Rebuttal to "Reserve-Based Currency vs. Precious Metals-Based Currency (Part 1)"

My first reply to Bill Gee's article
by Walt Thiessen
(libertarian)
Friday, February 11, 2011

When Bill Gee proposed that he and I have an online debate on the subject of money supplies, my reaction was, "That sounds like fun!" So let the fun begin.

This article is a point-by-point rebuttal of Bill's introductory remarks entitled, "Reserve-Based Currency vs. Precious Metals-Based Currency (Part 1)". I'll follow my rebuttal with a second article that directly makes the case in favor of a precious-metals currency...or preferably, currencies.

While the phrase "reserve-based currency" is technically correct, I take issue with it because it makes the system upon which it is based sound responsible and respectable. In reality, it teems with systemic fraud, cheating, smoke-and-mirror lies, and outright theft. I propose that instead of calling it "reserve-based currency" we should call it "debt-based currency", "fraud-based currency", "theft-based currency", or "counterfeit currency". All five of these terms are logically interchangeable from my point-of-view, but the latter four are more accurately descriptive and meaningful. I think we do a disservice to our readers by granting the current system a term as respectable as "reserve-based currency". Whenever the elastic money supply is increased by our central bankers, they effectively create counterfeit (but legal) money, and the resulting increase effectively decreases the unit-value of everyone's money in the long run. So I think for the purpose of this article I'll choose to call the current system "counterfeit currency" or "counterfeit money".

Bill does an admirable job of presenting the prevailing, conventional wisdom regarding the current system, whatever name we might give it. He cites a popular standard textbook for his description of money and how it derives its value. Some of it is accurate, but some of it is very misleading and inaccurate. Let me point out some serious problems I see with the textbook's description. I'll quote the particular passages I wish to contest, then follow with my critique of that passage.

"If the government backed the currency with something tangible like gold, then the supply of money would vary with how much gold was available. By not backing the currency, the government avoids this constraint and indeed receives a key freedom - the ability to provide as much or as little money as needed to maintain the value of money and to best suit the economic needs of the country."

First, it is not the government which maintains (or fails to maintain) the value of money. The Federal Reserve is a private organization, owned by the commercial banks, with most profits going to the federal government. The President of the United States appoints all of its members, who serve for terms of varying lengths. Typically, members of the Fed's Board of Governors are ex-bankers, pro-counterfeiting economists, and pro-counterfeiting financial planners. Thus, the Fed has a quasi-public face, but it's true nature is that of a private agency whose role is to control the money supply. Still, I think it's fair to say that while the privately owned Fed is responsible for having failed to maintain the value of money, the U.S. government, which granted the Fed that authority in 1913, actually bears the lion's share of blame for that loss in value because Congress has steadfastly refused to take the power to debase the money supply away from the Fed.

Second, as noted above, the value of money is not maintained at all under the counterfeit money system. Even by the government's own measurements, since 1961 (50 years ago) the dollar lost 86.7% of its value, according to the consumer price index as measured by the Department of Labor's Bureau of Labor Statistics. Since the Fed was founded in 1913, the dollar lost (by BLS measures) 94.5% of its value. I personally think these figures understate the actual loss, which I would put at over 95% since 1961 and closer to 99% since 1913. However, either way, these are extremely serious losses. Bill might counter that while the dollar has indeed lost a tremendous amount of value, wages have also increased during this same period to offset those losses. It's hard to find a single table that measures wages during the same period. However, I think we can safely say that wages haven't kept up. A fair estimate would be that wages have risen at less than half the rate that the value of the dollar has fallen. Thus it is more than twice as expensive to keep food on the table, a roof over one's head, and clothes on one's back than it was 50 years ago. No matter how we look at it, counterfeit currency has clearly failed to retain its value.

But even if we accept the idea that increased wages have to some degree offset the loss of the dollar's value, there can be no denying the fact that savings can never recover from the loss. Any money saved during that period is money lost. Bill might argue that the saver could always invest his savings at interest or in the stock market in order to offset some or all of the loss, but I counter that this suggestion ignores the principle of money. Money, by definition, is supposed to retain its value. Requiring people to be savvy investors (a ridiculous notion by itself, since most people have neither the time nor inclination to learn to become savvy investors) should not be a factor in that definition. Money should retain its value regardless of whether people invest.

Clearly, the power that the government (via the Fed) assumed to maintain the value of money resulted in unmitigated catastrophe.

