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Source link: http://archive.mises.org/8398/new-audio-book-the-case-againt-the-fed/

New Audio Book: The Case Againt the Fed

August 13, 2008 by

When the Fed was imposed upon the public by the cartel of big banks and their hired economists, they told us that the Fed was needed to provide needed stability to the economic system. After the Fed was founded, during the 1920s, the Establishment economists and bankers proclaimed that the American economy was now in a marvelous New Era, an era in which the Fed, employing its modern scientific tools, would stabilize the monetary system and eliminate any future business cycles. The result: it is undeniable that, ever since the Fed was visited upon us in 1914, our inflations have been more intense, and our depressions far deeper, than ever before.

There is only one way to eliminate chronic inflation, as well as the booms and busts brought by that system of inflationary credit: and that is to eliminate the counterfeiting that constitutes and creates that inflation. And the only way to do that is to abolish legalized counterfeiting: that is, to abolish the Federal Reserve System, and return to the gold standard, to a monetary system where a market-produced metal, such as gold, serves as the standard money, and not paper tickets printed by the Federal Reserve. (pp. 145-6) [The entire audio book is available for free download]

{ 44 comments }

George Donnelly August 13, 2008 at 12:45 pm

How about a version for the Kindle? That I might even pay for. With a quarter of a million Kindle owners now, not making your content available for us is a glaring oversight. Please? :)

Mike Sproul August 13, 2008 at 1:26 pm

The fed is not a counterfeiter. Whether the fed is desirable or not, all it does is print paper dollars and use them to buy bonds. Then it stands ready to use those bonds to buy back the dollars it issues. I could do the same thing. I could give my $100 IOU to my mechanic, who will in turn use my IOU to pay his worker, who will spend my IOU at the grocery store, etc. Eventually, I will buy back that IOU by handing over $100 worth of homegrown fruit in exchange for the IOU. That might be 40 years from now, but my IOU still circulates today as money. The fed will live longer than I will, so the fed doesn’t need to buy back its IOU’s for quite awhile yet.

Larry N. Martin August 13, 2008 at 2:24 pm

The fed is not a counterfeiter. All it does is print paper out of nothing and use them to buy bonds. Then it never sells the bonds back for money. I could do that if I were independently wealthy (which I would be if the government would let me do this).
I could give my “Larry dollars” to my mechanic, who could in turn give some of them to his worker, who in turn gives them to his grocery store, etc. Eventually, I could buy them back with something I produce in the future, but why should I when everyone is accepting Larry Dollars? In fact, I think I should print up even more Larry Dollars, because there’s more stuff I want to buy. All those Larry Dollars in circulation has nothing to do with the price of goods and services in terms of Larry Dollars, because I’m buying real goods and services with my made-up money for the cost of the printing press and paper I’m using.

Skip Dexter August 13, 2008 at 2:34 pm

Mike,

This is odd:

“…The fed is not a counterfeiter…all it does is print paper dollars and use them…”

Pretty much an operational definition of counterfeiting.

To be fair, since they were ‘given the right’ to counterf….er….print paper money, this isn’t a false copy of ‘the real thing’ which is more the sense of the definition of counterfeiting. I grant you that.

But ask yourself a related question: You give somebody an IOU. A day or a season later, you earn money for payback. That’s one thing. You create the money for payback with the fruit of your labor.

It’s quite another thing to print money out of thin air, buy things with it, AND collect interest on the debt, some of which will not be paid back for decades, if ever.

I suspect if you drilled into the details of fractional reserve banking and its implications, you’d be quite dismayed.

Larry,

Thanks for your post. You’d love the
book “The Moneymakers”. You are right,
exactly, spot-on on track.
http://www.amazon.com/Moneymakers-Secret-World-Banknote-Printing/dp/352750236X/

Skip Dexter August 13, 2008 at 2:35 pm

Mike,

This is odd:

“…The fed is not a counterfeiter…all it does is print paper dollars and use them…”

Pretty much an operational definition of counterfeiting.

