Analysis of Thomas Porter’s The Green Magicians
This article analyzes Thomas Porter’s The Green Magicians (Omni Publications, 1968). His words and my paraphrases or summaries of his words are in italicized. My commentary is in roman letters. I have provided references to pages in his book and have enclosed them in parentheses.
Mr. Porter states, “A bank’s basic function is to transfer credit (wealth) from one account to another. Banking is a bookkeeping business” (p. 3.). When a person deposits money in a checking or savings account, he is lending to the bank receiving the deposit. Banks use these deposits as reserves or as the basis for their loans. Although most loans are in the form of entries in checking accounts, some are in the form of cash. Although most people deposit checks that they receive in banking accounts, some convert their checks to cash. This cash comes from deposits, which serve as the bank’s reserves. (Mr. Porter acknowledges using deposits as reserves [p. 2.].)
Mr. Porter claims that “a bank does not loan money, but instead accepts the customer’s wealth in the form of property and agrees to transfer that wealth from the customer’s account to others as ordered by the customer’s checks” (p. 3.). Contrary to his assertion, a bank does not accept the customer’s wealth in the form of property. The customer’s property is used as collateral for the loan (Mr. Porter notes this purpose on page 2.) The customer retains ownership and use of the property during the term of the loan. However, the bank may place restrictions, such as, the customer may not sell the property during the term of the loan without the bank’s consent. What the bank does when lending is to convert the borrower’s credit, usually in the form of a promissory note, into the bank’s credit, usually in the form of a checking account entry. Bank notes (federal reserve notes) are another form of credit in which the borrower’s credit is converted.
Moreover, not all loans are collateralized. Credit cards are a good example. When a buyer charges a purchase with a bank credit card, he has borrowed money from the bank to pay the seller He provides no collateral for the loan. (Mr. Porter expresses great concern about bank credit cards supplanting all currencies. [p. 28.].)
Also, contrary to Mr. Porter’s claim (p. 2), banks do not claim the borrower’s property as an asset. They list loans as assets. Borrowers list loans as liabilities. (When a person deposits money in a savings account, he lists the deposit as an asset although it is a loan to the bank. The bank lists the deposit as a liability.)
The primary reason that people convert their credit, their promissory notes, into bank credit, checkbook money and bank notes, is that buying goods and services with bank credit is easier than buying them with personal credit. (One can buy with personal credit without involving banks — even large purchases. I bought my land with a promissory note to the owners; I did not use a bank loan.)
Mr. Porter states that banks do not normally lend cash money; they lend credit money (p. 2). What he fails to explain is that all money, including cash money, is credit money. Since 1933, all money in the United States has been credit money.
Mr. Porter remarks, “Checks are the commonest form of money (p. 3).” When he wrote his book, he was correct about checks being the commonest form of money. Now electrons in computers, electronic money, is rivaling, if not surpassing, paper checks as the predominant form of money.
He states “Bank credit must be ‘borrowed’ to create it and is destroyed when paid back” (p. 4). He is correct. To prevent inflating the money supply, credit money needs to be removed from the economy and destroyed once its work is done.
Mr. Porter notes, “Currency is no longer a tangible thing, but is an order to pay, like a check” (p. 5.). This is true. It was true for all three types of paper money in circulation in 1969, viz., silver certificates, U.S. notes, and federal reserve notes. Like checks, all three are forms of credit money. (At the time that he wrote this book, silver certificates were being withdrawn from circulation. A few years later, U.S. notes would be phased out.)
Mr. Porter writes, “United States Notes, Silver Certificates and coins are paid into circulation. They are not borrowed into circulation” (p. 6). This is true. However, he fails to inform that U.S. notes are forced loans that pay no interest and promises to pay nothing. He errs when he writes that “U.S. notes have never been redeemable in anything” (p. 4.) Between 1879 and 1933, U.S. notes were redeemable in gold coin on demand. One-third to one-half of them were backed by gold.
