Thomas E. Woods, Jr., is the New York Times bestselling author of 12 books, including The Politically Incorrect Guide to American History and Meltdown (on the financial crisis). A senior fellow of the Ludwig von Mises Institute, Woods has appeared on MSNBC, CNBC, FOX News, FOX Business, C-SPAN, Bloomberg Television, and hundreds of radio programs... (Read More)

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Why the Greenbackers Are Wrong (AERC 2013)

One of Ron Paul’s great accomplishments is that the Federal Reserve faces more opposition today than ever before. Readers of this site will be familiar with the arguments: the Fed enjoys special government privileges; its interference with market interest rates gives rise to the boom-bust business cycle; it has undermined the value of the dollar; it creates moral hazard, since market participants know the money producer can bail them out; and it is unnecessary to and at odds with a free-market economy.

Unfortunately, not all Fed critics, even among Ron Paul supporters, approach the problem in this way. A subset of the end-the-Fed crowd opposes the Fed for peripheral or entirely wrongheaded reasons. For this group, the Fed is not inflating enough. (I have been told by one critic that our problem cannot be that too much money is being created, since he doesn’t know anyone who has too many Federal Reserve Notes.) Their other main complaints are (1) that the Fed is “privately owned” (the Fed’s problem evidently being that it isn’t socialistic enough), (2) that fiat money is just fine as long as it is issued by the people’s trusty representatives instead of by the Fed, and (3) that under the present system we are burdened with what they call “debt-based money”; their key monetary reform, in turn, involves moving to “debt-free money.” These critics have been called Greenbackers, a reference to fiat money used during the Civil War. (A fourth claim is that the Austrian School of economics, which Ron Paul promotes, is composed of shills for the banking system and the status quo; I have exploded this claim already – herehere, and here.)

With so much to cover I don’t intend to get into (1) right now, but it should suffice to note that being created by an act of Congress, having your board’s personnel appointed by the U.S. president, and enjoying government-granted monopoly privileges without which you would be of no significance, are not the typical features of a “private” institution. I’ll address (2) and (3) throughout what follows.

The point of this discussion is to refute the principal falsehoods that circulate among Greenbackers: (a) that a gold standard (either 100 percent reserve or fractional reserve) or the Federal Reserve’s fiat money system yields an outcome in which outstanding loans cannot all be paid because there is “not enough money” to pay both the principal and the interest; (b) that if the banks are allowed to issue loans at interest they will eventually wind up with all the money; and that the only alternative is “debt-free” fiat paper money issued by government.

My answers will be as follows: (1) the claim that there is “not enough money” to pay both principal and interest is false, regardless of which of these monetary systems we are considering; and (2) even if “debt-free” money were the solution, the best producer of such money is the free market, not Nancy Pelosi or John McCain.

To understand what the Greenbackers have in mind with their proposed “debt-free money,” and what they mean by the phrase “money as debt” they use so often, let’s look at the money creation process in the kind of fractional-reserve fiat money system we have. Suppose the Fed engages in one of its “open-market operations” and purchases government securities from one of its primary dealers. The Fed pays for this purchase by writing a check on itself, out of thin air, and handing it to the primary dealer. That primary dealer, in turn, deposits the check into its bank account – at Bank A, let us say.

Bank A doesn’t just sit on this money. The current system practically compels it to use that money as the basis for credit expansion. So if $10,000 was deposited in the bank, some $9,000 or so will be lent out – to Borrower C. So Borrower C now has $9,000 in purchasing power conjured out of thin air, while Person B can still write checks on his $10,000.
This is why the Greenbackers speak of “money as debt.” The $9,000 that Bank A created in our example entered the economy in the form of a loan to Person B. In our system the banks are not allowed to print cash, but they can do what from their point of view is the next best thing: create checking deposits out of thin air. Banks issue loans out of thin air by opening up a checking account for the customer, whose balance is created out of nothing, in the amount of the loan.

The Greenbacker complaint is this: when the fractional-reserve bank creates that $9,000 loan at (for example) ten percent interest, it expects $900 in interest payments at the end of the loan period. But if the bank created only the $9,000 for the loan itself and not the $900 that will eventually be owed in interest, where is that extra $900 supposed to come from?

At first this may seem like no problem. The borrower just needs to come up with an extra $900 by working more or consuming less. But this is no answer at all, according to the Greenbacker. Since all money enters the system in the form of loans to someone – recall how our fractional-reserve bank increased the money supply, by making a loan out of thin air – this solution merely postpones the problem. The whole system consists of loans for which only the principal was created. And since the banks create only the principal amounts of these loans and not the extra money needed to pay the interest, there just isn’t enough money for everyone to pay off their debts all at once.

And so the problem with the current system, according to them, is that our money is “debt based,” entering the economy as a debt owed to a bank. They prefer a system in which money is created “debt free” – i.e., printed by the government and spent directly into the economy, rather than lent into existence via loans by the banks.

In the comments section at my blog I have been told by a critic that even under a 100% gold standard, with no fractional-reserve banking, the charging of interest still involves asking borrowers to do what is literally impossible for them all to do at once, or at the very least will invariably lead to a situation in which the banks wind up with all the money.

All these claims are categorically false.

It is not true that “there is not enough money to pay the interest” under a gold standard or a purely free-market money, and it is not even true under the kind of fractional-reserve fiat paper system we have now. It certainly isn’t true that “the banks will wind up with all the money.” There are plenty of reasons to condemn the present banking system, but this isn’t one of them. The Greenbackers are focused on an irrelevancy, rather like criticizing Barack Obama for his taste in men’s suits.

I want to respond to this claim under both scenarios: (1) a 100% gold standard with no fractional reserves; and (2) our present fractional-reserve, fiat-money system.

In order to do so, let’s recall what money is and where it comes from.

Money emerges from the primitive system of barter, in which people exchange goods directly for one another: cheese for paper, shoes for apples. This is an obviously clumsy system, because (among a great many other reasons I trust readers can conjure for themselves) paper suppliers are not necessarily in the market for cheese, and vice versa.

A money economy, on the other hand, is one in which goods are exchanged indirectly for each other: instead of having to be a hat-wanting basketball owner in the possibly vain search for a basketball-wanting hat owner, the basketball owner instead exchanges his basketball for whatever is functioning as money – gold and silver, for example – and then exchanges the money for the hat he wants.

