Do We Really Need to Return to Hamilton?

Do We Really Need to Return to Hamilton?
Thomas Allen

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Wilson asserts, and correctly so, that hard work and merit resulting in an appropriate reward has largely vanished in today’s America. Conniving, scheming, and, most importantly, political connections and being a member of a politically promoted group reward people today. (In turn, the rich and powerful, i.e., the ruling elite, globalists, control most of these people.) After the ruling elite, these are the people who will benefit most from protective tariffs. The ruling elite will use them to control the tariffs and direct the tariffs to protect their interest.
Wilson concludes his article with the following:

Nobody can understand or completely manage a large economy. Surely, there are not many “lessons of history” more obvious and certain than that. But economics is a matter of human thought and action. Human thought and action can be applied to such matters as trade, labor, the money supply, in ways that are better or worse. But better or worse for whom! We need to remember what prosperity is supposed to feel like. But first we must find out who “we” are.

Thus, if improving the prosperity of the people is the objective, America is obviously going in the wrong direction. Ever more government has improved the prosperity of the ruling elite. However, it has diminished it for everyone else. If the people want to regain their lost prosperity, they need to do something different. They need a massive dismantlement of government.

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

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

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

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

Copyright © 2010 by Thomas Coley Allen.

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

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

Thomas Allen

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Part 1

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

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

Thomas Allen

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Copyright © 2010 by Thomas Coley Allen.

Part 2 

More articles on money. 

Questions for Anti-Usurers

Questions for Anti-Usurers

Thomas Allen

According to Deuteronomy 23:19, “Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of any thing that is lent upon usury.” Webster’s New International Dictionary of the English Language, second edition, unabridged, 1948, defines “usury” as “a premium or increase paid, or stipulated, for a loan of money or goods.” Usury is a return or income on property without any apparent effort by the property owner. Usury is also called “interest,” “dividend,” “rent,” and “fee.”

The following are questions that opponents of usury need to answer to show that usury is undesirable.

1. Why have not the anti-usurers established loan companies that make interest-free loans? Why do they not put their money where their mouths are? If interest-free loans are economically preferable to interest-bearing loans, would not companies making interest-free loans soon drive companies making interest-bearing loans out of business? A truly interest-free loan would be without fees, etc. With a truly interest-free loan, a person, for example, borrows $10,000 for five years. At the end of five years, he pays the lender $10,000. The lender never receives anything more than $10,000 from the borrower. The borrower does not pay any more than $10,000. If the anti-usurers are not willing to do at least this much, why should they complain?

2. Why do most anti-usurers seek to hide their interest as fees, share-the-wealth, buy-out schemes, and the like? Loan fees are merely interest by another name. (Points and fees for mortgages originated as a means to circumvent interest caps when market interest rates for mortgages rose above the statutory ceiling.)

3. Why do anti-usurers want to outlaw savings accounts and certificates of deposit? Savings accounts and certificates of deposit are interest-bearing loans to banks. Why do anti-usurers want to require small account holders to pay bankers to hold their money?

4. As savings are mostly in the form of interest-bearing loans, where will savers put their savings? How will savers earn an income from their savings? Where can the common man, who can save only a small sum, put his money to earn a return? Why are savers to be penalized?

5. Why do anti-usurers want to outlaw publicly traded corporations? Corporative stock is merely an indefinite loan with a highly variable interest rate. From a corporation’s perspective, the primary difference between mortgages, bonds, and stocks is the priority of payment. Is not a dividend a return on a stock like interest on a loan? Is it not a return on money?

6. Without the ability to earn interest and interest on interest, how will the common man accumulate enough capital (store enough labor) to provide for himself in his old age? Or do the anti-usurers endorse the welfare state and want to force everyone in the community, ultimately under the penalty of death, to support the old?

7. Why do anti-usurers want to push people away from relatively low-risk investments like savings accounts, bonds, and dividend-paying stock and to commodity speculating and gambling? Besides speculating and gambling, where else can a person earn a return on his meager savings? Most do not have enough to start a viable business, and the anti-usurers seem to want to deny them this opportunity. If they do not, how will someone raise enough capital to start a viable business? If he combines with others to form a viable business, the partnership will have an unwieldy number of partners.