To be fair, since they were ‘given the right’ to counterf….er….print paper money, this isn’t a false copy of ‘the real thing’ which is more the sense of the definition of counterfeiting. I grant you that.

But ask yourself a related question: You give somebody an IOU. A day or a season later, you earn money for payback. That’s one thing. You create the money for payback with the fruit of your labor.

It’s quite another thing to print money out of thin air, buy things with it, AND collect interest on the debt, some of which will not be paid back for decades, if ever.

I suspect if you drilled into the details of fractional reserve banking and its implications, you’d be quite dismayed.

Larry,

Thanks for your post. You’d love the
book “The Moneymakers”. You are right,
exactly, spot-on on track.
http://www.amazon.com/Moneymakers-Secret-World-Banknote-Printing/dp/352750236X/

Skip Dexter August 13, 2008 at 2:36 pm

Mike,

This is odd:

“…The fed is not a counterfeiter…all it does is print paper dollars and use them…”

Pretty much an operational definition of counterfeiting.

To be fair, since they were ‘given the right’ to counterf….er….print paper money, this isn’t a false copy of ‘the real thing’ which is more the sense of the definition of counterfeiting. I grant you that.

But ask yourself a related question: You give somebody an IOU. A day or a season later, you earn money for payback. That’s one thing. You create the money for payback with the fruit of your labor.

It’s quite another thing to print money out of thin air, buy things with it, AND collect interest on the debt, some of which will not be paid back for decades, if ever.

I suspect if you drilled into the details of fractional reserve banking and its implications, you’d be quite dismayed.

Larry,

Thanks for your post. You’d love the
book “The Moneymakers”. You are right,
exactly, spot-on on track.
http://www.amazon.com/Moneymakers-Secret-World-Banknote-Printing/dp/352750236X/

Skip Dexter August 13, 2008 at 2:38 pm

Mike,

This is odd:

“…The fed is not a counterfeiter…all it does is print paper dollars and use them…”

Pretty much an operational definition of counterfeiting.

To be fair, since they were ‘given the right’ to counterf….er….print paper money, this isn’t a false copy of ‘the real thing’ which is more the sense of the definition of counterfeiting. I grant you that.

But ask yourself a related question: You give somebody an IOU. A day or a season later, you earn money for payback. That’s one thing. You create the money for payback with the fruit of your labor.

It’s quite another thing to print money out of thin air, buy things with it, AND collect interest on the debt, some of which will not be paid back for decades, if ever.

I suspect if you drilled into the details of fractional reserve banking and its implications, you’d be quite dismayed.

Larry,

Thanks for your post. You’d love the
book “The Moneymakers”. You are right,
exactly, spot-on on track.
http://www.amazon.com/Moneymakers-Secret-World-Banknote-Printing/dp/352750236X/

hjmaiere August 13, 2008 at 3:50 pm

Mike Sproul: “The fed is not a counterfeiter. Whether the fed is desirable or not, all it does is print paper dollars and use them to buy bonds. Then it stands ready to use those bonds to buy back the dollars it issues. I could do the same thing…”

No you couldn’t. If you printed a piece of paper that looked even vaguely like the pieces of paper the Fed prints, they’ll throw you in jail. You’re free to print up your own Mike Sproul Dollars, but try paying your taxes with Mike Sproul Dollars and you’ll understand what keeps Federal Reserve Notes in circulation.

Nate Emmons August 13, 2008 at 4:40 pm

I’d like to thank the Mises Institute for making these great books available in such high quality audio. An extra thanks to Dr. Floy Lilley for all the work she has to do on these. I really appreciate it.

Mike Sproul August 13, 2008 at 5:04 pm

Larry Martin:

Nobody would have accepted my mike dollars in the first place unless they knew I had enough assets to buy them back. My assets put a limit on how many I can issue (without them losing value), just as the fed’s assets limit how many dollars they can issue.

