiar with his work, it is also a good book to read as a refresher and to bring certain aspects of his theory into a better focus.

Also, this book is an excellent book for anyone who wants to learn about real money. It provides an overview of the real bills doctrine, the quality theory of money, and other aspects of money not often found in other monetary writings.

Any comments about fiat money reformers are solely mine. Mr. Fritsch does not mention them in his book. He only refers to the Keynesians and Friedmanites. I have used remarks that he makes to expose the irrationalities, absurdities, and frauds of fiat money reformers. Unless I specifically mention Mr. Fritsch making the comment, the reader should assume that the comment is mine.

Mr. Fritsch contrasts Prof. Mises’ concept of gold certificates and bank notes with that of Prof. Fekete. Prof. Mises claims that gold certificates and bank notes have present value like a gold coin. Prof. Fekete rebuts this claim. He argues that they were obligations, a future good, and not a present good like a gold coin. Prof. Fekete is correct. Gold certificates and bank notes are like checks, which if I understand Prof. Mises correctly, Prof. Mises considers a check to be a future good, a continuing obligation. Gold certificates, bank notes, and checks are all forms of credit money, which makes them obligations and future goods. The transaction is not completed until the gold is transferred, which extinguishes the credit.

Mr. Fritsch gives a good overview of subjective valuation and individual value scales.

In some of my critiques of the fiat monetary reformers (money cranks as others call them), I use the individual’s value scale to show that their reforms are doomed to fail just as the current Keynesian system is. Under a fiat monetary system, a small group or an individual decides how much money should be created and placed in circulation. To know how much is really needed, they have to know the value scale of every individual on the planet, which is about six billion value scales. The only thing constant about these value scales is that they are constantly changing as Mr. Fritsch illustrates. For any small group to know how much money is needed, when it is needed, and where it is needed — and getting that amount there at the right time — is impossible. The markets will always do a better job. And the freer the markets, the better the job it will do.

To deviate from his book for a few paragraphs, the reason that I have exposed fiat monetary reformers like Mr. Dale, Mr. Cook, Mr. Norburn, and the American Monetary Institute is that they are misleading many people. (For my critiques of their proposals, see “Analysis of Byron Dale’s Monetary Reforms as Presented in Bashed by the Bankers,” “Analysis of Richard Cook’s Monetary Reforms as Presented in We Hold These Truths,” “Analysis of Charles Norburn’s Monetary Reforms as Presented in Honest Money,” and “Analysis of the American Monetary Institute’s American Monetary Act.”) After listing to talk radio shows, especially on shortwave where these reformers get a forum, I find many otherwise intelligent people following for their poison.

They deceive people by accurately describing the current monetary system and its destructive effects on the economy and society. They usually focus on the Federal Reserve or the banking system in general. According to them, a major part of the problem is the private ownership structure of the Federal Reserve. Now comes their false solution. The government should acquire ownership of the Fed or abolish it and transfer its monetary authorities to another governmental agency. For them, the problem is not centralized banking itself, it is the ownership structure (I have never heard a good rationale explaining away the Bank of England, which is a governmental agency.) Furthermore, if the government would just issue the money directly, our economic problems would go away. They differ on the criteria for issuing the new money. None seem to have a mechanism for removing excess money from the economy other than the government having a budget surplus, which is highly unlikely. To them the problem is who issues the fiat money and how it is issued. The problem is never fiat money itself. They also agree that gold should not be money.

Fiat money reformers are the Jannes and Jambres (2 Timothy 3:8) of the reconstruction of America’s monetary system. They are like Pharaoh’s wise men who confronted Moses with their magic (Exodus 7:11).

Besides the fiat money reformers, another barrier that adherents of the true gold standard, the gold-coin standard, face comes from “hard money” folks. Nearly all advocate a fiat monetary system that incorporates gold. Most support using gold to back the money in some fashion. Under the true gold standard, gold does not back the money: Gold is the money. Many of these folks seem to support some kind of gold-exchange standard. (Gold-exchanged standards are political contrivances and are not market creations like real bills or the gold-coin standard. For an explanation of the gold exchange standard, see my article “Gold-Exchange Standard.”) Some seem to want a system similar to the euro where gold backs a fraction of the money. Only a few seem to want to require the paper money to be redeemed in gold on the demand of citizens of the issuing country.

Many of these hard money folks appear to oppose returning to the true gold standard because they believe that there is not enough gold. Without the real bills doctrine, their concern has some validity. However, as I show in “There Is Enough Gold” with further explanation in “Response to Dale’s Analysis of ‘There Is Enough Gold’” when the real bills doctrine accompanies the gold-coin standard, enough gold is available to accommodate world trade many times over. Even under the silver standard, enough silver is available to accommodate world trade several times over.

Now back to Mr. Fritsch’s book, his description of Keynesian economics reminds me of allopathic medicine. Keynesians attempt to cure chronic economic problems by attacking the symptoms while ignoring the underlying cause. Allopathic medicine attempts to cure chronic diseases by attacking (suppressing) the symptoms while ignoring the underlying cause.

One thing is missing from his discussion of real bills. He does not discuss selling a bill (commercial money) to a bank and having the bank convert the bill into bank notes and checkbook money (bank money). In my “Response to Dale’s Analysis of ‘There Is Enough Gold,’” I give a brief discussion of this action. I also mention it in some of my other articles.

Mr. Fritsch remarks that labor is a poor selection for money, resulting in poor quality money because it lacks the ability to store value. This inability to store value is one of the several reasons that Mr. Dale’s fiat monetary reform would result in poor quality and inferior money. He claims that his money would be based on labor associated with building roads. (An irony is that Mr. Dale has a better understanding of the true gold-coin standard than many hard money folks. Like most people, he is convinced that there is not enough gold for it to function as money today.)

