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Source link: http://archive.mises.org/9802/ending-the-monetary-fiasco/

Ending the Monetary Fiasco

April 17, 2009 by

Mises knew that capitalism, for a number of reasons, has politically powerful enemies. The most powerful, most destructive, and most vicious and subversive of these would be false monetary theory and, as a result, a misguided monetary system, as it inevitably will destroy the free societal order. “It would be a mistake to assume that the modern organization of exchange is bound to continue to exist. It carries within itself the germ of its own destruction; the development of the fiduciary medium must necessarily lead to its breakdown.” FULL ARTICLE


Nathan Mayer April 17, 2009 at 8:39 am

interesting article on gold manipulation:


fundamentalist April 17, 2009 at 9:10 am

Great speech! Thanks!

It reminds me of something Hayek said in the interview posted recently. I think he was quoting Mises as saying that the worst thing that could happen to economic theory would be to ignore the quantity theory of money; the second worst would be to take it too literally.

The US fed the starving people of the USSR and China in the 1970′s and ‘80′s. What will happen when Europe and the US have become fully socialized, except widespread famine?

KP April 17, 2009 at 9:24 am

Gold the real universal currency.

Nate April 17, 2009 at 10:35 am

I think politicians are so eager to dismiss gold or silver as a currency because it would actually make them think about what they pay for. Money, even fiat currencies, are a scarce resource just as cotton or iron; when it is represented as gold or silver coin however, it is easily understood and tough decisions on how much to pay or what to buy must be made. However, when money is in a fiat paper form, the issue of scarcity is easily hidden. It however does not go away, and eventually does catch up in the form of inflation or market bust.

David C April 17, 2009 at 10:55 am

I get an email newsletter called the silver stock report, and yesterday’s release said something that really stuck with me:

“If the study of the free market has taught me anything, it’s that we cannot trust any kinds of government programs or solutions to solve any of the world’s problems. … … … it is important to understand the source of the problem, since the source of the solution cannot be the government. The source of the solution is the market. … … … instead of wasting time working for a government solution, people should spend time working on the free market solution to the problem. ”

And I think that’s true. At this point, we should just take it on faith that the powers that be are never going to do the right thing. We should just figure out ways to use honest money anyhow, and to profit from their manipulation of the markets in the meantime.

Mike Sproul April 17, 2009 at 11:33 am

Too bad that Austrians are unable to extend their belief in economic freedom to a belief in free banking. If I choose to deposit 100 oz of silver in a bank, knowing that the bank will keep 10 oz on hand and lend the other 90 oz at interest, then that is between me and the bank. If I choose to use green pieces of paper issued by some bank or some government, that is my business. The only aspect of modern money that should bother Austrians is the monopolization of money and banking by central banks.

Jonathan Finegold Catalán April 17, 2009 at 11:38 am

Mike Sproul, Austrians do believe in free-banking. Although Austrians do argue the soundness of a 100% reserve, ultimately I believe that Austrians believe that the choice is up to the banks. On the other hand, they may believe that ultimately a bank that operates on a low-reserve standard will go into financial ruin. But, that’s the bank’s free choice.

AC April 17, 2009 at 12:27 pm

@ Jonathan Finegold Catalán

Right on the money (bad pun intended). Further, if I as a customer/depositor in a free banking environment, want to put my money (gold/silver etc.) into a bank whose going to risk it via reserve lending, I do so with understanding that there is a risk of loss and a risk of gain (interest). I will weigh the risks of each and make my decision.

Juan April 17, 2009 at 1:18 pm

Whoa. The Mike Sproul bot again. So boring. Mike, inflationists like you have been debunked for hundreds of years. Even before Menger was born. Under free banking, frb wouldn’t last a day.

greg April 17, 2009 at 3:20 pm

Now I understand why all those gold bugs want a gold standard, they would finally see gold break above $1,000 an ounce to settle at $6,000 or more. Without a gold standard, gold will continue to bounce between $800 and $1,000 because real demand for gold is pure speculation through the ETF’s.

If you want a metal that will perform better than a hedge against inflation, it is copper.