Skip:

The fed puts its name on the dollars it issues, recognizes them as its liability, and stands ready to use its bonds to buy them back. Pretty much the opposite of what a counterfeiter does.

“I suspect if you drilled into the details of fractional reserve banking and its implications, you’d be quite dismayed. ”

I have, and I’m not. Have you drilled into the real bills doctrine?

hjmaiere:

I wouldn’t care if the fed accepted them, as long as I could sell my mike dollars for fed dollars for the trouble of crossing the street.

Eric August 13, 2008 at 6:38 pm

Mike,

If you believe that the word counterfeiting only pertains to private citizens that don’t have the force of law behind them, then yes, the FED isn’t counterfeiting.

However, those of us that call them counterfeiters don’t really care about that distinction, since nothing the FED does is constitutional, and therefore illegal anyway. We only use the word counterfeit because economically, there’s no difference. Ok, the word is useful for attention grabbing purposes, but if everyone understood the actual distinction between criminal counterfeiters and the FED, then we’d be rid of them..

Consider an analogy of George Bush for example. Now technically he is NOT a murderer because he kills innocent people with the approval of the US government (he asks himself for permission). So, if murder were defined as an act committed by non government agents, then yes, Bush is not a murderer using that definition.

But to the dead, does this technical distinction really matter? Similarly, to those business that were manipulated during the boom and bust cycles and who went broke, does this technical distinction matter either?

And suppose that Bush claims that someday he will resurrect all the dead he’s killed, will that promise make it all better? Now here we would know he is lying, but when the FED promises to withdraw the money it created, and never does, some, like yourself, can’t seem to tell they are lying.

And forget about the FED as counterfeiters as compared to the commercial banks. For every billion the FED counterfeits, the banks counterfeit 10 billion. Then they loan that out at interest. And if they loan it to deadbeats who can’t repay, they go to the FED who now bails them out with more counterfeit money.

Pretty slick, actually. Most people don’t get it until it’s way too late. You may be in denial, but hopefully, you don’t have all your savings in FED notes under the bed.

On the other hand, if you really think the FED does no harm, then you shouldn’t mind trading $20 gold pieces for $20 in FED notes. I’ve lots I’d like to buy from you.

Ryan August 13, 2008 at 6:39 pm

Mike, those government bonds that supposedly back the dollar? It’s all paper. Nothing of value exists there, if it weren’t for a populace willing to be fleeced to pay the interest on the bonds.

Also, if you do not consider printing new money to make loans on 6% reserve to be counterfeiting, you have a strange definition of counterfeiting. Would embezzlement be more up your alley?

Ryan August 13, 2008 at 6:40 pm

Mike, those government bonds that supposedly back the dollar? It’s all paper. Nothing of value exists there, if it weren’t for a populace willing to be fleeced to pay the interest on the bonds.

Also, if you do not consider printing new money to make loans on 6% reserve to be counterfeiting, you have a strange definition of counterfeiting. Would embezzlement be more up your alley?

Kevin August 13, 2008 at 6:56 pm

Mike: “Then it stands ready to use those bonds to buy back the dollars it issues” Bonds are no different than the federal reserve notes. The fed doesn’t have any actual assets to redeem the IOUs for. They don’t produce anything.
At one time the IOUs were redeemable for an actual asset, gold. But as you know they stopped doing that right around the time they ran out or were going to run out of gold. Since then there has been nothing the Fed will exchange for its paper tickets, no way to get repaid for the IOU, so your analogy doesn’t fit with what is going on. For your analogy to be correct you would have pay your mechanic with pieces of paper saying “I owe you nothing, this is just a piece of paper and I will print as many of them as I wish to buy whatever suckers like you will give for them”

Inquisitor August 13, 2008 at 7:49 pm

Ok Larry, printing dollars then forcing people to trade in them isn’t counterfeiting. It’s just providing the market with “liquidity”. Whatever you say. I’ll have none of that Keynesian kool-aid though.

