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Austrian Economics, Apostles of Austerity Defending Deflation

by on August 1, 2012

“In a word, knowing by the experience of many centuries that people live and are guided by ideas, that these ideas are imbibed by people only by the aid of education provided with equal success for all ages of growth, but of course by varying methods, we shall swallow up and confiscate to our own use the last
scintilla of independence of thought, which we have for long past been directing towards subjects and ideas useful for us.”
Protocol Nr. 16

“The Power of Ideas will prevail!”
Ron Paul

Intellectual dishonesty is the hallmark of the leadership of Austrian Economics. Nowhere is this more palpable than with their disingenuous, dishonest and destructive defense of deflation. Now that we are facing the greatest deflationary bust since the Great Depression, with the worst still to come, Austrian Economics rises as the main defender of the Money Power’s onslaught.
Time to dispel their lies and misrepresentations concerning deflation point by point.

One of the key weaknesses of Austrian Economics as a philosophy/pseudo science is its reliance on deductionism. However, while this may be a weakness in terms of truth-seeking, it is major asset in terms of its real purpose: mind controlling the masses, wearying of Keynesian gatekeeping. With fuzzy ‘logic’, which by its nature suffers from the bullshit in, bullshit out dilemma, it is easy to obscure the obvious. Mind Controllers are fully aware that the brutish Goyim mind is not interested in facts and careful observation. It is interested in the power of ideas. And when one idea fades in the face of practice, it easy to conjure up a new one to keep the antfarm busy.

Harsh words?  Extensive experience in debating Austrian Economists have shown time and again that they are absolutely not interested in promoting learning. They are interested in promoting their case. A case, as Real Currencies and others have documented extensively, the Money Power created out of nothing solely for its own purposes.

Considering the fact that defending deflation amounts to nothing less than defending the Money Power’s obvious attempts to create an uprecedentedly severe world wide depression, there is every reason to reject their inane ‘theories’ vociferously.

The more so, because history clearly shows that depressions like these are used by our self declared masters to soften up resistance against large scale ritual murder, also known as World War.

So scolding Austrian Economics and its leaders does not imply disdaining the many people who have found the courage and the independence of thought to reject the obvious failures of Mainstream Economics. They are the seekers, inadvertently walking into the trap that the Money Power prepared for them with great effort and discipline.

Let’s hope that debunking Austrianism helps them to seek further and others to avoid falling for it altogether!

So what again is deflation? There are two definitions: a contracting money supply and declining prices.

The first definition is the classical one and best. Declining prices often are a result of a contracting money supply, but not per definition.

The real issue is the contracting money supply itself, which is associated with busts. Every major recession or depression in recorded history was associated with a contracting money supply.
And yes: Austrian Economists try desperately to obfuscate this fact, as we will see.

What the Austrians ignore and don’t want you to know
1. Reality
Of course! It’s the power of an idea, it has little do with facts based in real life. Just imagine: defending deflation in the face of the destruction in Greece, where the money supply is contracting at a rate of 10% per year and the economy with a whopping 7%. And while Greece is probably the worst case for the time being, it’s happening all over the West, including in the US itself. Real unemployment in the US is at 20%. Why? Because the money supply is tanking:

This is the simple truth, but all the Austrian Economists and Gold Dealers parading as the ‘alternative media’ have been scaring us to death with their hyperinflation fearmongering.

So this is the reality of deflation. Defending it means defending Greece. Few would do that, if they realized what they were actually doing.

2. During deflation, the value of debts increase in real terms.
Does that sound like a good idea when the whole planet is swamped in debt? Of course, the problem is compounded by the fact that interest payments also rise in real terms.

Debtors are the great majority of the population. Creditors the small minority. Austrianism is famous for defending the rights of creditors and capital in general. This shows in their defense of deflation also. Only the rich benefit from deflation.

Their outright lies
1. Deflation is declining prices. Great, right?
This is a lie, not because this definition is not fairly widely used, but because Austrian Economists define inflation as a growing money supply. So this is a clear ‘inconsistency’, but just a little too comfortable for them not to be considered an outright lie.

Often those mentioning this will say: prices decline because of technology. Rothbard was famous for this nonsense. Sure they sometimes decline because of technology. For instance cell phones and computers. But that has nothing to do with deflation in the real sense of the word and Austrian Economists know it. How do I know they do? Because they continue this nonsense, even when corrected.

2. Depressions are not associated with deflation
This is so incredibly stupid it hardly is worthwhile mentioning it, but it is a good example of how far these people actually go in hiding the obvious. Not only does it fly in the face of what has been common knowledge for ever, most certainly in the United States, their proof is most telling. They offer this study….by the Federal Reserve.