Tom Kelly April 17, 2009 at 3:26 pm

I followed the whole talk on You Tube this afternoon and I agree wholeheartedly with the analysis that our current problems are an inevitable consequence of a monetary system based on debt. Our troubles started when debt , which used to be something shameful, was renamed credit which was something to aspire to.
However, it strikes me that in treating our problems purely as economic, we are missing another major factor which will determine our future. Expectations of continuous GDP growth in a world of finite resources, which are rapidly being used up, are misguided, whether we have real or false money systems. So we must eventually learn to live in a world without economic growth. It must then be obvious that if world population is allowed to expand at its current rate, the quality of life for our descendents will be seriously reduced relative to ours, and survival, not prosperity, will be the major concern.
My question is “how does the Mises philosophy hope to deal with this inevitable situation?”

Mike Sproul April 17, 2009 at 4:06 pm


The Austrians who argue for 100% reserves–and there are a lot of them–are arguing against free banking, even as they claim to support it. The Austrians who claim that the dollar is fiat money–and that includes almost all of them–are confusing convertibility with backing. The paper dollar is physically inconvertible into gold, but it is backed by the Fed’s assets. The fed is clearly capable of using its bonds and gold to buy back every paper dollar. It doesn’t normally buy them back using gold, but it often buys them back using bonds.

Jonathan Finegold Catalán April 17, 2009 at 5:41 pm

The Austrians who argue for 100% reserves–and there are a lot of them–are arguing against free banking, even as they claim to support it.

I think you are mistaking an argument for sound banking policies as an argument for government enforcement of sound banking policies. Although, it’s true, a lot of Austrian authors have argued for outlawing fractional reserve banking, this only stems from the idea that they must compromise with government (the idea that if any regulation is going to take place it should be this). I think all those authors, however, would rather have free, unrestricted banking above all else, because they feel that the natural outcome will be a 100% reserve banking system.

The Austrians who claim that the dollar is fiat money–and that includes almost all of them–are confusing convertibility with backing. The paper dollar is physically inconvertible into gold, but it is backed by the Fed’s assets. The fed is clearly capable of using its bonds and gold to buy back every paper dollar. It doesn’t normally buy them back using gold, but it often buys them back using bonds.

No, they are saying that the dollars do not correspond to savings and capital if the government is printing money unrestricted. But, the dollar is a fiat currency; no economists dispute that. What is disputed are the weaknesses of the fiat currency, and the strengths of a metallic currency.

Mike Sproul April 17, 2009 at 6:40 pm


“But, the dollar is a fiat currency; no economists dispute that.”

You have stumbled on one economist who does dispute it. You can download my paper “There’s No Such Thing as Fiat Money” by clicking on my name above.

There have been several historical episodes that could reasonably be called ‘free banking’ periods. Hardly any produced 100% reserve banks, and virtually all of them had fractional reserve banks. Those banks generally maintained convertibility of their currency units into some weight of metal. Every weekend, the bank would shut down and convertibility into metal would be suspended. Nobody would have called those currency units ‘fiat money’ over the weekend, because everyone knew the currency was backed by the bank’s assets, even though convertibility had been suspended for two days. The Fed has suspended (physical) convertibility since 1933, but everyone knows the Fed’s assets are still there. A true ‘fiat’ money would have no assets backing it, and there is no such money.

David Spellman April 17, 2009 at 8:18 pm

Mike Sproul,

I understand the real bills approach, and as you state, it is sound so long as the currency (bills) issued are backed by assets. In fact, real bills would be how business expands faster than the supply of gold used as money.

But the key is that, as you state yourself, the currency must be backed by something of value. If I offer to pay you with Monopoly game money, I know for certain you would not accept it. Fractional reserve banks are doing the same thing, but people are forced to accept it because it is illegal to demand that business contracts be paid in gold or silver.

Fiat money is counterfeit money with no backing. Even the taxing power of the government cannot back it because taxes are paid with fiat currency. In the end, the government can print all the money it wants, thus destroying the value of the citizen’s existing money, and never provide anything of value as backing. Inflation is the tacit acknowledgment that fiat currency is worthless since the value of the money declines as its supply increases.

