Three Thoughts About Money

Three Thoughts About Money

Thomas Allen

Discussed below are Executive Order 11110, cryptocurrency as a form of fiat money, and payment of interest on the national debt.

Executive Order 11110

Some people believe that President Kennedy was assassinated because he was planning to abolish the Federal Reserve System. Their proof is Executive Order 11110. Using this executive order as proof, some claim that Kennedy was planning to replace federal reserve notes with US notes, a.k.a. greenbacks. One wonders if these people have ever read Executive Order 11110.

The portended part of Executive Order 11110 reads:

(j) The authority vested in the President by paragraph (b) of section 43 of the Act of May 12, 1933, as amended (31 U.S.C. 821 (b)), to issue silver certificates against any silver bullion, silver, or standard silver dollars in the Treasury not then held for redemption of any outstanding silver certificates, to prescribe the denominations of such silver certificates, and to coin standard silver dollars and subsidiary silver currency for their redemption,  (https://www.presidency.ucsb.edu/documents/executive-order-11110-amendment-executive-order-no-10289-amended-relating-the-performance)

Executive Order 11110 had nothing to do with the Federal Reserve. It delegated the President's authority to issue silver certificates to the Secretary of the Treasury. In 1878, Congress authorized the President to issue silver certificates — long before the Federal Reserve existed. 

Moreover, Executive Order 11110  had nothing to do with US notes. By law, the Department of the Treasury had to maintain $346,681,016 of US notes in circulation from 1878 to 1971. 

When this executive order was issued, three types of paper money were circulating in the United States: silver certificates, US notes, and Federal Reserve notes. Although all had equivalent purchasing power, all were issued under different laws. (One may still find silver certificates and US notes in circulation. I have received one of each since 2000.)

Furthermore, the President cannot abolish the Federal Reserve. Only Congress can abolish it. Congress created it; Congress can abolish it.

        Moreover, a common misconception that some people have about US notes is that they are debt-free money. They are not. A note is a debt instrument. Therefore, a US note is a debt. However, it is a noninterest-bearing and nonmaturing debt that is legal tender.

This strange notion that President Kennedy was assassinated because of Executive Order 11110 and that this executive order replaced Federal Reserve notes with US notes, which would have led to abolishing the Federal Reserve, has been floating around for at least 40 years.

Cryptocurrency

Cryptocurrency like Bitcoin is not real money. It is a type of fiat money. Real money has quantity, measurement, and substance. Fiat paper money has only quantity. Likewise, cryptocurrency has only quantity.

An early illustration of these three attributes in real money is recorded in Genesis 23:16. Abraham bought a burial plot. He paid 400 (quantity) shekels (measurement of weight) of silver (substance). In pre-1933 money, if a person bought something with a $20 gold coin, he paid with money that had quantity (20), measurement (dollar, a unit of weight equal to 23.22 grains), and substance (gold).

Cryptocurrency lacks two of these three characteristics. For example, a Bitcoin has a quantity of one. It can be converted to fiat money, such as dollars or euros, which has quantity but, like Bitcoin, lacks measurement and substance. (Bitcoin averaged about $60,000 in 2024 and ranged between about $39,507 and $99,637.) Unlike fiat paper money like the dollar, which appears to have a measurement, cryptocurrency does not even seem to give the illusion of a measurement until it is converted to a fiat currency. However, even if cryptocurrency has a measurement, its measurement, like fiat currency, is an abstraction. It measures nothing of substance. A unit of measurement has to be something concrete and definable, like the meter, ounce, minute, or horsepower, so that things can be compared with it. It has to be something that instruments can determine. Also, it lacks substance as its monetary value exceeds the value of the material of which it is made, and it does not promise to deliver anything concrete. (See “What Is the Difference Between Commodity and Fiat Money” and “Differences Between Real Money and Fiat Money” by Thomas Allen.)

Another distinction between real money and fiat money is how the quantity of money in circulation is determined. With real money, the markets decide how much money is in circulation. The money supply adjusts automatically to meet monetary needs. Under a fiat monetary system, the money supply is regulated artificially; instead of the markets deciding, some entity decides. For paper fiat money, the government or its central bank regulates the quantity in circulation. With cryptocurrency, the programmer regulates it with the program that he wrote that creates the cryptocurrency. Like other fiat currencies, the quantity of cryptocurrency is independent of the market or economic needs or demand for money. (See “Gold and Silver as Fiat Money” by Thomas Allen.)

One advantage that the existing paper fiat monetary system has over cryptocurrency is that it has a mechanism for withdrawing excess money. Cryptocurrency lacks such a mechanism. Once cryptocurrency is issued, it remains in circulation forever unless it is lost.

Interest on the National Debt

Many people express concern about paying the ever-growing interest on the ever-growing US national debt. However, two legal methods can be used to eliminate paying the interest on the US debt.

First, Congress can require the Federal Reserve Bank to buy all US government’s debt securities. Under current law, all earnings of the Federal Reserve above its operational cost go to the US Treasury. Thus, nearly all the interest that the federal government pays on its debts would return to the US Treasury. If Congress thought that the Federal Reserve’s operating expenses were too high, it could limit those expenses.

Second, the federal government could pay the interest with government notes, a.k.a. US notes, also called greenbacks. Also, it could pay off or even buy back the US government’s debt securities with government notes. Government notes are notes issued directly by the government instead of indirectly through the central bank, as are Federal Reserve notes. Moreover, instead of issuing bonds, treasury bills, etc., the federal government could just issue government notes. From the government’s perspective, government notes have a great advantage over other governmental debt. Government notes pay no interest and never mature. (See “Difference Between Bank Notes and Government Notes” by Thomas Allen.)

Of course, if either of these two methods is used, the US dollar will go the way of the Zimbabwean dollar much quicker than it will under the current system. (At its peak, the Zimbabwean inflation was estimated at 79.6 billion percent month-on-month, 89.7 sextillion percent year-on-year in mid-November 2008.)

Copyright © 2025 by Thomas Coley Allen.

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Indirect Taxes and Direct Taxes

Indirect Taxes and Direct Taxes

Thomas Allen

In Out of Step: The Autobiography of an Individualist (New York: The Devin-Adair Company, 1962), Frank Chodorov gives a good comparison of indirect taxation with direct taxation, pages 219–227. A summary of that comparison follows.

Taxes fall into two categories: indirect taxes and direct taxes. Indirect taxes are levied on goods and services before they reach the consumer. Examples of indirect taxes are sales taxes, excise taxes, value-added taxes, and tariffs. Direct taxes are mostly levied on the accumulation of wealth. Examples of direct taxes are property taxes, income taxes, social security taxes, inheritance taxes, and poll taxes.

Chodorov describes indirect taxation as “a permission-to-live price.” Numerous indirect taxes are hidden in the price of every good and service that is for sale. People can only avoid these taxes by refusing to buy and, thus, depriving themselves of the meaning of life and even life itself. Consequently, they pay the tax to survive and to give their life meaning. “The inevitability of this charge on existence is expressed in the popular association of death and taxes.” For most products, taxation is the largest single item in the cost.

Indirect taxes impact the poor much more than the rich. Because there are more low-income people than high-income people, low-income people consume more overall and, therefore, pay a greater share of the indirect taxes.

The state prefers indirect taxes to direct taxes because they are usually hidden. “It is taking, so to speak, while the victim is not looking.” About people who justify taxation as moral, Chodorov writes, “Those who strain themselves to give taxation a moral character are under obligation to explain the State’s preoccupation with hiding taxes in the price of goods. Is there a confession of guilt in that?”