Returning to Bill's quoted passage:

"In effect, by choosing not to back the currency, the government has chosen to give itself the ability to freely 'manage' the nation's money supply. Its monetary authorities attempt to provide the amount of money needed for the particular volume of business activity that will promote full employment, price-level stability, and economic growth."

First, I think we can all agree that the counterfeit money system has failed utterly to promote full employment. Between the Great Depression, the various recessions of the 20^th century, the millennium recession, and now the Financial Crisis of 2008 and its aftermath, the goal of full employment continues to take hit after hit. In fact, has there been even a single year during this period when the country experienced full employment, even if only briefly?

Second, I submit that the goal should not be price stability. It seems good on the surface if you don't think about its ramifications, but look deeper and the impact changes to monstrous. A sound money supply which retains its value must, by definition, be of limited quantity. The kind of elastic money supply Bill advocates (and which we currently have) cannot retain its value on a per-unit basis. If the money supply were limited in quantity, we'd have a mostly stable, little changing money supply lubricating and financing an expanding economy as the supply of goods and services regularly increased over time. Such a system should provide steadily decreasing prices, not prices at a stable level. Consider where our price levels would be if our money supply were honest. Everything would be dirt cheap and plentiful. Much more even distribution would have reached the whole world by now, not just the "developed" world. The "rat race" would not exist because people would no longer have to work long hours at progressively lower wages relative to prices in order to survive. Government sanctioned monopolies would be hard-pressed to maintain their market advantages, being constantly at risk of losing market share to more efficient producers. Thus, price-level stability is a terrible goal. It's little more than a thinly veiled justification for continuing to rip off people who are forced to use counterfeit currency as if it were good money.

Third, I ignore traditional methods of measuring "growth" because they are so misleading. GDP "growth" for instance is dominated by Wall Street profitability and government spending. It has almost nothing to do with Main Street financial health. Thus, the GDP tells us that the recession ended in June 2009, but most of us know how big a lie that is by simply looking at our own pocketbooks and livelihoods.

Continuing with Bill's narrative:

"For instance, if we used gold to back the money supply so that gold was redeemable for money and vice versa, then a large increase in the nation's gold stock as the result of a new gold discovery might increase the money supply too rapidly and thereby trigger rapid inflation."

Look at what we get with counterfeit money, and I think most of us would gladly risk Bill's unlikely scenario. Under the elastic, counterfeit money system we have today, the money supply has increased to nearly 1800 times its original size (an increase of roughly 180,000%) since 1913 when the Fed was first created. Even the most optimistic critic of gold or silver as money could not possibly imagine an increase in precious metals through a gold or silver strike that would come anywhere near that amount of increase. This point is a clear win for precious metal money and a clear loss for counterfeit money.

"Or a long-lasting decline in gold production might reduce the money supply to the point where recession and unemployment resulted."

This myth has remained long unchallenged and unquestioned by status quo economists. Only under an elastic money supply does a ceasing of increase in the money supply result in recession and unemployment. I'll address this point more closely in my next article. For now, suffice to say that a precious metal currency does not experience the same kind of rip-saw effect that elastic currencies experience because precious-metal currencies do not induce malinvestment like counterfeit currency does. Bill will probably point to times in history under the gold standard when there were economic expansions and contractions, but I counter that those expansions and contractions happened because the government permitted the gold and silver supply to be debased by counterfeit paper money or legal-but-fraudulent banking practices, and that these increases and decreases in the paper money supply or in bank deposits via fractional reserve banking caused those expansions and contractions.

"Therefore, the dominant economic culture suggests that money's Acceptability, Legal Tender and Relative Scarcity are all the 'backing' it needs."

The counterfeit money system is a government-enforced monopoly (hence "legal tender"). Claiming that such a system "suggests" acceptability is a fantasy. Calling it "relative scarcity" is a downright lie. Relative scarcity compared to what...a never-stopping printing press? Give the marketplace a precious-metal alternative currency to choose from, and you'll see just how quickly the dominant economic culture will reject counterfeit money. The only thing that holds the current system together (apart from chewing gum and baling wire) is the fact that the government gives the market no choice in the matter.

"Every major currency in the world has accepted this view, and the modern banking system depends on it."

Of course they have and do. Counterfeit money is very profitable for the banks, who run and control the major currencies of the world. The question is this: is counterfeit currency good for the rest of us? The answer is unavoidably no.