Real bills require real goods to back the currency. It is a promise to pay that can be liquidated in exchange for actual physical goods–be it gold, silver, cattle, grain, bricks, real estate, etc. Real bills cannot be defaulted on because the bearer can seize the issuers goods for payment. In a real bills regime, you can sell bills at a discount to face value, but you can never offer more bills than there are actual goods–or else you are committing fraud. This kind of fraud is business as usual in our current banking and financial system.

In a real bills regime, you could agree to let a bank loan your money at interest and not hold 100% reserves. But that is a contract that you will not demand return of your capital, so the bank is not obligated to hold it in reserve for you. Money market CDs work that way with a penalty for early withdrawal in exchange for higher interest rates.

Demand deposits (like checking and savings) are nominally not loanable funds. When we say 100% bank reserves, we mean that anyone–and in a panic, everyone–can request their money and get it immediately. Banking in a 100% reserve system would make a profit by charging warehouse fees for holding money and processing fees for honoring checks drawn against money. 100% reserve banks would not loan money unless they had a contract agreeing to do so and freeing them from having to keep the money on hand.

Real bills are a legitimate business instrument if backed by real assets. Creating fraudulent bills is, well, fraudulent. Fiat money is fraudulent creation of bills with no asset backing. The government will not redeem them for gold or anything else. The fiat money system is a gigantic game of hot potato where everyone is obligated to trade in fake money but tries to keep giving it away so as to not get stuck with any more than they have to when it loses its value.

And if you are somehow equating your Real Bills doctrine with the Fiat Money regime, you are doing yourself a tremendous disservice. If you sincerely believe that our current money regime is legitimate, you have failed to distinguish what truth you have from lies you are told. Real bills are great, and they are different from counterfeiting.

Gil April 17, 2009 at 9:13 pm

“Fiat money is counterfeit money with no backing.”

I can only see the term ‘counterfeit’ when used with everyday money as to mean ‘it’s counterfeit because it pretends to be real money which is gold (and maybe silver)’. But why does money have to be ‘backed’? What ‘backs’ the gold coins if they were the currency? You’d think Libertarians would be rather quiet if gold under the system is currently ‘undervalued’.

Mike Sproul April 17, 2009 at 9:16 pm


The point of the real bills doctrine is that money with no backing will have no value. If any institution could print tokens and buy goods with them, without holding assets as backing for those tokens, then there would be no end of rival institutions eagerly issuing their own tokens in order to get a piece of that free lunch. The only stable equilibrium would be for those tokens to have zero value.

Suppose a landowner buys a loaf of bread by handing the grocer his IOU, which promises to pay 1 oz. of silver. The grocer accepts that IOU because he knows the baker will accept it. The baker accepts it because the miller will accept it, who accepts it because the farmer will accept it, who accepts it because he rents land from the landowner, and the landowner will accept it in payment of rent. These IOU’s could circulate widely without ever being redeemed in actual silver. They just get retired every time someone pays rent with them. The IOU’s will hold their value as long as the landowner’s property is sufficient to back the IOU’s.

Replace ‘landowner’ with ‘government’, and ‘rent’ with ‘taxes’, and you have reasonable description of how our system of so-called ‘fiat money’ works. It is not the same thing as counterfeiting.

Marco Saba April 18, 2009 at 5:50 am

US dollar backed by oil (black gold)
“Very soon we EHMs discovered that we did not need to wait for countries to nationalize oil fields as an excuse to manipulate their politics. We turned the World Bank, the IMF, and other “multinational” institutions into colonizing tools. We negotiated lucrative deals for U.S. corporations, established “free” trade agreements that blatantly served our exporters at the expense of those in the Third World, and burdened other countries with unmanageable debts. In effect, we created surrogate governments that appeared to represent their people but in reality were our servants. Some of the earliest examples: Iran, Jordan, Saudi Arabia, Kuwait, Egypt, and Israel. Washington’s first ally in the struggle to defend the sovereignty of the dollar was Israel. Jake Dauber’s prediction that the dollar’s value would be determined by oil proved correct. When Tel Aviv and Washington drove the Arab world into a corner, Arabs had little choice but to strike back, in the Yom Kippur War and through the OPEC embargo. This propelled the U.S. Treasury Department into action. EHMs were enlisted to forge a deal with Saudi Arabia that wed the dollar to oil. The dollar was crowned king, and has reigned supreme ever since.”