Unlike indirect taxes, the taxpayer cannot pass direct taxes onto others. Direct taxation taxes people on what they have instead of something that they buy. It taxes people “on the proceeds of enterprise or the returns from services already rendered, not on anticipated revenue.” Consequently, the taxpayer has no way of shifting the burden of a direct tax.

The envious have always supported direct taxes because they believe the “soak-the-rich propaganda.” Also, among the adherents of direct taxation are the promoters of democracy; they see it, along with universal suffrage, as necessary to the achievement of democracy.

As history has shown, the greed of the state does not stop with taxing the rich. Its direct taxation spreads to cover the lowest-paid workers. Because in the aggregate, the poor generally have more to be taken than the rich; consequently, the state soon goes after the poor. As with indirect taxes, low-income people bear a much higher burden under direct taxation than do the rich. A small tax on the income of a low-income earner causes more hardship than a larger tax on a high-income earner.

Because direct taxes directly deny “the sanctity of private property,” they are more vicious than indirect taxes. “By its very surreptition the indirect tax is a back-handed recognition of the right of the individual to his earnings.” Thus, the state covertly takes what it needs, “but it does not have the temerity to question the right of the owner to his goods.” However, with direct taxation, the state claims, without embarrassment or shame, the right to all property. Thus, with direct taxation, “private ownership becomes a temporary and revocable stewardship.” Direct taxation leads to the Marxist concept of state supremacy replacing the Jeffersonian ideal of inalienable rights.

About taxation, Chodorov writes:

Taxes of all kinds discourage production. Man works to satisfy his desires, not to support the State. When the results of his labors are taken from him, whether by brigands or organized society, his inclination is to limit his production to the amount he can keep and enjoy.

Replacing the Federal Income Tax with a National Sales Tax
Some tax reformers are proposing to replace the federal income tax with a national sales tax. Typically, they propose a rate of 20-some percent to make the revenue from the sales tax to be approximately equal to that from the income tax. Further, they provide an out for war, national emergencies, etc. Congress can use these outs to raise the tax rate, apparently without limit. Most of these proposals do not prevent Congress from reimposing the income tax other than the integrity of Congress.

These proposals are highly flawed and do not improve the tax situation. Worst, most fail to prevent the return of the income tax. Consequently, Americans end up paying the new sales tax along with an income tax.

If a sales tax is to replace the income tax, it needs to be done by a constitutional amendment, which includes repealing the income tax amendment. Moreover, the repeal amendment or the sales tax amendment should specifically prohibit an income tax and any other similar taxes. Also, the tax amendment should cap the sales tax at a low rate, say 2 percent. It should have no outs; Congress could not exceed the cap even because of war or a national emergency. Another provision should prohibit the federal government from borrowing so that it cannot avoid the tax restrictions with the inflation tax. (This provision must also prevent the issuance of government notes, such as US notes, which is borrowing with noninterest paying loans.)

How could the federal government survive under such revenue restraint? It would have to eliminate all unconstitutional programs that it is currently administrating. This would include the elimination of nearly all the programs that the Departments of Agriculture, Commerce, Education, Energy, Health and Human Services, Homeland Security, Housing and Urban Development, Interior, Labor, and Transportation administer. It would also require ending the undeclared wars that the United States are involved in and ending the American Empire.

Copyright © 2020 by Thomas Coley Allen.

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Does the Monetary Unit Determine the Value of Bullion?

Does the Monetary Unit Determine

the Value of Bullion?