People dissatisfied with the awkward and ineffective system of barter perceive that if they can acquire a more widely desired and more marketable good than the one they currently possess, they are more likely to find someone willing to exchange with them. That more marketable good will tend to have certain characteristics: durability, divisibility, and relatively high value per unit weight. And the more that good begins to be used as a common medium of exchange, the more people who have no particular desire for it in and of itself will be eager to acquire it anyway, because they know other people will accept it in exchange for goods. In that way, gold and silver (or whatever the money happens to be) evolve into full-fledged media of exchange, and eventually into money (which is defined as the most widely accepted medium of exchange).

Money, therefore, emerges spontaneously as a useful commodity on the market. The fact that people desire it for the services it directly provides contributes to its marketability, which leads people to use it in exchange, which in turn makes it still more marketable, because now it can be used both for direct use as well as indirectly as a medium of exchange.

Note that there is nothing in this process that requires government, its police, or any form of monopoly privilege. The Greenbackers’ preferred system, in which money is created by a monopoly government, is completely foreign and extraneous to the natural evolution of money as we have here described it.

And make no mistake: money has to emerge the way we have described it. It cannot emerge for the first time as government-issued fiat paper. Whenever we think we’ve encountered an example in history of a pure fiat money being imposed by the state, a closer look always turns up some connection between that money and a pre-existing money, which is either itself a commodity or in turn traceable to one.

For one thing, pieces of paper with politicians’ faces on them are not saleable goods. They have no use value, and therefore could not have emerged from barter as the most marketable goods in society.

Second, even if government did try to impose a paper money issued from nothing on the people, it could not be used as a medium of exchange or a tool of economic calculation because no one could know what it was worth. Are three Toms worth one apple or seven fur coats? How could anyone know?

On the other hand, the money chosen by the market can be used as a medium of exchange and a tool of economic calculation. During the process in which it went from being just another commodity into being the money commodity, it was being offered in barter exchange for all or most other goods. As a result, an array of barter prices in terms of that good came into existence. (For simplicity’s sake, in this essay we’ll imagine gold as the commodity that the market chooses as money.) People can recall the gold-price of clocks, the gold-price of butter, etc., from the period of barter. The money commodity isn’t some arbitrary object to which government coerces the public into assigning value. Ordering people to believe that worthless pieces of paper are valuable is a difficult enough job, but then expecting them to use this mysterious, previously unknown item to facilitate exchanges without any pre-existing prices as a basis for economic calculation is absurd.

Of course, fiat moneys exist all over the world today, so it seems at first glance as if what I have just argued must be false. Evidently governments have been able to introduce paper money out of nothing.

This is where Murray Rothbard’s work comes in especially handy. In his classic little book What Has Government Done to Our Money? he builds upon the analysis of Ludwig von Mises and concisely describes the steps by which a commodity chosen by the people through their voluntary market exchanges is transformed into an altogether different monetary system, based on fiat paper.

The steps are roughly as follows. First, society adopts a commodity money, as described above. (As I noted above, for ease of exposition we’ll choose gold, but it could be whatever commodity the market selects.) Government then monopolizes the production and certification of the gold. Paper notes issued by banks or by governments that can be redeemed in a given weight of gold begin to circulate as a convenient substitute for carrying gold coins. These money certificates are given different names in different countries: dollars, pounds, francs, marks, etc. These national names condition the public to think of the dollar (or the pound or whatever) rather than the gold itself as the money. Thus it is less disorienting when the final step is taken and the government confiscates the gold to which the paper certificates entitle their holders, leaving the people with an unbacked paper money.

This is how unbacked paper money comes into existence. It begins as a convertible substitute for a commodity like gold, and then the government takes the gold away. It continues to circulate even without the gold backing because people can recall the exchange ratios that existed between the paper money and other goods in the past, so the paper money is not being imposed on them out of nowhere.

Free-market money, therefore, is commodity money. And commodity money is not “debt-based” money. When a gold miner produces gold and takes that gold to the mint to be transformed into coins, he simply spends the money into the economy. So free-market money does not enter the economy as a loan. It is an example of the “debt-free money” the Greenbackers are supposed to favor. I strongly suspect that many of them have never thought the problem through to quite this extent. If what they favor is “debt-free money,” why do they automatically assume it must be produced by the state? For consistency’s sake, they should support all forms of debt-free money, including money that takes the form of a good voluntarily produced on the market and without any form of monopoly privilege.

The free-market’s form of “debt-free money” also doesn’t require a government monopoly, or rely on the preposterously naive hope that the government production of “interest-free money” will be carried out without corruption or in a non-arbitrary way. (Any “monetary policy” that interferes with or second-guesses the stock of money that the voluntary array of exchanges known as the free market would produce is arbitrary.)

But now what of the Greenbacker claim that interest payments, of their very nature, cannot be paid by all members of society simultaneously?

This is clearly not true of a society in which money production is left to the market. The Greenbacker complaint about interest payments in a fractional-reserve system is that the banks create a loan’s principal out of thin air, and that because they don’t also create the amount of money necessary to pay the interest charges as well, the collective sum of loan payments (principal and interest) cannot be made. Some people, the Greenbackers concede, can pay back their loans with interest, but not everyone.

But this is not what happens in the situation we have been describing, in which the money is chosen spontaneously and voluntarily by the individuals in society, and in which government plays no role. Money in this truly laissez-faire system is spent into the economy once it is produced, not lent into existence out of thin air, so there is no problem of “debt-based money” yielding a situation in which “there is not enough money to pay the interest.” There is no “debt” created at any point in the process of money production on the free market in the first place. The free market gives us “debt-free money,” but the Greenbackers do not want it.

Suppose I, a banker, lend you ten ounces of gold, at ten percent interest. Next year you will owe me 11 ounces: ten ounces for the principal, and one ounce for the interest. Where do you earn the money to pay me the interest? Either by abstaining from consumption to that extent and saving up the money, or by earning it through providing goods or services to others. In other words, you earn the money to pay the interest the same way you earn the money to pay for anything else.

(Even under the classical gold standard, in which gold backed only some of the paper money in circulation, there is still a portion of the money supply – namely, the money substitutes that have gold backing – that were not lent into existence, and which can therefore serve as the source of interest payments.)

Although the “there isn’t enough money to pay the interest” argument fails, I want to take up a related warning about sound money – a warning I noted at the beginning of this essay – that I read in the comments section of my blog: moneylending at interest by the banks will yield a long-run outcome in which the bankers have all the money.

The argument runs like this: if banks can lend 1000 ounces of gold today and earn 100 ounces in interest (assuming a 10 percent rate of interest) at the end of the loan period, then in the next period they’ll have a new total of 1100 ounces to lend out, and in turn they can earn 110 in interest on that. Then they’ll have a total of 1210 ounces, and when they lend that out they’ll earn 121 ounces in interest. In the next period they’ll have 1331 (which is 1210 plus the 121 they earned in interest in the previous period) ounces, etc. Eventually, they’ll have everything.