Mike Sproul August 13, 2008 at 8:03 pm

Eric, Ryan, and Kevin:

Suppose I own an apartment complex. I go around town spending mike dollars, which are just my IOU. From time to time my tenants pay their rent in mike dollars, which I accept. Sometimes, I even print up mike dollars and use them to buy bonds from my tenants–US bonds, British bonds, corporate or muni’s, it doesn’t matter. Sometimes, local banks take 100 mike dollars on deposit, lend out 90 of them, and issue 100 checking account dollars to the depositors. I don’t think you’d call me, or even the local bank, a counterfeiter. Now try to think of what, exactly, is the big difference between what I do and what the fed does.

Better yet, click on my name above and read about the real bills doctrine. It might undo some of the damage that’s been done to you by macroeconomics professors.

Andrew August 13, 2008 at 9:04 pm

Sorry to point this out, but there can be no way to get rid of paper money: owners of the printing press can always print enough money to buy all the protection needed to preserve the uninterruptable operation of the press under the uninterruptable ownership.

Andrew August 13, 2008 at 9:04 pm

Sorry to point this out, but there can be no way to get rid of paper money: owners of the printing press can always print enough money to buy all the protection needed to preserve the uninterruptable operation of the press under the uninterruptable ownership.

Jeremy August 13, 2008 at 9:23 pm

Mike –

Why do you selectively ignore which arguments to respond to and which not to?

How about the fact that through the actions of the Federal Reserve, what was once a $20 gold coin costs over $800? How does that sit with your non-inflationary argument of other posts?

How about the fact that the constitution was clearly written to mean that the only power the gov’t has over money is to regulate it’s weight?

How about the fact that the business cycle has lengthened and worsened since the advent of the federal reserve?

How about the fact that the Federal Reserve has no obligation to trade their paper money for any asset that they possess?

And what difference does it make if the Fed has bonds on hand to trade for their inherently worthless scrip when the bonds themselves don’t represent anything real?

And your comparison to Mike dollars is worthless – you’re right, you’d only be able to issue enough up to the point that people still had faith in your ability to repay with real assets and goods.

Contrast that with Federal Reserve notes, where if legal tender laws were abolished the money would become nearly worthless in a very short period of time, because they are not ready nor willing to trade the scraps of paper for anything of real value.

And don’t tell me to read your site – respond to the _real_ arguments of others who have brought up all of the above issues with you many times before.

P.M.Lawrence August 13, 2008 at 10:18 pm

Mike Sproul wrote “My assets put a limit on how many I can issue (without them losing value), just as the fed’s assets limit how many dollars they can issue”.

That is incorrect. Mike Sproul‘s issues are limited that way, but the Fed’s are not. Those are limited by the US government’s resource base, which is wider than its pool of assets; it includes its ability to tax. So, taking US$ for goods and services works out as a prepayment of tax, not in return for things rendered by the US government. Even US government financial “assets” work out that way; at no stage does the US government ever render goods and services other than as rearrangements of imposed commitments to supply to it. (This was not the case when it released land – arguably, it had stolen that too, but it had previously ripped off other people to do that, not US subjects – apart from Indians and Hawaiians and that sort, of course.)

Mike Sproul August 13, 2008 at 10:37 pm

Jeremy:
“Why do you selectively ignore which arguments to respond to and which not to?”

I’ll ignore that.

“How about the fact that through the actions of the Federal Reserve, what was once a $20 gold coin costs over $800? How does that sit with your non-inflationary argument of other posts?”

The fed once held enough backing per dollar that each dollar was worth 1/20 oz. Now it holds enough backing per dollar that each dollar is worth 1/800 oz.

“How about the fact that the Federal Reserve has no obligation to trade their paper money for any asset that they possess?”

It’s not whether they’re obligated to buy back their dollars, it’s whether they do or don’t buy them back. As long as the fed uses bonds to buy back dollars, people will value dollars. If the fed stopped, people would stop valuing dollars.