8. Why do the anti-usury people want to keep the poor impoverished? If they do not, why do the anti-usurers want to prevent the poor from earning a return on any savings that they manage to accumulate?

9. Where will the masses live? No one will be able to borrow to buy a house. (The best that a lender could hope for if the borrower failed to pay the loan would be to receive a house in unknown condition and of unknown value. If the value of the house exceeds the loan, the borrower gets the excess. Such high-risk lending makes the risk of potentially highly rewarding commodity speculating look small.) The anti-usurers have shut off most avenues, except gambling and speculating, of increasing savings sufficiently to buy a house outright. So, if a person does not inherit a fortune or have parents who will give him the money, where does he get the money to buy a house? Does he have the government steal it from the wealthy and give it to him? He cannot rent a place to live because no sane person will become a landlord. Renting a house or apartment is merely lending capital or property as a house or apartment. Rent on a house or apartment is usury (see the definition above). The landlord lends the use of the house or apartment. In return, the landlord receives interest, which is commonly called rent. Under an anti-usury regime, the only thing that a renter should be obligated to do is to return the house or apartment to the landlord when his lease expires. Before anti-usurers try to weasel their way out of this dilemma by distinguishing between lending money and lending housing, they must explain why paying a person for the use of his property is acceptable while not paying a person for the use of his property is unacceptable. Why is receiving an increase from lending capital acceptable while receiving an increase from lending capital is not?

10. At least some anti-usurers are consistent enough to view the renting and leasing of land, dwellings, tools, machines, etc. as the same as renting and leasing money. If one leases a car [money], the owner of the car [money] gets the car [money] back at the end of the lease. Any money paid for the lease is ill-gotten gain made on property that is returned. It is all usury. (See the definition above.) Why do the anti-usurers want to outlaw leasing and renting and rental businesses? If they do not, why are they inconsistent? Will not outlawing rental businesses force people to buy expensive equipment that they will use only once? Does not such outlawry force people to waste their resources and time in buying and selling things? What happens if they do not have the money to buy the equipment and no one will lend it gratuitously? For example, if a person is moving and cannot afford to hire a moving company and cannot afford to buy a truck to move his furniture, what does he do with his furniture? Abandon it? Sell it as a discount to get rid of it quickly?

11. Will not insurance be more expensive if usury is outlawed? As insurance companies earn much of their income via lending (stock, bonds, and mortgages), where will they invest premiums to earn a return to keep down the costs of policies? Will they not be forced to collect the full amount of coverage plus the cost of security from policyholders and hoard the money in vaults?

12. Why do the anti-usurers oppose large-scale capital investments like power plants, steel mills, and automobile manufacturing assembly lines? If they do not oppose them, how will sufficient capital be saved and combined to build them—as their system discourages the savings of capital, i.e., the storing of labor? Without resorting to theft via taxation, how will enough funds be accumulated to build extremely expensive undertakings? (Remember that stock is as much of a loan as a bond; so selling stock cannot be used—unless no dividends are ever paid and no capital gains are made. What about capital losses?)

13. Why should a person be forced to risk his capital without hope of compensation, which is what anti-usury laws do? Why would any sane person want to incur the liability involved by letting another use his (the lender’s) property without compensation? Why do most anti-usurers fail to recognize that the lender risks losing his property? Why should a lender risk losing his property without compensation? Why would any rational person want to incur the risk of lending without compensation?

14. If a person buys a farm for money, to whom do the profits from the crops grown on the farm in subsequent years belong? The buyer or the seller? Does not consistency dictate that they go to the seller? Is not the buyer receiving an increase (interest) on his money (the money used to buy the farm) if he keeps any of the profits?

15. Except for charitable purposes, why should one person forgo his consumption today without compensation by lending to another person so that the other person can consume today? Is not the present value of everything greater than its future value for prisoners of time? If not, why? What are the exceptions and why are they exceptions?

16. Which has more value: a possession today or a promise to pay in the future? Or are they equal in value? If so, why? If not, why should they be treated as equal in value? Why do anti-usurers claim that they are equal in value? (As interest expresses the difference in value between the two and as the anti-usurers would outlaw interest, they in effect are claiming that they are equal in value.) If their values are not equal, then the one who promises to pay in the future is stealing value from the one who is lending what he possesses today. How can this theft be justified?