Now consider this: they made a name for themselves by exposing the Fed’s and Mainstream (Keynesian) Economics’s downplaying of inflation and the associated manipulation of volume, and then, when it comes to deflation, they use a study by the Fed ‘proving’ there is ‘hardly a relation between deflation and depression/recession’.

3. Their ‘misunderstanding’ of the business cycle
Yes, Austrian Economics is wrong about the business cycle, their main pride. Their heroes Mises and von Hayek noted that busts usually were preceded by booms. Booms caused by ‘too lax’ credit by the banks. This results in overinvestment, or ‘malinvestment’ after which a corrective bust is unavoidable.

In this way Austrianism actually makes people call for the bust to happen as soon as possible: the longer it is postponed, they say, the worse it will get. This is not entirely untrue, but considering the easy way deflation can be managed, it amounts to having people call for their own destruction unnecessarily.

Also, with this explanation they igore the fact that an interest bearing money supply MUST grow, to finance ever higher interest costs to society, fueled by the growing money supply itself. Or, as with a Gold Standard, face structural depression, due to ever smaller money left for real trade because the money supply cannot grow.

This is the famous P + I > P formula as put forward by Mike Montagne, where P is Principal and I is interest. It explains why money is always scarce when taxed with interest.

Worse still: despite this inherent flaw of interest on the money supply, the real problem is that the Banking Fraternity manipulates the volume willingly and knowingly. The Boom/Bust cycle as we know it is a completely artificial phenomenon, that would even occur, would the Money Power stop charging interest. The point is that during a deflation they are the only ones with cash, enabling them to buy everything up that the populace at large is selling at fire sale prices in a desperate attempt to get out of debt.

By hiding this fact, just like Mainstream Economics does, Austrian Economics just exposes itself as controlled opposition.

In the face of the horrible destruction that the Money Power is visiting on the entire world with its ‘credit crunch’, its valiant knights known as Austrian Economists keep the gates against the real opposition clamoring for reflation.

Reflation of the economy, not by handing over trillions to busted banks, but by an interest strike or even just handing out interest free credit or debt free money to the population (which is Social Credit) would easily solve the depression overnight.

But that would be ‘inflation’. With fiat money! Statist violence! Oh horror of horrors! That would certainly rob the rich of the CHOICE, LIBERTY and FREEDOM to choke us by withholding credit! How dare we!

Why Gold is so strongly deflationary
The Inflation vs. Deflation Dialectic

  1. Assuming our time or work magically creates a sum of interest as increased value above the sum value of any preexisting principal is preposterous to say the least . Logically you can only get increased value upon further production as increasing volumes of principal regardless. Earned profit is increased value upon further production which is an increasing volume of principal , unearned profit or the interest banks impose on what are falsified debts therefore is a decrease in volume below the value of its intended representation / sum principal .

    To actually assume that we would be better off & there is more incentive to invest in an interest based economy is an oxymoron really because unwarranted interest imposed on falsified debts can only be a perpetual deficit or devaluing the money & property it was intended to represent . I mean look around you, the increasing volume of people being dispossessed of all their property & wealth is an incentive?, so a shrinking volume of people or whats left of our industry & commerce can physically pay principal & interest out of circulation?. To suggest such a thing is not only bordering on insanity but its failing to see that price inflation is primarily artificial in nature, not because there is too much money circulating , mathematically impossible so long as we are paying principal & interest out of a circulation that’s only ever comprised of some remaining principal at the very most, unless any one here can prove & demonstrate how any sum/ volume of interest is created above the sum/ volume of principal?

    Price inflation is therefore primarily artificial simply because all industry & commerce is paying a sum of interest above the sum of principal out of circulation on their own falsified debts which is a cost passed on to the consumer in the price of goods & services.

    Price inflation therefore is not an increase of value because logic tells us if your paying two houses for only receiving one the bank has essentially stolen 2X the value of the house ,coupled with the elephant in the living room which is perpetual re-inflation or the irreversible multiplication of artificial debt,,, one only then has the illusion of increasing value of our production or asserting something as ludicrous as a sum of interest is an increasing value of any preexisting sum of principal, which is a sum of principal the bank steals on conception regardless, loaning a sum of principal only as if it was the banks principal to loan out in the beginning, & to merely assume banks loan other peoples money is likewise totally unfounded & simply not the case at all .

