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People are always looking for better ways of doing
things, and this includes a better way of imparting a message to a
misinformed American public. In particular, if a layman wanted to learn about
the nature of our money and banking system I would direct them to Murray Rothbard’s What Has Government Done to Our
Money? In my view Rothbard’s classic has always been the best
introduction to the topic. But Gary North has written an elementary work
called Honest Money
that held my interest not merely for its economic reasoning, but for the many
original touches I found throughout. Would North’s book reach more
people than Rothbard’s?
I must point out that Honest Money is subtitled, “The Biblical
Blueprint for Money and Banking,” and each chapter begins with
references to the Bible and Christian ethics. In the introduction he says his
book asks a question:
What violations of the principles of the Bible did
the West commit that led us into this mess [referring to the crisis of 2008
and its aftermath]? It also asks this question: What should we build on the
ruins of the present system after the collapse?
For those who would find relief knowing the Bible
sanctions honest money, North’s work will come as a godsend (no pun
intended). Even for those reprobates who forswear a religious worldview, his
book will provide a solid grounding in monetary theory and history.
North’s vast understanding of money and banking coupled with his lean,
no-jargon writing style takes the labor out of reading. His narrative carries
us on a journey from the development of money in its innocent youth, where it
was used solely as a means of facilitating trade, to money in its corrupt
maturity, where today it also serves to facilitate power and profit for a ruling elite.
Very importantly Honest Money also includes numerous bullet points at
the end of each chapter covering the main ideas. I found these bullets
indispensable. More good news: The book can be read comfortably in one
evening.
Crusoe’s Choices
North begins with the familiar star of economic analysis, Robinson Crusoe.
But rather than the usual pedestrian account of how Crusoe will budget his
time, North dramatizes the situation somewhat, as would be appropriate for
someone recently shipwrecked on an unknown island. He writes:
Say that [Crusoe] has a pile of goods to take from
the ship. He has put together a crude and insecure raft that he can use to
float some goods back to shore. The ship is slowly sinking, so he has limited
time. A storm is coming up over the horizon. He can’t grab everything.
What does he take? What is most valuable to him? Obviously, he makes his
decision in terms of what he thinks he will need on the island. . . .
The value of a tool as far as he is concerned has nothing to do with the
money it cost originally. He might be able to pick up a sophisticated clock,
or an expensive musical instrument, but he probably won’t. He would
probably select some inexpensive knives, a mirror (for signaling a passing
ship), a barrel (for collecting rain water), and a dozen other simple tools
that could mean the difference between life and death.
In short, value is subjective. . . the value of the
[tools he selects] is completely dependent on the value of [their] expected
future output. . . Then he calculates how much time he has until the ship
sinks, how much weight each tool contributes, how large his raft is, and how
choppy the water is. He selects his pile of tools and other goods
accordingly.
There are objective conditions on the island, and the various tools are also
objective, but everything is evaluated subjectively by Crusoe. He asks the
question, “What value is this item to me?” His assessment is the
sole determining factor of what each item is worth.
North then wonders: What if Crusoe knew the captain
had a chest full of gold coins? Would he go back to the captain’s
quarters and drag the chest to the edge of the ship and attempt to lower it
onto his raft? Unless he expected to be rescued soon, he would not. Gold
coins would be of no help to a man marooned indefinitely on a desert island.
In Crusoe’s case,
Gold isn’t wealth. It’s heavy. It
displaces tools. It sinks rafts. It’s not only useless; it’s a
liability.
This is how North introduces the reader to the
distinctions between objective reality and subjective preferences, and to the
fact that money arises only in a social context. With no one to trade with,
poor Crusoe had no need of it.
What is money and where did it come from?
In subsequent chapters he builds on these ideas. Money is a
universally-accepted medium of exchange. Originally, it was not imposed from
above but evolved from competition with all other goods on the market, as the
good most acceptable in trade. Over the centuries, gold and silver became the
most commonly used monies.
We know what money is worth right now because we observed what it could buy
yesterday, and for this reason we expect it to have purchasing power
tomorrow. If we march back in time, (following Mises’ argument, as articulated by Robert P. Murphy) we can use the previously observed purchasing power
component of this commodity we call money to explain the derived expectations
of it. If we continue going back, day after day, we reach the point at which this
commodity was just a widely accepted medium of exchange (not yet money).