17. A person lends his gardening tools (or money) to his neighbor to prepare his (the neighbor’s) garden. The neighbor returns the tools (or money) to the lender after the time has passed for preparing the garden (using the money as the lender wanted). Although the lender cannot prepare his garden, anti-usurers assert that the lender has suffered no loss as the lent property has been returned and, therefore, should receive no compensation. Why should not the lender be compensated? Has he not sacrificed his welfare for that of his neighbor? Should the neighbor get a free ride for this sacrifice?

18. Some anti-usurers argue that the lender has no claim on any portion of the labor of the borrower. If true, then why does the borrower have a claim on part of the labor of the lender? The lender forgoes the use of his stored labor while the borrower is using it. Therefore, the borrower has claimed part of the lender’s labor without compensation. Why the inconsistency?

19. Does any rational person ever borrow money at interest unless he believes that the benefits of the loan outweigh the cost? If so, when and why? Why would a rational person borrow when he believes that the cost of the loan will exceed the benefit? Why would he do with borrowing that which he would never do in any other transaction, economic or otherwise? (A rational person will never undertake any kind of transaction unless he believes that the benefits will exceed the cost.)

20. Anti-usurers argue that a lender’s claim that interest is payment for his service of letting the borrower use the lender’s property is false. The lender has not surrendered any of his wealth, and he does not become poorer making the loan. Does he not become poorer if the loan is not paid back? Moreover, does he not give up the use of his property when he lends it to another? How can two people use the same property simultaneously? Does not the lender forgo the additional wealth that his property could have earned him if he had not lent it? Why should he forgo this income without compensation? Why does not the lender provide the borrower a service with the loan? If no service is rendered, is not the borrower better off without the loan, which becomes an obligation? So why borrow?

21. Why is it unjust and oppressive for a lender to demand payment for the use of his property (including money) as compensation for not being able to use that property while the borrower has control of it? Why should the lender suffer a time-use loss without compensation?

22. Do anti-usurers really believe, as some argue, that the borrower is rendering a real and valuable service to the lender by keeping the property (money) for the term of the loan and returning it to the lender? If true, should not the lender pay the borrower interest on the loan? If the lender should not pay the borrower, why should the borrower be forced to render the service of holding the lender’s property (money) for no fee? Cannot a lender keep his own property (money) more securely than he can by entrusting it to another? Why would he entrust it to another? (The exception may be storing his property [money] at an institution skilled in protecting stored property [money].)

23. Why do anti-usurers not only fail to see that a lender is providing a service but frequently argue that he provides no service at all? On the contrary, as just discussed, some claim that the borrower is providing a service for the lender. What service is the borrower providing the lender? Is not the lender providing the borrower a service by providing the borrower the use of property that he would not otherwise have? Would not the borrower have to do without the property lent to him if the lender did not lend it? Why should the lender not be compensated for providing the service of lending the borrower the use of the lender’s property?

24. Do anti-usurers really believe as some seem to argue that borrowers borrow money to sit on it and not use it for investment or consumption? Do lenders lend money to borrowers with the thought that the borrower is doing the lender a favor by holding and using the lender’s money for a time as some anti-usurers argue?

25. Interest rates inform savers about where their savings are most needed and about how much savings are needed. If interest is outlawed, what will inform savers about where their savings are most needed and how much is needed?

26. Interest serves as a rationing tool to equalize the supply of lenders to the demand of borrowers. Without interest, will not the demand of borrowers soar and the supply of lenders collapse? Will not borrowers believe that an unlimited amount of money is available for loans? Will not lenders believe that the demand for money by people who really need it is near zero? If this is not true, then why does not the law of supply and demand apply to lending and renting of property? If interest is not used to ration lending, what will ration loans among borrowers?

27. Why do some anti-usurers believe that an exchange between two people is an act of usury if in the minds of the anti-usurers one party receives a thing of value much greater than the other? Do they not realize that no exchange can occur unless each person values what he receives more than what he gives up? Do they not realize that nothing has absolute value? (Things may have absolute value in the mind of God. What man knows the mind of God?) Are not all values subjective and constantly changing? For example, is not the value of a poor meal much greater for a hungry man than an excellent meal is for someone who has just eaten a buffet? If not, why?