    If I can prove with logic alone only the principal is created by one of us by signing & issuing a promissory obligation / note * before any banking book entry * when we ” allegedly ” borrow principal from a local bank , how can fractional multiplication thereafter ” allegedly ” multiply principal when either way here from the outset of the promissory obligation principal is only ever issued into circulation for what it is intended to represent , EG : A house , upon a sale or purchase of property?

    Those of you who think a gold standard worked in the past are greatly mistaken because you fail to see the U.S constitution artificially set or fixed the price of gold likewise this was a contributing factor by association to the artificial sustention of the price of our production thus as a result of golds inherent but contributing built in volumetric improprieties was in effect perpetually devaluing finite gold reserves upon any further of our labour & production it then had to further represent, which was the very reason why the gold standard had to be removed simply to prevent a perpetual devaluation of the physical gold itself upon any further growth of our production.

    A gold standard not only resulted in a further adverse volumetric disposition on top of the already inherent volumetric fault of unwarranted interest, but the banks in the past under a gold standard were redeeming or stealing the principal & interest in physical gold, just like they do today, stealing principal & interest in fiat out of a general circulation that only ever consists of some remaining principal at most.

    ” Even if there was that much gold out there the governments would have to each go into 10s of trillions into further debt to buy the gold to put into their treasuries so as to further represent any currency which in turn has to represent all our labour & production ”

    Its not what represents our labor & production that’s the root problem so long as what evidences our production whether its digits , fiat , even gold , coffee beans or rum has an equal volume that represents our promissory obligations we have to each other., its what banks do to our promissory obligations before any publication , its the banks purposed obfuscation of our promissory obligations pretending to loan any sum of principal that we the people give the only value.

    Real money therefore is a currency that equals our labour & production we give up & receive from each other upon its very creation , without any adverse volumetric disposition or terminal exploitation by unjust intervention , what is real is what all money represents which is our labour & production , our hard earned blood sweat & tear’s we give up to each other.

    In conclusion a free market has never existed & nor will it, not so long as all banks , no exceptions, are purposefully obfuscating our promissory obligations we have to each other & then stealing that production we give up to each other, X2 because of interest , now to merely claim to have some knowledge on something that has never truly existed is likewise assuming interest is what makes a market free , quite the contrary earned profit which is always a sum of principal is the only incentive to increase wealth as increasing volumes of circulation equal to remaining ” represented property value ” & equal to remaining principal debt or obligation, rightfully retiring then what has been consumed that no longer has value for its intended representation in what could be a free enterprise market, only thing is its all stolen today by thieving banks which is re- borrowed by political betrayers to perpetually re- inflate circulation over & over as we all perpetually create & pay it out of circulation along with any prior reflation over & over on all our * private * but falsified debts to all the local banks who likewise launder this money that we the people can only give value into the hands of mere publishers of our promissory obligations who just like the local banks neither give up or risk any consideration/value of their own commensurable or equal to the alleged loan or the debts they clearly falsify to themselves,,, where by a mathematical certainty , no exceptions ,we will all be dispossessed of our property & wealth including all millionaires & billionaires in the end , who are of course, not direct share holders in a central bank.

  2. marxbites permalink

    Republicae replied on Mon, Feb 9 2009 5:58 PM | Locked

    I have had some dealings with Montagne, he is, to say the least one of the more obtuse and emotionally erratic people I have encountered on the web.

    His opposition to loan Interest rests in a misconception of what Interest really is and how it functions within an economy. Under the assumptions that wealth would increase under an interest-free economy, there are few examples of such prosperity under Interest Free economies. The reason behind the lack of prosperity is that Interest Free money is, for a lack of a better word: unemployed and barren. Barren or unemployed monies perform no productive function within a vibrant economy.

    Within the Interest Free community, including those of the Marxist persuasion, there is the misconception that the borrower is being defrauded by paying interest; nothing could be farther from the truth. The truth is that in an Interest Free society, the lender would be cheated and defrauded, for who would hand over the fruit of their own labor to another while taking the risk of no return on the money that represents the fruit of their labor.

    Why does anyone consent to pay Interest for money? Why does a tenant agree to pay rent for the use of land or other property? The primary source for such consent is a private contract between two parties without the intervention of government, whether by prohibition or regulation. Now, for those who advocate an Interest Free society there must, by necessity, be both heavy government intervention and legal regulation to impede the principle of a private contract, as well as private property rights.

    Those who advocate a prohibition of Interest in our economy ignore the most basic principle of not only a free market, but individual freedom. They deny the primary justification of Interest and that justification is the right of property which the creditor has in his money.

