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Source link: http://archive.mises.org/5714/government-money-deserves-a-swift-abolition/

Government Money Deserves a “Swift” Abolition

October 5, 2006 by

People in Jonathan Swift’s time were no strangers to monetary debasement, writes Nicholas Curott. It was universally considered to be a great evil, as Swift notes: “Neither is anything reckoned more cruel or oppressive in the French government, than their common practice of calling in all their money after they have sunk it very low, and then coining it anew at a much higher value.” Swift fought a courageous campaign against the imposition of debased coinage in Ireland, when an English ironmonger procured a patent to coin copper coins. FULL ARTICLE

{ 32 comments }

Mike Sproul October 5, 2006 at 10:13 am

I’m no expert on the legal tender laws, but I doubt that I would be arrested for trading with silver, foreign currencies, salt, or any other rival money. Apparently, people use dollars because they are more convenient than other moneys, and if my average cash balance is $100, then 5% inflation costs me just $5 per year, in exchange for the convenience of being able to use dollars in my transactions.
Of course 0% inflation would be better, but we’ll get no closer to 0% as long as economists fail to understand that there is no such thing as fiat money (Google “no such thing as fiat money” for a paper.). The dollar, for example, is backed by the gold and bonds held by the Fed, and inflation results from declines in the amount of backing per dollar.

David C October 5, 2006 at 10:13 am

Last weekend my wife and I visited Tijuana and while down there I had an epiphany. These people are very poor, and very co-dependent on the health of the UD dollar. God only knows what’s going to happen when the dollar collapses, God only knows how many of those people I saw struggling day to day are going to end up dead. I noticed that many of the vendors were shunning pesos and accepting dollars as if they expected their government to ruin its currency, but not the US to ruin ours. I feel sick.

David Spellman October 5, 2006 at 11:55 am

Mr. Sproul,

The answer is that you can pay with anything you want if the other party agrees to accept it. Otherwise, they are allowed to pay with government money and you are obligated to accept it.

If you look at your paper money, it says “This note is legal tender for all debts, public and private.” What that means is that if someone wants to pay a debt with government issued money, you cannot sue them in court to pay with some other form of payment (unless they contracted to deliver goods, which nominally would be a commodities transaction).

In other words, the government says you have to accept their money for anything they owe you, and you have to accept their money for anything anyone else owes you if you expect the government to enforce a debt. Since most of us are debtors, most of us like this plan because we perceive that government money is the cheapest way to pay debts.

Imagine if you had to pay a thirty year mortgage with gold every month? That could wind up being a very costly loan since it would be immune to inflation. Even though people don’t understand the source of inflation, they readily can calculate the virtue of inflation when making debt decisions.

Reactionary October 5, 2006 at 11:59 am

Mike,

IIRC you’ve posted this notion before. Bonds don’t “back” anything. They’re simply a promise to pay dollars in the future. The only way gold can “back” dollars is for the dollars to be redeemable for a fixed quantity of gold.

m October 5, 2006 at 1:28 pm

David:

Legal tender laws don’t maintain the value of any currency, as a quick look at the history of the assignats and the continental dollar will confirm. Furthermore, a law that says a baker must accept paper dollars for a loaf of bread is irrelevant if it doesn’t specify how many paper dollars.

Mike Sproul October 5, 2006 at 1:33 pm

Reactionary

Yes; YRC. Would you then say that there is no difference between, on the one hand, a banker that issues $100 for a $100 bond, who keeps that bond as an asset, and can use that bond to buy back the $100, and on the other hand, a counterfeiter that prints $100 and spends them, without any provision for ever buying them back?

Curt Howland October 5, 2006 at 2:43 pm

So, Mr. Sproul, if the currency is “backed” with something, how do I go about redeeming this bill for some of that backing?

For instance, a silver certificate says “redeemable for one dollar in silver”. So even if that is an arbitrary quantity, it is still some physical commodity backing.

Yet nowhere is there anything to be redeemed by my Federal Reserve Note. I can buy a bond, but then what do I get when I try to redeem the bond? More FRNs. Oh, and not _enough_ more FRNs than are eaten up by inflation, so even the “backed by bonds” is false.

So can you be more specific? What, exactly, is “backing” the FRNs in my pocket? What may I redeem them for, in your opinion?

Curt Howland October 5, 2006 at 2:49 pm

David C., I lived in Japan for a few years. During that time, they had a _negative_ interest rate. That is, their central bank loaned money at 0% interest (prime rate), and even forced money into banks in order to prop up the banks who are accumulating and carrying uncollectable loans on their books for years, even decades, to keep from admitting just how much they’ve lost.

Even in the face of this method of obvious and rampant inflation, they Japanese Yen and USD tend to keep a kind of parity, 100-150 Yen to the Dollar.