Thomas Allen

    One of the debates that economists had during the era of the gold-coin standard[1] was whether the monetary value of the gold coin determined the value of gold bullion or gold bullion determined the value of the gold coin. Is the value of each unit of money determined by the value of the bullion in each unit? Or, is the value of bullion in each unit of money determined by the value of the monetary unit? In other words, is the monetary unit the independent variable, or is gold bullion the independent variable?[2]
    In his book Money (1882), George Weston argues that the value of bullion is determined by the value of coin, the monetary unit. The value of coin is determined by the quantity of coins and paper money. Weston is a proponent of the quantity theory of money. Other things being equal, the quantity of money fixes the value of the monetary unit, which he usually seems to mean its purchasing power. This is true not only for inconvertible fiat government paper notes, it is also true of full-weight gold coins and other types of money. According to him, governments can keep their government notes from deprecating by properly controlling their quantity. Moreover, he seems to prefer fiat paper government notes to full-weight gold coin. (A full-weight gold coin is a coin whose monetary value equals the value of its gold content.)
    Weston believes that a parity between full-weight coin and paper money can be permanently maintained by limiting the quantity of paper money. Moreover, he contends that controlling the quantity of paper money is more reliable than redeeming paper money in coin on demand, which he considers to be “hopelessly treacherous as it is costly and clumsy.” He adds that using the requirement to redeem bank notes in gold coin on demand to regulate the issue of bank notes is “false and fraudulent . . . and had proved itself in practice one of the worst scourges which has ever afflicted mankind.” Such a system causes the quantity of money to fluctuate too much. A superior system is to use the price of gold to regulate the issue of inconvertible paper money. Perhaps, he is correct, but no government has ever achieved the goal of maintaining parity or near parity of paper money with coin or bullion for more than a few years without redemption. Furthermore, rarely does a government use the price of gold to regulate the issue of inconvertible paper money. Such methodology is too restrictive and obviates the purpose of resorting to inconvertible paper money, which is to issue money based on politics and not on economics.
    Weston prefers a static supply of bank notes as the banking systems of England and most other European countries had where nearly all bank notes were backed by gold coin. A major problem with this static money supply is that to fit periods of high demand for notes, such as around Christmas, a large quantity of notes has to remain unused in vaults for most of the year. European countries overcame this inelasticity problem with checkable deposits, which Weston rejects as money. By expanding checkable deposits when demand was high and contracting them when demand was low, banks satisfied the markets’ monetary needs.
    Moreover, Weston believes that the law gives gold its value. Furthermore, the value of gold as merchandise is not an element constituting its value as money. This monetary value of gold can be regulated by varying the quantity of paper money in circulation. Increasing the quantity of paper money decreases the value of gold coin. Here he seems to confuse value with purchasing power. The two are different. Besides, increasing the quantity of paper money does not always lead to a decline in purchasing power of gold coin. In the United States, during the last quarter of the nineteenth century, the purchasing power of gold coin rose while it was accompanied by a rising supply of paper money (some fiat like the U.S. note[3] and some not like national bank notes[4]) and legal-tender silver dollars.[5] However, fiat paper money and fiat silver dollars may have prevented prices from declining more than they did.
    Also, Weston seems to believe that gold and silver are not money (Murray Rothbard strongly disagrees; he declares that gold is money, whatever its form.) People desire them because of ease of converting them to money — presumably, he means coin and possibly bullion as reserves for paper money. However, gold bullion has been used as money, and not merely as backing for paper money, before and after coinage.
    According to him, civilized people today (1884) do not desire gold for ornamentation but solely for its use as money. If true, the manufacturing of gold jewelry would be an unprofitable undertaking.
    Weston claims that silver coin can be kept at parity with gold coin by limiting the quantity of silver coins. He cites several examples in Europe. Silver coins in the countries that he mentions were either subsidiary coins to gold coin or soon became subsidiary coins. These countries were on the gold standard, and their silver coins were convertible to gold either directly or indirectly. This convertibility — not their quantity — kept the monetary value of these coins at par with gold coin, although the silver content of these coins was worth less than the monetary value of the coin. (If the monetary value of a coin fixes the value of its bullion content as Weston contends, why did not the value of silver rise to match the monetary value of the silver coin?)
    Weston seems deceitful about subsidiary coins and uses them to support his contention that the metal content of a coin does not determine the value of the coin, but the value of the coin determines the value of its metal content. Subsidiary coins are token coins used for transactions so small that full-weight gold coins cannot be used without receiving change in token coins. Moreover, token coins can be redeemed in gold coin. If a subsidiary coin is to circulate, the value of its metal content has to be less than its monetary value or else it will be melted for its metal.
    Nevertheless, his comments on the European silver coins fit the silver dollar in the United States at that time. The silver dollar was fiat money whose quantity was fixed by Congress and the Secretary of the Treasury. According to Weston, it was kept at par with the gold dollar by limiting the quantity of silver dollars manufactured. Although the value of the metal content of the silver dollar was worth less than a dollar, Congress declared the silver dollar to have a legal-tender value of one dollar. Although the silver dollar could not be directly converted to gold, it could be converted indirectly to gold. One means of achieving this conversion was to deposit silver dollars in a bank and then withdraw the money in gold coin. This indirect conversion to gold kept the silver dollar at par with gold.
    Historical examples argue against Weston’s position. As shown below, the value of bullion controls the value of the coin, and not the monetary value stamped on the coin.
    In 1985, Congress authorized the minting of a one-ounce gold coin with a legal tender value of $50 and a one-ounce silver coin with a legal tender value of $1. This action occurred 14 years after gold had ceased having any formal part of the world’s monetary systems. Likewise, it occurred decades after silver had any formal part of the world’s monetary system except as subsidiary coins, which use ended in the mid-1960s.
    If the monetary value of gold coin determined the value of its gold bullion content, which was $327 at end of 1985, then the gold coin should have pulled the value, price, of bullion down to $50 per ounce. Instead of the coin pulling the value of bullion down, bullion raised the value of the coin up. Likewise, silver bullion in the one-ounce $1 silver coin raised the value of the coin instead of the silver coin pulling the value of bullion down to $1 per ounce.
    Under the  Bretton Woods system, the US government guaranteed the US dollar to have the value of one thirty-fifth of an ounce of gold and exchanged one ounce of gold at the rate of $35 per ounce when a foreign government or its central bank redeemed its dollars. During the 1960s, the value, price, of gold bullion rose above $35 per ounce. If Weston were correct in that the value of the monetary unit determines the value of bullion, such a dichotomy could not have occurred. The price of gold could not have risen above $35 per ounce. As a result of the divergence between the monetary unit and bullion, the Bretton Woods system was abandoned in 1971.
    The same effect occurred in Weston’s day when Congress authorized the issuance of government notes called US notes and nicknamed greenbacks. Soon after issuance, the $10 US note began trading at a discount to the $10 gold coin. Although the magnitude of the discount varied, the US note did not exchange at par with gold coin until it became redeemable in gold. If the monetary unit determines the value of bullion, then the $10 US note should have remained at par with the $10 gold coin. Moreover, if the monetary unit determined the value of bullion, then subsidiary silver coins should have remained in circulation. They did not. For several years subsidiary silver coins ceased circulating because their value as bullion exceeded their value as money.
    According to Weston, the value of the dollar is determined by the quantity of coin and paper money. As S. McLean Hardy’s statistical study shows, during the War, the value of the dollar had more to do with Confederate victories and defeats than with its quantity. Confidence, not quantity, gives inconvertible paper money its value, although its quantity affects confidence. Convertibility gives paper money its value whatever its quantity.
    Weston does acknowledge that paper money can depreciate against gold coin and cause gold coins to cease circulating. How can this be if the value of money determines the value of gold bullion in the coin? How can the value of the bullion content of a $10 gold coin rise above the $10 monetary value stamped on the coin, if the monetary value of the coin determines the value of its bullion content? The experience that he witnessed with the US note proves that the value of the monetary unit does not fix the value of its bullion content.
    Centuries before the first precious metal coin was ever minted, people bought and sold goods and services with gold and silver bullion. Genesis 23:16 records such an event when Abraham bought a burial plot for his deceased wife by weighing out silver.
    More proof that a coin’s bullion content governs its monetary value is that well-worn coins exchange by their weight rather than by the monetary value stamped on them unless the law prohibits such discounting. In which case, the law is often ignored by refusing to accept the worn coin in trade at its full monetary value. (Unfortunately, creditors often had to accept worn coins in payment of debt.) Some countries under the gold standard allowed by law exchanges of well-worn coins by weight rather than by tale. Even in some countries that prohibited such discounting guaranteed the full-weight of their coins by exchanging new full-weight coins for worn coins.
    Weston asserts that suspension of the gold standard, i.e., the suspension of convertibility of paper money, in one country adds to the number of gold coins in other countries. The resumption of the gold standard, i.e., returning to convertibility of paper money in gold coin, draws gold coins from other countries. He ignores the large sink of hoarded coins, gold bullion, jewelry, ornamentation, plate, and other gold products that can absorb the excess gold under suspension and can return it under resumption. Thus, according to him, the abandonment of the gold standard in one major commercial country causes the value of gold in other countries to fall. Resumption of the gold standard causes the value gold in other countries to rise.
    When a country suspends species payments, Weston claims that its coins flow to other countries and reduce the value of money, and by that, the value of gold, in these countries. If so, the effect is only temporary. The value of gold as bullion and in coin is nearly equal worldwide. Moreover, the global quantity of gold available for monetary use is so massive compared with what may flee one country that the effect of the fleeing gold would be small or even insignificant. Weston would counter that this new supply of gold is sufficient to lower its value worldwide.
