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.

More articles on money.

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.

For more articles on money.

Analysis of Money No Mystery

Analysis of Money No Mystery

Thomas Allen

    The following is an analysis of Money No Mystery: Mastery by Monopoly by Arnold Leese [1938] (Hollywood, California: Sons of Liberty). Leese  (1878–1956) was a British fascist politician. What is proposed in his book is a fascist monetary system. He discusses some Jewish issues that are not addressed since they are beyond the scope and objective of this article. His words and my paraphrases or summaries of his words, I have italicized. My commentary is in roman letters. I have provided references to pages in his book and have enclosed them in parentheses.
    Mr. Leese comments on gold’s suitability for money. One property that makes gold suitable for money is its rarity (p. 3.). Rarity is an important characteristic for money if it is not too rare. What makes gold the most suitable metal for money is its flow-to-stock ratio. Annually, newly mined gold accounts for about 2 percent of the above ground stock of gold available for monetary use. Thus, newly mined gold does not have much effect on the value of gold.
    Mr. Leese remarks that irredeemable paper money had reached “a stage of general stability” (p. 3.). That may have been true during the late 1930s when he wrote. However, that stability was lost during World War II and the decades that followed.
    Like all fiat money advocates, Mr. Leese believes that governmental fiat gives money its value. Government can give otherwise worthless pieces of paper great value by declaring them legal tender and by that eliminate any need for gold backing (p. 3.). If governmental fiat can give money value, bimetallism would have worked. Gold and silver would have exchanged at the same value at the ratio decreed by the government. (Presumably, they would exchange at the same value even if various countries had radically different ratios.) If government fiat and legal-tender laws gave money its value, a $10 U.S. note would have had the same purchasing power as a $10 gold coin in the United States between 1862 and 1879. Instead U.S. notes traded at a discount to gold until they became redeemable on demand in gold.
    Mr. Leese claims, “No one inside this country [Great Britain] cared a scrap whether the legalised paper money was convertible or not into gold; he didn’t want gold; he wanted goods, and got them, through the scraps of paper legalised by the State as National Money” (p. 3.). That may be true. Only a miser wants money because it is money regardless of form. Most people want money so that they can trade it or invest it now or some time in the future. Convertibility into gold serves as a regulator of credit, paper money, and keeps it within proper bounds. If the government or banks are issuing too much paper money or other types of credit money, people will redeem the excess and halt the expansion. Gold keeps the monetary system honest and thwarts the expansionist programs of statists, which is why fascists and other statists hate it.
    Mr. Leese has a better understanding of the gold standard than most post-World-War-II writers, including proponents of the gold standard. He knew that the British pound was the value of 113 grains of gold (p. 4).
    Like most opponents of the gold standard, Mr. Leese declares, “Few people wanted to do this [exchange bank note for gold], because gold has limited functions in general utility; you can’t eat it, drink it, make clothes of it or even flirt with it; before you can make use of it, you have to exchange it for something you want” (p. 4). Thus, he presents one of the most absurd arguments that opponents of gold give. One can eat and wear gold. However, such an argument against gold is stupid and is intended to deceive. The same thing can be said about paper fiat money and even more so about its electronic equivalent. How does one eat, drink, and wear electrons, which make up the bulk of today’s money, flowing through some unknown computer at some unknown location?
    Mr. Leese makes an error common to most opponents and proponents of the gold standard. He asserts that if all paper money is not fully backed by gold, a true gold standard does not exist (p. 4.). The true gold standard does not require all paper money and other forms of market-generated credit money to be backed by gold. Bank credit money (bank notes and checkbook money) can also be backed by commercial money, real bills of exchange, which are themselves a form of market-generated credit money — the real bills doctrine.
    According to Mr. Leese, the international gold standard leads to people and countries attempting to corner gold to “become masters of the International Industrial situation.” Jews were the primary people who cornered gold. By cornering gold, Jews gain control of fixing the rate of interest (p. 4-5). Where the real bills doctrine operates, many financial transactions are with commercial money — not with gold. The propensity of consumers to buy fixes the discount rate of bills of exchange, which is not really interest — not the hoarders of gold. Hoarders of gold have much less power than their opponents give them. (A more detail discussion on hoarding gold is given in “Is Gold Too Easy to Manipulate?”)  As Jews control most of the paper money issued today through central bank operations, abandoning the gold standard for fiat paper money does not eliminate this issue. It does not assuage Leese’s problem of Jewish control of the monetary system. (Perhaps this is why the Protocols of Zion advocates abandoning the gold standard in favor of fiat paper money [v.i.].)
    Mr. Leese writes, “The Financier can, by using his control of Gold to expand or contract the volume of Money (currency or credit) in circulation, create boom or slump in Britain” (p. 5.). As post World-War-II history shows, the financier can more easily expand and contract the volume of paper money. He can expand the money supply far greater under today’s monetary system than he could under the gold standard. Thus, when the inevitable slump comes, it is more severe or last much longer than it would have under the gold standard.
    Like most opponents of the gold standard, Mr. Leese asserts that gold cannot “supply the industrial need for National Money” (p. 5). As I show in “There Is Enough Gold,” enough gold exists to accommodate world commerce several times over when accompanied by the proper credit system, the real bills doctrine. Enough gold was available in 2004 to accommodate 3.8 times the gross world product of 2007 without fractionalization of gold.
    Mr. Leese discusses Britain’s return to the gold standard following World War I (pp. 6-7).
    Mr. Leese writes, “OUR National Money must be divorced from its association with Gold” (p. 8). This part of his proposal has been achieved. In 1971 when President Nixon ended the gold exchange standard, Bretton Wood system, gold ceased any formal role in the world’s monetary systems.
    Mr. Leese states that countries (Great Britain) should pay for imports with domestic paper money that can only be exchanged for goods and services in the importing country (p. 8). To some degree, bills of exchange serve this purpose. The world is in the process of achieving the intent of his proposal by abandoning the U.S. dollar standard that has been in place since World War II. However, his proposal seems to require country A to buy from country B the value of products that it sells to country B. Such an arrangement would greatly hamper foreign trade.
    Mr. Leese recognizes the need to control the amount of money issued (p. 8). He does not offer any mechanism for doing this other than trusting politicians and bureaucrats. Thus, politicians and bureaucrats would have to act contrary to their nature by not seeking to increase their prestige, power, and wealth.
    Mr. Leese discusses how the practices of lending for interest came to Great Britain and the adverse effects of interest (pp. 9-12). Under fascism, interest on foreign loans belong to the people of the country as a whole and not to the individuals who lend the money abroad (p. 11). By “people as a whole” he probably means the government — at least that is what most statists mean. However, the government is not the people as a whole. It has never been and never will be. It is the small group of people controlling it. If the people as a whole are to receive the interest paid on foreign loans, some mechanism needs to be in place to divide that interest among the individuals of the country without the government getting part of it.
    Mr. Leese opposes the Social Credit scheme (p. 12). I discuss the flaws of Social “Credits in Analysis of Richard Cook’s Monetary Reforms.”
    Mr. Leese presents the monetary reforms of the Imperial Fascist League (pp. 12-15). A “Department of Issue is established to control absolutely the issue of currency and credit” (p. 13). Its objectives are:
    (1) Gradually inflate money and credit until the price level of commodities are raised to the level reached at the end of World War I (p. 13).
    (2) After achieving item 1 and in accordance with item 3, stabilize the purchasing power of money so that it becomes as fixed as the yard (meter), pint (liter), and pound (gram) and no longer varies; expand and contract the money supply to maintain a stable level of a general-price index (p. 13).
    (3) Adjust currency and credit until production is sufficient to satisfy the needs of the country and its exportation overseas (p. 13).
    (4) Retire gradually all external and internal interest-bearing government securities with non-interest bearing currency (pp. 13-14), i.e., with non-interest bearing government notes or central bank notes that function like government notes.
    (5) Adjust gradually “to the new values by limiting currency inflation, in the early stages, to State disbursements” (p. 14), i.e., the government gets the new money first before it loses value.
    (6) Distribute equitably credit inflation to agriculture and industry (p. 14).
    (7) Balance imports and exports by tariffs, embargoes, and trade packs that enforce equality in exchange value (p. 14). The trade issue is discussed above.
    Mr. Leese does not propose governmental ownership of banking. However, banks are stripped of their ability to create money via lending. That is, he advocates 100‒percent reserve banking. The government introduces new money by buying government securities and cancelling them and with low-interest loans. Only the government can lend money for mortgages, which are lent through deposit banks. The government fixes all bank interest rates (pp. 14-15).
    His proposal has so many flaws, one knows hardly where to begin. His system depends on the wisdom and integrity of politicians and bureaucrats. If that were not enough, his proposal also depends on them be omniscient. Governments have attempted items 1, 2, and 3. So far they have all failed.
    Moreover, all price indexes are flawed. They always over count some items and under count others. As people’s tastes constantly change, price indexes need to be revised often to account for changing tastes. Also, changes in technology affect quality and cost as well as offering new items not in the index. These changes need to be considered. An ever-changing price index makes comparing the cost of living over an extended time questionable. Furthermore, governmentally generated price indexes are subjected to political consideration. Politicians like to conceal inflation, so they adjust price indexes to hide the real cost of living.
    Most countries can achieve item 4, if so desired, by having their central banks buy all their securities. To keep such action from resulting in massive inflation,  if not hyperinflation, would require large-scale restraint of the monetary and banking system.
    When governments fix interest rates, they drive high-risk borrowers to the black market (loan sharks) for loans. To propose involving the government in the mortgage and lending markets is fuel for corruption and disaster. Governmental intervention in the mortgage and lending markets was a major contributor to the crash of 2008. When governments become involved in economic activities, politics usually trump economics.
    A great irony of Mr. Leese’s fascist proposal of replacing the gold standard with fiat paper money is that the Jewish Protocols of Zion has the same proposal. The Jewish proposal is set out in Protocol 20:

        The present issue of money in general does not correspond with the requirements per head, and cannot therefore satisfy all the needs of the workers. The issue of money ought to correspond with the growth of population and thereby children also must absolutely be reckoned as consumers of currency from the day of their birth. The revision of issue is a material question for the whole world.
        You are aware that the gold standard has been the ruin of the States which adopted it, for it has not been able to satisfy the demands for money, the more so that we [Jews] have removed gold from circulation as far as possible.
        With us [Jews] the standard that must be introduced is the cost of working-man power, whether it be reckoned in paper or in wood. We shall make the issue of money in accordance with the normal requirements of each subject, adding to the quantity with every birth and subtracting with every death.[1]

The two proposals merely disagree in the criteria to use in deciding how much money the government needs to inject into the economy. Was Mr. Leese an agent of the Jews?
    Mr. Leese’s proposal fails to achieve his purported goal. It does not make the monetary system or economy better — at least not in the long run. However, it greatly increases the power of the government, i.e., those who actually control the government, over the economy and the people. As such control is a goal of fascism, Mr. Leese’s proposal does successfully achieve that fascist goal.

Endnote
1. Protocol of the Learned Elders of Zion, ed. Sergyel Nilus, trans. Victor E. Marsden (1905, 1922), p. 16.

Copyright © 2015 by Thomas Coley Allen.

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Comparison of Three Monetary Systems

Comparison of Three Monetary Systems
Thomas Allen

The Foundation to Restore an Educated Electorate (F.R.E.E.) has put out a pamphlet titled “Time to End the Fraud.” It promotes the fiat monetary reforms of Theodore Thoren and Richard Warner. This pamphlet has a table taken from Thoren and Warner’s book The Truth in Money Book comparing Thoren and Warner’s “Treasury Credit Money System” to the current “Federal Reserve System.” I am comparing Thoren and Warner’s Treasury Credit Money System and their description of the current Federal Reserve System with the “People’s Money System.” Occasionally, I comment on the Treasury Credit Money System and the Federal Reserve System to identify misleading statements in the table. My comments are in parentheses.

First, I give a brief description of the People’s Money System. Under the People’s Money System, the people directly control the quantity of money in circulation. They do this in two ways. They control the quantity of gold and silver coins in circulation by the quantity of gold and silver bullion that they convert to coins and by the quantity of coins that they convert to bullion for nonmonetary uses. Also, they control the quantity of commercial money (real bills of exchanges) in circulation through their productivity. For a more detail description of commercial money see Reconstruction of America’s Monetary and Banking System, “There Is Enough Gold,” “Response to Dale’s Analysis of ‘There Is Enough Gold,’” “Analysis of Byron Dale’s Monetary Reforms as Presented in Bashed by the Bankers,” “Analysis of the American Monetary Institute’s American Monetary Act,” and “Analysis of Richard Cook’s Monetary Reforms as Presented in We Hold These Truths.” The People’s Money System does not require legal tender laws, banks, or governmental management of the monetary system.

Now for the comparison of the fifteen items in the pamphlet’s table.

1. Treasury Credit Money System: “Money created debt-free by the Treasury.” (But it is still debt.)
Federal Reserve System: “Money created as debt by private commercial banks (and Investment banks and Savings Banks since repeal of Glass-Steagall Act).”
People’s Money System: The people themselves create money debt-free as described above.

2. Treasury Credit Money System: “Money spent into circulation for Federal expenditures.”
Federal Reserve System: “Money spent into circulation only for expenses of Federal Reserve and commercial banks.”
People’s Money System: Money is spent into circulation by the people themselves for their own expenses.

3. Treasury Credit Money System: “Treasury never borrows.” (This statement is not true. With its notes the Treasury is forcing government loans on everyone. Unlike conventional government loans, these loans bear no interest. Moreover, the government never intends to pay them unless it pays them with more debt.)
Federal Reserve System: “Treasury collects insufficient taxes and borrows from private banks and others (individuals and foreign governments) to cover Federal deficit expenditures.” (This system does not force the Treasury to collect insufficient taxes and borrow the rest. Banks do not hold the weapons of coercion; the government does.)
People’s Money System: The government may borrow at interest from banks, private individuals, and perhaps other governments. However, it greatly restricts the size of the government and inhibits its expansion; borrowing is minimal.

4. Treasury Credit Money System: “Treasury lends money to banks.”
Federal Reserve System: “Treasury borrows money from private banks.” (The Treasury also borrows from individuals as noted under No. 3.)
People’s Money System: The people lend money to banks, mostly as savings deposits and certificates of deposits. The Treasury never lends to banks; it keeps the government’s money in government vaults.

5. Treasury Credit Money System: “Interest rates (mathematically) set by Treasury to balance interest receipts with Treasury expenditures.”
Federal Reserve System: “Interest rates set by New York banks according to secret policy decisions.”
People’s Money System: Interest rates are primarily set by savers and secondarily by investors, i.e., the markets set interest rates.

6. Treasury Credit Money System: “Banks operate as savings and loan associations (as they did before Glass-Steagall repeal) — lend from depositor’s savings and their own borrowings from Treasury.”
Federal Reserve System: “Banks create money through fractional reserve deposit expansion (commercial banks do not lend their depositor’s savings).”
People’s Money System: Banks do not create money. Fractional reserve banking does not exist. Two types of banks (or banking activities) exist: issuing banks and lending banks. Issuing banks convert commercial money (real bills of exchange) into bank money (bank notes and checkbook money) by buying real bills. Issuing banks do not lend. Money in checking accounts is fully backed by deposited gold or silver or real bills, which can quickly be converted into gold and silver coins. (Real bills always appreciate until they mature; then they are paid in specie.) Lending banks lend savings. No loans are made for periods greater than the time that the bank has complete control of the money being lent. That is, a depositor cannot demand the return of his savings during the time of the loan. Thus, lending banks do not borrow short and lend long. Checking accounts at lending banks are fully backed by gold or silver that the account holder has deposited or that the bank has transferred to the account from savings accounts via a loan.

7. Treasury Credit Money System: “Checks are cleared through a department of the Treasury.”
Federal Reserve System: “Banks clear their own checks.”
People’s Money System: Checks clear through clearing house associations, which member banks own.

8. Treasury Credit Money System: “System is inflation-proof and depression-proof.” (Like all fiat monetary reformers, Thoren and Warner claim that their system is inflation proof and depression proof. They are wrong. Money issuance under their system is not and cannot be based on economic needs. Because fiat money is a political creation, it is always based on politics and political needs. The supply of fiat money tends to grow, i.e., inflation. Inflation distorts the economy, which leads to economic contraction that can result in a depression.)
Federal Reserve System: “System causes inflation-depression cycles.”
People’s Money System: The business cycle is smoothed, and inflation and deflation are greatly mollified. Unlike fiat monetary systems, this system quickly and automatically increases and decreases the money supply as the demand and the economy’s need for money increase and decrease. Economics and not politics, as occurs with fiat monetary systems, drives the expansion and contraction of money supply.