In his discussion on credit, Mr. Fritsch gives two examples: John borrowing $200 and Ricardo selling a TV today for payment 60 days later. These types of transactions could not occur under Mr. Cook’s monetary system. At least they could not occur without governmental approval. Mr. Cook asserts that all credit should be the property of the government. Only the government should be allowed to create credit.

I have a minor correction to make about Mr. Fritsch’s comment on the Federal Reserve’s assets and liabilities. He states that U.S. government bonds are assets of the Federal Reserve and liabilities of the U.S. Treasury and that federal reserve notes are liabilities of the Federal Reserve. In the bookkeeping sense, he is correct. Bonds are on the asset side of the ledger, and federal reserve notes are on the liability side.

If I understand the U.S. monetary laws correctly, federal reserve notes are not liabilities of the Federal Reserve. They are the liabilities of the U.S. government. To enhance their acceptability, Congress made them obligations of the U.S. government. Thus, it appears that the law gives the Federal Reserve “its cake and lets it eat it too” by making the Federal Reserve’s liabilities the U.S. government’s liabilities.

Mr. Fritsch asks if the U.S. Treasury tried to buy back its bonds, where would it get the money. The U. S. government can buy back a little less than $347 million by printing U.S. notes. As far as I know, the law that allows the Department of the Treasury to print that many U.S. notes still exists. Congress could always increase that amount to cover the entire debt. That would make the fiat money reformers happy. It would also quickly expose the fraud and bankruptcy concealed by the current system.

As Mr. Fritsch so well illustrates, fiat paper money does not survive the military might of the issuing government that forces it on the people. (Fiat money made of a commodity, such as the silver dollar from 1878 to 1900, can survive its issuing government to the extent of the value of the commodity.) Some fiat monetary reformers believe that money should die with its issuing government. Such a belief reveals their lack of concern for the people.

Mr. Fritsch provides a good discussion of interest. For most fiat money reformers, interest is the arch enemy to be slain. Most disguise interest by calling it a fee (generally, a one time-fixed fee or a percentage fee charged up-front, which presumably would be much less than the standard interest rate), share-the-wealth or income, or something similar. Nearly all would definitely outlaw compound interest, which would do away with conventional savings accounts. Few go as far as prohibiting any kind of payment for a loan above the amount lent, which really does get rid of interest. Most do not seem to realize the chaos and poverty that they would create by outlawing interest. They need to answer my questions for anti-usurers in my article “Questions for Anti-Usurers.”

As Mr. Fritsch notes, the dual benefit of interest for lender and borrower can occur only with commodity money. It does not occur with fiat money. As fiat money reformers want to keep fiat money, they must deal with the one-sided effects of interest under fiat monetary regimes. Thus, most seek to suppress it, if not outright outlaw it. Instead of freeing the people and the economy from the heavy hand of government by returning to the true gold-coin standard, they seek to extend it in their attempt to control or eliminate interest. Thus, instead of eliminating the governmental intervention that caused the problem, they want more governmental intervention to solve the problem. How much simpler and freer the gold standard makes life.

Mr. Fritsch discusses the leather strap that used to be used in schools to maintain order and discipline. It was seldom applied. By the students knowing that the leather strap was there and would be applied was usually enough to maintain order and discipline. (Much of the unruliness in schools today comes from the removal of the leather strap.)

He uses the leather strap as an analogy for the gold standard, which he calls the “Golden Strap.” It was highly efficient and effective at maintaining economic order and restraining politicians. With the outbreak of World War I, politicians the world over saw a chance to discard the Golden Strap. Discard it they did.

The world is surely in need of it today. It has been needed since World War I. To avoid the strap, countries adopted the gold exchange standard after World War I instead of returning to the gold-coin-standard-real-bills system as existed before the war. They then abandoned the gold exchange standard in the 1930s to avoid the strap. The same thing happened following World War II. A gold exchange standard was established and then abandoned when the strap appeared.

I may have a disagreement with Mr. Fritsch’s concept of the demand for money or it may be my misunderstanding of his argument or it may be semantics. To me a person’s demand for money is how much money he wants to hold, hoard. It is not how much he would accept if someone gave him all he wanted. In this case, his acceptance demand is only limited by the space that he has to store the money. If the money were electronic, it would exceed a googolplex. When a person spends money, his demand for what he buys exceeds his demand for the money that he spends; otherwise, he would not make the purchase.

Mr. Fritsch writes that the discovery and exploitation of new gold and silver supplies never led to inflation. Did not the massive hoards of gold and silver that the Spaniards plundered from the Indians of Central and South America and sent to Spain cause an inflation in Spain that eventually brought Spain down? Didn’t this inflation spread across Europe?

Most economists attribute the rise in prices between 1896 and 1914 as caused by the large quantity of gold entering the markets from the new mines in South Africa. Thus, an increase in the world supply of gold led to a decline in its purchasing power. (Others contribute gold’s decline in purchasing power to natural market forces and not to the South African gold entering the markets.)

I am convinced that the primary cause of the decline in prices during the nineteenth century, especially the latter part, was the increase in productivity. New goods were being offered at a faster rate than the money supply was growing — hence, the downward trend in prices. This is what one would expect under the gold standard.

Moreover, if national bank notes had been tied to real bills instead of U.S. government bonds, the deflation in the United States between 1870 and 1896 would have been reduced. Under the real bills doctrine, money to buy new goods entering the markets would have been injected into the economy along with the new goods. Backing bank notes by government bonds instead of real bills greatly interfered with this process.

Copyright © 2010 by Thomas Coley Allen.

Part 2 

More articles on money.