This is completely wrong, although even if it were right, presumably even bankers need to buy things at one point or another, so the money would be recirculated into the economy in any case. The money commodity itself rarely yields people so much utility that they will hold it at the expense of food, water, clothing, shelter, entertainment, etc. And when it is recirculated, the same money can be used to make interest payments on multiple loans.

The more important reason that red flags should be going up here is that this warning would apply to any business, not just banking. For example, if Apple sells us great electronic equipment, it earns profits. Those profits allow it to invest in more efficient production processes, which means Apple will be able to produce even more and better computers and other devices next year. If we buy those, Apple will have still more profits, which means they’ll be able to produce still more and better products the year after that, and before you know it, Apple will have all our money.

So what’s left out of these scenarios? Demand. Consumers do not have an infinite demand for electronic products. If Apple keeps producing more iPods, it will have to sell them at lower and lower prices in order to induce us to buy them. This is economics 101 – the law of demand, derived in turn from the law of marginal utility. The more electronics I buy, the less utility I derive from additional units of such goods (and thus the less eager I am to purchase more). Meanwhile, as my remaining cash balance is depleted by these purchases, the marginal utility of my remaining money increases (and thus the more eager I am to hold on to that money rather than exchange it for still more consumer electronics).

The same goes for consumer (and producer) loans. The Greenbacker objection assumes that demand for loans is infinite. Like zombies, we’ll continue to demand loans no matter what the interest rate, and banks will always be able to find more people willing to take on more credit. But as we saw above, in order to induce us to absorb a greater supply of Apple electronics, and/or to induce additional buyers to enter the market, the prices of those goods had to fall.

This principle holds true for credit as well. To induce us to accept an increasing supply of credit, the banks will have no choice, given the law of demand, but to lower the rate of interest. Two consequences follow. As they earn less in interest, they will be less able to afford to pay their customers competitive interest rates on savings accounts and on financial products like CDs. And as those customers turn away from the banking system in search of higher yields outside banking, the banks will have less to lend. These twin pressures place an upper limit on the amount of credit the banks can extend.

So you can breathe easy. The banks won’t wind up with all the money after all.

On the free market, the production of money would occur in the same way that the production of any other good takes place, with no money producer being granted any monopoly privilege. The average person doubtless has a difficult time imagining how money could exist without a monopoly producer. Wouldn’t everyone want to go into the money-production business? After all, you get to create money. Why, I’ll just create my own money and spend it! Isn’t that naturally more lucrative than producing other goods?

First of all, no one can expect to print pieces of paper with his face on them and spend them into circulation. Nobody would accept them, needless to say, and as we have seen, it is impossible for money to be introduced ex nihilo in this way. The only kind of money that can emerge on the free market is one that, at least at one time, had been considered a useful commodity. Paper money can come into existence on the free market and without coercion if it serves as a redemption claim for the commodity money, but irredeemable paper money cannot originate without government threats or violence.

Again, as we saw previously, the pattern is this: a commodity is freely chosen by market participants to serve as money, for convenience paper receipts fully convertible into that money begin to circulate as money substitutes, and finally the government removes the commodity backing from the paper and only the paper circulates. That is in fact what happened in the United States in 1933.

So your friend Joe shouldn’t expect in a free market to be able to print up some paper notes with his face on them and be able to exchange them for goods and services. In addition to the logical problems with this that we examined before, he’d also look crazy for even trying such a thing.

Also, as with every other industry, profit regulates production. The production of money, like the production of all other goods, settles on a normal rate of return, and is not uniquely poised to shower participants in that industry with premium profits. As more firms enter the industry, the rising demand for the factors of production necessary to produce the money puts upward pressure on the prices of those factors. Meanwhile, the increase in money production itself puts downward pressure on the purchasing power of the money produced.

In other words, these twin pressures of (1) the increasing costliness of money production and (2) the decreasing value of the money thus produced (since the more money that exists, ceteris paribus, the lower its purchasing power) serve to regulate money production in the same way they regulate the production of all other goods in the economy.

Once the gold is mined, it needs to be converted into coins for general use, and subsequently stamped with some form of reliable certification indicating the weight and fineness of those coins. Private firms perform such certification for a wide variety of goods on the free market. This service is provided for newly coined money by mints.

Banking services would exist on the free market to the extent that people valued financial intermediation, as well as the various services, such as check-writing and the safekeeping of money, that banks provided.*

The intermediation of credit consists of borrowing money from savers, pooling those funds, and using those pooled funds to extend loans to borrowers. Banks earn the interest-rate differential that exists between the rates they charge to borrowers and the rates they pay to savers. The pooling of savings and the identification of projects to which those funds can temporarily be directed is an important service in a market economy.

And as with the production of all other goods and services on the market, credit intermediation is regulated by profit. It cannot be multiplied indefinitely, as a great many Greenbacker commentators appear to believe. In the same way that high profits in any industry attract newcomers to that industry and thereby dissipate those profits, a high interest-rate differential between borrowers and savers will attract more people into credit-intermediation services. These entrants will need to pay higher interest rates to savers in order to acquire additional funds to intermediate to borrowers. Conversely, in order to attract additional borrowers they will need to lower the interest rates charged to those borrowers. These twin pressures – higher rates paid to savers, and lower rates earned from borrowers – dissipate bank profits and place an upper bound on credit intermediation activities. So again, the banks face a natural limit to their activities, and cannot earn all our money.

So far, we have considered the case of a gold standard or a pure free market in money. But under a non-market system of fiat-money and fractional-reserve banks the Greenbackers’ concerns are still misplaced. There are plenty of reasons to criticize fiat money and fractional-reserve banking, but since the case against them is undercut by false arguments, I want to take apart this particular false argument.

We know from our earlier analysis that money has to emerge on the market as a useful commodity, and that the state theory of money, whereby money has value only when and because the state declares it to have value, is untenable.

When Franklin Roosevelt confiscated Americans’ gold in 1933 and gave them paper money in exchange, this money did not enter the system “as debt.” It was a simple act of conversion of specie into paper. (Thanks to J.P. Koning for tracking down that link.) This is how all hard-money systems become fiat ones: the precious metal that backs the currency is taken away, and the people are left only with paper given to them in exchange for their metal. And since that portion of the money stock that consists of the redemption of the people’s specie into paper is not debt-based – the government is giving them the money, not lending it – it becomes a permanent portion of the overall money stock from which interest payments can be drawn. There is, therefore, always a portion of the money stock that is unconnected to any debt, so there is no built-in process even in a fractional-reserve fiat paper system by which debts must be collectively unpayable.