9. Treasury Credit Money System: “Money maintains constant purchasing power.” (As discussed above, this statement is false. Money under this system will lose its purchasing power. Being irredeemable paper money, it is extremely low quality money. Low quality money cannot maintain a constant purchasing power. It always declines in value. History shows that money issued directly by government typically inflates, depreciates, faster than that issued by banks.)
Federal Reserve System: “Money loses purchasing power until it causes depression.”
People’s Money System: Being gold and silver, money is of the highest quality. Its purchasing power gradually increases over time. Unlike the other two systems, it results in the standard of living of the common man actually rising.

10. Treasury Credit Money System: “Money supply expands or contracts according to needs of society.” (Perhaps Thoren and Warner explain in their book how this is accomplished. However, I do not see how it is possible without saintly divine beings being in charge of the monetary system. I have yet encountered a fiat monetary system that, in spite of assurance of its proponents that it can, can manipulate the money supply to meet the needs of the economy. I guess that Thoren and Warner’s out is adjusting the money supply to meet the needs of “society” instead of the “economy.” Society includes both the political and economic. As fiat money is a political creation, it can be expanded and contracted to meet the political needs of society as those in power construe these needs.)
Federal Reserve System: “Money supply expands or contracts according to secret policies.”
People’s Money System: As discussed above, the money supply expands and contracts to meet the economic needs or needs of the economy. It accomplishes these adjustments automatically and quickly without any governmental intervention.

11. Treasury Credit Money System: “Taxes kept at a minimum.” (By substituting printing press money for taxation.)
Federal Reserve System: “Taxes kept at a maximum.”
People’s Money System: Taxes are kept at a minimum.

12. Treasury Credit Money System: “No personal income tax.”
Federal Reserve System: “Maximum politically acceptable income tax.”
People’s Money System: It does not necessarily eliminate personal income taxes. However, because it keeps the government small and lean, personal income taxes become unnecessary.

13. Treasury Credit Money System: “No national debt.” (This is another false statement. The U.S. government note, which is the form of money under this system, is a form of debt. It is a governmental debt forced on everyone. The national debt is not eliminated. It is merely transformed into noninterest bearing, nonpayable debt.)
Federal Reserve System: “National debt grows exponentially.”
People’s Money System: It does not necessarily eliminate national debt, but it keeps it small. To the extent that it encourages frugal government, it makes debt unnecessary.

14. Treasury Credit Money System: “All debts are totally payable.” (This statement is misleading and false. It is misleading when it claims that debts are totally payable. Debts paid with debt [government notes] may be discharged, but they can never be extinguished. Debt is paid by transferring it to another. This statement is false because government notes are debt, and the government never pays them off.)
Federal Reserve System: “Never enough money in the system to pay all debt (principal and interest).” (This is not quite accurate. Bankruptcy leaves money to pay the interest.)
People’s Money System: Unlike the other two systems, debt is not money. As all debts are eventually paid with that which is no one else’s obligation, gold and silver, this system truly does extinguish all debt.

15. Treasury Credit Money System: “Interest collections on treasury-held debt never exceed supply of debt-free money in circulation.”
Federal Reserve System: “Bank interest collections deplete the money supply forcing escalation of debt, interest and prices.” (If interest depletes the money supply, how can it force prices up? If people have less money to spend, merchants have to cut their prices if they want to sell their products.)
People’s Money System: As interest is paid in real money that remains in use as long as a need or demand for that money remains, this is a nonissue.

The following eight items are comparisons not in the pamphlet’s chart. Most likely, they were not considered because they show how much alike are the Treasury Credit Money System and Federal Reserve System.

1. Treasury Credit Money System: Produces low quality money.
Federal Reserve System: Produces low quality money.
People’s Money System: Produces high quality money.

2. Treasury Credit Money System: Leads to, or at least facilities, ever expanding, ever more powerful government; increases the government’s power over the people.
Federal Reserve System: Leads to, or at least facilities, ever expanding, ever more powerful government; increases the government’s power over the people.
People’s Money System: Leads to smaller, more limited government; decreases the power of the government over the people.

3. Treasury Credit Money System: Trusts politicians and bureaucrats; distrusts the people and bankers.
Federal Reserve System: Trusts politicians, bureaucrats, and bankers; distrusts the people.
People’s Money System: Trusts the people; distrusts politicians, bureaucrats, and bankers.

4. Treasury Credit Money System: Trusts promises and paper; distrusts that which is no one else’s obligation, especially gold.
Federal Reserve System: Trusts promises and paper; distrusts that which is no one else’s obligation, especially gold.
People’s Money System: Trusts that which is no one else’s obligation, including gold; distrusts promises and paper.

5. Treasury Credit Money System: Depends on legal tender laws, the military might of the government to force the people to accept the money. Its money cannot stand on its own merit.
Federal Reserve System: Depends on legal tender laws, the military might of the government to force the people to accept the money. Its money cannot stand on its own merit.
People’s Money System: Depends on the merit of the money to get the people to accept it. Legal tender laws are unnecessary.

6. Treasury Credit Money System: Money dies with the issuing government or sooner if the government abolishes it. Its type of money seldom survives a generation.
Federal Reserve System: Money dies with the issuing government or sooner if the government abolishes it. Its type of money seldom survives a generation.
People’s Money System: Money outlives the issuing government and even the country. It survives for millennia. Although the government may outlaw it, the government cannot kill or abolish it.

7. Treasury Credit Money System: Monetary unit is an intangible legal abstraction, which has no intrinsic value[1] that can store, measure, and transfer value and wealth.
Federal Reserve System: Monetary unit is an intangible legal abstraction, which has no intrinsic value that can store, measure, and transfer value and wealth.
People’s Money System: Monetary unit is a tangible specific measurable quantity of a commodity, e.g., as a specific weight of gold. As the monetary unit has intrinsic value, it can store, measure, and transfer value and wealth.

8. Treasury Credit Money System: Governmental policies are necessary to the management of the country’s money. Thus, the monetary system is politically managed.
Federal Reserve System: An “independent” central bank, the Federal Reserve, can best mange the country’s monetary system. As the creation and existence of the central bank is political, the central bank is guided by politics instead of economics in managing the country’s money. Besides, it is as ignorant as the government in knowing how much money is needed, when it is needed, and where it is needed. It is as incompetent as the government in getting the right quantity at the right time to the right place.
People’s Money System: The people through their market activities can best control the country’s money; monetary policies of the government and its central banks only hamper the management of the country’s money. The best monetary system is a market managed system. Thus, it is vastly superior to the government or its central bank at getting the right quantity of money to the right place at the right time.

Endnote
1. Intrinsic value is the value of the monetary material in its nonmonetary use. Commodity money such as gold has high value in its nonmonetary use. If the impressions were removed from a gold coin, the coin would still have the same value. Moreover, a double eagle is worth twice as much as an eagle even without any impression on it. A small piece of paper with the picture of a dead president on it has no more value than a square of stiff toilet paper — practically none. If the engraving were removed, a $100 bill would have no more value than a $1 bill.

A commodity’s utility in its nonmonetary use is what originally gave it value as money. With free coinage under the true gold standard, the monetary value and nonmonetary value of the commodity are kept in equilibrium. Originally, paper money obtained its value from the commodity money with which it was connected. As the distance from its connection with commodity money lengthens, its monetary value declines and eventually equals its nonmonetary value of nearly zero.


Copyright © 2010 by Thomas Coley Allen.

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Response to Dale’s Analysis of "There Is Enough Gold"

Response to Dale’s Analysis of "There Is Enough Gold"
Thomas Allen

This article is a response to "Analysis of Thomas Allen’s There Is Enough Gold" by Byron Dale. Mr. Dale’s analysis can be found at http://www. chrismartenson.com/print/25550.

Judging from Mr. Dale’s comments, I failed to explain myself adequately on several points. On the other hand, Mr. Dale’s comments are colored by his obsessive hatred of interest, dislike of bankers, conviction of the inadequacy of gold, and love of paper money if the government issues it instead of banks. (Of coarse, one could say that my disdain of fait money and monopolistic control of the monetary system and adoration of freedom and liberty distort my views.) I could include his abhorrence of our current debt-based monetary system, but I loathe it even more than he does. After all, he wants to maintain a fiat monetary system run by bureaucrats and politicians whereas I do not.

