Rist on Mollien’s Ideas About Bank Notes

Rist on Mollien’s Ideas About Bank Notes

Thomas Allen

    In 1938, Charles Rist  (1874-1955) wrote History of Monetary and Credit Theory from John Law to the Present Day (translated by Jane Degras, New York: Augustus M. Kelly Publishers, 1966) in which he reviews Count Mollien’s ideas about bank notes. Rist was a French economist, who was of the Banking School as opposed to the Currency School. [Under the gold standard, banking philosophies generally fell into either the banking school or the currency school. The banking school “holds that as long as a bank maintains the convertibility of its bank notes into specie (gold), for which it should keep ‘adequate’ reserves, it is impossible for it to over issue its bank notes against sound commercial paper with fixed short term (90 days or less) maturities.”[1] Its position is also called the “Banking Principle” or “Principle of Fullerton.” To the banking school, bank notes are merely circulating credit instruments. Although they can be exchanged for gold, they are not intended to be warehouse receipts for gold. The currency school “maintains that all . . . changes in the nation’s quantity of money should correspond precisely with changes in the nation’s holdings of monetary metal. . . .”[2] Its position is also called the “currency doctrine.” To the currency school, bank notes are merely warehouse receipts and, therefore, should be backed 100 percent by specie. To the banking school, bank notes are claims for new merchandise offered for sale in the markets. Under the currency school, bank notes are claims for gold. Under the currency school philosophy, an elastic currency does not exist; under the banking school, it does.] My comments are in brackets. Referenced page numbers enclosed in parentheses are to Rist’s book.
    Nicolas François, Count Mollien (1758-1850) was a French financier. He worked in the Ministry of Finance from 1774 to 1791 and went to England in 1796 and studied the Bank of England. In 1799, he return to France and again entered the Ministry of Finance. Napoleon frequently consulted him and made him a councillor of state in 1804. In 1814, he retired from public service. Later, he was appointed to the Chamber of Peers. His major writing, which contains his views on money and banking, is Mémoires d'un Ministre du Trésor Public, published in four volumes between 1780 and 1815.
    When Mollien returned to France, he was determined to revamp the French credit system using the English system as his model (p. 92). Mollien wanted to protect the Bank of France from the government, which “was always short of money and anxious to subordinate everything to its political ends” (p. 93). Also, he wanted to protect the bank from its managers, “who were too easily tempted to use it in their own interests” (p. 93).
    Mollien argued that “[a] banking issue should only discount good commercial paper” (p. 93). With the strict enforcement of this restriction, the bank would “avoid the requests of a government always in search of treasury advances, and the cash facilities which the bank directors might ask for their personal affairs” (p. 93). Moreover, “the bank should avoid all speculative paper, all ‘friendly accommodation,’ all ‘fraudulent paper’ or ‘collusive securities’ which do not represent real commercial transactions, and the payment of which is not guaranteed by ‘the share in real money with which each consumer should directly or indirectly furnish it’” (p. 93). Furthermore, the bank should fervently avoid treasury advances of the government because they do not arise out of the ordinary requirements of trade and would return to the bank for repayment (p. 93). That is, bank notes issued to the government for treasury bills are in excess of that needed for commerce, and would, thus, return to the bank for gold. [Today’s governments and banks avoid this problem by making bank notes inconvertible.]
    The essence of Mollien’s concept of the bank note was merely substituting one currency instrument for another already in existence. His concept is correct. When a bank note is issued against good short-term, self-liquidating paper, the bank note is merely substituted for another form of currency. Thus, he held that “[i]f notes are issued against sound bills of exchange, they only substitute a more convenient paper, with all the characteristics of money, for maturities created in the course of trade” (p. 94). His “idea that the note is merely a substitute for commercial money spontaneously created in the course of trade is correct” (p. 94). [Commercial money is short-term {less than 91 days} self-liquidating {the consumer pays the bill with his purchase} real bill of exchange {a bill that represents goods in the process of being sold to the final consumer}. Some economists reject the notion that bills of exchange are money; most of these economists accept bank notes as money like gold coin.]
    However, Mollien believed in the quantity theory of money. If too many bank notes are issued, they declined in value (p. 94). [Presumably, he believed that this is true even if all bank notes are issued against real bills of exchange and gold coin.]
    One significant difference between the Bank of England and the Bank of France as envisioned by Mollien was that the Bank of England held its gold reserves primarily for payments abroad. The Bank of France held its gold reserves primarily to redeem its bank notes (p. 95).
    In addition to bills of exchange that the bank had converted to bank notes, the bank also needed to maintain a reserve of gold coins for the redemption of its notes when redemption is demanded. However, its notes need not and should not be 100 percent backed by gold. Mollien writes:

But it would obviously be an exaggeration of caution to the point of absurdity to ask that the reserve of coin should be equal to the sum of the notes that a bank puts into circulation; if, in addition to the security for the bank-notes represented in the bills of exchange which the bank has discounted, it were to keep in its repositories a sum in coin equal to the notes, the bank's existence would be both impossible and useless, for it could only form this reserve by keeping in a state of stagnation at the very least the capital of its shareholders (p. 95).

He maintains, “The reserve of coin which a bank holds should therefore be measured against the number and the nature of the causes which can make repayments more frequent” (p. 95).
    Rist notes, “It did not occur to Mollien that the note is only a means of making the coin deposited beforehand in the bank circulate” (p. 96). Also, Mollien failed to consider the primary purpose of the gold reserve. "Whereas the gold reserve is the foundation on which the entire activity of the bank is created, Mollien considered it as a way of guaranteeing the convertibility of its notes” (p. 96).
    “Mollien considered notes useful because they economised the use of money” (p. 96). However, this idea conflicted with some of his other ideas. “He thought of the note as a substitute for bills held by the bank; but bills are an addition to metallic money; they are a commercial money spontaneously created to supplement the circulation of coin. In acting as a substitute for bills, notes play the same part as bills: they are an addition to, not a substitute for, the coin in circulation” (p. 96).
    Moreover, Mollien had difficulty in distinguishing between credit used as money and money itself. To him, bank notes were money like gold coin or inconvertible government notes. However, their issue was limited by the quantity of bills of exchange that they replaced (p. 96). [When a debt is paid with credit used as money, that credit money discharges the debt by passing it to another, the person or entity responsible or obligated for the credit money. The debt is not extinguished until the credit money is converted to something that is no one else obligation, such as gold or silver. Therefore, a bank note is credit money that discharges debt by passing it to the issuing bank. That debt is not extinguished until the bank retires the note by converting it to a commodity money like gold or silver.]

Endnotes
1. Percy L. Greaves, Jr., Understanding the Dollar Crisis (Belmont, Massachusetts: Western Islands, 1973), p. 8.

2. Ibid., p. 28.

Copyright © 2017 by Thomas Coley Allen.

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Gold Miners and the Gold Standard