    Does not a person, a business or a lending institution, by the virtue of an inviolable right to dispose and use his money as he will, lay conditions on that money if it is loaned out to another? Essentially, Interest is the price of time, but contrary to the current managed market, in a free market the price of time is set by market forces instead of manipulated by a central bank, which will always, without exception distort the market of capital.

    The Interest Free advocates follow a very specific view of economic production, an egalitarian view that equalizes all goods and services by the exclusion of interest. It is a “value-based” economic system that has been propagated by Socialist under the name of the Exploitation Theory. Incidentally, socialist economists have always considered Interest as nothing but exploitation and not, as it really is, a private property right based on the fact that money is property that represents a portion of the owner’s life and energy in labor.

    The Socialist Exploitation Theory goes something like this: “All goods that have value are the product of human labor, and indeed, economically considered, is exclusively the product of human labor. The Laborers, however, do not retain the whole product which they alone have produced; for the capitalist take advantage of their command over the indispensable means of production, as secured to them by the institution of private property, to secure to themselves part of the laborers’ product. The means of doing so are supplied by the wage contract, in which the laborers are compelled by hunger to sell their labor power to the capitalists for a part of what they, the laborer, produce, while the remainder of the product falls as profits into the hands of the capitalists, without any exertion on their part. Interest is thus a portion of the product of other people’s labor, obtained by exploited the necessitous condition of the laborer.”

    “But one man is superior to another physically or mentally and so supplies more labor in the same time, or can labor for a longer time…equal right is an unequal for unequal labor… In a higher phase of communist society, after the enslaving subordination of the individual to the division of labor, and with it also the antithesis between mental and physical labor, has vanished, after labor has become not only a livelihood but life’s prime want, after the productive forces have also increased with the all-round development of the individual, and all the springs of cooperative wealth flow more abundantly — only then can the narrow horizon of bourgeois right be crossed in its entirety and society can inscribe on its banners: From each according to his abilities, to each according to his needs.” Karl Marx

    “Free, unimpeded barter allowed people to produce to natural capacities; and to obtain for our own production whatever we deemed to be equal, undiminished measures of the production of others… Because no one takes from the trade anything but the equal of what they contribute to it, each party receives the full, self-determined equivalent of their contribution to the overall pool of their wealth. We have in effect two conflicting philosophies. One wants earnings for its work equivalent to its work. The other wants unearned gain which can only be taken at the cost of earning equivalent to real work… We mature beyond the era of unearned gain… Like cannibalism, unearned monetary gain and all the manipulation which goes with it will one day disappear from history forever after.” Mike Montange’s People for Mathematically Perfect Economy.

    “Usury centralizes money wealth, where the means of production are disjointed. It does not alter the mode of production but attaches itself to it as a parasite, and makes it miserable.” Marx

    Here is yet another utopian visionary who has come to the conclusion that if only interest was completely eliminated that everything would be wonderful.

    “Envision a world without poverty or economic oppression, a place where humankind can attain its potential amidst the rest of the world, without hunger or homelessness, where educated societies enjoy all the fruits of their labors. In such a society it wouldn’t be necessary to hand over your hard-earned dollars to the government to pay ever-increasing taxes. Could you learn to live in a place where budgets were balanced, homes were affordable, and you kept all the money you earned?” Jacques Jaikaran.

    Like Montagne, Jaikaran adheres to the doctrine of an Interest Free society. I remember reading similar promises from the lips of Marx, Lenin, Trotsky and a long list of Socialists, who also advocated an interest free society where the “capitalist parasites” would be restricted from preying on the hapless proletariat.

    The pedigree of this theory, this prohibition of Interest is almost purely Marxian in origin. As the free market economist George Reisman stated: “For more than a century, one of the most popular economic doctrines in the world has been the exploitation theory. According to this theory, capitalism is a system of virtual slavery, serving the narrow interests of a comparative handful of businessmen and capitalists, who, driven by insatiable greed and power lust, exist as parasites upon the labor of the masses.”

    Interest, like money, arose from a need and it is vital to a free market economy, without it you not only would not have a free market you couldn’t have a free market. The workings of a free market are so dependent on the vital functions that interest accrual provides that it would be impossible for the economy to work.

    This Interest Free concept also stems for a total lack of understanding of what money is and what it represents. People work, they labor and part of the fruit of their labor is the money they earn in compensation for the time and effort they put into their jobs. In the most essential meaning money represents a portion of a person’s life. Now, if you earn money by your time and that money represents the time you took out of your life to earn it, is your life worth nothing if you lend it out in the form of money as opposed to the time you lend out in the form of work?