To understand Mr. Dale’s comments better, one needs some knowledge of his reform. He proposes that the U.S. government print and spend paper money into circulation to build and maintain roads. It would not be issued for any other purpose. He writes, "The spending of the paper money would be limited to building roads which would be of equal benefit for all. Since roads can only be built by labor, in reality, all that would be done would be to monetize labor. As the money was spent, it would flow into circulation and we would all have debt-free money with which to meet our needs for a medium of exchange based on labor performed."[1]

The reform that he proposes in his book is much closer to the current system than my proposal. He maintains a fiat paper dollar currency. He only changes who issues the money (the government instead of the Federal Reserve and banking system) and how it is issued (direct spending by the government on road construction instead of lending.) My system scraps the current system entirely including abandonment of the paper dollar and a central body managing the money (both retained by Mr. Dale). It replaces the current system with an entirely new system. (Actually, it is not really all that new; it is similar to the system that existed before 1860.) Under my proposal, the government does not create and spend money into circulation. Banks do not create and lend money into circulation. Mr. Dale’s monetary reform makes only superficial changes instead of fundamental changes as I propose. A more detailed discussion of his proposal as presented in his book Bashed by the Bankers can be found in my booklet "Analysis of Byron Dale’s Monetary Reforms as Presented in Bashed by the Bankers."

Mr. Dale seems convinced that all monetary problems relate to charging interest on loans. He seems to believe that most, if not all, monetary problems would vanish if the charging of interest were outlawed. Does this disdain for interest come from the bad experience that he suffered for failure to pay a loan?

One could add that he despises debt-based money. However, that would be a mistake. As he proposes to replace the current interest-bearing debt-based money with non-interest-bearing debt-based money, his problem is with interest-bearing and not with debt-based.

Now, let’s look at his comments to my article.

Mr. Dale errors when he claims that "the markets did not regulate the gold supply. Miners of gold supplied the gold and they, for the most part mined all that they could find as fast as they could."[2] First, smart miners do not necessarily mine all that they can as fast as they can. Smart miners 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.

Apparently, I failed to add enough detail here. Under the classical gold standard the markets regulated the quantity of gold coins and gold bullion used as money. If the markets demanded more coins, jewelry, flatware, and other items of gold were converted to coins. Gold dealers and others presented this gold to the mint for coinage. If the markets decided that too much gold was being used for money, people would melt the excess gold coins and use the gold for other purposes, such as gold teeth and jewelry. (The markets are essentially the sum of every individual acting independently according to his economic contribution.)

Several times Mr. Dale used one of the favorite arguments against the gold standard: The gold mining industry decides how much gold is available. Mr. Dale is correct that the desire for profit drives gold miners. However, gold miners are not particularly concerned about the monetary needs of the country. 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.

"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. [Mr. Dale rejects this fact.]

"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."[3]

Gold miners may influence the quantity of gold available, but they do not decide how much of the available gold is used as money.

Mr. Dale claims that using real bills of exchange as money is using paper debt-based money. Like most people, Mr. Dale confuses a debt-credit instrument, i.e., a loan, with a market-clearing-credit instrument, i.e., a real bill of exchange. Real bills are not loans.

"Real bills should not be confused with loans. They are not loans; they are deferred payment. They are used ‘as means of payment [that] have the effect of making commodities [i.e., goods] circulate more rapidly, without the use of money.’[4] They are claims to future money and, as such, evidence of credit transactions. The holder of a bill redeems it on the date specified on the bill for money paid by the person on whom the bill is drawn. Real bills are short-term credit that matures into gold or silver within 90 days.

"The retailer is not borrowing from the supplier, and the supplier is not lending to the retailer. Moreover, the retailer does not retire a loan if he pays his bill before maturity. Real bills finance the production and distribution of goods without debt.[5] They are a form of credit that is not a debt.

"When a bank buys a real bill, it does not make a loan. When a bank buys a real bill, it is clearing and not lending.[6] Therefore, real bills should be considered clearing instruments instead of credit [debt] instruments."[7]

The real bills doctrine automatically provides the markets with the money to buy new goods at the time those goods are being offered for sale. It saves capital for production by eliminating the need to withdraw savings for market clearing (selling new goods). When the goods have been sold (consumed), the new money is withdrawn from circulation and is permanently retired. The new money withdrawn is either the new money created by this real bill or an equivalent amount created by other real bills.

For a more detailed discussion of the real bills doctrine see Reconstruction of America’s Monetary and Banking System by Thomas Coley Allen (pp. 174-194), Antal Fekete’s lectures on the real bills doctrine at http://www.silverbearcafe.com/ private/fekete.html, and articles discussing the real bills doctrine at http://www. safehaven.com/searchresults.cfm?c=real+bills&ct=Any&x=&t=on&ab=on&fm=&fd=&fy=&tm=&td=&ty=&cat=&l=10.

Like most people, Mr. Dale has little understanding of the true gold standard. He states, ". . . the monetary unit is named the dollar. Let’s say that the monetary unit is specific weight of gold, one grain of gold. The price of gold is then one dollar per grain. Therefore one has fixed the price of gold or no one would know what a dollar is." Mr. Dale claims that I error when I state that "the price of gold is not fixed. The monetary unit is a specific weight of gold." While trying to refute my position, he supports it with his example. He states "that the monetary unit is a specific weight of gold, one grain of gold." Then he erroneously concludes that "the price of gold is then one dollar per grain." No, it is not. If the dollar equals one grain of gold, to say that the price of gold is a dollar is absurd. It is like saying that 16 ounces equals a pound; therefore, the price of a pound is 16 ounces. The dollar has been defined as one grain of gold. The dollar is a unit of weight like the pound or gram. It is just limited to gold. The dollar is fixed in terms of gold; gold is not fixed in the terms of the dollar.

This discussion may seem to be an unimportant discourse about semantics. It is not. The distinction is highly important. Is gold to be fixed in dollars, i.e., gold is priced in dollars? That is, the government declares that the dollar is an abstraction, and it has arbitrarily fixed the price of gold. This notion leads quickly down the road to paper fiat money. On the other hand, is the dollar to be fixed in gold, i.e., the dollar is a unit of weight of gold. The government declares the dollar to be a tangible and defines it as a measurable amount of gold. This notion is the essence of the gold standard; the monetary unit is a weight of gold.

Mr. Dale’s comment on my free coinage statement is absurd. Did I really have to add that the law, Congress, defines the monetary unit, the dollar, as so many grains of gold, e.g., 23.22 grains in the Gold Standard Act of 1900. Using this standard, the mint produced a $10 coin containing ten times the weight of gold as a $1 coin if $1 coins were produced at that time. (This is what the Constitution means by "regulate the value thereof.") If the dollar were an abstraction as Mr. Dale promotes instead of a specific unit of weight, then the amount of gold in a $10 coin need not have any relationship to the amount of gold in a $1 coin. That the weight of gold in a $10 coin is ten times the weight in a $1 coin is further proof that the dollar is (or was) a unit of measure for weight. It evidences that the dollar is defined in terms of gold instead of gold being defined in terms of the dollar.

I write that a component of the gold standard is that "no restrictions are placed on exporting or importing gold." Like many people, Mr. Dale expresses great concern that too much gold would be exported, the country would lose most of its money, and people would lack money with which to trade internationally. (People who express this concern about the exportation of gold have little confidence in the free market—especially with money. Moreover, they never seem to be concerned about the excessive importation of gold. Excessive importation can be more disastrous than excessive exportation as witnessed by its destruction of the Spanish empire.) Although Mr. Dale does not mention it, the same problem can occur between regions in the same country. If a country’s gold stock declines enough to affect its value, i.e., causes the value of the remaining gold to rise (which usually results in general prices declining), gold will automatically begin coming into the country. If barriers are not erected to impede the movement of gold, people from countries with an abundance of gold will come with their gold to buy the bargains in countries deficient in gold. Prices of goods in countries deficient in gold are lower than they are in countries with an abundance of gold. (Prices adjust to the quantity of money available—a fact that Mr. Dale seems not to know.)