AC April 18, 2009 at 9:40 am

@ Mike Sproul

In our current system where the gov’t is ever increasing the money supply people would not accept the gov’t “backed” money if we weren’t forced to. It’s known as legal tender laws. If people would accept the fiat paper, you wouldn’t need legal tender laws. In fact, I wish you had the power to put your belief into an experiment, by removing legal tender laws. We’d see how long people used gov’t currency. I can’t pay my taxes to the US gov’t in gold. If I am contracting with the gov’t, I can’t demand they pay me in gold. In fact, if someone is offering me US currency in a US based transaction, I can’t legally refuse it.

Gov’t printing to increase the money supply (not merely replace worn currency) is the same thing as counterfeiting. Look at President Nixon’s decision in the early 1970s where he permanently removed the convertibility of US dollars to gold. He did so because foreign individuals were uneasy with the total amount of new money being printed up. So foreign individuals (gov’ts, banks, etc.) started asking for the gold backing the paper instead of the paper. That’s when Nixon closed the gold window. He did so because there would’ve been a gold flight out of the US.

Does it really matter who’s printing it when there is no backing for it whatsoever? How much is printed is the important factor, not who prints it.

Mike Sproul April 18, 2009 at 10:36 am


There have been plenty of historical experiments where legal tender laws have either not existed, or been sporadically enforced. Study enough of those episodes, and you will see that as currencies lose backing, they lose value, no matter what legal tender laws are in place. Governments have committed mass murder in attempts to enforce legal tender laws, and their money lost value all the same. In most countries today, people openly use US dollars for their trades. In no sense are they ‘forced’ to use their own government’s so-called ‘fiat money’.

Nixon suspended convertibility, but the fed’s gold and bonds are still there, still backing the dollar. There are many kinds of convertibility: physical, financial, instant, delayed, certain, uncertain, at the customer’s option, or at the bank’s option. In 1971 the Fed suspended one kind of convertibility: instant physical convertibility at the customer’s option. Many other forms of convertibility are still in force.

pbergn April 19, 2009 at 12:41 am

Why not apply some common sense to the Sound Money thesis?

According to the IRS, only 5% of Americans make over 250K/year. So, it is fair to assume that the rest of the US population has very little or no savings at all, that is 95% of populace lives from paycheck to paycheck, therefore leaving no footprint in the amount of money reserved as real savings… Thus, only 5% of US population contributes to 100% of what can be qualified as real savings in the Free Market Economy.

Taking the assumptions above, now assume that by some magic the gold is reinstated as the money of the land. The fiat paper currency will be exchanged at some fixed ratio with the gold. It is fair to assume that the initial distribution of gold (sound money) will mirror that of the real savings. In other words, giving 5% of population 100% control over the amounts of gold reserved as savings and not actively circulated for market transactions. The government, since it cannot print more fiat money, will have to keep borrowing from the wealthy 5%, promising ever more returns in gold, thus effectively transferring the burden of paying back the debt to the rest – the 95% of population, which in turn, will continue the exponential trend of making the 5% ever richer, and 95% – ever poorer, since the former will keep lending (provided the government will have to offer higher and higher interest rates to make lending of the gold more attractive), and the latter will borrow more and more, since the cost of money will constantly increase under this trend, resulting in the increase in cost of living (since it will be harder for the businesses to obtain cheap credit necessary for day-to-day operations). Plus the government inevitably will try to increase the tax burden… This kind of situation will inevitably result in severe deflation and depression…

As the mental experiment above shows, there will be little or no difference in terms of making the distribution of wealth more even among the participants in the Free Market Relationship. Moreover, the ever-increasing divergence in the distribution of wealth will exponentially marginalize the population, which, when reached some critical point will tear the fabric of the society – resulting in public unrest and uprising…

Conclusion: the Sound Money policies by themselves, and the Gold Standard in particular, are not capable of alleviating the socio-economic centrifugal forces by themselves. There has to be a political solution coupled with the Sound Money policies, or any economic policies for that matter – to make them work…

ao April 19, 2009 at 6:47 am


i think there is a simpler solution to the problem you are describing . It is called “balanced government budget” or an even better one “slightly surplus budget” . No need to borrow then huh ? (Ok , existing debt has to be paid off first but that’s another story )

ao April 19, 2009 at 6:48 am


i think there is a simple solution to the problem you are describing . It is called “balanced government budget” or an even better one “slightly surplus budget” . No need to borrow then huh ? (Ok , existing debt has to be paid off first and that would not be simple :-) )

Sally C. April 20, 2009 at 5:19 am

‘After years of running huge Keynesian-inspired public deficits, Japan’s gross public debt-to-GDP ratio is now approaching 200%.’
Can someone explain why the Yen is still so strong?