    If Weston is correct in that whatever gold that flees a country that has suspended the gold standard flows into the monetary system of other countries, only a small part will end up in circulating gold coins. Most will go to banks as deposits and become the basis for credit expansion. Most of the money created by this expansion will be as checkable deposits while some will be as bank notes. This credit expansion is what causes monetary inflation and the resulting rising prices. Its contraction results in deflation and decline in prices. However, many problems associated with credit expansion can be avoided by using sound banking practices (not fractional reserve banking practices, which allows multiple parties to use the same money simultaneously). Sound banking practices include not borrowing short and lending long and backing all checkable deposits 100 percent with full-weight coin or commercial money.[6] (Commercial money is a real bill of exchange that is self-liquidating usually within 90 days or less; it can only function under a commodity standard like the gold standard.)
    The decline in purchasing power, Weston contends, results from a reduction in demand for gold as coin when the gold standard is suspended. However, he claims that the loss in purchasing power results from a loss of the value of gold coin. The reverse occurs when the gold standard is resumed and paper money is again convertible in gold. Purchasing power of coin and paper increases because the value of gold increases. He ignores the quality of money theory, which explains the fall and rise of money’s purchasing power, which he calls value. When the gold standard is suspended, low-quality inconvertible paper money, which has less value and purchasing power than gold, replaces gold coin. When the gold standard is resumed, a high-quality money, gold coin and paper money convertible in gold, replaces low-quality inconvertible paper money.
    Moreover, he seems to credit the rise and fall in prices mostly on changes in the supply and demand for monetary gold. He sees the changes in prices being caused by changes in the value of gold. He ignores changes in credit money, except bank notes, which he considers to be real money and not credit money,[7] have much more effect on prices than changes in the supply of gold.
    Weston fails to explain how the monetary unit gets its initial value. Under the gold standard, the monetary unit gets its value from gold. The monetary unit is defined as a specific weight of gold and the monetary unit has the value of that weight of gold. For example, the Gold Standard Act of 1900 defined the dollar as 23.22 grains of gold. Therefore, the dollar had the value of 23.22 grains of gold. This is more proof that the monetary unit derives its value from its metal content as the value of bullion precedes the monetary unit.
    This notion Weston rejects. He claims that the value of the monetary unit, the dollar, gives the 23.22 grains of gold its value. The dollar may give 23.22 grains of gold its price, but it does not give the gold its value. Value and prices are not the same things. Value is subjective; price is objective. Moreover, not everything that has value, has a price; for example, love of one’s mate and children has great value but no price.
    An example of the difference between price and value is that, under the gold standard, when a person buys a shirt for $10, the shirt has the value of 232.2 grains of gold and a price of $10. (Today, when one buys a shirt with a $10 federal reserve note, what is the value of the shirt? Without defining the dollar in terms of itself, which is a poor and unsatisfactory definition that should be unacceptable and not used, such as the value of the dollar is a dollar’s worth of goods, no one can definitively define the value of the dollar.)
    Before any commodity became money, a medium of exchange, it had to have value independently of its monetary use. Its monetary use adds to its value as a commodity, but does not create it. Weston acknowledges that gold had value as ornamentation, etc. before being coined, and its uses as coin add to that value and even gives gold its highest actual value. If true, no gold coin would ever be melted for use as ornamentation, for the highest value of gold is that in the form of a coin. However, as gold coins were often melted for their gold and that gold was used for other purposes, gold as coin is not always its highest use.
    Moreover, Weston is unclear about how paper money gets its value other than the government limiting its quantity. How this limitation initially gives paper money, especially inconvertible paper money, its initial value, he does not explain. Convertible paper money derives its value from the gold that it represents. Inconvertible paper money derives its value from the gold coin that it replaces. Quantity has nothing to do with this initial value.
    In his argument to prove that coin fixes the value of bullion, Weston shows that government can easily manipulate their monetary systems and the purchasing power of their money — usually to the detriment of the people. However, he fails to identify or to describe a governmentally manipulated monetary system that works better than, or even as well as, the gold-coin standard accompanied by a well-functioning credit system, although as an example, he offers Brazil, which used the price of gold as an index to regulate its fiat paper money supply.
     Under the gold-coin standard, the government does not regulate the quantity of gold coins produced. However, it often intervenes to restrict the quantity of bank notes issued, although such intervention is not necessary and probably undesirable as it can distort the markets. Market forces decide the quantity of gold coins minted and gold coins melted. When the government does not intervene, and to some extent, even when it does, market forces regulate the quantity of bank notes issued.
    Whether bank notes and government notes[8] are convertible or inconvertible to full-weight gold coin, Weston argues that they are money in their own right. They are real money and are not merely forms of credit money. True, they are used as a medium of exchange. Also, when they are inconvertible, they nearly always become the unit of account, especially if the government makes them legal tender. However, real money like full-weight gold or silver coin performs one monetary duty that these notes cannot perform. That is, full-weight coin not only discharges debt, it also extinguishes debt because it is no one else’s liability. Bank notes and government notes can only discharge debt. They do so by passing the obligation to another, which is ultimately the person or entity responsible for the note.[9] For example, the US government is the responsible party for today’s federal reserve note. Contrary to Weston’s assertion, bank notes and government notes are not real money; they are credit money and cannot extinguish debt.
    Weston rejects the notion that bills of changes and checkable deposits are money. According to him, they do not have the effect as bank notes and do not increase the quantity of money. Today, as checkable deposits far exceed bank notes as money in industrialized countries, most monetary disturbances like inflation comes from changes in checkable deposits than fluctuation in bank notes.
    Therefore, Weston’s quantity theory of money ignores commercial money, real bills of exchange, as part of the quantity of money. Like bank notes, commercial money is a form of credit money that can be used to purchase goods and discharge debts. Unlike bank notes, commercial money has a specific life, usually 90 days or less, before it expires. Commercial money often exceeds bank notes in quantity and even exceeds the quantity of coins and paper money. If the quantity of money is the sole determinant of the value of money, other things being equal, as Weston asserts, or even the primary determinant, then how can he ignore commercial money? Nevertheless, Weston rejects the notion that bills of exchange are money and, therefore, need no consideration as part of the quantity of money or any quantity of money theory.
    Likewise, Weston’s quantity theory of money also ignores checkable deposits, checkbook money, as part of the quantity of money. Like bank notes, checkable deposits are a form of credit money that can be used to purchase goods and discharge debt. Unlike bank notes, which can pass through many hands before returning to a bank, checks usually pass through only one or two hands before returning to a bank. The major difference between a bank note and checkbook money is that a bank note is an order drawn on a bank to transfer gold from the bank’s account to the bearer and a check is an order to transfer gold from the drawer’s account to bearer. In Weston’s time (1884), in the United States, checkable deposits exceeded bank notes and coin in purchasing goods and discharging debt. He acknowledges that checks are used for most transactions. Moreover, under fractional reserve banking, which was practiced in his day as it is today, checkable deposits exceed species, commercial money and in Britain bank notes and in the United States silver dollars and US notes held by the bank; thus, they exceed what Weston considers real money. Any quality of money theory that ignores checkable deposits is a highly deficient theory. Nevertheless, Weston rejects the notion that checkable deposits are money and, therefore, need no consideration as part of the quantity of money or any quantity of money theory.
    A bank note is merely a check that a bank writes on itself. (Under the system advocated by Weston as modeled after the British system after 1844, this is not the case. Under the British system, what were called bank notes were similar to gold certificates issued in the United States. Whereas gold certificates were fully backed by gold, a fraction of the British notes was backed by nontradable government securities. Like gold certificates, they were warehouse receipts promising to pay the bearer in gold. Unlike US gold certificates, which were not legal tender, British notes were legal tender. Although Weston implies that making bank notes legal tender makes them real money, he seems to accept gold certificates as real money though they were not legal tender.) A bank note, even if it is merely a warehouse receipt, is a credit instrument because it is someone else’s liability. Weston rejects the notion that bank notes are credit instruments: a check that the issuer writes on itself to pay the bearer money, i.e., gold coin. To him, bank notes are money in their own right and are not promises to pay money, i.e., gold coin.
    An interesting note cited by Weston is that John Stuart Mills mused that under the right conditions, deposits and checks might replace currencies altogether. Weston thought that such a replacement was absurd. However, today, most countries are moving to eliminate currency and to force people to use bank deposits and checks, preferably with debit cards instead of paper checks. If this happens, the quantity of money, according to Weston’s theory, goes to zero: Money would cease to exist by his definition of money. Then what would fix the value of gold bullion?
    Weston displays inordinate confidence in the government to manage the country’s monetary system. As the history of the last 100 years shows, governments are highly incompetent in managing their monetary systems if the objective is to avoid inflation, hyperinflation, panics, depressions, recessions, and other economic and monetary disturbances and disasters. If the objective is to transfer wealth and power from the common people to the rich and powerful, they has been highly successful.
    When his quantity theory of money fails, Weston has an out, which is “everything else being equal.” When it fails, it is because “everything else is not equal.”
    In conclusion, Weston argues that the value of gold bullion does not control the value of gold coin or paper money kept at par with it. To the contrary, the opposite is true: The maximum value of gold bullion fluctuates with and is regulated by the value of gold coin and paper money at parity with gold coin. Moreover, the value of the monetary unit depends, other things being equal, on the quantity of monetary units, both coin and paper money.
    Weston errs when he claims that the value of the monetary unit gives gold bullion its value. To the contrary, the value of gold bullion gives the monetary unit its value. The value of gold preceded its use as money, and its use as money preceded its use as coin. Weston confuses value with price. The monetary unit gives gold its price, which is objective, but it does not give gold its value, which is subjective.