He claims that the value of U.S. notes had “been stabilized by being exchangeable for silver certificates whose value has been stabilized by their value in silver” (p. 4.). This claim is false. Silver certificates ceased being convertible in silver in 1968. At the time of his writing the value of silver in a silver dollar exceeded the value of a one-dollar silver certificate. As silver certificates, U.S. notes, and federal reserve notes had the same purchasing power, what fixed the value of one to the other two? It was not silver as Mr. Porter implies.
The U.S. government may have spent U.S. notes into circulation, it did not spend gold certificates into circulation as Mr. Porter claims (p. 4). The owners of gold deposited their gold with the U.S. Treasury Department for gold certificates. If no one deposited gold in exchange for gold certificates, there would be no gold certificates in circulation.
Mr. Porter correctly notes that federal reserve notes are orders to pay like checks. Also, he notes that they are a private bank note (p. 5.) Unlike most fiat money reformers, he at least mentions that federal reserve notes are obligations of the U.S. government. However, he implies that this obligation only existed under the gold standard and that this was the cause of Roosevelt’s great gold thief of 1933 (p. 5). (He does not use “thief.”) As the U.S. government and the Federal Reserve Bank held nearly all the monetary gold, Roosevelt did not have to steal privately held gold. If the gold coins in circulation were approximately equally distributed, each person would have held $2 to $ 3 in gold — well below the $100 limit. (I discuss this in detail in “Review of Daniel Carr’s ‘FDR’s 1933 Gold Confiscation was a Bailout of the Federal Reserve Bank.’”) As nearly every country besides France had left the gold standard by the time that the United States did, few foreign claims for gold payment remained. The U.S. government and the federal reserve bank had plenty of gold to pay the few, if any, that remained. The purpose of abandoning the gold standard was to relieve the government and banks of the burden of paying in gold and of keeping their promise to redeem their notes and checks.
Mr. Porter remarks that the U.S. government pays the federal reserve bank interest on U.S. bonds (p. 5.). He fails to mention that most of this interest is returned to the U.S. government.
Mr. Porter lists three things that give currency value:
“1. Need of the currency to pay taxes.
2. Legal requirements to accept it in payment of debt.
3. Direct or indirect exchangeability for something of value such as gold or silver” (p. 6.).
Number 3 ceased to exist long ago and was not even in effect when Mr. Porter wrote his book. However, number 3 is what originally gave today’s currency its value. The nonmonetary uses of gold and silver gave gold and silver money its initial value After gold and silver began to be used as money, the combination of their nonmonetary uses and monetary use fixed their value. Numbers 1 and 2 are what now gives currency its value albeit at a decaying rate. Also, the service that currency provides as a medium of exchange gives it some value. (One of the great monetary mysteries is why fiat money, which is a promise to pay nothing, has any value at all.)
Mr. Porter correctly notes “that cash is only a slightly different form of credit money” (p. 6.).
He claims, “The only thing backing the money in the U.S.A. is the property of those who ‘borrowed’ it into circulation” (p. 11.). What really backs money in the United States is the taxing power of the U.S. government — its military might to take people’s property. All checkbook money is built on a foundation of federal reserve notes and bank deposits at the federal reserve banks. Federal reserve notes into which these bank deposits are convertible on demand are backed by the U.S. government. Likewise, U.S. government securities that the Federal Reserve uses to cover its liability of bank deposits are backed by the U.S. government. The U.S. government stands behind the country’s monetary system. This governmental control and guarantee of the U.S. monetary system seems to be what Mr. Proter advocates although in a different form.
He claims, “The total debt of the nation must increase by the amount of interest removed from circulation or it will be made up by foreclosure on property” (p. 11.). He focuses negatively on interest paid to bankers on loans. He ignores interest charged to banks for loans, i.e., interest paid on savings and checking accounts. Interest is also paid on personal nonbank loans, government securities, and other nonbank loans. Rent for a house or an apartment, car, equipment, or anything else is interest (See Usury by Calvin Elliot and “Questions for Anti-Usurers” by Thomas Allen.) If most of the interest that bank charge “is not legitimate profit but gained under false pretenses” (p. 10) is true, then most of the interest charged by nonbank lenders, landlords, equipment leasers, etc. must be profit gained under false pretense.