28. Do anti-usurers propose to outlaw the selling of bills of exchange? No lending or borrowing is involved with a bill of exchange. When a bill of exchange is sold, it is sold for less than the face amount due. Money today is worth more than money tomorrow is worth today. Thus, no rational person will buy a bill of exchange due in a day, week, or month for full face value. Do anti-usurers propose to void this law of nature? Will they make the selling of a bill of exchange below face value a criminal act?

29. Why was life better during the anti-usury eras of the Dark Ages and Middle Ages than during the usury era of modern times?

30. Were the convoluted loans created during the Middle Ages and Renaissance to circumvent anti-usury laws better than the straightforward interest-bearing loans of today? If so, why?

31. The Industrial Revolution was built on interest-bearing loans, of which many were interest-bearing small savings accounts (small loans to banks). Why do the anti-usurers promote a system that would have prevented the industrial age from occurring? Was life before the Industrial Revolution that much better? If so, how and why?

32. Some anti-usurers cite the historical record of one government after another outlawing usury. As governments are usually the largest debtors in any society, do they not have a bias toward interest-free loans? Do not interest-free loans make their wars cheaper and, therefore, make wars more enticing?

33. Why should consenting adults be prohibited from engaging in interest-bearing lending—one as the lender and the other as the borrower?

34. Why should a person with capital who needs income be prevented from agreeing with a person who can produce income but lacks the capital to do so to exchange capital for income? By all common usury definitions, this income would be considered usury. The person with capital who cannot produce income is usually an older person. The person lacking capital who can produce income is a younger person. Why should the older person be denied a steady stream of income? Why should the younger person be denied the capital to produce income?

35. Who is ever really forced to borrow at interest? How many people have had a legal interest-bearing loan forced on them? Who are they? Can a person avoid paying interest by not borrowing? He can do without for whatever he was going to use the borrowed money; can he not?

36. Those who make a Scriptural argument against usury ought to know that the Scriptures allow interest-bearing loans to strangers, i.e., people of a different race. (“Unto a stranger thou mayest lend upon usury. . . .” [Deuteronomy 23:20]) If they do not have this rudimentary knowledge, they should not be making a Scriptural argument. Does not the prohibition against lending money to people of one’s own race give an incentive to lend to people of other races? If not, why? Do the anti-usury people intend to remove this incentive to lend to people of other races while neglecting their own race by outlawing interest-bearing loans to everyone? If so, why do they want to void what the Scriptures clearly allow? Does not the anti-usury program lead to the absurdity of Asians lending to Europeans to build up Europe while Europeans lend to Asians to build up Asia? Likewise, does it not lead to the absurdity of Europeans having to borrow from Asians to buy their cars and houses while Asians have to borrow from Europeans to buy their cars and houses? Or do the anti-usurers really believe that rational people will risk their property (lend their money) for no chance of reward when they can risk their property where they have a chance of reward?

Copyright © 2010 by Thomas Coley Allen.

More articles on economics.

Analysis of the Monetary Reform Act — Part II

Analysis of the Monetary Reform Act — Part II
Thomas Allen

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

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

Section 10, Treasury Deposits, authorizes the use of money placed in Treasury Department Deposits “pursuant to appropriation by Congress, to pay for goods, services, or interest needed by the federal government.” Funds “in excess of federal expenditures not funded by tax revenues” are rebated to individuals via the income tax system. Future monetary growth under Section 7 funds withdrawals greater than receipts. If withdrawals exceed this amount, then tax increases cover the excess. If Congress does not increase taxes sufficiently, the Secretary of the Treasury may add a surcharge to the income tax sufficiently to cover the deficiency.

This Section does not have any more force to constrain the use of printing press money to fund deficit spending than the other Sections. It puts pressure on the Secretary of the Treasury to act. It authorizes, but does not require, him to place a surcharge on income taxes. Will the President in the absence of Congressional approval choose the unfavorable reaction to a tax increase? Possible, but not often.

What this Section does, is to allow Congress to increase taxes without having to vote to increase taxes. It appropriates funds to satisfy its favorites. Then, the Secretary of the Treasury raises the taxes necessary to pay for the deficit. That the Secretary would choose to raise taxes on his own is not likely. Contrary to the intent of the Act, printing press money will cover most deficit spending.