I note that a component of the gold standard is that "all paper money is redeemable in gold on demand." Mr. Dale cannot possibly be as ignorant as his comment suggests. He comments, "[I]f gold is the money, what is the paper money he is talking about, where does it come from and how does it get into circulation?" He knows the answer to this question because several paragraphs above he comments on the paper money component of the monetary system that I am presenting and refers the reader to the parts of my article where I discuss this paper money, where it comes from, and how it gets into circulation.

Where does Mr. Dale get this notion that adherents of the gold standard want to outlaw paper money? I have never found one that does. Adherents of the gold standard do disagree about whether all paper money should be warehouse receipts, i.e., all paper money is fully (100 percent) backed by gold, or not fully backed by gold. They all agree that all paper money, whether fully backed or not, should be redeemed in gold on demand and should never be legal tender. (A few adherents of the gold standard would allow issuers of bank notes to delay redemption if the note carried a notice that redemption could be delayed.)

Another component of the gold standard that I give is that it is self-regulating and automatically adjusts to meet the demand for metallic money. Mr. Dale asks how this supply would be self-regulating. He is convinced that "the gold miners would regulate the supply of gold by how much gold they found and mined." Gold miners do add to the supply of gold by the amount that they mined. 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. I doubt that Mr. Dale is of the Rothbard school.) The markets decide how much gold is being used as money. It decides 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. This example ignores the artistic work of jewelry as is commonly done in India and other countries.

I also note that no monetary policy is necessary and none is desirable. Mr. Dale asks, ". . . if the monetary unit is set by a specific weight of gold isn’t that monetary policy?" I suppose in the broadest sense that defining the monetary unit as a specific weight of gold is a monetary policy in the same sense as defining the pound and foot is a weights and measure policy. However, when people think of monetary policy, they normally think of the government or its central bank manipulating the money supply to achieve some goal, such as interest rates, general price levels, employment, or road construction.

To my statement that "the government does not issue any paper money," Mr. Dale makes another ridiculous comment: "If there is enough gold for a workable money system and the people choose to use that system why would there be any need for any paper money." For some transactions, such as transferring gold from one account to another, which is what a paper check does, or for making large purchases, which is more convenient with paper bank notes, people find paper money more suitable. Mr. Dale knows this. He says so in his book. Why does he make such an absurd statement? Does he want to belittle supporters of the gold standard? He seems to preclude any use of paper money when the standard money is gold coin.

Mr. Dale seems to be almost as obsessed with gold miners as he is with interest. I state that "Gold coins are the property of the individual holding them. . . . No restrictions or controls are placed on the private ownership of gold." He responds, ". . . that sounds good until the miners decided . . . to loan all the gold they mined into circulation as interest-bearing loans." If the gold miners decided to do this, which 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? Mr. Dale keeps trying to confuse the gold standard with the current federal reserve dollar standard where money is created through the lending process.

Mr. Dale claims that I am contradicting myself when I write, "The government's monetary duties are limited to defining the monetary unit, coining all gold presented to it for coinage and guaranteeing the weight and fineness of such coins. . . ." He asserts that these duties conflict with specifying the monetary unit as a specific weight of gold. What does he think "defining the monetary unit" is? It is specifying (defining) the monetary unit as a specific weight of gold. Where is the conflict? If the government is arbitrary in its declaration of the monetary unit, perhaps a conflict exists. However, if it merely codifies what the markets have already decided as Congress did with the Coinage Act of 1792, no conflict exists.

He also asserts that these duties conflict with free coinage of gold. "Coining all gold presented to it for coinage" is free coinage. I clearly define free coinage as such several sentences earlier. So, I repeat, where is the conflict?

Apparently, in trying to overcome the excessive emphasis that most people placed on the quantity of money while ignoring its quality, I may have over emphasized the quality aspect. As Mr. Dale notes, both are important.

I was trying to stress that the quality of money, i.e., the purchasing power of the monetary unit, is more important than the quantity of money, i.e., the number of monetary units. The more that a given quantity of money can buy, the higher is its quality. The less that quantity buys, the lower is its quality. High quality money can buy a large amount of goods with a small quantity of money. Low quality money requires a much higher quantity of money to buy the same amount of goods. The federal reserve dollar is low quality money, and the gold dollar is high quality money. A gold dollar has the purchasing power 50 times greater than a federal reserve dollar. Fifty federal reserve dollars are needed to do the work of one gold dollar. Thus, a large quantity of low quality federal reserve dollars are needed to do the work of a high quality gold dollar. It is obvious from Mr. Dale’s comments that he thinks in terms of quantity (the more, the better) instead of quality (the higher, the better). Would he really prefer ten million Zimbabwe dollars (July 2008 vintage) to one euro? If he thinks in terms of quantity, he would prefer the ten million Zimbabwe dollars. If he thinks in terms of quality, he would prefer the one euro.

Mr. Dale continues to harp on my not explaining how the markets regulate the money supply. Mr. Dale, you got at least to meet me part way. I explain several times in my article how the markets regulate the money supply. Again, here it is. For metallic money, it is done through free coinage. The mint coins all the gold presented to it for coinage, and the people may melt all the coins that they desire for other usages. The quantity of coins is maintained through minting and melting such that little or no difference exists between the value of gold in coins and gold in other forms. All of this is done without any decision by any political body or governmental bureaucrat.

To this is added the market-driven changes to the money supply through the real bills doctrine or commercial money principle, with which Mr. Dale disagrees. I explain below how money is created under the real bills doctrine.

I have failed to explain myself adequately if Mr. Dale concludes that I am saying "that no one can purchase things with fiat money." People have been buying things with it in the United States since 1933. When I write that "fiat money lack quality," I do not mean that it cannot function as a purchasing medium. I mean that its purchasing power steadily declines over time. Thus, it is a poor store of value. Being a poor store of value, it is a poor measure of value and a poor unit of accounts resulting in arbitrary inflation adjustments being made. Usually, it represents nothing tangible, or at least the issuer is not required to covert it into something tangible on demand.

I do not understand why Mr. Dale fails to find me distinguishing between metallic money and credit money. In the sentence following his comment, I make such distinguish. I give a thorough discussion of the gold standard (metallic money) and the real bills doctrine (credit money).
Mr. Dale claims that my statement about the 100-percent gold standard is false. It is not. Under the 100-percent gold standard, all paper money is merely a warehouse receipt for gold, i.e., all paper money is backed 100 percent by gold.

Mr. Dale errors when he says, especially if he claims that I say, that the "real bills doctrine based on bank created money loaned into circulation at interest is a good money system because it is based on production." I do contend that the real bills doctrine creates credit money based on production. I deny that it is "based on bank created money loaned into circulation at interest." A monetary system based on the gold standard and the real bills doctrine can function without banks although not as efficiency. The real bill itself is money, commercial money. It can be used to discharge debt. If the owner of the real bill sells it to an investor, the investor buys it at a discount. The discount, which is not an interest rate, varies with the maturity date of the bill. Like all prices not fixed by the government, the markets fix the rate.

If he sells it to a bank, the bank buys it with bank notes or checkbook money, i.e., credits the seller’s checking account with the amount of the real bill. The bank is not lending, much less lending at interest. Savers fix the interest rate by their propensity to save. Consumers fix the discount rate by their propensity to consume. Moreover, the bank is not creating money in the true sense. The money creation is done when the retailer accepts (signs) the real bill of exchange. What the bank has done is to convert commercial money (the real bill of exchange) to bank money (checkbook money and bank notes). This action is akin to someone depositing federal reserve notes with a bank and having the bank credit his checking account with the amount of the deposited notes. The bank has merely converted one form of money, the federal reserve notes, to another form, checkbook money.

Mr. Dale keeps repeating that I "never seem to be able to tell us just how a person acting in his individual capacity can product [sic] any kind of money." I have already explained how an individual can convert gold into money by having it coined.

Although an individual seldom converts his labor into money acting as an individual, he can do it cooperatively under the real bills doctrine. If he is part of the work force of a factory, his labor is "monetized," so to speak, into commercial money through the real bill of exchange process. To simplify, I assume that the manufacturer sells directly to the retailer. When the manufacturer sells to the retailer, he offers and the retailer accepts a real bill of exchange. Thus, they have created money, commercial money. With the labor of all the individual factory workers, this money has been created. It is a representation of all the individual workers’ contribution to the finished product. As these workers produce more, they cause the creation of more money.