Endnotes:
1. See “What is the Gold Standard” by Thomas Allen.

2. See “Is the Price of Gold Fixed Under the Gold Standard” by Thomas Allen.

3. See “The U.S. Note, 1862-1879" by Thomas Allen.

4. See “National Banking System” by Thomas Allen.

5.  See “The Silver Dollar 1873-1900" by Thomas Allen.

6. See “Real Bills Doctrine” by Thomas Allen.

7. See “Differences Between Real Money and Fiat Money” by Thomas Allen.

8. See "Difference Between Bank Notes and Government Notes" by Thomas Allen.

9. See “Extinguishing Debt” by Thomas Allen.

Copyright © 2017 by Thomas Coley Allen.

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America’s Adulteration of the Gold Standard

America’s Adulteration of the Gold Standard

Thomas Allen

    Between 1879, when the United States returned to the gold standard, and 1914, when World War I began, was the peak of the gold-coin standard. However, a pure gold coin standard did not exist. Perhaps the United States had the most adulterated gold standard among the major countries. The United States adulterated the gold standard with various forms of fiat money.
    In 1789, Congress adopted a silver standard with a bimetallic silver-gold system. It defined the dollar as 371.25 grains of fine silver. It fixed the silver-to-gold exchange rate at 15 to 1 (the value of 15 ounces of silver equaled the value of 1 ounce of gold).  This ratio overvalued silver relative to gold. Thus, gold coins did not circulate.
    To encourage the circulation of gold coins, Congress changed the silver-to-gold ratio from 15 to 1 to 16 to 1 in 1834. It did so by reducing the weight of gold in a dollar to 23.20 grains of fine gold from 24.75 grains. Three years later it changed the weight of gold in the dollar to 23.22 grains of fine gold. (Thus, a $10 gold coin with 232.2 grains of fine gold was equivalent as legal tender to 10 silver-dollar coins with a total of 3721.5 grains of fine silver.) These changes placed the United States on a de facto gold standard. As the dollar continued to be defined as 371.25 grains of silver, the United States remained on a de jure silver standard. (They remained of a de jure silver standard until 1900 when Congress changed the definition of the dollar to 23.22 grains of fine gold.)
    In 1837, Congress changed the gold content of the dollar to 23.22 grains. It remained at this weight until 1933 when the United States abandoned the gold standard.
    In 1863, Congress enacted the National Banking Act. A key part of the Act was requiring banks charted under the Act to secure their bank notes with U.S. government bonds. (Later bank notes of State-chartered banks were taxed out of existence.) Thus, the Act guaranteed a market for U.S. government bonds. As a result, bank notes represented U.S. government bonds instead of the gold value of goods on which real bills of exchange were drawn — the real bills doctrine. Bank notes did not increase or decrease in response to the market demand for them pursuant to the real bills doctrine. They increased and decreased in response to the expansion and contraction of U.S. government debt. (As hard as it is now to believe, there were times when the U.S. government’s debt actually decreased.)
    The first major adulteration came in 1862 when Congress authorized the issue of legal-tender government notes, called U.S. notes and nicknamed greenbacks. These notes immediately became undervalued relative to gold. Thus, the United States quickly converted to the U.S. note standard.  (The West Coast remained on the gold coin standard. In the East, gold traded at a premium to U.S. notes. In the West, U.S. notes were discounted against gold.)
    After reducing the quantity of U.S. notes during the late 1860s and early 1870s, Congress fixed the quantity of U.S. notes at $346,681,000. It required the Secretary of the Treasury to maintain this level.
    Pursuant to an 1875 law, U.S. notes became redeemable at par with gold on January 1, 1979. In anticipation of redemption, the U.S. government acquired enough gold to back about a third of the U.S. notes.
    After U.S. notes became redeemable in gold, U.S. notes remained a fiat currency for two reasons. First, the government instead of the markets determined the quantity issued. Second, they were never fully backed by gold.
    The next major adulteration came in the form of the silver dollar. With the Coinage Act of 1873, Congress ended the free coinage of silver. (This Act became known as the Crime of  ’73.) Ending the free coinage of silver ended bimetallism in the United States. However, under the Act, silver dollars continued to be full legal tender in unlimited amounts. (No rational person would have used silver dollars to pay a debt when this law was enacted. Then the silver content of a silver dollar was worth more than a dollar in gold, which was worth more than a U.S. note dollar.)
    Soon after the enactment of this law, the value of silver began to fall relative to gold. Thus, if the free coinage of silver had remained, the United States would have returned to the silver standard.
    Because of the fall in the value of silver, the sliver mining interest, greenbackers (people who wanted the country to remain on the irredeemable U.S. note standard), populists (most of whom came out of the greenbackers), and debtors agitated for the free coinage of silver at the 16 to 1 ratio. In response, Congress passed the Bland-Allison Act in 1878.
    The Bland-Allison Act ordered the Secretary of the Treasury to buy silver bullion and coin it into silver dollars. It declared the silver dollars legal tender. Moreover, they were not directly redeemable in gold. It required the Secretary to buy between $2 million and $4 million of silver bullion each month for coinage.
    Although each of these silver dollars contained 371.25 grains of silver, they were fiat money — albeit expensive fiat money. Instead of the markets deciding the quantity of silver dollars to issue, Congress and the Secretary of the Treasury decided. Furthermore, the monetary value of a silver dollar exceeded the value of its silver content. Unlike silver dollars coined under free coinage, these silver dollars were the property of the U.S. government. (Silver dollars coined under free coinage were the property of the person presenting the silver bullion for coinage.)
    In 1890, Congress revised the Bland-Allison Act with the Sherman Act, also called the Silver Purchasing Act of 1890. The Sherman Act created a new fiat money: legal-tender Treasury notes of 1890. It ordered the Secretary of the Treasury to buy 4.5 million ounces of silver bullion each month at the market price with Treasury notes until silver reached $1.29 per ounce. This was the price at which 16 ounces of silver had the same value as 1 ounce of gold, i.e., the 16 to 1 ratio. The purchased bullion was coined into silver dollars as necessary to redeem the Treasury notes. However, the Secretary had the discretion to redeem them in gold. In 1893, Congress repealed the silver purchasing provision of the Sherman Act and by that the issue of Treasury notes.
    With the enactment of the Gold Standard Act in 1900, Congress placed the United States formally and clearly on the gold standard. It defined the dollar as 23.22 grains of gold. It required the redemption of U.S. notes and Treasury notes of 1890 in gold only. Thus, it converted Treasury notes into government notes redeemable in gold. Treasury notes were to be replaced gradually with silver certificates. As silver dollars became convertible in gold on demand, the Act made the silver dollar a subsidiary coin like dimes, quarters, and half-dollars. However, silver dollars remained full legal tender. However, even with the enactment of the Gold Standard Act, the silver dollar because of its legal-tender status remained a fiat currency along with the U.S. note.
    The monetary system of the United States began as a bimetallic silver-gold system with the dollar defined as 371.25 grains of silver. Between 1862 and 1879, the United States were on the fiat U.S. note monetary standard. As long as the United States remained on the gold standard, the U.S. note and the silver dollar adulterated the gold standard. The United States never operated on a pure gold coin standard.

Copyright © 2015 by Thomas Coley Allen.