Under the gold standard as it existed in the United States, the banks issued both kinds of money substitutes in the Misesian typology: money certificates (paper that serves as a receipt for gold on deposit) and fiduciary media (paper that, while physically indistinguishable from money certificates, does not correspond to any gold on deposit; this is what the banks create when they want to increase the money supply beyond just the stock of gold). Only the fiduciary media would qualify as being “debt-based money,” because only the fiduciary media enters the system as new loans. The money substitutes that correspond to gold in the banks’ reserves are not debt-based. They do not enter the economy in the form of a loan. They enter the economy as receipts for gold on deposit with the banks. This portion of the money stock, too, becomes a permanent fund, even after the transition to a fiat money system, from which interest payments can be drawn.

Remember, once again, that when people pay banks interest on their loans, these interest payments themselves will in large measure be spent into the economy by employees of the bank. The same unit of money can thus be used to pay principal or interest on multiple loans as it circulates again and again. There is no reason that bankers or anyone else would want to earn profits and never spend or invest them, unless someone happens to be a fetishist deriving pleasure from literally rolling in the money itself. This is unusual.

Far and away the best defenses and descriptions of a pure free market in money are Jörg Guido Hülsmann’s book The Ethics of Money Production and Jeffrey Herbener’s astonishing 2012 congressional testimony before Ron Paul’s monetary policy subcommittee. I strongly urge you to read at least the Herbener testimony. It is beautifully written and its logic practically compels the reader’s assent. (While you’re at it, watch this video in which Professor Herbener explains why he became an Austrian mid-career, even though he stood to gain nothing professionally by doing so.)

In short, there is no need to replace the Fed with another government creation. There is no good reason to replace the Fed’s monopoly with a more directly exercised government monopoly. All we need for a sound money system are the ordinary laws of commerce and contract.

Let’s oppose the Fed for the right reasons, and let’s oppose it root and branch: not because it doesn’t create enough money out of thin air (is this really a fundamental critique of the Fed, after all?) but because the causes of freedom, social peace, and economic prosperity are at odds with any coercively imposed monopoly, and because the naive confidence in the American political class that the Greenbacker alternative demands is beneath the dignity of a free people.

(Thanks to Robert Murphy for his comments on this essay.)

*There is a tradition within the Austrian School, particularly among Rothbardians, of separating these functions of banks. Banks can act as money warehouses or as credit intermediaries, or as both. These are not the same thing. It is possible to imagine banks that offer one service or the other, as well as to conceive of banks that offer both services but distinguish sharply between them. Checking deposits, for instance, would be available to customers on demand, and so in that case the bank would be operating as a money warehouse, while savings accounts, CDs, etc., would be considered a loan to the bank, with which the bank could engage in intermediation activities.

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  • Anonymous

    Money can circulate but as soon as it is repaid as principal, it is extinguished and disappears. New money must be loaned out in a loan to replace it in the money supply. Loans must constantly be made to keep the same level of money supply. Interest does get re-spent by the banks, but in the bank’s market. i.e. NYC, London, Frankfurt, or, on things that bankers like to buy (foreign vacations) so the system drains cash from where it was borrowed into existence (the countryside) toward the financial capital. There house prices rise and restaurant spending is high, etc. “Sloshing around” is the term. Meanwhile, the real economy is drained. The system shifts velocity from one center to the other.

  • Anonymous

    Unfortunately, you don’t prove anything about the major claims of Greenbackers. You shift topics to avoid presenting evidence about the interest money shortage. You shift from the real system to a hypothetical commodity based money system to try to prove there is enough money in circulation. You do it right here “But this is not what happens in the situation we have been describing…” Yes, the fractional debt-money system is the system we are talking about. And, that is the one you need to stick with in your explanations, not shift to a commodity system that doesn’t exist and Greenbackers are not even talking about. The commodity system anyway does not remove the bankers’ prerogative to hoard to manipulate demand in the market to affect prices. That is the ultimate crux of the problem with any privately-owned system versus a democratic fiat currency that is flexible to meet demand for unit of exchange in the economy commensurate with the economic potential of the population and no other standard. Anyway. What is interesting is that the industry feels threatened enough that the Greenback has to once again be derided in the punditry blogosphere.

  • Nicolas Beattie

    I attempt to address this issue in my very long 2 part post. If your interested in this subject this, I’d love to know what you think about my assessment.

  • Nicolas Beattie

    I agree with gist of what your saying. If you’re interested in this subject, please check out my long 2 part post in which I cover this in detail. I’d love to know what you think about my assessment.

  • Karmaisking

    Agreed. I don’t know why they have to shift the goalposts all the time. And empirically the Greebackers are absolutely correct – new debt has been created since 1971 on an exponential basis just to keep the system even semi-solvent. What idiot would want to borrow in the current system? No one. Only someone FORCED to borrow to survive. That proves the Greebackers claims regarding the inherent dynamics of the CURRENT system. Merely saying “In a hypothetical free market world everything would be fine” is essentially irrelevant to the issue.

  • http://www.opednews.com/author/author24983.html Scott Baker

    Tom Woods wrote a similar, albeit shorter, more digestible, essay, 3 months ago: http://tomwoods.com/blog/why-the-greenbackers-are-wrong/#comment-751686003. I wish I could respond to each and every misguided essay like with a fresh rebuttal, but my activist work (promoting Greenbacking, among other macro-reforms like Public Banking and Land Value Taxation) keeps me too busy.

    So, I will repost my earlier comment in its entirety, expecting that Tom Woods will repost similar re-rebuttals, etc.:
    Wrong on theory & wrong on history. I don’t have the author’s space, so I’ll just highlight the wrong points:

    1. History (which Woods ignores almost entirely, or uses only as
    “myth”). The Greenback, first introduced under Lincoln (1862-1863) was
    up to 40% of the currency at the height of the Civil War. True, we did
    have commodity inflation for a time, but that went quickly away after
    the war, when commodities were not so scare & in demand. Meanwhile,
    we won a war when the banks wanted 26-35% interest & Lincoln said
    “feh” to that, & turned to Art. 1, Sec. 8 (also unmentioned by
    Woods) that the Founders had, after extensive & raucous debate,
    included, post-Revolution, despite the then-known dangers of inflation
    (actually British counterfeiting had more to do with undercutting our
    first debt-free money, the Continental). $450 million was produced,
    later reduced to $351 million by a corrupt & bribed Congress (the
    banks strike back), but in circulation until 1996, making Greenbacks our
    longest-lasting currency.