Mr. Dale vehemently disagrees with my characterization of fiat money. I contend that the government or its central bank arbitrarily regulates the money supply. He asserts, ". . . the key distinction between fait money and gold is wealth based money vs. interest-bearing debt based money." His definition of fiat money is unique. (He probably created this unique definition to avoid his proposed fiat money being called fiat money, which it really is, by contending that wealth-based money is not fiat money. He claims that his proposed money is wealth-based because it is issued to build roads.) If it is interest-bearing debt-based money, it is fiat money. If it is wealth-based money, it is not. By his definition, the French assignat was not fiat money as it was based on land. Every economist whom I have read who has commented on the assignat considers it fiat money. I am not sure how Mr. Dale would classify the U.S. note as it was neither interest-bearing debt-based money (although it was debt based) and was not wealth based between 1862 and 1879 and after 1932. (Mr. Dale probably considers it wealth based between 1879 and 1932 when it was redeemable in gold on demand.)

The definition of fiat money used by many monetary economists is that the money supply is controlled arbitrarily instead of being regulated by the markets. This is its most important aspect. Secondarily, the material of which the standard money is made has less value than the money itself. These are the two criteria that I use for mydefinition.

His comment on fiat money was written to my sentence: "The key distinction between fiat money that uses gold and the true gold standard is the way that the money supply is regulated." I am claiming that gold can be part of a fiat monetary scheme. Mr. Dale seems to be arguing that gold, regardless how the quantity of monetary gold is regulated, is not fiat money. (What about gold lent at interest into circulation? Is that fiat money?) Yet he also seems to consider the federal reserve dollar to be interest-bearing debt-based money from its beginning in 1914 and, therefore, is fiat money. Between 1914 and 1933, the federal reserve note was not legal tender and was redeemable in gold on demand. Was it fiat money? I say no because it was not legal tender—no one had to accept it. Through the redemption process, the markets prevented too many from being issued. By Dale’s definition, it seems to be fiat money because most of it came into being via the purchase of treasury notes. However, gold backed at least 40 percent of the federal reserve notes. This 40 percent was wealth-based money. Was this 40 percent not fiat money? In 1933, Congress ended the redemption of federal reserve notes and made them legal tender. I contend that from this point forward federal reserve notes were true fiat money. Mr. Dale probably agrees. However, with his definition, that all federal reserve notes were fiat money before 1968 is questionable. Gold backed at least 40 percent of the federal reserve notes outstanding until 1945. In 1945 Congress reduced the backing to 25 percent and eliminated it in 1968. As this 40 percent and later 25 percent were wealth-based gold, apparently this money was not fiat money by Dale’s definition.

Like most people, Mr. Dale confuses the markets’ demand for money overall with an individual’s desire for money. If everyone had all the money that he wanted, money would be worthless. Most people want an unlimited supply of money.

He cannot conceive of people melting gold coins to use the gold for other purposes. I explain above why people would melt gold. If gold is more valuable in another product than it is in coins, people will melt coins for use in the higher gold-valued product. If people seek to maximize their wealth, as Mr. Dale suggests, why would they not melt coins? If the value of gold in some non-coin form never exceeded the value of gold in coin form, nearly all gold would be coined. As that has never happened, gold must have a great deal of value outside coins.

Mr. Dale contends that federal reserve notes being legal tender is a nonissue because the U.S. Supreme Court and others do not accept federal reserve notes and require checks. He states that checkbook money is not legal tender, which is true. The reason that these agencies refuse federal reserve notes and require checks is that they do not trust their employees. On the other hand, the Post Office requires federal reserve notes and refuse checks for money orders. (Unless a change has been made in the past two years, no State agency in North Carolina can write a rule that precludes payment in federal reserve notes. The Department of Revenue may be an exception as many of its rules are not subject to normal rulemaking.)

Legal tender laws usually do not require a person to sell his goods or services for federal reserve notes. He can sell them in whatever currency that he wants. However, if he sells on credit, the legal tender laws require him to accept payment in federal reserve notes if the debtor so choice to pay with federal reserve notes.

Stripping the federal reserve dollar of its legal tender status is important in returning to the gold standard. If the federal reserve dollar remains legal tender, the debtor could pay a debt contracted in gold with federal reserve notes.

Under my discussion of the real bills doctrine, I write that the bill of exchange allows the retailer time to get the money that he will use to pay for the merchandise from the buyers of that merchandise. Mr. Dale remarks, "If there was enough money in the system the retailer would have the money to pay for the goods." Where does the retailer get the money for his initial stock? Mr. Dale does not say. Presumably, he would have to save enough money to buy his initial stock. (Mr. Dale’s reform is designed to discourage savings.) Thus, he would have to borrow the money from himself, a bank, or someone else to pay for his initial stock. (Mr. Dale does not like people borrowing.) Mr. Dale suggests that the retailer should be buying his next stock from the money earned from selling his current stock. Is it not more economical to pay for the current stock from the selling of the current stock and for the next stock from the selling the next stock? It does eliminate the need to borrow either from oneself or from a bank. Mr. Dale should like that.

At the point of repeating myself again, Mr. Dale is totally confused about the real bills doctrine. His confusion is never more evident than his comment on the simple example that I give about the real bills doctrine.

He sees a long line of lending where no lending is occurring. A real bill of exchange is not a lending instrument. It is a clearing instrument No one is lending. No one is borrowing. Producers and wholesalers are giving the retailer time to sell the final product to the final consumer. By doing this, they free capital for other uses instead of tying it up in stock.

Perhaps Mr. Dale is confusing the real bills doctrine with the current system. The producer, wholesaler, and retailer are dependent on bank loans to operate. The real bills doctrine frees them from this dependency on bank loans. It allows them to operate without banks and loans. Again, Mr. Dale should like this.

Mr. Dale asks where an investor or bank gets the money to buy a real bill and what kind of money is it and how did it get into circulation. Under the system that I am advocating, the investor gets his money from savings. I have already explained how metallic money and commercial money and the bank money into which commercial money is converted get into circulation. (I am not sure where they would get the money under Mr. Dale’s reform as it discourages savings. However, real bills would not exist under Mr. Dale’s reform as all his money is someone’s obligation.)

Mr. Dale asserts that all checkbook money is bank-created money. If one deposits a gold coin in his checking account, the bank takes the coin and appears to do something mysterious with it—Mr. Dale does not state what happens to it. The bank just creates checkbook money out of nothing—so Mr. Dale implies. Apparently, the money in the checking account is not a claim against the gold deposited. In reality, the bank puts the gold coin in its vault and credits the depositor’s checking account with the gold deposited. The depositor can then write a check on his account instructing the bank to transfer the gold to another person. Mr. Dale is an intelligent person and should know this.

Mr. Dale continuously harps that a bank creates money when it credits a checking account even when money is deposited in a checking account or when a bank converts one form of money to checkbook money. I suppose that one could construe that a bank creates money when it converts money from one form to another. When a person deposits a gold coin in his checking account, in a sense the bank does create checkbook money by crediting to the depositor’s checking account. That checkbook money did not exist before. However, that process is more correctly viewed as conversion instead of creation. The new checkbook money enters the money supply, and the deposited gold coin is removed. When a check is deposited redeeming the gold coin, the gold reenters the money supply and the checkbook money leaves it. No change has occurred in the money supply.

Likewise with real bills, a bank removes it from the money supply when it "creates" checkbook money, crediting the checking account of the seller of the bill, to buy the bill. The bank has not increased the money supply. It has removed the bill, which is money in its own right, from the money supply to offset the checkbook money added. Within 90 days that checkbook money, or an equivalent amount checkbook money and bank notes, is permanently removed from the money supply when it pays the real bill. When paid, the real bill is also retired permanently and removed from the money supply as the goods that it represents have been sold.

These processes differ from the current bank lending process. Currently, banks often create new money as checkbook money when it lends. Mr. Dale, does a bank create money when it lends savings deposits? When the Federal Reserve buys treasury bills, it creates checkbook money, that is, it credits a checking account with the price of the treasury bills. It can do this directly or indirectly through local banks by crediting that bank’s reserves. This is not a conversion process because treasury bills were not and are not money. The Federal Reserve is actually adding new money to the economy without offsetting it by removing an equivalent amount of existing money.
I note that "the real bills doctrine generates the money necessary to buy newly produced goods and retires that money when the goods are sold." Mr. Dale responses, "If there was enough gold money there would be no need for the real bills doctrine." Apparently, my lack of clarity again appears. I never claim that there is enough gold without the real bills doctrine for the economy to function efficiently. (It can function, but not efficiently.) Furthermore, I know that Mr. Dale is obsessed with his loathing of charging interest. Commercially created money (real bills) does not involve interest. To repeat myself, the discount rate for a real bill is not an interest rate.