Gold Miners and the Gold Standard

Thomas Allen

    One of the many arguments used against the gold standard is that gold is at the mercy and whim of a single industry: the gold mining industry. The gold mining industry decides how much gold is available. This argument that gold miners decide the amount of gold available for money fails on at least four accounts.
    First, current mining of gold provides only a small fraction of gold available for monetary use. Nearly all the gold ever mined is available. Gold miners typically provide about 2500 tons of gold per year to a world stock of around 155,000 tons.
    Second, when the real bills doctrine and decentralized banking accompany the gold standard, the quantity of paper money (credit money) available does not correspond to the quantity of gold available. Bank notes and checkable deposits can expand and contract to meet the needs of commerce independently of the quantity of gold. Gold mining does not have a monopoly on gold-based money.
    Third, gold’s monetary value depends on the integrity of the monetary unit and its issuer and not just the quantity of money. Having a definite fixed monetary unit is more important than the actions of gold miners.
    Fourth, the profit motive guides gold miners. They have an incentive to provide their customers as much gold as they demand in a cost-effective way. Profits of gold mining increases as output increases and production cost decreases. The desire for profit drives gold miners and not the monetary needs of the country or the desire of gold miners to manipulate the money supply.
    Opponents of the gold standard claim that the markets do not regulate the gold supply. Gold miners usually mine gold as fast as they can. Smart miners do not necessarily mine all that they can as fast as they can. They mine at a rate that maximizes their return. Furthermore, the consumer is the final determinant in the quantity of gold mined by his consumption of gold and gold products.
    Under the gold standard, the markets regulated the quantity of gold coins and gold bullion used as money. If the markets demand more coins, jewelry, flatware, and other items of gold are converted to coins. Gold dealers and others melt gold products into bullion bars and present this gold to the mint for coinage. If the markets decide that too much gold is being used for money, people melt the excess gold coins and use the gold for other purposes, such as gold teeth and jewelry.
    One feature of the gold standard is that it is self-regulating and automatically adjusts to meet the demand for metallic money. Some opponents of the gold standard are convinced that gold miners regulate the supply of gold by how much gold they mine. Gold miners do add to the supply of gold by the amount that they mine. However, unless they are coining their gold, they are not adding to the monetary stock. (The exception is the Rothbard school, which claims that all gold regardless of form — the weight of the metal and not its form makes the money — is part of the monetary stock.) The markets decide how much gold is being used as money. They decide that by the quantity of gold brought to the mint for coinage and by how many coins are melted for other uses. If the value of gold in jewelry, for example, begins to rise in relationship to the value of gold in coins, people will melt the coins and convert them to the more valuable jewelry until the value of the two are brought back in line. If the value of gold in coins begins to rise in relationship to gold in jewelry, people will convert the gold in jewelry into coins until the value of the two are brought back in line. Gold miners may influence the quantity of gold available, but they do not decide how much of the available gold is used as money.       
    Some opponents seem to believe that the gold standard operates like the current fiat-paper-monetary standard where bankers lend new money into circulation. They fear gold miners lending new gold money into circulation. Gold miners could do this, but it is highly unlikely. They would only be lending about 2 percent of the world gold stock. The other 98 percent is available for monetary use without borrowing or lending. Are people really going to borrow that 2 percent?
    Gold miners do not lend newly mined gold into circulation. They spend newly mined gold into circulation by paying their employees, stockholders, bondholders, creditors, and suppliers and also by paying their taxes and utilities.
    Contrary to the claims of opponents of the gold standard, gold miners do not control the quantity of gold available for monetary use. They merely add a small percent to the global gold supply each year. The markets decide how much gold is to be used as money in the form of  gold coins and monetary bullion.

Copyright © 2013 by Thomas Coley Allen.