This made me realize just how fast the printing presses are running in the US, that the dollar is just as bad as the Yen. Japan is just smaller, so it’s more visible.

Yet, indeed, the USD _is_ more stable than the Peso. Astounding, isn’t it, how successful the central bankers and government educrats have been in the Big Lie of fiat currency.

Darrel Karisch October 5, 2006 at 4:09 pm

anybody heard of Liberty Dollars?

I’m not affiliated nor am I a participant in any way. It seems that this is a constructive path to the reintroduction of real money, or at least path of protest…

http://www.libertydollar.org/ld/press-kit/usmint-allegations.htm

http://www.LibertyDollar.org/

Mike Sproul October 5, 2006 at 4:10 pm

Curt:

There are two kinds of convertibility: Physical convertibility, where I can get an ounce of silver or a bushel of wheat for my dollar, and financial convertibility, where a dollar can be redeemed at the bank for a dollar’s worth of bonds. For example, after the Xmas shopping season, people might have 50 unwanted paper dollars on their hands, so they might take them to the issuing bank, hoping to get an ounce of silver. The bank, however, can head-off this demand by selling a $50 bond in exchange for $50 in paper, thus soaking up the unwanted dollars. So as long as the bank maintains financial convertibility (i.e., conducts ordinary open market operations), physical convertibility is irrelevant.
See http://www.geocities.com/sproulmike/nofiatmoney.doc

Sione Vatu October 5, 2006 at 4:45 pm

Mike

You’ve got to see the humour in that; paper for paper. Trade one promise for another. Trade a lie for another lie. Do you reckon that is going to continue indefinately?

Sione

Person October 5, 2006 at 4:49 pm

Mike, I’m going to try to follow you here: If the people want to redeem their money for silver, why would they take a $50 bond? Or are you claiming they’d sell $50 in the future at a discount now? So when they “soak up the extra dollars” by promising more money later, but they haven’t gained any silver, how would they redeem the money in the bonds for silver at a later date. I just don’t understand what about the bond would make people take it if they’re entitle to silver.

Jacob Steelman October 5, 2006 at 4:55 pm

We do have men and women as eloquent as Swift to explain the theft that is inflation and they have been doing it for a long time – Rockwell,Read,Rothbard,Mises, Rand, Smith, Bastiat etc. just to name a few of the thousands. Unfortunately the men and women sitting in power today in the US and other countries, unlike the English Parliament of Swift’s time, would not consider for one second the need to stop the debasement of the currency. Quite the contrary – they are actively and aggressively debasing the currency as fast as they can. It is a moral issue not a lack of information that is our problem today.

Nick Curott October 5, 2006 at 6:28 pm

Please note that Swift was actually Irish, not English. Thanks to Jerry Salchert for pointing out this mistake to me.

Nick Curott October 5, 2006 at 6:28 pm

Please note that Swift was actually Irish, not English. Thanks to Jerry Salchert for pointing out this mistake to me.

Edward Stringham October 5, 2006 at 9:15 pm

Nice article my man Nick!

I loved the part about how Swift warned that if government had legal tender laws they would end up circulating things as worthless as stamped leather for money. “But alas! Alas! It all has come to pass, just as Swift had forewarned.”

Great job!

Mike Sproul October 5, 2006 at 11:01 pm

Person:

The fact that people held dollars means they preferred them to silver. Then, when the shopping season was over, the dollars piled up in their drawers, unused. If the banker then offered a $50 bond for sale, the people with the unwanted dollars would buy that bond. The bank could destroy the 50 dollars or just store them. The dollars remaining in public hands are only the ones that are wanted, and would not be brought to the bank for silver. Obviously, the bank doesn’t have to deal in bonds. It could just as easily sell $50 of furniture to soak up the 50 unwanted dollars; but either way, the public has no reason to demand silver in preference to the paper dollars.

banker October 5, 2006 at 11:30 pm

Isn’t the point of redeeming FRN to get rid of FRNs and replace with something else like gold or silver? Why would someone want to replace FRN now with a promise for more FRN later? That is not redemption, but simply a loan for dollars now for dollars later. There is a difference between loaning and redeeming FRNs.

Income taxes are paid in dollars. Legal tender laws force people to use dollars. Enough said, if taxes were significantly reduced and legal tender laws removed I wonder how long it would take for people to stop using dollars. It is not that hard to convert.

Scott October 6, 2006 at 12:20 am

Howdy,

Regarding the value of $100 in 1913 as compared to now, the calculator linked to uses the CPI to do its calculations. Doesn’t the CPI usually under represent the actual inflation because of what is included in the basket of goods?