To explain adequately everything to Mr. Dale, I guess that I needed to write another 30 pages or more. Even then, I could not anticipate all his points of confusion. Furthermore, I doubt that I could convince Mr. Dale that the discount rate is not an interest rate and a real bill is not a loan. No matter how articulately I or anyone else expresses this truth, I doubt that Mr. Dale will ever accept it.

Mr. Dale claims that my statement "with their production, the people create money" could "only be true if everyone bartered." I have already described about how people create money under the real bills doctrine. I will not repeat that here. Barter is not necessary. To my statement that "with their consumption, they destroy money," He remarks, "I didn’t know that eggs, bananas, meat, bread, wine, houses and clothes etc. were money." Where did I say that they were money? True, people consume these products. However, they buy them with gold coins, bank notes, or checkbook money. The seller uses these moneys to pay his bill. Payment of the bill retires (destroys) it. If the owner of the bill receives bank notes or checks in payment, he sends them to the bank of origin for gold. The bank of origin removes (debits) gold from the account on which the check is drawn—thus, destroying that checkbook money. It retires (destroys) the bank notes received and redeemed. Thus, "with their consumption, they destroy money."

Mr. Dale asks why gold is needed with the real bills doctrine. The real bills doctrine cannot work without gold (or another commodity functioning as money, such as silver). Real bills must always mature into specie, i.e., gold in our present discussion. Being a future good or obligation, real bills can only mature into a present good that is no one’s obligation, such as gold. (As fiat money is a future obligation, including Mr. Dale’s fiat money, real bills become nonfunctional under fiat monetary systems.) Moreover, gold functions as the governor or regulator for the whole system. If real bills overestimate or underestimate the value of new goods being offered for sale, gold notifies sellers, bankers, and others that errors are occurring and corrective action is needed. It also prevents inventory speculation, which is discussed below. Moreover, gold is also needed for things that do not qualify to be covered by a real bill of exchange, e.g., things that typically take more than 90 days from production to final consumer, such as houses and factories.

Mr. Dale continuously insists that bankers are earning "all that ‘nice’ interest as profit for not really producing any thing" in connection to real bills. Must I repeatedly rebut that real bills pay no interest? Its discount rate is not an interest rate. I explain this above.

Furthermore, real bills are not loans. They are claims to future money and evidence of credit transactions. They are clearing instruments and not lending instruments. I explain this above.

I state, "Banks merely convert it from one form (real bills or commercial money) to another (bank notes and checkable deposits)." Mr. Dale remarks, "Then why don’t we all just write our own real bills and go deposit in our checking accounts." He has got to be kidding. Is this a serious question? I give the obvious answer: Most of us are not doing anything that would qualify for a real bill of exchange. So, if we wrote one, we would need a coconspirator or some ignorant buffoon to accept (sign) it, or we would have to forge a signature of acceptance. If we then tried to unload it on a bank or someone else, we would be guilty of fraud. I am sure that Mr. Dale knows this.

Nelson Hultberg describes real bills as "temporary bills of exchange that appear simultaneously with goods that are being produced to aid such goods in further transportation along the production/consumption chain. These bills of exchange then go out of existence once the goods have cleared the markets."[8]

Most of us are not directly involved in the production of consumer goods expected to be completely sold within 90 days. Therefore, most of us cannot write real bills of exchange. Mr. Dale, I am beginning to believe that you "must not live in the same world as the rest of us."
Mr. Dale continuously harps on real bills being loans. As I explained above, they are not loans. No one is borrowing. No one is lending. Furthermore, no one pays interest on a real bill. The discount is not interest. If the retailer pays the supplier on delivery instead of 90 days later, he receives the discount. He pays less if he pays at the time of delivery than he would pay if he pays 90 days later. Does that mean he has collected interest from the supplier? Mr. Dale seems to think so.

About the real bills doctrine, Mr. Dale claims that it is "based on the theory that gold was the only real money, money that neither the farmers, nor the businessmen, nor the bankers had." Why would no farmer, businessman, or bank have any gold? That any of them would have been in business without at least at some time possessing gold is incredulous.

He also states, "The real bills doctrine was where the banks could finance industry based on commercial paper guarantees." This is not exactly correct. Not all commercial paper is acceptable for discounting under the real bills doctrine. The only commercial paper eligible for discounting under the real bills doctrine is a real bill of exchange or a promissary note that is functionally the same as a real bill of exchange. Other commercial papers, such as bills of acceptance and bills of accommodation, are really lending and not clearing instruments. A bank may say that it is discounting them, but it is really lending and charging interest.

Mr. Dale is correct when he states that government bonds and broker loans are ineligible. However, he claims that inventory speculation is acceptable under the real bills doctrine. It is not. A function of gold under the real bills doctrine is to prevent inventory speculation. Bank notes and checkbook money created for inventory speculation result in bank notes and checkbook money exceeding the demand for money to buy new goods. The excessive credit money would be redeemed for gold. As people redeem the excess bank money for gold, the bank risks not having enough gold in its vaults to honor these claims (its credit money). If it fails to redeem all its bank money presented for redemption, the government should send the banker to prison for fraud. If the government would imprison every banker who failed to redeem his notes and checks drawn on his bank’s accounts (assuming the account is credited for more than the check), bankers would be strongly discouraged from discounting (buying) any bills based on inventory speculation.

In my demonstration showing that enough gold exists, Mr. Dale complains about my expressing gold in dollars. To make the necessary comparisons, I needed to convert everything to a common unit. I could have converted everything to euros or ounces. I chose dollars because most Americans think about money in terms of dollars.

Mr. Dale must have been "grasping at straws" at this point to find faults with my paper. Apparently, he would have understood the comparison better if I compared gold in ounces to trade volume in dollars.

Toward the end of the paper, Mr. Dale describes the real bills doctrine. His description assumes a central bank like the Federal Reserve. Some of the problems that he associates with the real bills doctrine can occur with a centralized banking system. Although I did not discuss the banking system in my original article as it was beyond the scope of the article, I argue against centralized banking and in favor of decentralized banking in my book Reconstruction of America’s Monetary and Banking System. My first recommendation in reconstructing America’s monetary system is to abolish the Federal Reserve.

Mr. Dale claims that "in the 1792 coinage act the dollar was value in wealth owned, a weight, 24.75 grains of pure gold." This is incorrect. Congress defined the dollar as 371.25 grains of silver (.995 fine) or 416 grains of standard silver (0.892 fine). Thus, Congress defined the dollar as a certain weight of silver, which Mr. Dale acknowledges in another comment, and not gold. (It did not fix the price of silver.) "As for gold, Congress adopted the ‘eagle’ and defined it as equal to ten silver dollars. One eagle contained 247.5 grains of pure gold and was equal in value to 3712.5 grains of pure silver. Thus, in terms of gold, one silver dollar equaled 24.75 grains of pure gold, 27.00 grains of standard gold (0.91667 fine). . . ."[9]

When I state that "when accompanied by the real bills doctrine this amount of gold could accommodate more that $425 trillion in trade quarterly or more than $1.7 quadrillion annually," Mr. Dale claims that I am fractionalizing gold. I am not. Under the real bills doctrine with sound decentralized banking, fractional reserve banking does not exist. Specie or commercial money backs all credit money (bank notes and checkbook money) that a bank "creates" (more correctly, converts). The specie and commercial money remains out of circulation. No one has use of it while the bank money representing that specie or commercial money is in circulation or available for use. Thus, if all bank notes and demand deposits (checkbook money) are fully backed by specie (gold and silver) or commercial money (real bills) maturing into specie, fractional reserve banking as such does not exists. I know that Mr. Dale will never understand that this is not fractional reserve banking. For my inability to explain this concept adequately and clearly, I apologize to him.