    Interest, under a Gold Monetary system is a vital function of monetary economics, not only domestically but also concerning the balance of trade. It provides so many signals, so many influences within the economy that it is almost impossible to explain given the space we have here. In fact, volumes have been written on the subject of how a free market economy is completely dependent for its health and for prosperity on interest value assessed by the time preference of money.

    So, how would an Interest Free economy work and how would you transition toward such an economy? Well, Das Capital gives a great deal of information on that subject in its Ideology of Dialectic Materialism. You want to read about an Interest Free economy, read Das Capital. You want to see Interest Free societies, look at some of the Socialistic societies which have impeded market forces by forbidding interest from their economic systems. In fact, it would take a massive STATE to both enforce it and to prop up the economy since the economy would have no gauge, no ability to self-regulate.

    There would be absolutely no incentive to lend money under such a system. Indeed, you would have to allow the massive STATE bureaucracy to expand to an extraordinary scope just to make the economy function to any degree at all and like Montagne advocates you would have to have the Government continue to maintain power over a Fiat Currency.

    “I suggest that money should be endowed with value based on the wealth that it represents. In my example, I assume the service life of the home is 40 years. The value is consumed (depreciation) in balance with the payments. In this system, every cent of the circulation is used to pay for the value of the original assets as they are consumed; thus the elimination of inflation or deflation which results when there is too little or not enough circulation.” Montagne

    Once again, that concept is taken, almost directly from Marx and his Monetary Expression of Value. Marx rejected the Credit theories of Money, in other words Interest and sought to bring about a Value Based Monetary system, which sounds eerily like that which Montagne supports.

    Montagne proposes an Interest Free society where “promise certificates” are provided throughout the economy for what amounts to IOUs. I find it very interesting, as well as completely unworkable since the supply chain would be filled with these promises to pay. Since there would be no incentive to lend, at any level, the producer of the most basic product would be forced to wait on payment from another up the line who would also be forced to wait on payment and so on. How would homes be built under an Interest Free economy, who would lend money for free? How would the suppliers be paid down the production ladder, would they, could they only accept a certificate of promise? How would any suppliers get operational capital?

    Under an Interest Free utopian economic model how do you suppose that anyone, whether it is an institutional lender, a small business extending credit, or anyone extending credit would be willing to voluntarily give up consumption [based on the money they have on hand] today in anticipation of consuming [the money they receive for lending their money] in the future without a corresponding compensation for the value [price] of time?

    What would be the incentive for anyone to lend under such circumstances?

    Now, in a free market, Interest rates are not only determined like other prices through the interaction of supply and demand, but it also is a determinate factor in providing both present and future supply and demand along with a stimulus for productivity, a vital timing signal and risk evaluator. Without Interest how will all those factors come into play in the “economy”? The answer is that there would be no mechanism to perform such functions in an Interest free economy.

    It all boils down to what money is and how money acts within a given economy, questions that you don’t address because you can’t address such questions in your economic modeling. Money, particularly asset money, provides a store of both present and future economic energy therefore there is a definite time value and time preference to money. Now, based on the assumptions of an Interest Free economy, it would take away elements of time value and time preference by the rejection of interest in such an economic model. There is therefore, no way to account for the lack of such vital elements and the effects such a lack will have on economic flows, both in active states of the market and in rest states of the market.

    Think about savers, what incentive to they have in an Interest Free economy and if there is no interest what about investments which pay, in the form of dividends, a type of interest on the investor’s money based on corporate earnings. Apparently such dividends must also be banned in a “mathematically perfect, interest free utopian economy”.

    Concerning savings, when a person places money in savings what he is doing is transferring real current resources or at least the means to purchase current resources to a bank or other entity with the anticipation that his money will have just as much or more, due to the Interest accrued on the savings account, more future purchasing power than when he deposited his money. How would an Interest Free economy provide incentives for savings? It could not.

    Savings, by the way, especially in a sound monetary economy, are the backbone for capital production, without it how would the economy function? How would the balances between savings, investment and capital production be achieved under an Interest Free economy? What mechanisms would you put into place to replace the vital role that interest plays between those balances?

    The same is true of someone lending money, when someone is willing to transfer his funds in the form of a loan, the basis of that loan if the promise of the borrower of those current resources to return those resources to the lender at a future time; in an Interest Free economy, the lender would not be compensated from the time value of his money and therefore there would be absolutely no incentive for anyone to lend present resources that could be readily placed into economic service today for those same resources at a future date without an expression of time value on those funds. In this case you are saying that there is no need in an economy for either time value or time preferences that would be a major and massive hindrance for any economic movement or productivity.