The U.S. government does not have to increase its debt to “borrow” money into existence or resort to using noninterest loans, like U.S. notes, to provide money to pay interest. People do not buy with money. They buy with production, labor. Products and labor buy products and labor — Say’s law. (As stated in Wikipedia , Say’s law is as follows: “As each of us can only purchase the productions of others with his own productions — as the value we can buy is equal to the value we can produce, the more men can produce, the more they will purchase.”) Money merely serves as an intermediary to facilitate the exchange. Ultimately, borrowers pay interest with their production.
Mr. Porter claims that “all interest is charged unjustly” (p. 13). If true, banks should not pay interest on deposits or certificates of deposit. Governments should not pay interest on their bonds. Corporations should not pay interest on their bonds or dividends (a form of interest) on their stock. Landlords should cease offering their property for rent. Without interest, our society would revert to the agrarian society of the Middle Ages or of ancient times.
In Chapter V, Mr. Porter gives his solutions. When a person borrows from a bank, he should pay a fee adequate to cover the cost of the loan with a reasonable profit and to protect the lender from possible loss (p. 30.). What the difference between this fee and interest other than how it is computed, he does not explain. As any good anti-usurer knows, fees related to loans is just another name for interest.
Borrowers should not be allowed to convert checkbook money resulting from loans into currency, precious metals, or anything other than credit. However, people who deposit precious metals or currency should receive precious metal or currency when demanded (pp. 30-31). Precious metal is no longer an issue — and it was not when Mr. Porter wrote as silver coins where no longer used. By currency, I assume that he means U.S. notes and federal reserve notes, i.e., paper money. Whether federal reserve notes are considered credit or currency may not matter, as he favors eliminating the federal reserve banks and by that their notes. He probably means U.S. notes. If bank notes are considered currency, why the restriction? Bank notes are functionally the same as checkbook money. Prohibiting banks from converting checkbook money created by lending to paper money, i.e., U.S. notes, removes an important limitation on the amount of loans that a bank can make.
Mr. Proter wants to make checks legal tender (p. 31.) He states, “Coin, United States Notes, Credit and silver at a definite value per ounce, should all be made legal tender for all debts, public and private by Federal law” (p. 32.) A major cause of monetary problems comes from legal-tender laws. These laws should be repealed instead of extended. Real money, such as gold and silver, do not need the protection of legal-tender laws. Fraudulent money like U.S. notes and federal reserve notes do. Without declaring them legal tender, they may have difficulty circulating and would circulate at a discount to specie. Mr. Proter states, “What is needed is a Federal law chartering institutions to issue credit backed by property, without maintaining any reserves and without being required to pay their debts in anything other than credit” (p. 31.).
Mr. Proter favors repealing then entire Federal Reserve Banking Act (p. 32.) This is the best proposal that he makes.
He seems to favor returning to some kind of bastardized silver standard. He remarks, “Making all debts payable in either silver, credit or currency at a definite ratio and as the person paying chooses, will maintain and stabilize the value of all money the same as making it redeemable in silver would. Yet the government will not need to invest in the silver and the silver will not be withheld from the market or the use of the consumer” (p. 32.). Obviously, he has little understanding of the true silver standard. Under the true silver standard, the government does not invest in silver. It merely coins all silver presented to the mint for coinage. The coins minted are the property of the person presenting the silver. They are not the property of the government until it obtains them via taxes, fees, or fines. The only way that U.S. notes and bank credit can maintain the same value as silver is for them to be converted to silver on demand. That requires the U.S. government to maintain silver reserves for U.S. notes, and banks, for bank credit.
He supports the Friedman concept (although he does not credit it to him) of free floating exchange rates for currencies. Currencies change value relative to each other instead of being a fixed weight of gold or silver or fixed in terms of another currency. Thus, neither gold or silver would be used in international exchange or for balance of payments (p. 32.). Essentially, this system is the one that the United States and most countries use today. Some countries do fix their currencies in terms of the U.S. dollar. This part of his proposal has been mostly implemented.