Besides breeding corruption, such action harms the economy. Money is taken from the productive and given to the politically influential. Thus, the economy becomes less productive.

Section 11, Interest, describes paying interest on Treasury Department Deposits. One of Mr. Carmack’s objectives is the elimination of federal debt. Yet the Act allows banks under Section 9 to invest in Treasury Department Deposit accounts. In Section 10, the Act allows Congress to appropriate all the moneys in Treasury Department Deposits — and more. Section 11 describes the paying of interest on Treasury Department Deposits. To me, this looks like and sounds like banks lending the government money.

Moreover, Mr. Carmack has reintroduced fractional reserve banking, or at least its essence, that he wants to outlaw. Section 9 allows banks to count money invested in Treasury Department Deposit accounts as reserves for the 100-percent-reserve requirement for checking accounts. Thus, money in these Treasury Department Deposit accounts is immediately available for the checking account depositors to use. Section 10 allows Congress to appropriate funds placed in Treasury Department Deposits. Thus, the Act allows two different parties, Congress and the checking account owner, to use simultaneously the same money. Simultaneous use of the same money by multiple parties is the essence of fractional reserve banking.

Mr. Carmack realizes this problem with banks. He requires 100-percent reserves for banks to prevent simultaneous multiparty use of money. Apparently, he does not realize that the government is acting like a fractional reserve bank when it spends deposits used to back checking accounts. Thus, he defeats himself in trying to outlaw fractional reserve banking.

If he does not intend for the government to engage in fractional reserve banking and wants to end routine governmental borrowing, he needs to prohibit any bank, private individuals, associations, and companies from having Treasury Department Deposit accounts.

Section 12, Lending Institutions, gives the requirements for lending institutions. These include “investment trusts, mutual funds, brokerage or lending houses.” They may sell stock and may receive, borrow, lend, or invest money at interest but only with existing funds, i.e., U.S. notes and Treasury Department Deposits. They cannot be called banks. “[A]t no time may more funds be subject to demand than are presently idle and one hundred per cent (100%) available on demand.” This provision seems to be the Act’s prohibition against borrowing short and lending long. If so, it could be worded better. “For any funds deposited with such associations payable on demand there must be a dollar of United States Notes on hand or deposited in a Treasury Deposit.” This provision seems to be functionally the same as a checking account, “payable on demand,” although this Section prohibits calling them demand accounts and prohibits lending institutions from providing checking accounts. “No such association may denominate any account a demand account, nor promise immediate availability of any funds which may be invested, deposited or otherwise placed by such association without notice in any instrument or account other than Treasury Deposits.” Thus, this Section seems to be at least partially contradicting itself. Moreover, this Section prohibits the transfer of funds “by check, credit card, electronic transfer or any substitute therefor.” Does this mean that all count withdrawals and loans have to be in currency? It seems so.

Section 13, Repeal of Conflicting Acts, repeals the National Banking Act of 1864 and amendments and the Federal Reserve Act of 1913 and amendments. It transfers all Federal Reserve System monetary authority along with the Federal Reserve's assets, liabilities, and employees to the Department of the Treasury. It greatly restricts the action of the Federal Reserve System during the transitional year. Federal Reserve notes are phased out but remain legal tenders as long as they are in circulation. If this Act contained only the first sentence of Section 13, the repeal of the National Banking Act and the Federal Reserve Act, it would be a great law.

Like most other fiat money reformers, Mr. Carmack is convinced that fiat money or centralized banking per se does not cause the country’s monetary problems. Who issues the currency and how it is issued cause them.

Mr. Carmack’s proposal does not have a formal governmentally owned and operated central bank like Great Britain does with the Bank of England. (The Bank of England is part of the British government; it is a government agency.) However, the Act requires the Department of the Treasury to act like a central bank in many ways. It holds the country’s banking reserves outside bank vaults. It appears to assume the Federal Reserve’s check-clearing activities. It manages the country’s money. The only activity that the Federal Reserve performs that the Department of the Treasury would not be doing seems to be rediscounting bills.

I do not know what Mr. Carmack intends to do with the Federal Reserve’s large staff of economists. The primary job of many of them seems to be to write scholarly articles for Federal Reserve journals. Perhaps he could use them to write scholarly articles to support his system.