    Those who advocate such an Interest Free economy miss the entire premise of lending, of time value, time preference and the productivity associated with lending using interest as a measure of future value and timed usage. The borrower assesses risk based on the rate of Interest and a certain degree of faith in his ability to repay the loan. The borrower is using current resources of the lender in the belief that he will be able to produce future goods and or services to the extent that he will not only have enough to pay back the lender both principle and Interest, but that he will, through the process and his business acumen also have a profit at the end of the process. How therefore, do you deal with the transfer of qualified demand in such cases? The answer is you can’t.

    If there is no incentive for such practices, and apparently under the Interest Free “style” of economy such incentives would be banned by law. In such Usury Free economies, a person or lender would naturally keep their resources to themselves for present productive activities from which they could profit instead of lending those resources for a future return with no profit whatsoever. I mean if I were a lender who could make a profit today within my money, why would I lend it for 1 year, 5 years, 10, 15, 20 or 30 years with no return at all on it? Sorry, but few people would take such a risk with not hope of a return on the time value of their hard-earned money.

    I would assume that since there would be no Interest [which is nothing more than rent on money] allowed in an Interest Free economy that the practice of charging rent would also need be banned, since it is also interest on property. Rent is a form of Interest after all, you are lending out land, or merchandise or real estate in the estimation that you will get a return on those properties plus an excess if the property complete with clear title or not. The rental of money is no different than the rental of other properties that you own.

    Also, on a practical matter, how would you enforce an Interest Free economy, there would have to be a massive government machine to enforce this law, what will it be? It would be much more intrussive than anything we currently have today and it would have powers that would, by shear necessity, involve itself into every financial trasaction that took place in an Interest Free economy.

    Also, what role would the government have to take in terms of economic intervention since you are removing some of the most basic functions with an economy, primarily the role that interest plays in a vital economy? The government would replace the role of Interest in an economy otherwise such an economy would not function since all incentive is taken out of the system, time preference and time value will be no more. What mechanism would be used: government.

    Well, I can tell you that if you propose an Interest Free economy and a fiat monetary system along with it then you will definitely not have a prosperous future. The only way that can happen is if the government is completely restored to Constitutional Order, limited and severely restricted to its delegated powers as enumerated in the Constitution. A sound monetary system restored which will automatically limit the expansion and power of the government, restraining the politicians and eliminating special interest powers, monopoly favors and regulatory license. A free-market without any intrusion of government is just as important as the restoration of Constitutional Order, without economic freedom, the Right of Private Property and the Right of Private Contract then we will not have prosperity.

    In a free market, sound monetary system, the most wonderful thing happens to banks; they suddenly become responsible to their clients. Their fiduciary responsibility makes them compete and therefore keep their policies and practices above board. In a free market banks are allowed to fail just like any other business would be allowed to fail it they made bad business decisions.

    The key to understanding any economic proposal is what effect it actually has on the Rights of the Individual, the Right of Private Contract and the Right of Property. If it sounds too good to be true, it probably is nothing more than a wolf in sheep’s clothing.

    In Liberty and Eternal Vigilance,

    • Republicae is the scum of this earth

      • marxbites permalink

        You have such a nice way with words – why so angry?

        Critique of Montagne Mathematically Perfected Economy


        I identify and evaluate the four premises underlying Mike Montagne’s Mathematically Perfected Economy™:

        People trade things that are of equal value. If they trade things that are not equal in value, then one of them is being cheated

        Borrowers are trading more money in the future for less money now. It follows from premise #1 that they are being cheated.

        Any monetary system subject to interest ultimately terminates itself under insoluble debt. It follows from premise #2 that, because the charging of interest is not currently prohibited, the world economy is destined to collapse.

        There is class conflict between laborers and usurers as they battle over the unearned gain (surplus value) that is the proletariats’ due. By an argument similar to dialectical materialism, as the world economy collapses (see premise #3), the implementation of Mathematically Perfected Economy™ is inevitable.

        Mr. Montagne denies that he is a socialist though I view his theory as being akin to Marxism and find fault with all four of his premises.


        I have been asked to review Mike Montagne’s website (he is unpublished), PEOPLE for Mathematically Perfected Economy™. Having famously stated that “critiques and rebuttals are how science advances,” I did not feel that it was appropriate to just ignore Montagne. Anyway, I was asked, and I try to respond to my reader’s questions whenever I can.