Returning to the Gold Standard

Returning to the Gold Standard

Thomas Allen

    The following is written for the United States. With minor modifications, it could be applied to most countries.
    Several recommendations have been proposed for returning to a gold standard or a monetary system that incorporates gold. One is returning to the true gold standard. Nearly all of these recommendations require fixing or defining gold at a specific price, generally between $1000 and $10,000 per ounce.
    Because of falsely perceived problems with returning to the true gold standard, several pseudo gold standards have been proposed. One is backing the currency by some arbitrary amount of gold, usually between 5 and 25 percent. Another is to use the price of gold as an index. The central bank expands and contracts the money supply to keep the price of gold within a specific, but arbitrary, range. Related is making gold part of a commodity basket index. Then the central bank expands and contracts the money supply to keep this arbitrary index within an arbitrary range.
    Although the gold exchange standard fell quickly the two times that it was tried, it is still popular in some circles. Presumably, its proponents will make it work this time.
    The following recommendations can return the country to the true gold and silver standards without the problems of the aforementioned recommendations. They take the control of the money from the government and its central banks, the Federal Reserve, and return it to the people where the U.S. constitution originally placed it. These recommendations call for phasing in the gold and silver standards. Many pertain to reforming banking as poor banking practices cause many of today’s economic problems.
    1. All U.S. debt securities held by the Federal Reserve are voided and the Federal Reserve is abolished. The Federal Reserve returns the gold certificates that it holds to the U.S. government. Federal reserve notes are no longer printed unless the U.S. government needs to print more federal reserve notes to pay its existing debts made in terms of federal reserve dollars.
    2. As part of abolishing the Federal Reserve, the U.S. government buys all the stock of the Federal Reserve banks owned by member banks and pays for the stock with federal reserve notes. All member banks receive in federal reserve notes all their reserves held by the Federal Reserve.
    3. All gold held by the U.S. government or the Federal Reserve is distributed equitably among the people who lived in the United States in 1933 or their descendants if they have died. The distribution is in gold coins minted in denominations 5, 10, and 20 pennyweights.
    4. The Federal Deposit Insurance Corporation (FDIC) is phased out. Its coverage could be reduced by one-fifth per year for five years after which it ceases to exist. Any bank could opt out of the FDIC earlier and cease being subject to its regulations.
    5. The U.S. government immediately opens the mint to gratuitous free coinage of gold and silver. Private mints may also coin gold and silver provided the minter and the content of gold and silver of the coin are identified on the coin.
    6. Gold and silver coins replace the federal reserve dollar. The coins are denominated in troy pennyweights of gold or silver. The pennyweight value is stamped on the coin. Also stamped on the coin are the grains of gold or silver that the coin contains. (Also, stamping on the coin the number of grams of gold and silver in the coin is desirable.)
    7. No fixed exchange rate or legal ratio exists between gold and silver. No fixed exchange rate exists between federal reserve dollars and gold or silver.
    8. Legal tender laws are repealed; people are required to accept the type of money (gold, silver, or federal reserve dollars) for which they have contracted.
    9. Sound banking needs to be restored as quickly as possible. Banks issuing banknotes for real bills of exchange need to be physically separated from other types of banking.
    10. Banks issue only gold and silver banknotes and checkbook money to buy real bills. Banks do not issue banknotes or create checkable deposits for any purpose but to buy real bills.
    11. Other banks do not issue banknotes and do not create checkable deposits. They make loans by transferring money from savings and bank capital. Borrowing short and lending long is prohibited.
    12. Banks and others may issue gold and silver certificates provided such certificates are fully backed by gold and silver. The government should not issue certificates.
    13. All banknotes and certificates clearly identify the issuer and whether it is in gold or silver.
    14. The smallest denomination of banknotes and certificates is 50 pennyweights of gold and 100 pennyweights of silver.
    15. The States penalize the issuer of banknotes and certificates that refuses or fails to redeem its banknotes or certificates on demand.
    16. Within 12 months, no new checkable deposits are created in federal reserve dollars; they are in silver or gold. Within 12 months, no new loans are made in federal reserve dollars; they are in silver or gold.
    17. Federal reserve dollars are withdrawn from circulations as debts made with federal reserve dollars are paid off. Debts contracted in federal reserve dollars are paid with federal reserve dollars although the debtor may pay with gold or silver if he so chooses and the creditor willingly accepts.
    18. Banks maintain 100-percent reserves in gold and silver for primary gold and silver demand deposits. Banks that buy real bills maintain 100-percent reserves for derivative demand deposits in real bills and maintain adequate reserves of gold and silver to redeem in gold and silver checks drawn on derivative demand deposits. All other banks maintain 100-percent reserves for derivative demand deposits by transferring money from savings or bank capital to them.
    19. Banks are prohibited from buying government securities, using government securities as reserves, lending money to buy government securities, or accepting government securities as collateral for loans.
    20. Banks do not pay out banknotes or certificates of other banks.
    21. No bank keeps any of its reserves in another bank.
    22. The U.S. government and States keep their money in their own vaults and write checks against money in their vaults. They do not deposit money in banks. The U.S. government and States belong to clearing houses to clear quickly checks, banknotes, and certificates that they receive and checks written on their accounts.
    23. Within 12 months, the U.S. government and States begin paying their employees in physical silver coins and continue to pay them in physical silver coins for at least five years. After five years, they may pay their employees with silver checks or silver transfers to the employees’ checking accounts.
    24. The U.S. governments and the States start collecting taxes in gold and silver within six months. They should continue to collect enough taxes in federal reserve notes to pay their debt obligations made with federal reserve dollars.
    25. Within 30 days, the U.S. government and States cease contracting and issuing securities in terms of federal reserve dollars and start contracting and issuing securities in terms of gold or silver.
    26. All capital gains taxes, sales taxes, and other taxes on the exchange, sell, or purchase of gold and silver in any form that is at least 18 carats or on any other currency are eliminated.
    27. People may make contracts in gold and silver or any other commodity, good, or service, that they choose. Contracts are paid as specified in the contract. If the value of the contract when completed has risen in terms of federal reserve dollars, no taxes are paid on the increase. Tax laws in general are revised so as not to penalize using gold or silver as money.

Copyright © 2014 by Thomas Coley Allen.

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

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

Thomas Allen

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Copyright © 2010 by Thomas Coley Allen.