    2. Greenbacks were not over-produced, they were vastly
    under-produced, and the banking lobby has fought hard, and mostly won,
    against them being issued ever again, defeating both HR1452 (1999) and
    HR2990 (a much more extensive bill that would make the Fed Reserve part
    of gov’t for the first time, under Treasury. It’s private now….yes, IT
    IS. When they stop demanding interest payments, it’ll be public).

    3. Money should exist in sufficient quantity to meet the productive
    capacity of the nation. Right now, it is fire-hosed at the
    banking/financial sector, trillions at a time, from the
    bank-rescuer-in-Chief, the Fed chair, while 80% (or more) of the
    population hasn’t had a real raise since 1973 (the inflation figures are
    cooked downward too, but that’s another story – see John Williams’ Shadowstats.com).
    It is the commodity futures and stock traders driving up inflation, and
    the land and resource monopolists (including the resource of money)
    doing the hoarding, while their rent-seeking behavior drives the middle
    class into the ground with the poor. Back to the greenbacks….

    4. It is not just interest-free money, it is principal-free. Under a
    true Greenback system, you would not even need taxes (except to prevent
    monopolies and rent-seeking on them, see above), so money created would
    just stay in circulation, building roads, schools, a new energy grid,
    or whatever gov’t produces (I am not a pure Greenbacker, and I can see a
    dual system whereby private banks, including State Banks, get to create
    money too, but the federal gov’t creates its own when needed, as now).

    5. Greenbacking is supported by SCOTUS’ Julliard v. Greenman, which
    upheld the gov’t’s right to “coin Money” (case structure in the
    original: see Nattalson, Robert G.s’ scholarly paper “The coinage clause
    in the constitution” http://www.economicstability.o
    on why that, and many other arguments, support the gov’t creating money
    directly). Julliard upheld the right under the “borrowing clause” it is
    true, but in practice and further legislation, including Roosevelt,
    Greenbacks were produced without expectation they’d be repaid directly
    (see taxes, above).

    6. gold is not money. Gold is mentioned only in Art. 1, Sec. 10, and
    there only as a means for STATES to repay their debts. We have had
    gold-backed money (America is the land of monetary experimentation),
    silver-backed money etc., but all of these just prove people want MONEY,
    not the commodity, to pay for things. Nixon finally took us off the
    gold standard in 1971 for the very reason Woods denies, that there was
    no longer enough gold in Fort Knox to pay for things, when Europeans
    wanted to exchange the dollar for gold. After a war-debt/oil-crisis
    fueled inflationary binge in the 1970s, we settled into a more-or-less
    3%/year inflation rate (though again, this understates things, but not
    because there is too much money per se, but because the Federal Reserve
    System pumps out too much for the top 1%).
    BTW, if you are a free
    market guy, you should not want gov’t interfering with the gold market
    by basing their money upon it. That is manipulation, pure and simple.

    7. The Weimar Republic was undercut by private-bank backed
    short-sellers inducing the private banks to over-produce reichmarks,
    leading to monstrous inflation. The gov’t ended that by producing its
    own money. Germany certainly went in the wrong direction after that,
    but there is a reason it came back from being hideously in debt to
    become a super-power in a few short years, and part of the reason was
    greenbacking (oh, I think I’ll stick with Lincoln as a better example
    after that! :( ).

    8. The banks DO eventually collect all the money, and we haven’t
    even talked about the shadow baking system, including derivatives worth
    more than a quadrillion dollars. It is the private banking system, not
    gov’t that has historically, over-produced credit as money, due to greed
    and short-sightedness. Gov’t has done a better job from tally sticks
    to Lincoln’s greenbacks.

    9. Woods paints a simple feel-good world of “It’s a Wonderful Life”
    bankers who invest in their communities and not in commodities, stocks,
    bonds and other secondary markets, all-the-more encouraged by a
    bailout-happy gov’t that is so institutionally captured that the real
    question is not whether the corporations are part of gov’t but whether
    gov’t is part of (and owned by) the corporation. That is the very
    definition of fascism, according to the Father of fascism, Mussolini,
    who said he should have called fascism, “corporatism,” for that very
    reason. Restoring the power to “coin Money” to gov’t would
    automatically make them independent of the corporate money power, moving
    them a step closer to representing the People, instead of the
    Corporation. Another plus for Greenbacking.

    10. The seigniorage effect of having gov’t produce its own money was
    completely ignored by Woods. It is billions/year. That is a matter of
    accounting fact, nothing more or less. (I am advising on a lawsuit
    about this very matter in Johnson v. Treasury here: tompainetoo.com. My petition to restore Greenback dollars is exhibit B).
    – Scott Baker, president of Common Ground-NYC, NY Coordinator of Public Banking Institute.

  • Nicolas Beattie

    I address the “not enough interest” problem raised by greenbackers in a long two part post as a response to Tom Woods’ essay. If you’re interested in this subject, please read my post and let me know what you think.

  • Nicolas Beattie

    This might be old stuff but I feel it deserves closer scrutiny. The argument from Greenbackers that there is “not enough money in circulation to pay the interest” is flawed: there is enough money to pay the interest on debts from existing flows in circulation, however that is not the whole story. From my perspective their critique of the current system in relations to this argument is partialy, and I repeat, partialy correct. If you have the time and are so inclined, please read my long two part post where I develop this subject at length. I’d love to know what you think. If someone has or could prove my argument wrong, I’d love to hear about it. Thanks.

  • Nicolas Beattie

    Greenbackers argue that there “isn’t enough money in circulation to pay interest on existing loans.”
    “What I found through tinkering with T-account experiments is that it is
    quite obvious that the debt and interest can be paid, but it requires
    that the debtor create value…”
    True, it would seem that GreenBackers are wrong about this, However, they aren’t completely wrong. My conclusion is that our current system makes it harder, not impossible, for debtors to pay interest, harder than it would be in a free-market, 100% reserve monetary system.
    If you’re interested, please read my long 2 part post on the subject. I’d love to know what you think. Thanks.

  • Nicolas Beattie

    Interesting. Thanks for the response.
    “Merely saying “In a hypothetical free market world everything would be fine” is essentially irrelevant to the issue.”
    While I do think things would be better in a free market world, you’re right that we should focus on the issue at hand. And Perheps do a better job of describing the dynamics of the current system.
    “That proves the Greebackers claims regarding the inherent dynamics of the CURRENT system.”
    I wouldn’t go quite that far: “Proves” is perhaps too strong a word ;) However, as I mentioned, GreenBacker are at least partially correct in their assement of our current system, and the debt-addiction dynamic described by them is certainly very real.