        From what I could find on the internet, the only people to previously engage Montagne in debate were the Austrians, who pounced on the word “mathematical” in the title of his theory and denounced him as a mathematician, which they despise. I can commiserate – the “math cannot predict human action” line has been directed at Axiomatic Economics as well.

        Montagne quotes a Ron Paul supporter:

        One thing I find as the inevitable pitfall to MPE is that math cannot predict human action… [Montagne’s] assumption that there exists a perfect mathematical model for running an economic system containing inherently flawed organisms, presumes the feasibility of a symmetrical model for economic development that contradicts the asymmetrical reality of human nature.

        And Montagne is not cherry-picking these quotations either. This is typical of what I found on the Mises Institute Forum when I plugged “Montagne” into their search engine. “What one would expect from mathematical ‘economists,'” writes Jon Irenicus, a well-known Misesian who does not see any difference between Montagne, Debreu or this author – apparently, once an Austrian has seen one mathematician, he has seen them all.

        Clearly, Montagne met with little effective resistance from the Austrians. Frankly, I saw no evidence that they had actually read Montagne’s website. If they had, they would have found that there is no math there, unless one counts some graphs purporting to show a “probability and timeline for world-wide economic collapse as a consequence of interest.” Of course, all mathematics is axiomatic, so our task is to determine whether Montagne’s premises are sound, not to just blithely accept his premises and then confine our investigation into whether his graph does indeed go to zero, which would indicate an economic collapse.

        Theone, of the Market Ticker Forum, who is not known for mincing his words, also believes that we must look at the assumptions that people make.

        With [Montagne’s] assumptions you can make the numbers do whatever the hell you want them to do and monkeys “might” fly outta my ass. As far as I can tell there is absolutely nothingin those equations that prognosticate “systemic failure.” [Montagne] is simply pulling his comment about systemic failure right out of his ass at the point at which the maximum amount of money has been “created” from a finite reserve amount.

        Montagne has sent me an e-mail claiming that I do not know what a proof or a disproof is and demanding that I accept his assumptions and confirm or deny that they prognosticate systemic failure. But, since Theone has already demonstrated that Montagne’s assumptions are insufficient, what remains to be shown is whether they are sound and thus can be redeemed by additional assumptions or unsound and thus irredeemable. My task, therefore, is to determine whether Montagne’s premises are acceptable, not to inquire what they prove alone or what they might prove if additional and more restrictive assumptions were made.

        But before we consider Montagne’s premises, I want to point out that drawing a timeline to world-wide economic collapse and calling oneself “mathematically perfected” is very similar to Marx predicting the inevitable collapse of capitalism and calling himself “scientific.”

        Joshua Muravchik (2004, p. 60) has written about the “spectacular inversion” of what is meant by the term “scientific socialism:”

        What is science but the practice of experimentation, of hypothesis and test? Owen and Fourier and their [utopian] followers were the real “scientific socialists.” They hit upon the idea of socialism, and they tested it by attempting to form socialist communities. In all, there were scores of these tests in America and England – and all of them failed, utterly and disastrously.

        Then Marx came along and said never mind these experiments at bringing about socialism by human devices, it will be brought about by the impersonal force of history. In other words, under the banner of “science,” Marx shifted the basis for socialism from human ingenuity to sheer prophesy.

        So, let us not allow talk of mathematical perfection to beguile us into a study of sheer prophesy, but let us consider the axioms on which these prophesies are grounded. I ask no less of my own critics. That is why my three axioms are printed at the top of the homepage of my website and I have a non-mathematical explanation of the axioms. It certainly wouldn’t do to have people saying, “if he’s claiming axioms, then he ought to have listed them,” so I made sure that my axioms were clearly posted when I started my website in 2005.

        Montagne’s theory is based on four premises:

        People trade things that are of equal value. If they trade things that are not equal in value, then one of them is being cheated. Montagne writes:
        Free, unimpeded barter allowed people to produce to natural capacities, and to obtain for our own production whatever we deemed to be equal, undiminished measures of the production of others… Because no one takes from the trade anything but the equal of what they contribute to it, each party receives the full, self-determined equivalent of their contribution to the overall pool of their wealth.

        Borrowers are trading more money in the future for less money now. It follows from premise #1 that they are being cheated. Montagne writes:
        [If] we were confronted by a small man and 5 body guards… and the small man shouted down to us his law that “he” had taken control of the [market] grounds, all consummated trades required each party to give up 3 items for each 10… This would be the end of our trade without cost, on the ground, at the value, and for the reward of our common choosing. But usury is a greater abomination, because while it may not so much require armies as deception, disinformation, ignorance, fear and division, it inherently and inevitably takes more than any knowledgeable public would ever assent to, and by necessity must erase the very possibility of representation.