Gold Confiscation

Gold Confiscation

Thomas Allen

    Many American buyers and potential buyers of gold express concern about the U.S. government confiscating gold. This fear is legitimate because rogue governments like the U.S. government can be highly unpredictable and destructive. It can steal not only gold but any thing else that the rulers want.
    Nevertheless, gold confiscation is not likely. Today’s monetary system differs greatly from that of 1933 when President Roosevelt’s great theft occurred. Then gold was the money. Gold coins actually circulated and were used for buying and selling. Federal reserve notes, U.S. government notes, and national bank notes were redeemable in gold coin on demand.
    Today governments officially shun gold and pooh-pooh it as money. Although their central banks hoard large quantities of gold, governments deny that it has any monetary value. It is a barbaric relic that used to interfere with their fiat monetary dreams and deserves to be banished forever from the monetary system. To confiscate gold today would be an admission that they have been wrong for the past eight decades. Moreover, today people who distrust government hold most of the gold outside investment houses, banks, and industry. They would not likely surrender it to the government.
    When Roosevelt stole the people’s gold, his theft was easy. The U.S. government and the Federal Reserve held 93 percent of the country’s monetary gold as trustees for backing gold certificates, federal reserve notes, and national bank notes. With the $100 exemption,[1] he did not have to take any gold coins held by individuals.
    The monetary statistics presented in this article are from Banking and Monetary Statistics, 1914-1941, published by the Board of Governors of the Federal Reserve System. Section 11, “Currency,” Table No. 110, “Currency in Circulation — By Kind, Monthly, 1860-1941,” page 412, gives the total currency in circulation for February 1933 as $6258 million. Of this amount, gold coins accounted for $284 million; gold certificates, $649 million; United States notes, $301 million; federal reserve notes, $3405 million; and national bank notes, $861 million.
    On page 506 of Section 13, “United States Government — Treasury Finance and Government Corporations and Credit Agencies,” the gold reserves for backing United States Notes are $156 million. Table No. 156, “Analysis of Changes in Gold Stock of the United States, Monthly, 1914-1941,” page 537, gives a monthly average gold stock of $4093 for February 1933.
    For February 1933, the U.S. government held $156 million in gold to back U.S. notes. It also held $649 million in gold to back gold certificates. Thus, the U.S. government held $805 million in gold. Federal Reserve Banks held $3004 million in gold, and $284 million in gold coins were in circulation. These give a total monetary gold stock of $4093.
    Of the $4093 million of the monetary gold, the U.S. government and Federal Reserve held $3809 million in gold or 93 percent of the country’s monetary gold. The people held $284 million in gold coins or about 7 percent of the monetary gold. If the coins were roughly evenly distributed among the population, each person would have had between $2 and $3 in gold coins (c. 123 million population). At this time the smallest gold coin in circulation was $2.50.
    As Roosevelt’s confiscation order allowed each person to keep $100 in gold coins, he did not have to steal any coins that the public held. Between the Treasury and the Federal Reserve, he already had nearly all the gold. All he needed to do, and what he did do, was to violate the U.S. government’s, the Federal Reserve’s, and national banks’ contracts with the people by voiding the redemption clauses in the law and on the paper money.
    Since the U.S. government made using gold coins and gold certificates as money illegal, if a person who held them wanted to spend them, he had to exchange them for federal reserve notes, U.S. notes, or silver coins. Consequently, gold ceased being a medium of exchange in the United States.

Endnote
1. Franklin D. Roosevelt, 34 ‒ Executive Order 6102 ‒ Requiring Gold Coin, Gold Bullion and Gold Certificates to Be Delivered to the Government, April 5, 1933,  http://www. presidency.ucsb.edu/ws/index.php?pid=14611&st=&st1=#axzz1Kq4ZdySU, April 28, 2011, from John T. Woolley and Gerhard Peters, The American Presidency Project [online], Santa Barbara, CA. Available from World Wide Web: http://www.presidency.ucsb.edu/ ws/?pid=14611.

Copyright © 2011 by Thomas Coley Allen.

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Extinguishing Debt

Extinguishing Debt

Thomas Allen

    Commodity money, such as gold and silver, is real money. Real money is a medium of exchange that extinguishes debt and other financial obligations. Credit money, such bank notes, government notes, gold certificates, checks, and bills of exchange, is not real money. Credit money does not extinguish debt or other financial obligations. It merely discharges the debt or obligation by passing it to another person or entity.
    Although checks, bank notes, government notes, and certificates, are used as mediums of exchange, they are not real money themselves. Only real money can extinguish debt. They are promises to pay money. Under today’s monetary system, the issuer has no intentions of keeping that promise. Therefore, under today’s monetary system only national bankruptcy via hyperinflation or repudiation can extinguish debts.
    When a person buys groceries, he can pay with full-weight gold coins (assuming the gold standard) or with a check or bank note. If he pays with gold coins, no further obligation exists. The grocer has received something that is no one else’s obligation, gold coins. If the buyer pays with a check or bank notes, the buyer’s obligation to the grocer has been discharged. However, it has not been extinguished. The grocer has received a promise to transfer gold to the grocer. The obligation is not extinguished until the grocer presents the bank notes or check to the bank that issued them, and the bank converts the check or bank notes to gold coins.
    Likewise, with debt, a borrower extinguishes the debt when he pays with gold coins. He has paid the lender with money that is no one else’s obligation. If he pays with bank notes or check, he has merely discharged the debt. It has not been extinguished. It has been transferred to the bank. The debt is not extinguished until the lender presents the check or bank notes to the issuing bank, and the bank converts them to gold coins.
    If the buyer or borrower uses governmentally issued notes, like U.S. notes or gold certificates, he has discharged his financial obligation to the grocer or debt to the lender. However, the financial obligation or debt has not been extinguished. It has been passed to the government. The obligation or debt is not extinguished until the government redeems its notes and certificates in gold, that is, commodity money.
    In the United States between 1879 and 1933, gold certificates (first issued in 1882), bank notes, and government notes, which were called U.S. notes and nicknamed greenbacks, were redeemable in gold on demand. (U.S. notes were legal-tender; the other two were not.) If a debtor used one of these forms of credit money to pay his debt, he discharged his debt, but he did not extinguish it. If he paid with bank notes, the obligation was transferred to the issuing bank. If he paid with gold certificates or U.S. notes, he transferred the obligation to the U.S. government. The debt was not extinguished until the bank note, certificate, or greenback was converted to gold. (This conversion permanently retired the bank note and gold certificate. However, it did not permanently retire U.S. notes. The Secretary of the Treasury had a statutory obligation to reissue U.S. notes after they were redeemed.)
    Under today’s paper monetary system, debts and other financial obligations are never extinguished. They are merely passed from one person to another and eventually become an obligation of the government or its central bank. (In the U.S. all debts become obligations of the U.S. government as federal reserve notes are by law obligations of the U.S. government. Since the Bank of England is a department of the British government, its bank notes are obligations of the British government.) Nevertheless, these debts will eventually be extinguished.
    Under a fiat monetary system, debts may be extinguished in several ways. First and most likely, is to inflate the debt away by destroying the value of the money and pushing it to zero. (The Continental, assignat, the Hungarian inflation of 1945-46, and, more recently, the Zimbabwe dollar are examples of this phenomenon.) However, this approached is often forestalled by replacing one fiat paper money with another fiat paper money. (This has occurred often in Latin American countries.) Even countries that have destroyed their paper money with hyperinflation usually choose to replace the old paper money with new paper money. Another way debt can be extinguished under a fiat paper money system is for the issuing country to die as the result of war. (That is what happened to debts denominated in Confederate dollars. When the Confederate States of America died as the result of the War for Southern Independents, their money, which was not legal tender, also died. Along with the death of the money was the extinction of debts denominated in Confederate dollars.) Countries may also extinguish debt by repudiating them as monarchs of the Middle Ages occasionally did. Another approach is to return to a commodity monetary system, such as the gold standard, where paper money is convertible in the monetary commodity. (Great Britain took this approach some years after the Napoleonic Wars when it returned to the gold standard. The United States returned to the gold standard in 1879 after leaving it in 1861.)
    Thus, debt can be extinguished in several ways. One is by reputation. Another is by the death of the currency from inflation or war. The best and least painful way to extinguish debts is with commodity money, such as gold. That is, by paying debt with money that is no one else’s obligations.
    Commodity money, such as gold and silver, extinguishes debts and other financial obligations. Credit money, such as checks, bank notes, government notes, and bills of exchanges, cannot extinguish debts and other financial obligations. They discharge debts and financial obligation by transferring them to another.
    (Bills of exchange were another form of credit money used under the gold standard. A retailer accepted a bill of exchange from a wholesaler. The wholesaler could use the bill to discharge his debt to the manufacturer. When the wholesaler paid with the bill, he was no longer in debt to the manufacturer. He had discharged his debt to the manufacturer with a debt, the bill, which promised to pay gold by a specific date. The wholesaler paid his debt by passing it to the retailer. The debt still existed. Now the retailer had the obligation to extinguish the debt by paying gold to the manufacturer instead of to the wholesaler. When the retailer paid the bill in gold to the manufacturer, he extinguished the debt. The financial obligations represented by the bill, and the bill itself, ceased to exist.)