“the bonds themselves don’t represent anything real?”

The bonds are backed by the taxing ability (and other assets) of the government. Paper dollars are backed by gold and bonds, bonds are backed by taxes. Just like mike dollars are backed by the rents I collect.

“And don’t tell me to read your site”

No, really. Read my site. You have no idea how much you need it.

Mike Sproul August 13, 2008 at 10:45 pm

PM lAwrence:

“Mike Sproul’s issues are limited that way, but the Fed’s are not. Those are limited by the US government’s resource base, which is wider than its pool of assets; it includes its ability to tax.”

The fed is bigger than me, and so it can issue more money than I can. The Fed is not exempt from the rules of accounting. Its assets still equal its liabilities.

P.M.Lawrence August 13, 2008 at 11:06 pm

Mike Sproul wrote “The Fed is not exempt from the rules of accounting. Its assets still equal its liabilities.”

Only if you dummy what counts as an asset, e.g. tax “owed” gets counted as an asset, yet that is where the fiat side of things comes in – it’s only because the government says so.

Adam Pearson August 13, 2008 at 11:29 pm

The one thing you’re missing Mike is that only Fed notes are legal tender, otherwise paper money would be done for. It wouldn’t be able to stand up to the competition because its assets are worthless compared to hard assets. As for taxing, if you have to rob the public to back your money, maybe its not counter fitting per se, but it’s like writing a note to someone backed by your ability to pull off stick ups.

newson August 13, 2008 at 11:37 pm

to mike sproul:
your iou’s don’t qualify as money. they are not universally acceptable (only to a small group of people who can know you personally), and it is likely that your bits of paper will attract a steep penalty.
so promissary notes don’t count as money, unless you force people to take them.

Tuur August 13, 2008 at 11:47 pm

Shouldn’t the title say “The Case AgainSt the Fed”?

Adam August 13, 2008 at 11:50 pm

“The fed once held enough backing per dollar that each dollar was worth 1/20 oz. Now it holds enough backing per dollar that each dollar is worth 1/800 oz.”

Taking this to it’s logical conclusion, eventually it’s worth 1/1,000,000,000 oz. I’m sure Zimbabwe has at least some gold in their vaults, by this logic they do not counterfeit. The second a bill that is actually redeemable in hard money is allowed to compete, goodbye fed notes.

To use your rent example, suppose you keep printing bills until each mike bill is worth 1/x of real money. Adam bills redeemable in gold on demand will crush you. Better get some new financing.

John Delano August 14, 2008 at 12:10 am

Have you ever considered putting any of these into a single file? I think m4b is one that works well with audio books. The various lecture series on here could be put onto a format similar to this. I could try putting one together if you are interested.

ktibuk August 14, 2008 at 6:57 am

Mike Sproul, like all RBD people, is obsessed with backing.

He thinks “backing” is what determines value.

But as almost everyone knows, value depends on supply and demand, not backing.

No matter what the “backing” is, if the supply of dollars increases while “the demand to hold cash” remains the same, value of money decreases.

The thing about gold, or some commodity, being preferred as “money” is the supply of the “money” can not be increased arbitrarily Especially by government or a cartel of banks.

Papers backed by gold aren’t valuable, or hold their value, because they are backed by gold, but that backing, in other words supply, can not be increases by whim. If someone discovered alchemy and transformed copper to gold easily then paper backed by gold would lose its value just the same. Till gold is the same price as copper, plus transformation costs.

Also those “assets of the fed” can be produced endlessly, or until the money is destroyed completely. Because they are nothing more than IOU’s. Pieces of paper with numbers and words on them.

Mike Sproul August 14, 2008 at 8:40 am

PM Lawrence:
“Only if you dummy what counts as an asset, e.g. tax “owed” gets counted as an asset, yet that is where the fiat side of things comes in – it’s only because the government says so.”