Bill then goes on to describe what he calls the three major flaws in the current system, which he claims a central bank adequately addresses. The first one he mentions is faith. This is a poignant choice, and not only for the reasons he describes. Counterfeit currency depends completely on faith. Precious-metal currencies require almost no faith at all. Historical evidence becomes our guide. So long as the government does its part to prevent precious-metal debasement and defrauding, history tells us that precious-metal currencies are quite trustworthy. Unhappily, government has a terrible track record in this regard, largely because it is the greatest transgressor of all (except for banks). Only blind faith can support such a system (and only when supported by government enforced monopoly). The only protection the market can have is to use competing currencies. The more currencies (including precious metal currencies) are permitted to compete with each other for acceptance in the public marketplace, the harder it is for a conspiracy of politicians or bankers (or both) to get away with debasing any of them.

His second identified major flaw is the crucial one, ironically entitled "inflation control". For a central banker, inflation control means trying to figure out how much inflation he can allow the banks under his gaze to get away with inducing. Sadly, the term does not mean avoiding all inflation. Counterfeit monetary systems depend upon a steady inflation for their survival and profitability for the bankers and power elite.

For our current purposes, Bill does a good job of describing the fractional reserve banking experience. What he omits, however, is what all mainstream economists omit. Fractional reserve banking is legalized theft. It should be treated as such. Unhappily, government has a long history of not cracking down on fraudulent banking practices, but rather has long sanctioned these acts of theft.

The money banks lend out never belongs to the banks; it belongs to the depositors. Nor do most banks even bother to ask the permission of their depositors; they merely (and fraudulent) promise to return their deposits on demand. The depositors mostly get none of the interest collected by the bank, except for a pittance with savings accounts and CDs. And when the loans go bad, it's never the bank that pays the price. The price is passed along to the depositors as we discovered in the 1920s and early 1930s, or to the taxpayers as we discovered in 2008 with the banks that were "too big to fail". Thus, bankers get the rewards, while depositors (and taxpayers) bear the risk.

Notice that no other business is permitted to engage in the behavior that banks engage in. If a real estate attorney, for example, were to invest funds he gets from his clients to hold in escrow toward a real estate purchase, even by investing them in something as "safe" as a money market account, the government would justifiably throw him into prison. If a pawnbroker were to "invest" gold and silver coins (or other goods) pawned with his shop, he too would justifiably go to prison. But when the banker engages in the exact same behavior, he gets rewarded and enriched, and he always avoids prison for the exact, same behavior. If banking as it is currently practiced is truly a good idea, we should all be permitted to engage in it, so we could all grow rich! Instead, it's a no-risk (for the banker) proposition that is only available to the wealthy. The banker is the only businessman in the world legally permitted to engage in this despicable practice.

Address this issue directly by making it illegal for everyone, bankers included, to invest other peoples' money without their permission while simultaneously promising to return their money to them on demand, and the whole point about "inflation control" becomes moot. In fact, it would also end the possibility of bank panics of all kinds in the future, including the kinds of panics that led to both the Great Depression and the Financial Crisis of 2008.

The third flaw that Bill mentions is politics. I agree; it's a major flaw. I only wish he addressed this flaw in greater detail. The counterfeit money system is supported by the government wholeheartedly because the government benefits so much by it. Without it, no government would be able to go as deeply into debt as modern governments are able to do, whether first-world, second-world, or third-world. Bill addresses this point rather kindly in a later section of his article entitled, "Government Debts", treating the point as if the sole concern were Keynesian economic stimulation. In fact, we have much greater concerns where government debt is concerned. Government power could not be perpetually increased and centralized without the power of a central bank behind it. The political problem isn't limited to appointing the Greenspans and the Bernankes of the world to head the Fed. The counterfeit money system permeates, influences, and indeed controls every single political issue on the face of the earth, because all of them are directly affected by the money power of counterfeiting and the huge boon that power is to government growth. Further, there is no end in sight to this growth in government's influence and power. In the long run, that can only lead to total tyranny. We're already well along the way.

And as for Keynesian stimulation, in Bill's words, "A true Keynesian economist would argue that in times of recession, governments need to spend more than they collect in taxes and then pay off the debt by raising taxes when times are good." The problem with this isn't just the fiscal policies Bill cites. It's also that the debt never gets paid off! Under a counterfeit currency system, to pay down government debt in a major way is highly dangerous because it is also highly deflationary. This is true because another term for counterfeit currency is debt-based currency. When your currency is debt-based, paying down debt on a large scale reduces the size of your overall money supply for repayments that are made to banks who hold the government bonds. (Repayment to private investors does not have the same effect.) Thus, government doesn't dare to ever pay down debt in a significant way. The debt just keeps growing and growing, moving us closer and closer to economic disaster.