Peter October 6, 2006 at 12:47 am

This blog needs a Kook Rating System, to cope with Mike Sproul and Jim Bradley :)

Peter October 6, 2006 at 1:35 am

And Person

adi October 6, 2006 at 3:32 am

Mike “The Real Bills” Sproul is back again!

Mike wants us to believe that giving fictious promises for the fictious money is same as the real thing..

Seriously, as noted earlier by banker it’s the govt’s monopoly on money which causes all kinds of unpleasant situations. Government and money is not very good combination as several eras in history have shown to us (though inflationists would praise these things and not condemn).

Vince Daliessio October 6, 2006 at 6:02 am

Mike,

I have no problem with allowing an institution such as a bank offering securities instead of assets – I wouls simply like to see each presented in honest terms and not fraudulently represented.

It is clear to me that the difference is that asset deposits, warehouse receipts, whatever, are titles to assets, wheras your favored version of “non-fiat” money deposit is effectively a speculative investment, that in exchange for a pittance in interest (really a negative return in most cases after inflation and taxes)I have no title to my asset given, simply a promise to pay at some later date another investment of dubious value.

In other words, hard money deposits are assets, while paper money deposits are speculative investments, most of which lose value during their term.

Just so we have that straight.

JIMB October 6, 2006 at 6:29 am

Peter, etc – Mike Sproul is right. Since the dollar IS money (no matter how much some Austrians would like it not to be) – in fact it is arguably the ONLY ‘base’ money (hence the necessity of worldwide dollar reserves and 2.5 trillion of it trading hands daily) -selling bonds to reduce money of zero maturity is in fact valid.

All that does is replace immediate transactable money with a claim to money in the future.

What makes money is acceptance for goods (read Mises on this, guys – that is the essential requirement – other properties follow this essential property). All the goods for which dollars are traded is what “backs” the dollar, until such point that dollars are in such excess compared to goods, that the market develops alternatives (despite the unequal playing field the government has made).

The level of debt the Fed is willing to turn into tradeable money (right now the Fed turns only treasury debt into money, hence the necessity of government debt) compared to the demand to hold money (for whatever purpose), is what determines the speed of inflation.

Read the following sentence carefully (perhaps more than once): The mechanism of inflation is a continuous bias (only temporarily interrupted) toward expanding transactable money by defending (via money creation) immediate redeemability of deposits mismatching the demand for deposits by depositors against the demand for longer-term credit. THAT is why debt is expanding. Banks can get away with promising and achieving instant redeemability even though they haven’t the market ability to do so, thereby increasing their ability to offer loans (which become deposits after they pass from the borrower’s hands). The limit is reached when the Fed administrates an interest rate that constrains the process and no more reserves (immediate money) can be got cheaply enough to justify borrowing.

Banks typically create a loan then look to borrow the reserves (they know they can get the reserves at a given price because the Fed will defend the rate they administer). The public is hit twice, once by dilution of the money (offsetting the natural non-negative inflation rate) and then by the act of the Fed buying government bonds which the public is one the hook for through taxation. Nice work, if you can get it.

JIMB October 6, 2006 at 7:06 am

Person, etc. – My bad: Mike was right about convertibility; however the “no such thing as fiat money” isn’t accurate at all. It is the mechanism of creation that determines – if money is created without the full backing of a real good (impossible of course if the money IS a real good), then it is fiat money.

JIMB October 6, 2006 at 7:06 am

Person, etc. – My bad: Mike was right about convertibility; however the “no such thing as fiat money” isn’t accurate at all. It is the mechanism of creation that determines – if money is created without the full backing of a real good (impossible of course if the money IS a real good), then it is fiat money.

Mike Sproul October 6, 2006 at 12:15 pm

Banker:

You’re talking as if bonds are indestructible. Bonds are issued and bonds are retired, just as paper dollars can be issued and retired. It’s not a case of changing today’s FRN’s for nest year’s FRN’s.

Your view on taxes implies that taxes create a demand for money and thereby give money value. My view is that taxes provide the government with assets, and those assets are one of the things that can back money.

Mike Sproul October 6, 2006 at 12:20 pm

Vince:
I assume you mean that if a paper dollar promises to pay 1 ounce of silver, then it’s fraudulent for the bank to issue new dollars for anything but new silver, EVEN IF the dollars are issued for something worth just as much as an ounce of silver. The simple answer is that if all parties agree to that exchange, then a good libertarian has no reason to object.