Gerry Flaychy April 20, 2009 at 5:21 pm

In this example, if we replace ‘landowner’ with ‘government’, and ‘rent’ with ‘taxes’, then we have also to replace ‘his IOU’ with ‘Treasury bonds’, wich promise to pay a certain amount of US dollars in a certain later time.

In our system, these T-bonds are not used as a medium of exchange between grocers, bakers and farmers, and they don’t serve to pay taxes.

So there is something wrong with this example: what is it ? Could it be the word «his» in the first sentence of the example ?

AC April 20, 2009 at 5:58 pm

To Mike Sproul,

The former gold convertibility of US dollars was the only proper convertibility. The gov’t confiscated the gold, told people “hey these new dollars are directly backed by the gold, use them instead, we’ll keep the gold safe and secure.” Our gov’t has illegitimately removed all pretense of convertibility into tangible items of value.

I don’t want gov’t bonds for which repayment is based on legalized theft or future promises to pay. I want my dollars backed not by promises of future taxation, or the promise that the gov’t can make individuals my indentured servants, but by tangible items of value that we can trade.

Concerning other countries using US dollars as the world’s reserve currency, that is because we’ve got the biggest military and economy. They use our dollars because they have more faith in them than their own nation’s currency. Furthermore, if other nations en masse began using gold as their own internal currency standards, our gov’t would have a fit. We’d try to buy up their gold, confiscate it, or misappropriate it through other means to keep it out of their hands. Because, adoption of a sound money policy by the world at large would bankrupt the US. They wouldn’t want our paper dollars (with other than gold convertibility). Our gov’t would be cut down or we the people would be turned into citizen slaves, probably the latter. Other world gov’ts don’t do this, because well….their gov’ts are more henious than ours are at confiscating the citizenry’s property.

I’ve read some of your other posts, which are articulated well. Concerning an example where you mentioned a landowner renting his ground and giving an IOU to the baker, etc. You mention that we can replace landowner with ‘government.’ Well, there’s slight hitch in that thought. Governmental transactions of taxes are not voluntary, such as me renting from the landowner. But your analogy, I believe is a pretty good portrayal of what we currently have in this country. We are merely renting our property from the gov’t. We’ve believed we have private property, but in truth we do not under the system in place.

When the ‘value’ backing our currency is future government theft (and if the theft gets large enough, it becomes serfdom), it is not the proper backing for a free society. Back to you Mike Sproul.

Mike Sproul April 20, 2009 at 8:29 pm

If you want to throw T-bills into the mix, the correct analogy would be to suppose that the landowner bought a car by handing his larger-than-usual IOU (i.e., his bond) to the car dealer. Somewhere down the line, the landowner uses his small-denomination IOU’s to buy that bond. His personal T-account will show that he replaced his bond with small IOU’s, but the basic relation remains: The value of his liabilities (bonds+currency) is determined by the value of his assets (land+car).


I’m not trying to address the legitimacy of government and taxes. I’m just focusing on the forces determining the value of money. So suppose someone discovers an uninhabited island and is universally recognized as king of the island. Call him a landowner or call him the government. The value of any money he issues will be determined by the value of the assets he has to back that money.

Gerry Flaychy April 21, 2009 at 7:19 pm
” Mike Sproul
If you want to throw T-bills into the mix,”

It is not at all what I want. What I want, is to know what you mean specifically by ‘government IOU’ in your example: is it government bond issued by the Treasury (which is an IOU); is it money issued by the government itself and redeemable in a certain commodity (which is also an IOU); or something else ? And if it’s something else, then what is it ?

newson April 21, 2009 at 8:15 pm

to sally c:
unwinding of the yen carry-trade in the wake of the financial bubble bursting.

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