No. It’s because the government has the power to back up its ‘say so’. If the government lost the power to tax, its say so would be worthless. If you’re uncomfortable with the fed issuing dollars for bonds, let it issue each dollar for a dollar’s worth of land instead. The dollars would be issued, and backed, just the same.

Adam Pearson:

I suppose some of my tenants would feel the same way about my mike dollars and my rent collection. Whether my rents are robbery or not, I still get them, and they still back mike dollars. I could issue legal tender declarations all I want (and so could the fed) and they would be meaningless without valuable assets to back them up.

Newson:

All monies are acceptable in varying degrees. There is no point to trying to force the definition of money into your mold. The right question to ask is: What gives a thing value? And to what extent is it used in trade for other things? The right answer to the first question is ‘backing’.

Adam: The real bills doctrine clearly says that money is worth its backing, just like any other financial security. So less backing per dollar means less value per dollar. No puzzle there.
A quick look around the world might make you wonder if it’s actually gold-backed currencies that have been crushed.

ktibuk:

If the value of money is determined by supply and demand, then every time some rival money is issued, the demand for existing money will fall, and it will lose value. Meanwhile, the issuer of the rival money gets a free lunch from issuing the money. So, for example, as dollars invade mexico, the peso loses value, which reduces the demand for pesos still more, etc,, until the peso is worthless. As long as money has value in excess of its backing, this process will continue, quickly driving the value of all money down to its backing value.

magnus August 14, 2008 at 8:42 am

The whole point of creating the Fed in the first place is its currency-generating monopoly privilege.

And, as ktibuk said, the purpose of a currency-generating monopoly privilege is to get around the pesky problem of a limited supply of money.

The thing that makes this system to attractive to government and the banks and the investment companies and Wall Street is something many people seem to forget — there is a time lag in the propagation of new money.

The first user of the new money enjoys the benefit of getting full value for that money. Before the new money enters circulation, prices have not yet risen. It is the act of injecting this additional “liquidity” (i.e., new money) into the economy that causes prices for scarce goods to be bid up. As this new money gets passed around from hand to hand, it bids prices up along the way. This is why inflation is perceived as a general rise in prices.

But the first user of the new money is able to buy goods at pre-inflationary prices. The later users of the money are the ones that get the shaft.

Larry N. Martin August 14, 2008 at 9:51 am

Ok Larry, printing dollars then forcing people to trade in them isn’t counterfeiting
Inquisitor, I was making fun of Mike Sproul’s post. Sorry, I forgot the tags.

Nisarg Sutaria August 14, 2008 at 12:14 pm

Dear Sir,

FED has performed quite well since years. Only mysterious issue is when the FED chairman is changed market crashed. This is my observation which is a correct one. This is going on almost from 1927 when Roy A. Young was appointed and also when Alan Greenspan came into power and as recent as when Ben Bernanke came into the power.

Nisarg Sutaria

Nisarg Sutaria August 14, 2008 at 12:15 pm

Dear Sir,

FED has performed quite well since years. Only mysterious issue is when the FED chairman is changed market crashed. This is my observation which is a correct one. This is going on almost from 1927 when Roy A. Young was appointed and also when Alan Greenspan came into power and as recent as when Ben Bernanke came into the power.

I run the Blog : http://economicsunboxed.nisargsutaria.com/

Nisarg Sutaria

Nisarg Sutaria August 14, 2008 at 12:16 pm

FED has performed quite well since years. Only mysterious issue is when the FED chairman is changed market crashed. This is my observation which is a correct one. This is going on almost from 1927 when Roy A. Young was appointed and also when Alan Greenspan came into power and as recent as when Ben Bernanke came into the power.

I run the Blog : http://economicsunboxed.nisargsutaria.com/

Nisarg Sutaria

P.M.Lawrence August 14, 2008 at 11:06 pm

Mike Sproul quoted me: “Only if you dummy what counts as an asset, e.g. tax “owed” gets counted as an asset, yet that is where the fiat side of things comes in – it’s only because the government says so”, then wrote “No. It’s because the government has the power to back up its ‘say so’”.