Going back further still, we reach the point where the first person accepted
it as a medium of exchange. From there, it became more acceptable because
someone had previously accepted it not for consumption but to trade away for
something else. Prior to that, this commodity that is now money was valued
strictly for its use in direct exchange.
Thus, money evolves from a commodity used in direct exchange, to a good used
in indirect exchange, to a widely used medium of exchange, to a universally
accepted medium of exchange.
What about the supply of money? Who determines that?
If we have honest money, the market controls its supply. In today’s
world it’s a committee. Just as we wouldn’t want a committee to
set prices for us, North says, “why should it be allowed to control the
supply of money in which all prices are quoted?”
There’s another question. How do we know that
the committee will act only in behalf of us citizens? How can we be sure that
the committee won’t start fooling around with the money supply in order
to feather its own economic nest?
Fooling around with the money supply was more
difficult when money was a precious metal. Yet, fraudsters found ways to
cheat. Normally, the weight of the money would be far lower than the weight
of the item being purchased, and the seller could adjust the scales to make
the money even lighter and the product heavier. Interestingly, North tells us
that God delivered men from bondage and has the power to enslave them again
if they cheat in money matters. For Christians, is central banking an
expression of God’s wrath? Whether it is or not, our arrangement with
the Fed is a form of enslavement.
Fraudulently adjusting the scales is an attempt to get something for nothing.
Coin clipping and coin debasement are likewise early entries in the cheaters‘ bible. Paper money issued as
pseudo-receipts for commodity money inaugurated a new era of theft: “A
counterfeit coin . . . can be weighed. A piece of paper looks just like other
pieces of paper.” And the biggest cheat of all are the
government-issued fiat paper currencies that have proliferated the world
since August 15, 1971.
A complacent public
But what about the hapless public through all this? Will they ever revolt?
Not very often. The public decides that paper money
is money, not pieces of shiny metal. If paper is acceptable by the store down
the street, then who cares? Who cares if prices go up, year after year?
What’s “a little” price inflation? We’re all doing
better, aren’t we? . . . .
“Inflation can’t hurt anyone too badly” is a delusion of
fully employed younger workers. It can hurt everyone who isn’t staying
ahead of it with pay increases, and I mean after-tax pay increases.
Inflation acts as a turbocharger for the progressive
income tax. The latter was passed in 1913 with rates so low and applied to
incomes so high that almost no one worried, just as no one worries about a
little inflation. The average family made $1,000 a year, but the tax
didn’t kick in until the $20,000 level, and even there it was only 1%.
Those few who made $500,000 or more were “soaked” at only 7%.
But once the law was in place the politicians changed the rules. Imagine
that. In 1916, while Woodrow Wilson was bragging to voters about keeping us
out of war, the top rate was bumped to 15%. The following year, while Wilson
was shipping American men “over there,” the bottom bracket
plunged from $20,000 to $2,000 while the top rate reached 67%, then 77% a year
later.
Here was their plan: lower the level of taxable
income, and increase the rate of taxation in every bracket. Next, inflate the
money supply, so that everyone is pushed into higher and higher taxable
brackets. The higher your money income, the larger the percentage of your
income gets collected by the State.
And as Rothbard has noted,
As luck would have it, the new Federal Reserve
System coincided with the outbreak of World War I in Europe, and it is
generally agreed that it was only the new system that permitted the U.S. to
enter the war and to finance both its own war effort, and massive loans to
the allies; roughly, the Fed doubled the money supply of the U.S. during the
war and prices doubled in consequence. [p.
120]
Inflation is another name for counterfeiting.
Counterfeiters create money from nothing then spend it. The private
counterfeiter and the government counterfeiter have the same goal: to get
something for nothing.
The public doesn’t trust private counterfeit
money. The public does trust government counterfeit money, at least for a
long time, until people’s trust is totally betrayed (mass inflation).
What is the difference in principle between private
counterfeiting and government counterfeiting? None.
A Tale of Three Counterfeiters
One of the most memorable parts of Honest Money is North’s tale
of the counterfeiters. Counterfeiting is evil, right? It’s an act of
swindling others. But it acquires a high moral luster if it’s practiced
in plain sight by the right people.