Part 2 

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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.

Part 1 

More articles on money.

Analysis of the Monetary Reform Act — Part I

Analysis of the Monetary Reform Act — Part I
Thomas Allen

This is the first part of a paper analyzing the “Monetary Reform Act” as it appeared on November 3, 2010. This Act and a description of it can be found at http://www.themoneymasters.com/monetary-reform-act/

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

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

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

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

Step 2: Increases the reserve ratio private banks are required to maintain from 10% to 100%, thereby terminating their ability to create money, while simultaneously absorbing the funds created to retire the national debt.

Mr. Carmack states that “These two relatively simple steps, which Congress has the power to enact, would extinguish the national debt, without inflation or deflation, and end the unjust practice of private banks creating money as loans (i.e., fractional reserve banking). Paying off the national debt would wipe out the $400+ billion annual interest payments and thereby balance the budget.”

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

The preamble of the Act reads:

To restore confidence in and governmental control over money and credit, to stabilize the money supply and price level, to establish full reserve banking, to prohibit fractional reserve banking, to retire the national debt, to repeal conflicting Acts, to withdraw from international banks, to restore political accountability for monetary policy, and to remove the causes of economic depressions, without additional taxation, inflation or deflation, and for other purposes.

As shown below, the Act does not stabilize the price level, retire the national debt, or remove the causes of economic depression. It is merely another fiat monetary attempt to get something for nothing.

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

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

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

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

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

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

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

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

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

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

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

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

Section 7, Future Monetary Growth, requires the Treasury Department to increase the quantity of U.S. notes (outstanding currency plus Treasury deposits) outstanding by 3 percent per year. It accomplishes this goal by paying U.S. notes into the economy “first to retire (or purchase) any future war bonds (issued pursuant to section 8. hereof), then any remaining marketable and non-marketable federal debt (e.g., Federal government agency securities, intra-governmental debt, and fully guaranteed obligations of the government), then, pursuant to appropriation by Congress, to pay for goods, services, or interest.” Any new money that Congress does not appropriate is rebated to individuals via the income tax system. This Section also prohibits the sale of U.S. government debt securities except during war.

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

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

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

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

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

In defense of his selection of 3 percent, Mr. Carmack writes in Footnote 5:

With population growth and productivity increases averaging approximately one percent (1%) each per year for the last thirty years, a three percent (3%) growth figure will insure stable prices within a vary narrow range and would allow for price-level or cost-of-living adjustments (COLAs) in contracts with a predictable effect to address any slight variation in economic activity from the three percent (3%) monetary growth rate. Further, as perfect fine-turning of monetary growth in a complex economy is not possible, to err on the side of a very slight inflation would at least relieve those burdened by debt of some of the effects of the prior inequity caused by private money creation, whereas to err on the side of deflation would exacerbate such inequity.

He believes that “a fixed rate of growth will provide the needed stability so long lacking [in] monetary policy.”

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Copyright © 2010 by Thomas Coley Allen.

Part 2 

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Federal Reserve System

Federal Reserve System
Thomas Allen

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

Perhaps the most powerful tool used by Illuminists to control a government is to control that government’s credit and issuance of money and the country’s banking system. (The fifth plank of the Communist Manifesto reads, “Centralization of credit in the hands of the state by means of a national bank with state capital and an exclusive monopoly.”) With the control of these, comes the control of the economy. (Mayer Amschel Rothschild said, “Give me control over a nation’s economy, and I care not who makes its law.”[1]) Control of the banking, credit, and monetary systems gives the Illuminists enormous influence and power over governments. (Reginald McKenna, president of Midlands Bank of England, said, “Those that create and issue the money and credit direct the policies of government and hold in their hands the destiny of the people.”[2]) They can dictate the terms upon which a government can borrow money. With this power, they can demand and ensure that the government will grant and protect their monopolistic control of the banking, credit, and monetary systems.