Floating exchange rates make foreign trade more speculative. Exporters and importers need to account for variable and unknowable future-value changes between the U.S. dollar and foreign currencies. Such changes were not a problem for countries on the gold standard because they did not occur. Countries defined their monetary unit as a specific weight of gold. Moreover, variable exchange rates leads to the U.S. government speculating in foreign exchange markets in an attempt to maintain stability — a task that it did not have to do under the gold standard.
Mr. Protor claims that “the Constitution empowers Congress to issue our money” (pp. 32-33.). He makes a mistake common to all fiat money reformers and federal judges and to most Congressmen. The Constitution does not empower Congress to issue money. It empowers Congress to coin money. That is, the U.S. government coins (not issues) all gold and silver presented to the mint for coinage. If no one presented any gold or silver for coinage, there would be no money other than perhaps some previously issued credit money, such as script. (As I have discussed this in detail in Reconstruction of America’s Monetary and Banking System: A Return to Constitutional Money and other articles, I will not do so here.)
Mr. Protor states, “A dollar bill is a token of a definite amount of wealth. It represents a definite amount of work done. As long as it represents a definite amount of wealth or work done its value obviously will not change and inflation or deflation cannot occur (p. 33). The “dollar” as used in the Constitution has nothing to do with work. It is the weight of silver in the Spanish milled dollar. Congress found the average weight of silver in the Spanish milled dollar in circulation was 371.25 grains of silver when adjusted so that 15 grains of silver had the same value as 1 grain of gold. Mr. Proter does not define how much of what kind of work equals one dollar. He seems to follow the classical concept of wealth and value of Adam Smith and other classical economists. As Carl Menger proved, value is subjective and has nothing to do with work.
If he is correct, we should have experienced no inflation over the past several decades. As we have had inflation, his definition of the dollar is flawed. Otherwise, wealth and work done in the U.S. has been declining over these decades.
Mr. Proter goes on to remark that “inflation is caused by labor demanding more money without more production or work done” (p. 33.). Thus, according to him, whenever labor demands an increase in pay without an increase in production, the dollar loses value. He is not alone in this belief. However, the purchasing power of the money is independent of the income of workers. Its purchasing power depends on its quality. High quality money like gold and silver maintains purchasing power better than low quality money fiat paper money like U.S. notes.
Mr. Protor claims that the economic problem in the United States is not over-production. The problem is under-consumption (p. 33-34). This is a commonly held belief by fiat money reformers.
He notes, “Unemployment is caused by a shortage of money in circulation. Every time considerable money is put in circulation, unemployment drops sharply, until the money is in some manner removed from circulation as soon happens” (p. 34.). The decade of the 1970s proved him and others who held this belief wrong. During the 1970s , both the money supply, unemployment, and prices soared. Unemployment usually does decline with a significant increase in money supply. It does so because when “considerable money is put in circulation,” the purchasing power of the monetary unit declines. Declining purchasing power lowers the cost of labor.
His proposal of returning to a free enterprise economy (p. 34) is sound. However, his proposal to prohibit charging interest would devastate the economy (v.s.).
Mr. Proter also supports the Liberty Amendment, which he quotes (pp. 35-36). The Liberty Amendment is a great proposal, which would eliminate many problems that the country faces. It would eliminate all the so-call free trade agreements, which are actually managed trade agreements, like NAFTA. It would prohibit the U.S. government from engaging in any business or enterprise. Also, it prohibits subjecting the laws of the United States and the States to any foreign or domestic agreement.
Like most fiat money reformers, Mr. Porter believes that only two approaches exist in providing the economy with the money it needs. One is having the government print and spend money into circulation — his preference. The other if for people to borrow money into circulation. That is, banks create checkbook money to lend to borrowers. This approach he adamantly opposes.
He ignores the one monetary system that can provide the economy with all the money that it needs without governments or banks. That monetary system is the gold-coin standard accompanied by the real bills doctrine and ideally the silver-coin standard. It automatically inserts money into the economy when it is needed and where it is needed far more accurately and precisely than governments can. Moreover, it inserts the amount needed far more accurately and precisely than governments can. Furthermore, unlike governmentally issued fiat money, which remains in the economy indefinitely and leads to inflation, it removes money from the economy once it is no longer needed.
Copyright © 2013 by Thomas Coley Allen.
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