Copyright © 2016 by Thomas Coley Allen.

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The Silver Dollar 1873–1900 – Part 4

Gold Standard Act and Conclusion
Thomas Allen

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

Gold Standard Act
With the enactment of the Gold Standard Act, the monetary system of the United States was formerly and clearly placed on the gold standard in 1900. This law declared that the gold dollar was the standard unit of value. It required the Secretary of the Treasury to maintain parity of all forms of money, which included the silver dollar and silver certificate. It provided for the redemption of U.S. notes and Treasury notes of 1890 in gold only and prohibited their reissue except in exchange for gold. Thus, it converted these Treasury notes, which had been used to buy silver, into government notes redeemable in gold. The law provided for silver certificates in small denominations to replace gradually the Treasury notes of 1890. Silver certificates were restricted to $10 and smaller. Also, it authorized the issuance of gold certificates, but unlike U.S. notes and gold coins, they were not made legal tender.

Although the Act did not affect the legal-tender status of the silver dollar (it remained full legal tender), it implied that by now the silver dollar had been reduced to credit money, a subsidiary coin for gold. It was no longer money in its own right. It had ceased being fiat money. The Secretary of the Treasury had to maintain the value of the silver dollar to equal a dollar in gold. He had to redeem silver dollars in gold if necessary to maintain parity.

As White notes, the silver dollar made an expensive fiat money.[1] However, it did limit the government’s ability to inflate much more than paper fiat money if the government decided not to maintain parity with gold. Its intrinsic value would be reached much sooner than paper. With silver, the government could only cut the value (purchasing power) of the currency by 25 to 50 percent. With paper, it could reduce the value to zero. At least the silver dollar gave the people some protection that the greenback never could.

Conclusion
Friedman and Schwartz sum up the silver dollar era:

The fear that silver would produce an inflation sufficient to force the United States off the gold standard made it necessary to have a severe deflation in order to stay on the gold standard. In retrospect, it seems clear that either acceptance of a silver standard at an early stage or an early commitment to gold would have been preferable to the uneasy compromise that was maintained, with the uncertainty about the ultimate outcome and the consequent wide fluctuations to which the currency was subjected.[2]

Although the last three decades of the nineteenth century were deflationary, this era was one of the greatest periods of economic growth for the United States.

A highly important question remains to be answered: Why did the gold value of silver decline so much after 1873?

Friedman and Schwartz assert that the supply of and demand for silver explains its decline, “The reasons for the price decline seem fairly clear: on the supply side, rich new mines were opened in the American West, and there was a world wide increase in productivity; on the demand side, a number of European countries shifted from a silver or bimetallic to a gold standard and sharply reduced their monetary use of silver.”[3]

The monometallists, advocates of the single gold standard of this era, claim that the increase in the supply of silver caused its fall in value. However, the fall in value began before the world’s silver stock had greatly increased. Moreover, gold production was much greater than that of silver. To which the monometallists reply that the fall resulted from an anticipation of an increase in supply.

Even today, the supply argument seems weak. In recent years (decades), the increase in the supply of gold has been greater than that of silver. During this time, the demand for silver seems to have been much higher as its usage has been higher. Yet the value of silver generally lags that of gold.

Laughlin opines that the abundance of gold caused silver to lose value relative to gold.[4] With the discovery of gold in America, enough gold became available to supplant silver coins. People preferred gold to silver because it had more value per unit weight. As the demand for gold grew, so did its value. As the demand for silver fell, so did its value. Moreover, the supply of silver began increasing after 1872.

The bimetallists, advocates of the silver-gold system with a legally fixed exchange rate between the two, claim that “demonetization” caused silver’s fall in value. They point to Germany ending the free coinage of silver in 1871, which glutted the market with silver. This action forced France and the other members of the Latin Union to abandon the silver standard, i.e., to end the free coinage of silver. The United States ended the free coinage of silver in 1873. During the 1870s other European countries ended their silver standards or bimetallic silver-gold system and adopted the monometallic gold standard. To the bimetallists, ending the free coinage of silver and by that discontinuing the use of silver as standard money caused its decline in value.

One result of discarding the silver standard was an increase in demand for gold coins. This increased demand for gold coins would account for some of the decline in the value of silver in terms of gold. Not only were countries replacing the silver standard with the gold standard, but they were also replacing fiat paper monetary standards with the gold standard.

Friedman and Schwartz opine that if the United States had reverted to the silver standard, the deflation of the 1880s and ’90s would have been avoided or at least moderated. Inflation would not have occurred. Prices would have remained stable.

The abandonment of the silver standard around the world reduced the demand for silver. As countries moved onto the gold standard, the demand for gold increased. Thus, the value of silver was pushed down and that of gold was pushed up.

If the United States had gone onto the silver standard, they would have abated much of the value change between the two metals. While reducing the demand for gold, they would have increased the demand for silver. If the United States were on the silver standard, other countries then on the silver standard might have remained on the silver standard instead of converting to the gold standard. Increasing the monetary demand for silver and decreasing it for gold would have greatly lessened the rise in the value of gold and the fall in the gold value of silver. Thus, the deflation during this era would have been significantly diminished if not eliminated.[5]

Although silver ceased to be used as standard money in most countries (China and some Latin American countries being notable exceptions), it was still used in subsidiary coins in most countries and as fiat money in the United States. If merely ending the use of silver as standard money caused its fall in value, why did gold soar in value (in terms of standard fiat currencies) when its last legal connection to money was severed in 1971? Whatever explanation used to explain silver decline in value after 1873 needs to be able to explain gold's rise in value after 1971.

(Charles Rist offers this explanation for why silver’s value declined and gold’s value rose when their free coinage ended. When the free coinage of silver ended, people replaced silver with gold. Gold adequately performed all the basic functions of money. Silver was not needed to perform any of these functions. Therefore, the monetary demand for silver declined. As demand fell, so did its value. When the free coinage of gold ended, people replaced gold with irredeemable paper money. Irredeemable paper money does not perform all the basic functions of money. As it nearly always depreciates in value, it fails as a store of value. Gold continued to perform a monetary function as a store of value. Therefore, a monetary demand for gold remained after its free coinage ended. Thus, when gold replaced silver, it fulfilled all of silver’s monetary functions. When irredeemable paper money replaced gold, it failed to fulfill all of gold’s monetary functions.[6])

The pro-silver folks are not the sole blame for the deleterious effects of the silver dollar. For the most part, they did not want fiat silver money. They wanted commodity silver money. They wanted to open the mint to the free coinage of silver.

Most of the blame belongs to the pro-gold and anti silver folks. To thwart the pro-silver folks’ attempt to allow the free coinage of silver, the pro-gold faction compromised. These compromises resulted in the Bland-Allison Act and the Sherman Act. Thus, the pro-gold folks were mostly responsible for the detrimental effects of fiat silver money between 1878 and 1900.