Mr. Dale writes, "Before one can have gold or silver stamped into coined money one must have the gold and silver, which seems to be something very hard for most people to get their hands on." If Mr. Dale or anyone else who finds it hard to obtain gold and especially silver, he has not bothered to find any. Gold and silver are easily found without hardly looking—try eBay for a starter. Hundreds if not thousands of money changers exist around the country to change federal reserve dollars into gold and silver. Anyone who can acquire federal reserve notes can acquire silver. One can convert a $20 federal reserve note (less than the cost of a meal for two at a moderately priced restaurant) into one ounce of silver and receive change back. If one observes his change, he may occasionally find a silver dime or quarter. Anyone who earns an average wage can easily save enough to obtain gold if he really wants the gold.

I point out that Gresham’s law explains why one does not see people paying their debts with gold and silver. I noted that people are not going to pay a $1000 debt with 20 $50 gold eagles (20 ounces of gold) or 1000 $1 silver liberty dollars (1000 ounces of silver). Mr. Dale remarks, "If all the things he mentioned above where legal tender and the legal tender law were enforced, all those things would have the same purchasing power." Congress has made all them legal tender. As the debtor chooses the legal tender with which to pay his debts, he will choose the cheapest (lowest quality) one, which is the federal reserve note. (Considering Mr. Dale’s predilection for paper money, he probably would use gold or silver coins, if he could find any, for payment and save his paper money.)

They may all have the same debt paying power although the IRS disputes that. The IRS contends that when a person’s wages are paid with gold eagles, for example, for tax purposes the wage is computed based on the value of the coin’s metal content in terms of the federal reserve notes. It is not computed based on the legal tender value stamped on the coin.

Mr. Dale fails to realize that Gresham’s law trumps legal tender laws when high quality money like gold and low quality money like irredeemable federal reserve notes are both legal tenders. People will spend the low quality money and save the high quality money.

Mr. Dale asserts, "The myth is that there ever [sic, I assume he means never] was enough gold for a good general medium-of-change." If there has never been enough gold, why have people chosen it for money when left free from governmental coercion? People have never voluntarily chosen irredeemable paper money, even the paper money promoted by Mr. Dale, as their money without governmental coercion. Perhaps Mr. Dale can provide an example if I am wrong.

Mr. Dale writes, "The United States Constitution did not declare what was to be or what was not to be dollars." The Constitution does not define year or mile, either, but it uses year and mile as a unit measure—just like it uses dollar as a unit of measure. Mr. Dale must believe that the writers of the Constitution did not have a clue about what they meant by "dollar." They were going the leave its definition to the whim of Congress. Congress could define the dollar on a whim and could change that definition at anytime on a whim. He also must believe that the people as States adopted a constitution that allowed Congress to levy a duty up to $10 per slave imported without knowing what a dollar was. Without this knowledge, they would not know what this tax would be. Would they have approved the Constitution not knowing what a dollar was or would be? Would they have approved the Constitution if Congress could declare the dollar to be anything that it wanted it to be? If so, for all they knew, Congress would define the dollar as a slave. Thus, the importer of slaves would pay the U.S. government up to ten slaves for each slave imported. Does Mr. Dale really believe this? He does if he believes that the definition of the dollar was left to the whim of Congress. (Mr. Dale must maintain that the definition of "dollar" is left to the whim of Congress to justify the constitutionality of the dollar that he proposes in his monetary reform.)

If Mr. Dale is consistent, he must also believe that the definition of "year" and "mile" is left to the whim of Congress. Congress could lawfully change the definition of "year" from one rotation around the sun to 100 rotations and give themselves lifetime tenure. A two-year term would thus last for 200 rotations around the sun. It could lawfully change the definition of "mile"such that the ten-miles-square district over which it is given exclusive legislation covers the whole country.

Contrary to Mr. Dale’s assertion, people knew what a dollar was. Lawfully, Congress can no more change that definition than it can change the definition of year or mile. The definition of "dollar" was not left to the whim of Congress. Everyone knew that the dollar meant the weight of silver in the Spanish milled dollar. Under the Articles of Confederation, Congress had defined the dollar as the weight of silver in the Spanish milled dollar. It adopted that standard because the Spanish milled dollar was customarily used in commerce and business.

Mr. Dale faults my article for my failure to discuss banking. Such a discussion was beyond the scope of my article. If he wants to read my discussion of banking and how it needs to be reconstructed, he should buy my book, Reconstruction of America’s Monetary and Banking System, and read the 80 pages on banking.

I write, "The founding fathers never intended that the U.S. government should issue any kind of paper money. The Constitutional Convention discussed that issue and the Convention rejected granting the U.S. government the authority to print or issue paper money." Mr. Dale responds, "The Constitutional Convention discussed not using bills of credit." Members of the convention used "bills of credit" and "paper money" interchangeably. They were synonymous. James Madison wrote, "Striking out the words [‘to emit bills on the credit of the United States’] cut off the pretext for a paper currency, and particularly for making the bills a tender either for public or private debts."[10] Oliver Ellsworth, who was also a member of the Constitutional Convention and later chief justice of the Supreme Court, concurred with Madison, "This is a favorable moment to shut and bar the door against paper money."[11]

Mr. Dale claims that "the first thing that the founding fathers did under the direction of Alexander Hamilton . . . [was to] set up a bank and issued bills of credit." The United States Bank was a private corporation chartered by Congress. It was not part of the U.S. government. Like all other banks, it could issue bank notes or, as Mr. Dale calls them, bills of credit. As such, it did not violate the constitutional prohibition against Congress issuing bills of credit. (One could construe that chartering the bank was a way to sneak around this prohibition.) I agree with Jefferson that Congress has no authority to charter a bank. Therefore, the United States Bank, like the current Federal Reserve, was unlawful, and its establishment was unconstitutional.

In conclusion, Mr. Dale habitually confuses the monetary system of the gold and silver standard accompanied by the real bills doctrine (commercial paper principle) that I propose with the current monetary system. He seems unable to think outside the parameters of the current monetary system. Because he cannot free himself from the parameters of the current debt-based fiat monetary system does not mean that others cannot. (He wants to maintain a debt-based fiat monetary system.)

In closing, I offer a comment by Professor Walter E. Spahr, Chairman of the Department of Economics at New York University from 1927 to 1956, "What is the meaning of a gold standard and a redeemable currency? It represents integrity. It insures the people’s control over the government’s use of the public purse. It is the best guarantee against the socialization of a nation. It enables a people to keep the government and banks in check. It prevents currency expansion from getting ever farther out of bounds until it becomes worthless. It tends to force standards of honesty on government and bank officials. It is the symbol of a free society and an honourable government. It is a necessary prerequisite to economic health. It is the first economic bulwark of free men."[12]

Endnotes

1. Byron Dale, Bashed by the Bankers (Pro-American Educational Foundation, 1988), p. 51.
2. Byron Dale, "Analysis of Thomas Allen’s There is enough Gold," http://www.chrismartenson.com/ print/25550, Aug. 21, 2009. All quoted material whose source is not noted is from this source.
3. Thomas Coley Allen, Reconstruction of America’s Monetary and Banking System: A Return to Constitutional Money (Franklinton: TC Allen Co., 2009), p.130.
4. Charles Rist, History of Monetary and Credit Theory from John Law to the Present Day, translator Jane Degras (1940, reprint; New York: Augustus M. Kelly, 1966), p. 35.
5. Antal E. Fekete, "Monetary Economics 101: The Real Bills Doctrine of Adam Smith," Lecture 6, Aug.5, 2002, http//www.shoemakerconsulting.com/GoldisFreedom/PVFfiles/ lecture101-6pvf.htm, Sept. 12, 2007.
6. Antal E. Fekete, "Monetary Economics 101: The Real Bills Doctrine of Adam Smith," Lecture 12, Oct.6, 2002, http//www.shoemakerconsulting.com/GoldisFreedom/PVFfiles/ lecture101-12pvf.htm, Sept. 12, 2007.
7. Allen, p. 183.
8. Nelson Hultberg, "Cranks in the Gold Community," July 11, 2005, http://www.finacialsense.com/editorials/hultberg/2005/0711.htm, July 12, 2005.
9. Allen, p. 84.
10. George Bancroft, A Plea of the Constitution of the United States, p. 40.
11. Ibid., p. 43.
12. The Gold Standard Institute, Newsletter #3, August 24, 2009, p. 1.

Copyright © 2009 by Thomas Coley Allen. 

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