  • Nicolas Beattie

    Fractional reserve banking sometimes seems just as mysterious to me as sorcery (alchemy might be a better anaology), so I get where you’re comming from, though perhaps I can help with your specific question.
    The total potential ammount that can be created into the system by a 10,000$ dollar deposit, might well add up to 90,000$, however this is not accomplished all in one step.
    Depostior A deposits 10,000$ at Bank A. Bank A keeps 1,000$ (10%) as reserves and lends out 9,000$ to Borrower B. Borrower B buys a used car from Vendor C for 9,000$. Vendor C (who becomes Depositor C) deposits 9,000$ at bank C. Bank C keeps 900$ (10%) as reserves and lends out 8,100$ to borrower D. Borrower D pays a Contractor E 8,100$ to renovate his house. Contractor E (now Depostitor E) deposits 8,100$ at Bank E. Bank E keeps 810$ as reserves and lends oun 7,290$ to borrower F. And so on and so forth until the ammounts discussed to too small to be a useful loan.
    So theoricially, since the banking sector is a closed loop, you could create about 90,000$ dollars from an initial 10,000$ deposit. However, only in a series of discrete steps and If at any time someone doesn’t deposit the money at the bank, then the process stops.
    Keep in mind, since banks only keep 10% of all deposits on hand at any one time, they are inherently insolvent. If all, or just many, depositors demand their money at once, the money isn’t there, at least not until the loans are repayed. This is called a bank run.
    Furthermore this process is generally fraudulent and inflationary, but you probaby already know that.

    “a bank can claim the $10,000 IS the 10% being retained – so the bank can lend $90,000, rather than $9,000″
    What I’ve been describing is Fractional reserve banking, however, I have heard in passing that central banks can do what you describe, but I couldn’t tell you if this is true or not. I’m not sure where I saw or read this.

    It was perhaps in the “Money as Debt” video. You can google that if you want. It actually relates to what Tom Woods is talking about in his essay.

  • M111ark

    Monday, March 25, 2013

    Good morning Tom,

    Think of this as a cover letter. I’ve just woken up to see that the EU has chosen to steal what they need from depositors who have over 100,000 euro on deposit at Cyprus banks. I suppose that you and I could agree that is theft. If any more proof is needed that the financial system is completely corrupt, well, after MF Global and The Bernanks daily theft from the people of American, who’s going to deny the complete collapse of the rule of law. I see no good end to the world’s seemingly endless moral collapse.

    I blame the money system. It’s a fraud on the people. It demands growth at any cost. The cost are now being laid bare for all to see. At least those who can maintain their moral sense thru the onslaught of media propaganda. Private
    banks have no business creating the currency of the country. Sovereign nations have no business giving up their responsibility for maintaining the value of their currency to private individuals.

    It is beyond imagination that any responsible person who has a media presence could advance the notion that any private person should have control of the issuance of a sovereign’s national currency. That is solely the responsibility and
    privilege of a nation. A people who do not engage their responsibility as citizens deserve the government they get. This is however, a world wide phenom, not only us, something else is going on here. If any proof be needed that the human race is not yet ready for independent rule… one need not look beyond a debt-money system.

    Someday we will be though. It’s just a matter of evolution. The more people who understand how theft takes place each day the debt-money system is allowed to persist the sooner we’ll see the end of it. My favorite book says that we’ve(the human race) embarked upon a thousand year voyage of rapid change… that we
    should not look for calm seas until the end of that period. That book has the weight of the cosmos on its side, not one to take lightly.

    So. Please rethink you position. Gold backed is not the answer, that system merely imposes an artificial restraint on actions and responsibilities, it does not engender a
    sense of moral responsibility. There is no individual moral growth
    with such a system.

    Thanks for your attention to this most important topic. I have found that no one I’ve spoken to about this topic seems to get. I can tell you that I didn’t back in the early
    90’s when my father was ranting about the government borrowing it’s own money!, and confiscating taxes from him to pay the interest. Sometimes, it’s just time and experience.


    mark branham

    Before any discussion can take place one must agree on the facts. These are
    the facts about money.

    1. Banks create all debt-money. This money is created out of nothing every time someone takes out a loan. All debt-money has an interest cost component. There will always be more debt-money owed than there is debt-money.

    2. The treasury creates currency and coins which is sold to the bank at face value. This is the only interest-free money available to citizens.

    3. The debt-money form of monetary system is a ponzi scheme. The only way to get more money into the system is to borrow it, which always has an interest component. As long as the economy is expanding, the system can function.

    4. Now one can understand the true reason for the first time home buyer tax credit and the cash for clunkers schemes. They were both an effort to get the consumer to borrow more money.

    5. There is some slop in the system. Foreign money may enter the system from wealth created without an interest component. It’s not enough to pick up the slack caused when consumers can no longer borrow in sufficient amounts so,…

    6. The FED is the creator of last resort. QE is the FED’s only response to a system starved of new money. So the FED buys treasuries which comes with an interest
    cost and worthless agency and bank paper which has an interest cost, and they keep it on their balance sheet.

    7. Governments without a central bank have no way out of a debt-money system starved of credit. That’s why weak countries in the euro zone like Greece and Cyprus are up shit creek, they can’t print credit. Of course, who would take it. Which makes the position the U.S. Is in unique…

    8. We can print our own money and the world accepts it because:
    a. it’s the world’s reserve currency, for now
    b. if you don’t like it our military will come kick your ass.
    Those who say our money is not backed by anything have never been on the receiving end of our pissed off military. In the world of money it’s really the only
    thing that matters. Might does make right in this case.

    So much for facts. You might even have a little argument with 8… but you’d lose that as well if you did. China won’t impose it’s currency on the world until it has a military to back it up, perhaps 8 to 10 years. On to the consequences of a debt-money system.

    All ponzi schemes fail. Just as happened to Madoff, when the old money going out (debt repayment) is greater than new money coming in (borrowing) the system
    collapses. It’s just math. That’s why the FED is blowing bubbles, it’s all they have left. In truth, the system has already collapsed, all that’s left is bubbles – internet in the late 90’s, housing in the early 00’s, stock market today. We all know what they’re trying to do – keep the stock market ever higher hoping that will create enough confidence so the credit bubble gets restarted. It might even work for a while, but it’s not sustainable. Debt-money depends on constant growth that, on a
    finite planet, is an impossibility. The growth that we have depended on for the last 500 years is coming to an end because it was resource based and resources are finite. Absent a revolution in technology that renders resource use much more efficient, that model is doomed. Even so Jevon’s paradox puts the lie to efficiency.