He appears to have forgotten what he was claiming. He claimed that the government’s books balanced. That has nothing to do with whether it has the ability to collect taxes, only with whether it enters taxes payable in its books as an asset – a dummy exercise.

He goes on with his digression: “If the government lost the power to tax, its say so would be worthless. If you’re uncomfortable with the fed issuing dollars for bonds, let it issue each dollar for a dollar’s worth of land instead. The dollars would be issued, and backed, just the same.”

It could still balance the books with trickery if it lost the ability to tax; it would have to provide for “bad” debts. If it started to “back” with land releases, it would have to have the land already. Yes, the process works; that was never the problem. There’s still the problem that it could arbitrarily revalue it upwards, another dummy exercise; “let it issue each dollar for a dollar’s worth of land” is circular, and doesn’t hold anything steady.

Mike Sproul can’t do any of these things with his issues. That highlights the underlying point: the government has a special ability that the likes of Mike Sproul haven’t, and what goes on isn’t simply internal to the mechanics of issuing currency.

Bob S August 15, 2008 at 1:35 am

“Sometimes, local banks take 100 mike dollars on deposit, lend out 90 of them, and issue 100 checking account dollars to the depositors.”

Mike

Correct me if I’m wrong, but its more like take in 100, lend 900 – OK more than what was deposited by whatever factor – and issue 100 checking account dollars.

Sooner or later it catches up with you, because everybody that is taking your dollars is issuing even more – something you left out of your equation.

Mike Sproul August 15, 2008 at 1:22 pm

PM lawrence:
“Mike Sproul can’t do any of these things with his issues. That highlights the underlying point: the government has a special ability that the likes of Mike Sproul haven’t, and what goes on isn’t simply internal to the mechanics of issuing currency.”

If I really have valuable assets backing the mike dollars I isue, then they will hold their value. If my assets are inadequate, they will not. The same is true for any central bank. If the backing isn’t there, then you’ve got Zimbabwe on your hands.

Bob S August 15, 2008 at 1:28 pm

Yes, a deposit will be muliplied by whatever–to $190 after the first iteration.

But if a bank gets 100 paper dollars and issues 1000 checking account dollars, don’t make the usual mistake of thinking that the 1000 checking account dollars rest like an inverted pyramid on the 100 paper dollars. The 1000 checking account dollars are backed by the 100 paper dollars PLUS $900 worth of IOU’s, collateral, etc, that the bank gets when it creates the extra $900.

Eric August 15, 2008 at 3:02 pm

Bob S,

These sorts of things become easier to understand when a private citizen does it. Simply replace FED notes for some private currency and then check your conclusions. For example,

Suppose I create some Eric Dollars, and use a gun to force you to accept them for a payment even though we had a contract that said I’d pay in a certain number of FED notes.

Would you then tell me that there’s nothing wrong with the above coercion? If that’s too raw, then what if I buy a politician to pass a law to the same effect. Then when you don’t accept my Eric dollars you are in violation of the new law and can go to jail if you use force to try to collect in FED notes. Remember, the supreme court has ruled that ex post facto laws don’t pertain to financial issues, and so strike that one from the constitution.

Suppose further that I keep expanding the supply of Eric dollars and threaten to jail you if you try to use your saved up FED notes. And if you resist, naturally I will resort to any force needed to stop you, including deadly force.

Oh, BTW, Since you are a threat to my business in creating marketable Eric dollars, I will have to confiscate your FED notes and give you some of the latest Eric dollars – at an exchange rate of my choosing. But be careful, as the ink is not yet dry.

And lastly, suppose I then tell you that Eric dollars are valuable because they are backed up by George IOUs, because I’ve been buying them all up with my Eric dollars. Never mind that George already owes many Trillions of dollars, and much of that debt backs all those fancy FED notes.