Politics prevented them from completely abandoning silver as legal tender. Allowing the free coinage of silver at the then-legal ratio of 16 to 1 would have reverted the country to the silver standard. Ardently, they opposed the silver standard; they wanted the gold standard that most of the world was on or moving toward.

Instead of compromising by making silver fiat money, the pro-gold should have compromised by allowing the free coinage of silver and raising the legal ratio above the market ratio. That would have preserved the gold standard until the legal ratio fell below the market ratio. However, when amendments were offered to change the ratio, they were voted down. Even better than changing the ratio, would have been to eliminate it. Elimination of the ratio was never seriously considered.

Many politicians of this era suffered from the same false delusion that has inflicted politicians throughout the ages. The ancient myth that the king’s (Congress’) edict gives money its value enthralled many of these politicians. Congress’ decree could force both gold and silver coins to circulate together at the current ratio of 16 to 1. After all, Congress had declared them to have an equal value at this ratio.

Not all politicians suffered from this superstition. Many knew that free coinage of silver at the current legal ratio of 16 to 1 would cause overvalued silver to circulate and send gold into hiding or to Europe. Most inflationists and pro-gold folks knew this outcome. It is this outcome that the inflationists wanted. It is this outcome that the pro-gold folks did not want.

In Open Mints and Free Banking, William Brough gave the best solution to the silver problem. His solution was to eliminate the legal exchange ratio and open the mint to the free coinage of silver. Thus, the mint would coin all gold and silver brought to it for coinage. Eliminating the ratio and allowing the free coinage of silver would have allowed the people themselves to decide how many silver coins and gold coins that they wanted. Both coins could have circulated together without either driving the other out of circulation. Both could have circulated side-by-side without the inflation and following depression caused by the Treasury notes of 1890. If Congress had adopted Brough’s recommendation, it would have eliminated most of the problems associated with silver in between 1878 and 1900. The most likely outcome would have been silver coins being used for day-to-day retail buying and selling and for wages. Gold would have been used for the export-import business, large purchases and investments, and long-term savings. The drain on the Treasury’s gold would have been significantly lessened. As no legal exchange rate existed between gold and silver, Gresham’s Law would not have been at work converting overvalued silver into gold for export as occurred under the Bland-Allison Act and especially under the Sherman Act. The money supply would have more closely matched the actual needs of the people.

Four other changes were also desirable. First, U.S. notes, greenbacks, should have been permanently removed from circulation as they were redeemed for gold or paid into the Treasury. Second, bank notes should have been issued based on and backed by real bills of exchange instead of U.S. governmental securities. Third, the U.S. government should have ceased issuing gold and silver certificates and should have retired those redeemed. Banks and other private institutions should have assumed the task of issuing gold and silver certificates. Fourth, all legal tender laws should have been repealed.

An argument used by the silverites was that the U.S. government should not discriminate against either metal. As long as it had a legal ratio, it would always discriminate against the undervalued metal in favor of the overvalued metal. At 16 to 1, silver was overvalued and gold was undervalued. At this ratio, silver coins would have quickly replaced gold coins in circulation. If the silverites really wanted to eliminate discrimination, they should have supported the elimination of the legal exchange ratio. Then the markets would have decided how many coins of each metal were needed. As they wanted to maintain the ratio of 16 to 1, they wanted the U.S. government to discriminate against gold. If the silverites wanted silver money for the sake of having silver money, they would have accepted an offer to eliminate the legal ratio. If it were currency depreciation that they wanted, they would have rejected the offer. As the offer seems never to have been made, we may never know for sure their preference. However, based on their comments and actions, they probably would have rejected the offer.

According to Rothbard, the silver movement destroyed the hard money, limited government, laissez-faire political party, the Democratic party of Jefferson, Jackson, and Cleveland.[7] It ushered in an era, which continues to this day, of statist control of both the Republican and Democratic parties. Until 1896, the Democratic party stood for limited government with minimal governmental intervention in economic and social affairs. For the Democrats, remaking man was not a function of government.

The Republican party was the party of the progressives, pietists, and Hamiltonians (advocates of central banking, governmental protection and promotion of big business, and protective tariffs). It sought to use government to mold man into perfection. It was the party of the greenback and inflation, prohibition of liquor, the public school system to remake mankind, blue laws, Protestantization of Catholics, and high tariffs. “. . . the Republicans glorified in calling themselves throughout this period [i.e., last half of the nineteenth century] ‘the party of great moral ideals,’ while the Democrats declared themselves to be ‘the party of personal liberty.’”[8]

After Cleveland won in a landslide in 1892 and the Democrats captured both houses of Congress, the Republican party had to remake itself or remain a minority party. It remade itself. It abandoned the prohibitionists, modified its immigration policy, and moved toward the center away from its extreme pietism.

Meanwhile, the Democratic party began to fractionalize. Pietism had come into the party in the South with a call for prohibition. In the West where the silver mines were, the Democrats adopted a pro-silver stance. Moreover, people blamed Cleveland for the Panic of 1893 although it resulted from the actions of the Republican Harrison administration. Seeing that the hard-money laissez-faire Cleveland faction was weak, the pietist faction in the South and the silverites in the West united under William Jennings Bryan to gain control of the Democratic party. Thus, the progressives, pietists, and Hamiltonians gained complete control of the Democratic party, which was once the party of liberty, and have never since loosened their grip.

J.P. Morgan and other financiers through Henry Cabot Lodge offered to support the Republican party if it supported the gold standard, which was Cleveland’s basic economic issue. Otherwise, they would support Bryan. William McKinley accepted the deal, and the Republican party abandoned its traditional easy money policy.

The pietist-silverite takeover of the Democratic party caused many Democrats to sit out the election. Others voted for McKinley. Since the election of McKinley, both parties and all presidents have been statists and progressives in varying degrees. Voter turnout has trended down ever since.

The most devastating and long-lasting effect of the silver dollar fiat money was the utter destruction of a party of liberty in the United States. Since 1896, no party advocating laissez-faire economics, limited government, personal responsibility, and personal liberty has won the presidency or taken control of either house of Congress. Only a few such candidates have won congressional elections. State governors and legislatures have not fared any better.

[Editor’s note: The appendix, which contained eight tables of monetary statistics, and the list of references are omitted.]

Endnotes
1. Horace White, Money and Banking (Boston, Massachusetts: Ginn & Company, 1896), p. 204.

2. Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867-1960 (Princeton, New Jersey: Princeton University Press, 1963), pp. 133-134.

3. Ibid., p. 114.

4. J. Laurence Laughlin, The Elements of Political Economy (New York, New York: American Book Co., 1887), p. 311.

5. Friedman and Schwartz, p. 134.

6. Charles Rist, The Triumph of Gold, trans. Philip Cortney (New York, N.Y.: Philosophical Library, 1961, pp. 122-124, 151-153.

7. Murray N. Rothbard, A History of Money and Banking in the United States: The Colonial Era to World War II (Auburn, Alabama: Ludwig von Mises Institute, 2005), pp. 175-179.

8. Ibid., p. 174.

Copyright © 2010 by Thomas Coley Allen.

Part 3

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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 http://www.themoneymasters.com/monetary-reform-act/.

I have italicized the 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 the use of 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 absence 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 accounts 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 this 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 Reserve's 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. The only activity that the Federal Reserve performs that the Department of the Treasury would not be doing seems to be 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, sets 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 withdrawing 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 do 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 of allowing the government to own the banks. In Footnote 13, he writes that “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, 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 that “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 any time. 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 the 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 taxpayers.

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 the 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 to 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 during 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 of 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.

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

2. Ibid.

Copyright © 2010 by Thomas Coley Allen.

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