    Perhaps the most egregious damage done to the US is that debt-money has turned citizens into consumers. When we were citizens, we had value; we were somebody.
    It was like we were the shareholders of a large going concern and we elected managers of this concern to act in our best interest. We had created something unique in the world and we all had a stake in seeing it do well. But then, just as we were on the verge of great things, the banksters, seeing what was coming, decided they were better managers than those we elected to do the job. So in 1913 we got the Federal Reserve. And the banksters got their pathway to untold riches.

    It was Bernays and company, at the urging of the money elite, who began convincing Americans that they wanted more and more of everything. It was a deliberate effort to convert us from citizens to consumers. The more we consumed, the more the economy grew, and the more money the monied elite made. But
    what of the long term effect of turning us from citizens to consumers? Our value is no longer as a participant in the health of the state, our value is only measured in the amount of new money we can borrow. That’s it!!! You want to know why our freedoms are being whittled away piece by piece? – if we cannot fulfill our ONLY value to the state as borrowers of money, we are worthless. Look, in a debt-money economy, it’s only us consumers who keep the game going. Without us there’s nothing left but bubbles – not an economy.

    Debt-money is the root cause of our decline as a civilization. Well, the proximate cause anyway, there’s still one more layer above it but that’s a discussion for another time.

    Even the dumbing-down of our people can be laid to debt-money. If I hear one more idiot call symptoms problems… We can’t even recognize the difference between them. Even debt-money can be called a symptom. Until we are able to discern the nature of problems and distinguish them from symptoms we are doomed to repeat the same mistakes that got us into this mess.

    Debt-money demands we accept a lie. The fact that I have to spend my time writing this response just infuriates me. How in the world can you not see!!! everything about a debt-money economy forces us to accept the lie. Since 1913 we have had a false economy filled with deluded people doing the same things that enslaved them in the first place. How healthy is that!!! you want to know why we have school shootings, a government that is out of control, an education system that is not, crony capitalism that is destroying our republic… it’s the lie that is our so-called
    economy. A debt-money economy. It’s the path to our enslavement… and the fact that supposedly intelligent people cannot see it just astounds me.

    You may rightly blame the government for our ills, but it’s in the same boat as we the people. They too must borrow their own money. The government is, at this time in our history, just a convenient cutout for the oligarchs that actually make the decisions. There are a few who resist, like Ron Paul, but the media makes quick work of them.

    Do not make the details of debt-money your point of disagreement. Whether it’s all owed to the bank or not is not the question – it’s owed to somebody. The one who holds the debt is master of the debtor. Consider that when thinking about our
    nations actions around the world.

    Contrary to what you may believe about government, it is a necessary and vital congress of the development of the human race. We have no natural rights – try arguing with the tiger in the jungle that you have a natural right to life. You don’t. ALL rights come from the aggregation of human action. First the family afforded you some rights, then the tribe, then a confederation and then a nation state. We are far from the ideal but we will get there through evolution. It all takes time. Is our
    present government capable of handling the issuing of money? We all know it’s not. But even in it’s present morbid state it’s better than granting that right to a private bank.

    I do not recommend the end of the FED nor do I recommend the end of debt-money. It took us a very long time to get where we are today and, though imperfect, it is perfecting. In some distant time governments will issue money
    directly, without interest. All we can do as individuals is to become better people. It’s all we should do.

    Be a truth seeker. Love more. Be assured that things are progressing as they must. Trust.

    PS Observe the euro zone, it’s a perfect example of how a debt-money system does not work. The banks in Cyprus are going to steal from all deposits above 100,000 euros. Europe’s problem is that it’s individual countries do not have a central bank that can create credit at will, as we can. Neither do they have a military that can back it up. Yet they are tasked to maintain a debt-money system that has broken them. How much more obvious can it be. A debt-money system can ONLY survive as long as a central bank can create credit at will. That’s what The Bernank is doing! QE to infinity at 85 billion a month to keep the illusion alive that we actually have an economy. Are you going to call that system sustainable?

  • M111ark

    just posted

  • M111ark

    see post above

  • http://www.facebook.com/people/Gordon-Johnson/1374212093 Gordon Johnson

    I agree that the Greenbackers are cranks. They are cranks because they propose to replace a confidence system founded on the principle (and principal) of a privilege too easily abused, and which fails FOR THAT REASON, with another privilege-based system that is ripe for abuse.

    There is a time an place for everything under the sun.

    Clearly people DO sometimes create fiat money voluntarily. They also voluntarily give others the power of life and death over themselves, and the power to redistribute 100% of their earnings.

    What can I say? People do stupid things, sometimes.

    But while Tom is vastly smarter and more educated than I, the arguments here aren’t compelling with regard to the greenbackers’ ‘debt-based’ claims. I don’t think he has really answered where the interest in terms of currency can come from in the instance the greenbackers raise.

    If creation of money is based on privilege, assigned by law, and nominally directed by a government body (though perhaps carried out by a privately owned bank), but only the principal is created… then where DOES the interest come from?

    The dissertation about the origin of currency doesn’t apply to the interest question because the Greenback didn’t branch from that tree of voluntary exchange. Our current paper currencies were an act of fiat that IMITATED naturally occurring currency – and were forced down our collective throats by coercion – Executive Orders 6102 for Americans at home and 11615 for others and by ‘legal tender’ laws.

    The Apple dissertation does not apply for two reasons, firstly Apple’s products are not a monopoly while fiat currencies ARE a monopoly within their spheres. Here I mean that I don’t have to pay for an iPad with some other Apple product or with some similar electronic product, but I DO have to repay a loan with a monopoly currency whose creation is privileged and interest bearing. Secondly the argument doesn’t apply because the mechanism of profits does not require any physical thing to spring into existence ex-nihilo, rather industrial profit and profit from trade rest on a foundation of innovation wherein the inputs to production become progressively less expensive due to increased efficiency in the production chain.

    But where DOES the interest come from when A) production of the currency is based upon PRIVILEGE, B) ALWAYS carries an interest rate, and C) NEVER creates the expected interest???? The products we exchange for such currencies would not seem to bear on the problem because they, in themselves, do not expand or contract that supply of money – the exact reason why price inflation and deflation occurs.

    In the case of the base-currency creation I believe the factual answer is that the Federal Reserve is required to SURRENDER its returns from the creation of money to the treasury, thus obviating the need for some un-privileged entity (in terms of monetary creation) to somehow create money to pay the interest.

    However, I don’t think the case is clear with regard to fractional reserve banks. The interest rate, it seems to me could firstly be paid from accumulated capital. Yes, it can also be paid by attracting money from another sector of the economy. But presumably there would be other loans in that other sector which would then be impossible to repay. So, to repay interest the money could firstly be drawn from accumulated capital denominated in terms of currency (whether the original currency or foreign exchange reserves).