In North’s tale three men counterfeit and are discovered.
The first one is a businessman with an offset printing press who prints 500
$20 bills and spends them into circulation.
The second man is an employee of the Bureau of Engraving and Printing who
prints a million $20 bills, and the government spends them into circulation.
The third is the chairman of a major New York bank that has loaned a billion
dollars of fractional-reserve money to Pemex, the oil company owned by the
Mexican government. Pemex cannot meet interest payments on the loan because
the price of oil has collapsed.
What happens to these three men?
The businessman is convicted of counterfeiting and sent to prison.
The government employee continues to print money until he reaches age 65,
when he retires and collects a pension.
The bank chairman calls the Fed, who in turn calls the Mexican government to
get them to issue a bond for $25 million. The Fed subsequently creates $25
million to buy the bond. The Mexican government sends the money to Pemex,
which then sends it to the New York bank to meet its quarterly interest
payment. “The chairman of the New York bank gets a round of applause
from the bank’s board of directors, and
perhaps even a $100,000 bonus for his brilliant delaying of the bank’s
crisis for another three months.”
The $25 million then multiplies through the U.S.
fractional reserve banking system, creating millions of new commercial
dollars in a mini-wave of inflation.
The World’s Most Powerful Insurance Company
Counterfeiters need protection if they are to succeed. The biggest
counterfeiters, the major banks, sought and established the protection they
wanted in 1913, with the Federal Reserve System. The details of the Fed were
developed in a highly secret meeting of banking elites and a U.S. senator held at Jekyll Island, Georgia in
1910. For years, the Fed’s defenders not only denied the meeting took
place, but regarded any suggestion that it did as laughable. In 2010, the
denials were long forgotten when Fed officials met at Jekyll to celebrate its founding.
The Fed’s public purpose was to prevent banking panics, as recessions
were once called. It was to create an elastic currency to meet the needs of
business, through dispassionate and skillful management of the money supply.
The elasticity has stretched mostly in one direction - expansion - as the
bank has created many hundreds of billions of dollars out of nothing since it
began operations in 1914. Under its watch, the economy has experienced at
least 11 recessions over the last century, including the longest one on
record, 1929-1945.
From 1930-1933 6,000 banks failed, only one of which was considered a major
bank, The Bank of the United States. Unlike the other big banks, it was not
an “insider’s” bank, but was financed mostly by small
merchants, especially Jewish merchants. The state of New York shut it down in
1930, North tells us.
One of the greatest services the Fed does for government is monetize its
debt. When the federal government can’t raise taxes without facing a
tax revolt and borrowing from private sources would entail high interest
rates, it calls on the Fed to buy its debt on the cheap.
The Treasury creates the debt certificates (usually
on a computer entry: liability). The central bank buys them by creating
another entry: money. The computer blips are swapped. . . .
The money is then used by the government to buy whatever it wants (mainly
votes). This new money goes through the economy. If the banking system is a
fractional reserve system, the money multiplies many times over. This is the
process of legalized counterfeiting we call inflation.
The Fed doesn’t buy the government securities
directly. It buys them from a select group of about 20 banks and securities
trading firms in New York City, who collect commissions from the trades.
Question: Why doesn’t the Fed buy these bonds
directly? Answer: because it couldn’t generate commissions for the
favored 20 banks.
Conclusion
Honest money is not necessarily a gold - silver
standard, North says. “The only standard that matters is the no
fractional reserves standard, coupled with the no false balances
standard.”
Honest money is the product of honest people. “[It] requires honest law and people who are self-disciplined. Let the people
have what they want, just so long as it is morally valid, non-fraudulent, and
non-coercive.”
As long as the Fed is around, we will never have honest money. The purpose of
the Fed is to inflate for the benefit of its friends: the big banks and
government. Honest money is a rare commodity and as such is an inflationist’s nightmare. In light of this
situation we should never question the success of government schooling. Even
today, there is widespread belief that the Fed is the nation’s number
one inflation fighter, and few people would know how to
disagree, including trained economists.
My recommendation: Give John Q copies of Rothbard and
North. Like me, he just
might get hooked.
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