Based on Footnote 8, Mr. Carmack believes that abolishing the Federal Reserve and transferring its power to the Department of the Treasury will eliminate or at least greatly reduce the power and influence of private bankers over the country’s banking and monetary policies. Placing all this power in the Department of the Treasury or any other governmental department does not solve this problem. Bankers have controlled the Department of the Treasury in nearly every administration since Washington’s administration.

Moreover, if he wants to reduce bankers’ influence, he should fire all employees of the Federal Reserve and forbid the federal government to employ any of them ever. They are all contaminated with banker influence. Yet he wants to move all these pro-banker people to the Department of the Treasury and put them in charge of his system. If he really wants to eliminate the power of the bankers, he needs to eliminate the power instead of transferring it.

Section 14, Penalties, sets forth penalties for engaging in fractional reserve banking. Does this mean that the U.S. government is going to fine itself for engaging in fractional reserve banking? Or is it above the law? When Congress appropriates money from the Treasury Department Deposits held as reserves for checking accounts and the President and his bureaucrats spend it, are they going to prison for 20 years? Or are they above the law?

Section 15, Withdrawal from International Banks, requires the U.S. government and the Federal Reserve to end their membership and participation “with the Bank for International Settlements, the International Monetary Fund, the World Bank, and all other international banks” that are “inconsistent with and in direct conflict with the purposes of this Act.” It also directs the President “to take such steps as may be necessary to withdraw the United States from all participation, and membership, in the Bank for International Settlements, the International Monetary Fund, the World Bank, and all other international banks.” The withdrawals must be achieved within one year. He must “recover the original and any subsequent United States subscriptions, contributions and quotas to such organizations, not already fully and lawfully expended, whether in the form of gold, deposits, currency or otherwise” This Section directs the President “to enter into negotiations to establish new exchange facilities” that have “no authority to create money or credit in any form” and that have “no independent authority to establish laws or regulations binding upon the United States or its banks, financial institutions or citizens.”

Withdrawal from these organizations is one of the few positive features of this Act. I question the need to enter “into negotiations to establish money exchange facilities.” Other than giving the U.S. government more control over foreign trade and by extension domestic commerce, what purpose would they serve? Companies that want to engage in foreign trade should bear the expense and risks of making their own deals.

Section 16 Foreign Exchange, directs the Secretary of the Treasury to regulate foreign exchange rates to allow “the external rate of exchange freely to fluctuate, as foreign price levels fluctuate (i.e., in accordance with their respective purchasing power), while utilizing the exchange stabilization fund and foreign currency reserves to counterbalance fluctuations in the exchange rate.” He is to adopt regulations to “1. keep the stable, internal domestic price level established by this Act unaffected by foreign exchange rate fluctuations; 2. maintain imports and exports of capital, in equilibrium.” Under no circumstances are “the foreign exchange rates [to] be allowed to alter the fixed rate of monetary growth set forth in section 7.”

In other words, the Secretary of the Treasury is to intervene in the currency markets and manipulate currencies. He is required to be a currency manipulator. If any individual or consortium attempts to manipulate the currency market, they are condemned and may even be fined or imprisoned. When the Secretary of the Treasury does the same thing, he gets paid. Mr. Carmack’s proposal breeds corruption by not only empowering, but demanding, the government to manipulate currencies.

The people who own the Secretary can make a fortune in currency markets by knowing what the Secretary will do before he does it. They will surely know because they put him in that position to serve and inform them.

Currency manipulation and speculation were not a problem under the gold-coin standard that existed before World War I. It only occurred when the fiat money accompanied the gold standard or when the government allowed banks to suspend redemption.

The Act gets worse. It requires the Secretary to intervene in the capital markets to keep imports and exports of capital in equilibrium. Thus, anyone seeking to transfer money into or out of the country will need the approval of the U.S. government. Capital could be construed to mean much more than money. It could be construed to cover just about every export and import. Thus, the Secretary may have to balance imports with exports. Anyone seeking to import or export things may have to have the approval of the U.S. government. This provision fertilizes corruption.

Furthermore, this Section also makes a false assumption. That is, this Act will achieve stable internal domestic prices. As shown above, this Act is inflationary and cannot maintain stable internal domestic prices regardless of the Secretary’s currency and capital manipulations.