    But what if the currency expansion was so persistent that it exhausted the accumulated capital? Then, it seems to me, that the only way for the interest on the loan to be repaid, would be through inflation of the monetary base.

    Notably, this is exactly what happens in a pure gold standard. Loans can be repaid with interest because the expansion of the economy enables innovation. The innovation results in efficiencies in production, which recirculate back through the economy to gold mining in the form of increased gold production relative to that which would be possible without the innovation-created efficiencies. …But it takes time.

    Of course, it is still possible for the market to temporarily err in the pricing of credit, not allowing sufficient time for the innovation to occur and then affect the greater economy. These loans would go bad. But the loss would be the interest.

    In a gold standard, the principal may change hands, but the principal itself is very hard to completely destroy. That’s why it’s on the periodic table, after all.

    The problem with Greenbackerism is the same as the problem with fiat currencies in general – they rest upon easily-abused-privilege and confidence.

    Thus a Greenbacker is only upset about WHO gets the ill-gotten gains (the banks) and presumes that if run by ‘trustworthy’ people the expansion of money supply could be more generally shared, thus rendering (in their estimation) inflation as a zero-sum game. But they’ve ignored the effect on savers. And they’ve ignored Lord Acton’s proverb. And they’ve ignored that the control of monetary expansion rests in any case with fallible people with no way to measure the increases in efficiency that is not self-referential.

    All of that is fixed with a metals standard. When your economy gets more efficient, mining does too. No fallible humans need be in that decision cycle. No privilege, and thus no chance to abuse it. And the effect on savers is nil to positive. The same efficiency, after all, that enables the monetary expansion also makes the saver’s saved gold buy more stuff – a not necessarily exactly zero sum game, but much better than any econometric formula.

  • Cronus de Gaia

    My info source is Ed Griffin’s great book and audio lecture by the same name, “The Creature from Jekyll Island – a Second Look at the Federal Reserve”. The audio lecture is especially good, describing the history and ongoing machinations of the Fed. It’s available at http://www.realityzone.com/creatureaudio.html.

  • Anonymous

    I probably will in the future, but I’ve already got a backlog of various papers that people want me to read (either to help with editing or just to give my opinion). Don’t take offense, it’s just that I only have so much time to get to everything.

    I will say this, I’ve been on both sides of the FRB debate, and I’ve read just about every argument for or against. I don’t often debate this topic anymore because it’s been beaten to death, but my own stance now is somewhere in the middle. It isn’t Rothbard/Hoppe, but neither is it Selgin/White.

  • Anonymous

    I suspect there would never have been a bitcoin if not for the pre-existence of fiat currency. Also it needs to be stressed bitcoin is NOT fiat currency. No fiat, no fiat currency. Of course it could be co-opted by some state, but at the moment it is not fiat currency.

    Anyway I will bet a bitcoin that there never would have been bitcoins accepted as currency if not for fiat currency. Bitcoin is only attractive compared to them, it’s not really that attractive compared to gold, or some commodity backed currency.

  • Anonymous

    There is certainly redistribution going on but it’s due to the current system. Anyway money is worth what it is worth. Any quantity of money can serve the function. Under an asset backed currency the currency will appreciate over time which benefits wage earners and currency holders, and doesn’t encourage the perpetual speculatory financials bubble.

    Also “denied loans”.. why do you think debt is wealth? Excessive loans for consumer goods are what ‘strangles the economy’, or else for capital goods for ventures which will fail. The problems we face are exactly too MUCH debt which is spurred on by Fed and Federal policy. Loans for consumer goods are what, when repaid, have added nothing to capital stocks.

  • http://www.facebook.com/chris.horlacher.3 Chris Horlacher

    Great paper Tom! I was able to actually get Bill Still (Money Masters producer) in to a debate on the Ed & Ethan show. He wasn’t too happy with me by the end of it, I guess he thought he would be going up against someone who wasn’t really educated on these matters. Thanks for all you’re doing, here’s a link to the debate:


    I also presented an addendum at the Mises Canada Toronto meetup that happens every month. There are some greenbackers lurking around here in Canada that have actually launched a suit against the central bank. Imagine my surprise (or lack thereof) when I figured out that their leader is a former Trotskyite.


  • Nicolas Beattie

    No offense taken, I do get back to me if you find the time to read it.
    I do consider FRB to be fraudulent from every possible perspective, however, I should probaly read some Selgin, White and Guttenburg in order to test that assumption. Thanks for the references.
    Although my text little to do whether FRB was indeed fraudulent or not. My main argument had to do with whether the current monetary system indeed makes it more difficult for debts to be successfully repaid in aggregate, as GreenBackers claim. As the original Argument by GreenBacker’s fall short, I introduce the conceps of stocks and flows that you mentioned in another post, and re-examine the issue.

  • Anonymous

    Okay, but that is often a topic that comes up when somebody is comparing the current system to that of 100% reserves. Also, I had literally just finished von Guttenberg’s paper on fraud about 5-10 minutes before I read your comment.

  • Nicolas Beattie

    I figured as much, though I am not as familiar with the literature as you seem to be (which is one of the reasons I wanted others to take a look at my long assessment).

    If it is indeed correct that there is added difficulty in repaying debts under the current system, It seems to me this perspective should be integrated into the current analysis of the Austrian Theory of the Business Cycle, as it would to be a supplemental causal factor in both bubble formation and the large number of defaults that occur when that bubble bursts.

    Personally, I haven’t seen any Austrian perspectives on this subject to date. Do you know who might have written on this subject, or more broadly, under what name is this subject referred to (search engine keywords)? Maybe I’ll encounter a discussion on this in the Rothbard/Hoppe vs. Selgin/White/Guttenburg debate on FRB.

    I hate to be a bother, you’ve been so helpful already. Whether you can help with this or not, it seems I have a lot of research and reading to do.

    Thanks a trillion! I owe you an irredeemable debt ;)

  • http://clintballinger.edublogs.org/ Clint Ballinger

    “The Greenbackers’ preferred system, in which money is created by a monopoly government, is completely foreign and extraneous to the natural evolution of money as we have here described it.”

    The evolution of money you describe is fantasy, it just didn’t happen that way, therefore the rest of your analysis is wrong.
    Money arose out of debt contracts, which evolved into private banking, and out States compelling individuals to pay taxes (the conflict between these two system is still evident in the Circuit Theory of money versus the Neo-Chartalist state theories of money; they are BOTH correct at the same time, but neither sees that moving one step further, to a PURE state – yes “greenback” system – is the way forward.)

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