To gain and consolidate control and power, the Illuminists use what is often called the Babylonian monetary system. This system depends on a strong central government, which depends on a strong central bank for its continuous financing. Thus, the government grants the bank a monopoly over the money and credit system. The central bank controls the issuance of money, which for much of the twentieth century has been debt, i.e., the money that the people use represents someone’s debt. This power gives the central bank control of the economy.[3]

After the Napoleonic Wars, the Rothschilds established central banks in all the major countries of Europe. They used their power as central bankers to urge countries of Europe to undertake a massive arms buildup although Europe was living in a time of peace. By 1886 military expenditures had become so great that they were beginning to cause Europe’s economies to stagnate. Countries could not continue their arms buildup without either internal rebellion or external war. Yet, they had spent so much money on armaments that they could not finance a war. Finally, the United States offered away out of their problem.

In 1913, Woodrow Wilson became President of the United States. One of his first acts was to sign the Federal Reserve Act into law. A few months later World War I began. This law solved the problem of financing a world war.

The Federal Reserve Act and the Federal Reserve System that it established grew out of the work of a few major bankers and their political allies. In 1910 Paul Warburg of Kuhn, Loeb and Co.; Henry P. Davison, senior partner of J. P. Morgan and Co.; Charles D. Norton, president of (Morgan’s) First National Bank of New York; Frank A. Vanderlip, President of (William Rockefeller’s) National City Bank of New York; Benjamin Strong, vice-president of (Morgan’s) Bankers Trust Co.; and A. Piatt Andrew, Assistant Secretary of the Treasury, met with Senator Nelson Aldrich on Jekyl Island and secretly drafted a plan for an American central bank.[4] The essence of this plan later became the Federal Reserve System.

These bankers controlled heavy industry, oil, communications, and railroads in the United States. They had the reputation of controlling the entire money and credit of the United States. “They elected Congressmen, appointed judges, and bought and sold newspapers and publishing houses whenever they need a job done.”[5]

The first attempt at creating the Federal Reserve System failed because the bill was associated with the Republican Party, which was too closely connected with Wall Street. To solve this problem, the Illuminists decided to put the Democrats in power and have them introduce a new bill. This job was made easy when Theodore Roosevelt, the Republican President whom William Taft had succeeded, decided to run on the Progressive Party ticket. Jacob Schiff had persuaded Roosevelt to run against both Wilson and Taft[6] J. P. Morgan provided Roosevelt money and manpower to run an effective campaign. Two Morgan agents, Frank Munsey and George Perkins, practically ran Roosevelt’s campaign.[7] (Rockefeller financed Wilson’s campaign. Jacob Schiff, Paul Warburg, Bernard Baruch, Henry Morgenthau, Sr., Henry Dodge of National City Bank of New York, and Thomas Ryan, all of whom were bankers, and the first four of whom were Jews, Samuel Untermyer, a wealthy corporate Jewish lawyer, and Adolph Ochs, publisher of the New York Times, also supported Wilson.[8]) Roosevelt received more press coverage than Taft and Wilson combined. Thus, Roosevelt diverted enough votes from President Taft, who was a popular President and who opposed establishing the Federal Reserve System although the Republican platform endorsed it, to give Wilson the presidency. Wilson delivered the Federal Reserve Bank. Actually, the political influence of William Jennings Bryan (the ardent foe of the big bankers, leader of the Democratic Party’s left-wing, and Wilson’s Secretary of State) is what pushed the bill through Congress.[9] The “unseen guardian angel” of the Federal Reserve Act was Colonel Edward House, who was in constant contact with Paul Warburg while the Federal Reserve Act was being prepared and steered through Congress.

(Putting a President in office was nothing new to Morgan. J.P. Morgan and Co. and Kuhn, Loeb and Co. joined in an alliance in 1901 to form the Northern Securities Co. To stop the Department of Justice from prosecuting the Northern Securities Co. as a trust until a less vulnerable system could be worked out, Morgan, Schiff, and Paul Warburg got Theodore Roosevelt elected President in 1904. The Northern Securities Co. was the consolidation of the Rothschild empire in America. In 1869, J.P. Morgan and Co. became an international agency of the Rothschilds when J.P. Morgan and Anthony Drexel concluded an agreement with N.M. Rothschild Co. that made J.P. Morgan Co. its agent.)

The Federal Reserve System achieved the three main functions of a central bank. Private individuals owned the bank, received a profit from the ownership, and controlled the issuance of money. Through the Federal Reserve System, the owning banks could use the credit of the United States government for their own profit. They issued currency (federal reserve notes) on the credit of the United States government. The country’s entire financial resources were at the command of the Illuminists through the central bank. Perhaps most important, the Federal Reserve System mortgaged the country by involving it in perpetual war. Like all central banks, the Federal Reserve System sought to control the government by controlling loans to the government. It sought to influence economic activity and manipulate foreign exchanges. To secure its monopoly, it sought to influence politicians by economic rewards in the business world when they left government.