One of the many fatal flaws in all fiat money reforms is their slavish reliance on politicians, which the Secretary of the Treasury is. Fiat money reformers have this puerile belief that all political leaders under their system will be statesmen who place the welfare of the country above their own and that of their friends. (Ironically, most fiat monetary reformers are aware that most of the politicians under the current system are slimy, sleazy scoundrels who always place their and their friends’ selfish desires above the welfare of the country. Moreover, bankers and plutocrats own them. Fiat money reform must be something akin to second coming. It turns sinners into saints.)

Mr. Carmack seems to try to prevent this corruption by discouraging “speculative trading in small differentials in interest on exchange rates” by charging a small fee on currency exchanges (Footnote 12). It may affect small private actors. It does nothing to stop the U.S. government or foreign entities from speculating. Is Mr. Carmack so naive that he believes that the administration will not become involved in currency speculation in the name of foreign exchange stabilization if its friends and owners demand such?

Section 18, Severability, is the severability clause typically found in new legislation. It declares if any provision is found unconstitutional, the remainder remains in effect.

Except for repealing laws and withdrawing from international organizations, nearly everything in this Act is unconstitutional. However, if Congress ever enacted it, I doubt that any federal court would declare anything in it unconstitutional. Anything that increases the power and prestige of the U.S. government increases the power and prestige of federal courts. If the U.S. government has more power and prestige, so do its judges. Like most people, most judges prefer more power and prestige to less. Therefore, they are not likely to rule against this Act. Besides, seldom does a judge let the Constitution stand in the way of his personal biases and political expediency.

Unlike some fiat money reformers, Mr. Carmack at least recognizes the dangers of allowing the government to own the banks. In Footnote 13, he writes that “the power to loan does not properly rest with the government, is most effectively handled at the local free market level, and is easily abused for political purposes as was the case with pre-war Germany’s Reichbank which granted loans to whomever the government chose for political reasons, as do government banks in communist command economies.” He also believes that the setting of interest rates is best left to the markets.

Also, Footnote 13 is a paraphrase of Ms. Coogan, “[F]or the government to create money as loans is even more vicious than for private banks to create money as loans, carrying with it the power to aid (by granting loans) or destroy (by denying loans) whomever it chooses.” Both Ms. Coogan and Mr. Carmack are so focused on creating money through loans that fail to realize that what they are proposing is tantamount to the same thing. They fail to realize that when the government issues U.S. notes, it is issuing debt and, by that, is creating money by loans. It is forcing everyone to lend to it. It is indiscriminately forcing a noninterest-bearing loan on everyone. (In Footnote 7, Mr. Carmack implies that U.S. notes are noninterest-bearing loans. He writes that “no interest would be paid on currency in circulation.”) Moreover, it never intends to pay this debt unless it pays it with more debt.

In his discussion on Footnote 13, Mr. Carmack recognizes that politics guide government instead of economics. He writes:

Decentralized, private lending agencies generally tend to loan to any creditworthy applicant, their primary motive being profit (or profit-derived power) which is maximized by making more loans; whereas governments replace this profit priority with political ends such as rewarding their supporters, the political value of which is maximized by restricting loans. So government lending tends to arbitrary discrimination for political motives, an abuse generally avoided in a truly free market lending situation.

Yet he wants to entrust the government with the management of the country’s money, which is perhaps the most important aspect of the modern economy. For money issuance, he expects economics to guide the government instead of politics. The government needs only to follow the arbitrary criteria set out in the proposed Act. However, the government can change this Act or any part of it at any time. As shown above, it can work with and around the provisions in this Act to achieve its political ends.

Moreover, as the Act guarantees inflation, the people who receive the new money first benefit from the losses of the people who receive the new money later. People who receive the new money first have more political influence than people who receive the new money later.

Fiat money is a political creation. It is not, has never been, and cannot be an economic, market, creation. Therefore, it will always function politically. The economy is forced to adjust around it.

Another flaw in Mr. Carmack’s proposal is the inability of his scheme to remove excess money. Whereas some fiat money reformers allow the removal of excess money through budget surpluses, Mr. Carmack’s scheme precludes this approach. His Act demands the government to increase the quantity of money by 3 percent per year. If the government does not spend it, it goes to income taxpayers.