The one distinction here is that I’m not allowed to use force unless in self defense, while the government, and the FED, can use force on me any time they want. And force is the acid test in all libertarian issues. You can hide the iron fist in a velvet glove, but it’s still going to bash your brains in if you don’t comply.

jp August 15, 2008 at 3:30 pm

“It’s not whether they’re obligated to buy back their dollars, it’s whether they do or don’t buy them back. As long as the fed uses bonds to buy back dollars, people will value dollars. If the fed stopped, people would stop valuing dollars.”

?

Mike, you always used to say that even if convertability was suspended, dollars would still be backed and therefore valuable. Around this time you’d trot out your stock market example. GM stock has value even though GM doesn’t allow shareholders to redeem stock for actual GM assets.

Now you are saying that convertability determines a currency’s value, and not backing. What gives?

Mike Sproul August 15, 2008 at 7:58 pm

JP:

Think of a paper dollar, convertible after 1 year into 1 oz of silver, but inconvertible (physically and financially) until then. At a 5% interest rate, and no costs of printing and handling, that dollar will start the year worth about .95 oz. At that point it is backed but inconvertible, but it’s still valuable. For that 1 year, both physical and financial convertibility are irrelevant. Only backing matters.
Now suppose that printing and handling costs .03 oz./year. Now the dollar will have to start the year at about .98 oz, and finish the year at 1 oz.
After a certain number of dollars have been issued on jan. 1, say some rival foreign money comes along on jan 2, and people no longer want to use dollars. The dollar is now only good as an investment, and it will drop to .95 oz, and end the year at 1 oz. (Its usefulness as money made people hold it despite the 2% return.)
Here’s where convertibility matters: The issuer is able to maintain convertibility (physical and/or finalcial) at .98 oz. at the start of the year, rising to 1 oz at the end. That was what they were going to do in the first place. If the issuer fails to maintain, that is a partial default, and the dollar falls to .95. In this case convertibility matters.

This is explained in my ‘no fiat money’ paper on my real bills website.

P.M.Lawrence August 16, 2008 at 4:59 am

When Mike Sproul describes things that would keep up the value of his issues, he yet again misses the significance of the very thing he is highlighting by the contrast between his issues and government issues: this is not what does the trick for government money. That is held up by a substitute for obtaining goods and services by force (taxes) and by rearrangements of the same (government bonds). It’s the very thing Eric pointed out in “The one distinction here is that I’m not allowed to use force unless in self defense, while the government, and the FED, can use force on me any time they want. And force is the acid test in all libertarian issues. You can hide the iron fist in a velvet glove, but it’s still going to bash your brains in if you don’t comply.” That only turns into “backed by assets” if you do the dummy exercise I described earlier; it’s fundamentally different in kind to being backed by real assets.

But then, Mike Sproul doesn’t practise or preach real Real Bills Doctrine anyway; like the wikipedia article on the subject, he allows any form of fiat, then turns round and says “if you can do it, it must be real”. That misses the point of Real Bills Doctrine that, when the conditions for it obtain (by specifying amounts and timescales, putting bounds on return and risk respectively), not only do you intrinsically arrive at a point that provides value but also you facilitate creating that value; that was precisely what traditional core bank business was, providing credit that not only got a return, it created the value added to pay it, value that would not otherwise have been added at all – i.e. it was trade credit for working capital. The only problem with Real Bills Doctrine is that you can fool yourself that the conditions obtain when they don’t.

Jeremy August 19, 2008 at 10:02 am

PM Lawrence -

But do you even believe that simplified version of the Real Bills Doctrine which you present?

It glosses over two things:

All resources are limited, and loaning out money that didn’t exist before, even if it is backed by land or whatever, does not change this. It only changes who gets access to the resources.

The other thing that this process inevitably causes is that when money is created in such a way, the value of all of the other outstanding money is reduced – ie the banker and the borrower benefit at the expense of everyone else.

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