With the initial stock offering in 1914, six New York banks bought a controlling interest in the Federal Reserve Bank of New York. They were National City Bank (a Rockefeller bank), First National Bank (a Morgan bank), National Bank of Commerce (a Warburg bank), Hanover National Bank, Chase National Bank (a Rockefeller bank), Chemical Bank, and Marine National Bank of Buffalo (later Marine Midland).[10] These seven banks acquired more than 40 percent of the stock of the Federal Reserve Bank of New York. Some of the leading merchant banks of Great Britain controlled most of these banks. These British banks included Schroder Bank; Morgan, Grenfell and Co. (affiliated with J.P. Morgan Co.), Lazard Brothers; N.M. Rothschild; Brown Shipley Co. (affiliated with Brown Brothers, later Brown Brothers, Harriman).

The Federal Reserve System gave the international bankers control of the money and credit in the United States. (Federal reserve notes are privately issued money backed by the taxing power of the United States government to cover losses of the banks issuing the notes.) Thus, the international bankers gained control of the economy of the United States. With control of the economy, they could control the country. With control of the economy, they controlled and exaggerated the boom-bust cycle. Insiders who knew when the Federal Reserve Bank would begin expanding the money supply could buy property and shares when they were cheap before the expansion. Then they could sell just before the Federal Reserve Bank began to contract the money supply, which they would know in advance. As the economy crashed, they could again buy shares and property cheaply, often at distressed prices of bankruptcy. If their banks had financial difficulty because of loan defaults, the Federal Reserve Bank would lend them the money necessary to protect them from bankruptcy.

For the Illuminists, 1913 was a victorious year in the United States. They obtained a vast new source of revenue for the United States government with the ratification of the Sixteenth Amendment. (In 1909, Aldrich, John D. Rockefeller’s spokesman in Congress, proposed, with President Taft’s support, amending the Constitution to grant Congress the power to levy income taxes.) This Amendment gave them unrestricted power to tax incomes and estates. With unlimited power to tax incomes and inheritance, the economy could be socialized, unlimited wars fought, and foreign socialistic governments maintained in power with foreign aid. (Without the income tax, the United States’ participation in World War I was doubtful; this tax was necessary to pay for the war.) Next came the ratification of the Seventeenth Amendment, which destroyed what little remained of the federal republic that survived Lincoln’s war to destroy the South and the Constitution. This Amendment removed the elections of Senators from state legislatures and required them to be elected by popular vote. Perhaps their greatest victory came at the end of the year when the Federal Reserve bill became law. Now the Illuminists had the power to create booms and busts—and thus amass enormous fortunes for themselves.

Endnotes
1. H.S. Kenan, The Federal Reserve Bank (Los Angeles, California: The Noontide Press, 1966), p. 6.

2. Gary Allen, None Dare Call It Conspiracy (Seal Beach, California: Concord Press, n.d.), p. 41.

3. Eustace Mullins, The Curse of Canaan: A Demonology of History (Staunton, Virginia: Revelation Book, 1987), pp. 196-197.

4. G. Edward Griffin, The Creature from Jekyll Island (Westlake Village, California: American Media, 2002), p. 5.

5. Kenan, pp. 94-95.

6. Archibald E. Roberts, Emerging Struggle for State Sovereignty (Fort Collins, Colorado: Betsy Ross Press, 1979), p. 152.

7. Allen, p. 48.

8. Kenan, p. 123.

9. Martin A. Larson, The Federal Reserve and Our Manipulated Dollar (Old Greenwich, Connecticut: The Devin-Adair Company, 1975), pp. 46-47.

10. Eustace Mullins, Secrets of the Federal Reserve (1991), p. 34. Eustace Mullins, The World Order: Our Secret Rulers (Second edition, Staunton, Virginia: Ezra Pound Institute of Civilization, 1992), p. 103.

[Editor’s note: The list of references in the original is omitted.]

Copyright © 2010 by Thomas Coley Allen.

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