Mike Sproul October 6, 2006 at 12:37 pm

JIMB:
Some reasons to doubt the existence of fiat money:
1) It creates a free lunch for its issuer, which would attract rival moneys. For example, if Mexico gets a free lunch by issuing pesos, then the US could take that free lunch away by circulating dollars in Mexico. The more dollars invade, the bigger the US free lunch, and the lower the peso falls, with no stable solution short of zero. But if you recognize that the peso’s value is equal to its backing, this puzzle disappears.
2) If money is unbacked, why do all banks hold assets (gold, bonds, etc) against the money they issue? Why not just print it and spend it?
3) The only justification ever given for claiming the dollar is fiat money it the fact that the dollar is physically inconvertible. That completely ignores the fact of financial convertibility, and the fact that there is a clear difference between being inconvertible and being unbacked.
Fiat money sounds an awful lot like phlogiston, ether, and caloric, which don’t exist either.

JIMB October 6, 2006 at 1:42 pm

Mike – What is your definition of fiat money?

I believe the most operable definition is a money that can be created independently (i.e. is not limited to) the simultaneous creation of some consistent basket of good(s).

(1) The dollar is better backed than the others because of our better political behavior and our more powerful economy, so the competition is not just between monies but also between political systems; Mexico has no choice but to substantially collateralize it’s currency with dollars, as it’s misbehavior and unstable property rights cause significant skepticism from private creditors as to the continued value of the currency.

(2) Banks hold assets like gold and bonds because they want a return on their investments and they don’t fully trust fiat money – not to “back” the money they create by lending. Think about this – if tradeable money isn’t already backed by some process outside the bank, what bank would accept it in payment for debt? And what bank would want a bond deminated in it?

The banking system is an oligopoly which forces banks to uniformly inflate. That is made necessary because one bank could otherwise inflate faster than the others and then stress the system with deposit redemptions (see Rothbard on this: http://mises.org/money.asp );

(3) I maintain that fiat money is money that has no direct link to a good at the time of creation of the money: all money is “backed” (eventually, after prices have adjusted, unless a country goes into hyperinflation) because money is traded for goods.

Fiat money doesn’t have to be backed at issuance – that is what makes it “fiat”.

Paul Marks October 6, 2006 at 2:16 pm

Economics (contrary to the mainstream academics) is indeed not a empirical subject (it a is a subject of logical reasoning), but history is an empirical subject and the matter of whether or not the United States government has ever forced people to use its fiat money is clear.

The Constitution of the United States gives Congress the coin money (Article 1, Section 8) it says “coin” to avoid the printed fiat money mess of the “Continentals” which were issued during the war (the writers of the Constitution were also influenced by the various fiat money issues of State-Colony governments long before the war). The Constitution also states (Article 1, Section 10) that only “gold or silver” coin may be a legal tender in any State.

On top of all this many private contract stated that payment was to be (for example) in gold.

However, in 1933 these contracts were declared void by the Federal government (in defiance of the Constitutional duty to uphold contracts) and gold was taken from private owners by the threat of violence. The government demanded that its taxes be paid in “Dollars” (which it controlled) and, as stated above, voided private contracts and robbed the people. There was no war to use as an excuse, so the (government created – via the Federal Reserve Board credit money bubble of the late 1920′s) Depression was used as an excuse instead. Of course the idea that these government actions were good for the economy is both false (they were bad for the economy, helping to prolong the Depression) and not relevant (as “helping the economy” is not a lawful reason for going against the Constitution of the United States).

The Supreme Court upheld these actions – which shows the weakness in having a government appointed court as the guardian of Constitutional limits on government power (although the Supreme Court, or rather some members of it, were to show some resistance to the unconstitional activities of the “New Deal” regime till the mid 1930′s).

In short the idea that individuals choose the present fiat money regime via voluntary interaction is simply false – it was forced on them.

Not econmics, a matter of historical fact. However, when given the chance to vote out President Roosevelt 60% of the voters choose to reelect him – which shows the tension between democracy and liberty (a tension not understood by “modern” people who treat the words “democracy” and “liberty” as if they meant the same thing).

Seventy years ago the majority of Americans showed that they did not really liberty, and instead choose the promise that an activist government would save them from the consequences of previous government actions (not that the Depression was the result of previous government actions, the credit bubble of the Fed in the late 1920′s, the efforts to prevent wage cutting in response to the Depression by President Hoover, the vast increase in trade taxes in 1931, and so on, was understood).

Indeed President Hoover (an interventionist) was presented as a fanatical defender of liberty, and President Roosevelt’s arbitary and contradictory (for example destroying crops to try and force up prices, whilst complaining that the poor could not afford to buy food) antics were presented as “fighting the Depression” rather than prolonging it.

That all previous credit bubble busts (most recently that of 1921) had not seen such government action (and because of this the economy quickly recovered) is not taught in mainstream education today.

Andrew Neumann October 11, 2006 at 6:27 pm

Great article, and the comments demonstrate what a sad state of affairs it is that people don’t understand that our money is not backed by anything other than the point of a gun. Particularly sad when one considers that the government will tell you this themselves.

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