"Despite the obvious flaws of the current system, most economists agree that abandoning the system now would be a disaster of global proportions."

A disaster to whom? The bankers? The politicians? So long as we make legalized fraud (fractional reserve banking) illegal, there is no risk at all to abandoning such a system. The only question is how to make the transition happen as easily and seamlessly as possible.

"With an ever-expanding world market, there is a constant need for additional dollars to be generated into the system that is not constrained to a finite supply of gold or any other precious metal. Should the world suddenly abandon the current monetary system, it is likely that International Trade would grind to a halt, thousands of companies that depend on trade would go out of business overnight, and millions who depend on trade for their very survival would starve."

Who said anything about sudden abandonment? There's no need for that. All we have to do to transition is make it legal once again for people to use precious metals as money, this time in competition with the dollar. After the new currencies take hold in the market, we should also make fractional reserve banking illegal.

The reason the gold standard failed wasn't because gold is finite (a contradictory claim, given Bill's earlier complaint that a gold strike would lead to an increase in the money supply!). It failed because of legally protected counterfeiting while gold and paper were forced to trade at a fixed price ($24/oz). Blaming gold for this fact is ridiculous.

If counterfeit currency is really such a great idea, let it prove itself by operating in direct competition with precious-metal currencies! If it does a better job than precious-metal currencies, then such currencies would be no threat to it. Yet, we know for a fact that the government considers precious-metal currencies to be a huge threat to their scheme, because they've made the use of precious metals as currencies effectively illegal. That should tell you something about the true viability of counterfeit money, even ignoring all the rest that I've written above.

Finally, we get to Bill's piece-de-resistance:

"Global corporations have four primary sources of liquidity: Net Sales, Investment Income, Equity sales, and Debt sales. Net Sales = Total Sales minus Total Costs. Investment Income is the income derived from the purchase and sale of Stocks, Bonds, US Treasury Bonds, Mutual Funds, Derivatives, etc. Equity sales is the income derived by selling a portion of its ownership to investors in the form of company stock. Debt sales is the income derived from the sale of corporate bonds, similar to US Treasury Bonds. The Equity and Bond Markets represent a multi-Trillion dollar industry and is itself a generator of money into the money supply.

"Almost every person in the industrialized world directly benefits from this market. These include Insurance Policies, 401K Retirement accounts, 523 College Savings plans, Pensions, Mortgages, Student Loans, etc. Should the world suddenly abandon the current monetary system, the flow of credit, which is essential for this system to work, would stop as the market struggles to take an inventory of currency supply. Payments would stop, the value of current investments would come into question and millions, if not billions of people would lose their jobs. We came dangerously close to this condition in 2008 when the value of the mortgage bond market came under question, so just imagine if the entire equity and bond market were faced with similar uncertainty."

Let's say what he said another way. The entire world economy is addicted to debt-based money, and governments in cooperation with bankers have forced this addiction upon us. Bill suggests that without debt-based, counterfeit money it would be impossible save money, attend college, retire, and insure our lives, property, and health. He claims that without counterfeiting, there'd be no businesses, no stock market, no bond market, no forms of investment of any kind. "The flow...would stop," he says. Stop? Hardly! All of those things would necessarily change, but they would not come close to ending. Worse, he claims that we all benefit from counterfeiting, in the form of pensions, mortgages, student loans, etc. Putting aside the obvious distortions of truth in these claims, I'd gladly trade in his so-called "benefits" for the use of real money. The focus of my next article will be on the real benefits of real money, benefits which counterfeit money cannot possibly hope to match. I'll link to that article here when it's published.

Did you like this article?
If you did, Thumb It!
9 thumbs so far

Facebook Share: Share

Share on Twitter

©2011 Walt Thiessen, all rights reserved. You must have written permission from the author in order to republish this work.
Published: Friday, February 11, 2011
Last modified: Friday, February 11, 2011

The views expressed in this article are those of Walt Thiessen only and do not represent the views of Nolan Chart, LLC or its affiliates. Walt Thiessen is solely responsible for the contents of this article and is not an employee or otherwise affiliated with Nolan Chart, LLC in his/her role as a columnist.

Report violation by Walt Thiessen of Nolan Chart LLC's terms of use policy.