A monetary system exists that accomplishes Mr. Carmack’s goal of divorcing the creation of money from lending. Furthermore, it divorces the creation of money from politics and government. (No fiat money reformer really wants to divorce the creation of money from the government. They need the government to create their money and force it on the people. Thus, they do not really want to divorce money creation from politics in spite of any protestation to the contrary.) It places the creation of money directly in the hands of the people. Banks are desirable but are unnecessary. As this system uses gold or silver or preferably both, ipso facto, fiat monetary reformers must reject it. Above all else, gold must not enter the monetary system.

Like all fiat money reformers, Mr. Carmack emphatically trusts politicians and bureaucrats to manage the country’s money. He does not trust the people to manage the country’s money directly. Most likely, he cannot conceive of them doing so or how they could do it. (Fiat money reformers seem to trust the people always to elect saintly omniscient statesmen to office, who in turn will hire only saintly omniscient bureaucrats to manage the country’s monetary system. Yet they cannot trust the people to manage the country’s monetary system directly, which they can do without the necessity of omniscience or saintliness.)

Except during the greenback era, the people managed the country’s money directly and without the government, except as a minter of coins. Between 1789 and 1933, when the government did intervene in the management of money, it did so to the detriment of the people’s management. Its primary intervention during this era was to protect bankers. When enough bankers failed to keep their promise to redeem their notes in specie on demand, the government intervened to relieve them of this obligation. It should have sent them to jail for fraudulently violating their promises.

Like all fiat money adherents, Mr. Carmack seems convinced that not enough gold exists to function as money today. As I show in “There Is Enough Gold” and with additional amplification in “Response to Dale’s Analysis of ‘There Is Enough Gold’” that enough gold exists to accommodate world trade several times over.

Mr. Carmack suffers from an ignorance common to all fiat money adherents. Like them, he misunderstands the nature of money. Murray Rothbard describes this ignorance as follows (I have substituted “fiat money adherents” for Prof. Fisher in Prof. Rothbard’s description along with the connecting verbs):

[Fiat money adherents show] a total misunderstanding of the nature of money, and of the names of various currency units. In reality, as most nineteenth century economists knew full well, these names (dollar, pound, franc, etc.) were not somehow realities in themselves, but were simply names for units of weight of gold or silver. It was these commodities, arising in the free market, that were the genuine moneys; the names, and the paper money and bank money, were simply claims for payment in gold or silver. But [fait money adherents refuse] to recognize the true nature of money, or the proper function of the gold standard, or the name of a currency as a unit of weight in gold. Instead, [they hold] these names of paper money substitutes issued by the various governments to be absolute, to be money. The function of this “money” was to “measure” values.[1]

Prof. Rothbard continues:

Under a fiat system, the currency name — dollar, frank, mark, etc. — becomes the ultimate monetary standard, and absolute control over the supply and use of these units is necessarily vested in the central government. In short, fiat currency is inherently the money of absolute statism. Money is the central commodity, the nerve center, as it were, of the modern market economy, and any system that vests the absolute control of that commodity in the hands of the State is hopelessly incompatible with a free-market economy or, ultimately, with individual liberty itself.

Mr. Carmack appears to be blending Milton Friedman’s and Gertrude Coogan’s proposed monetary reforms. Unlike many fiat money reformers, he attempts to restrict the government’s power to issue money. As shown above, the government will quickly overcome these restrictions. He recognizes the dangers of allowing the government to have absolute power. Still, he wants to give it absolute power over the country’s money, which it can use to control nearly everything else in the country. Like all fiat money reformers, he trusts politicians and bureaucrats with the management of the country’s money, but he fears the people managing it directly. He trusts paper and promises and distrusts that which is no one’s obligation or promise, i.e., gold and silver. Along with all other fiat money reformer, he can tolerate almost anything monetarily except having gold as money.

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

2. Ibid.

Copyright © 2010 by Thomas Coley Allen.

Part 1 

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Analysis of the Monetary Reform Act — Part I

Analysis of the Monetary Reform Act — Part I
Thomas Allen

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

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

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

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

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

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

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

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

The preamble of the Act reads:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Copyright © 2010 by Thomas Coley Allen.

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