        Any monetary system subject to interest ultimately terminates itself under insoluble debt. It follows from premise #2 that, because the charging of interest is not currently prohibited, the world economy is destined to collapse. Montagne writes:
        Any purported economy subject to interest ultimately terminates itself under insoluble debt, because to maintain a vital circulation, we must perpetually re-borrow periodic principal and interest payments as subsequent debts, increased so much as periodic interest. Re-borrowed principal equals and thus retains the former debt its payment would otherwise resolve. Thus the sum of debt increases so much as periodic interest, which is re-borrowed as new debt, above the retained sum of debt… the probability for world-wide collapse as a consequence of interest is therefore 100 percent. Certain.

        There is class conflict between laborers and usurers as they battle over the unearned gain (surplus value) that is the proletariats’ due. By an argument similar to dialectical materialism, as the world economy collapses (see premise #3), the implementation of Mathematically Perfected Economy™ is inevitable. Montagne writes:
        We have in effect two conflicting philosophies. One wants earnings for its work equivalent to its work. The other wants unearned gain which can only be taken at the cost of earning equivalent to real work… We mature beyond the era of unearned gain… Like cannibalism, unearned monetary gain and all the manipulation which goes with it will one day disappear from history forever after.

        The conclusion, of course, is that loaning money at interest should be banned. Montagne explains, “Mathematically Perfected Economy™ thus is to loan interest-free currency into circulation… A virtually cost free capacity to sustain unlimited prosperity without the artificially imposed irregularities of inflation.”

        And what will our economy be like after the Revolution? Montagne boasts:

        For example, a $100,000 home with a 100 year lifespan would be paid for at the overall rate of $1000 per year or $83.33 per month; and the earning this alone would immediately free should we implement mathematically perfected economy™ immediately, reflect the degree to which we would prosper further, without any other improvement whatever.

        That sounds like a fine plan if you are in the market to buy a house! Of course, rent control also sounded like a fine plan – until it was actually implemented. Then, for some reason, no new apartment buildings were constructed and the existing ones fell to slums. Who could have anticipated such a thing? (I mean who besides Milton Friedman and just about every other economist with a working brain?)

        At first, when a Castro or a Chávez is seizing houses from the bourgeois and distributing them to the proletariat for a nominal $83 per month, socialism seems like a fine plan – maybe even a mathematically perfected plan. It is only later, when the people are crowding into old houses with leaky roofs that were built before the Revolution, do they start to wonder if it was such a fine plan after all. Of course, by then it is too late to revolt – they are too tired to fight and they have long since hocked their rifles to buy bread. If only they had known more about economic theory, they might have seen through Great Leader’s siren song of mathematical perfection!

        The basic flaw in the logic of modern socialists (Montagne, Cook, Zarlenga, etc.) is confusion between motivation and capability. “He’s privately controlled!” the socialist sneers at the Federal Reserve chairman, the unspoken assumption being that, were the socialist put in charge, he would immediately open the floodgates of wealth and prosperity for us all. It would be a veritable socialistic paradise, if only the Benevolent One were given the authority to print money! But, the fact is, the Fed is in a box. If a socialist were put in charge, he would be in the same box. Basically, if a central bank prints too much money, they debase the currency. Small countries like Zimbabwe are in a much tighter box than big countries like the United States, but a box it is.

        Montagne’s claim (sometimes called the Debt Virus Theory), that spending paper money directly into the economy, rather than buying Treasury Bills as the Fed does, is not inflationary can only be sustained with a gross re-definition of the word “inflation.” But re-defining words like “inflation” does not revoke the laws of economics. If you are taking a curve too fast in your car, you cannot avert a crash simply by re-defining “road” to include what used to be known as “median.”

        Arguing with socialists is a bit like Alice’s meeting with Humpty Dumpty – common words like “inflation” just seem to mean whatever the socialist chooses them to mean. So, rather than following Montagne down that linguistic rabbit hole, I will simply point out that his plan has already been tried, albeit without the hubris of calling itself mathematically perfected. During the Revolutionary War, the Continental Congress spent paper money directly into the economy and we all know what happened to them. They won the war but the expression “not worth a Continental” still resonates with us today. Ten years later, their government went the way of the Weimar Republic. Fortunately, unlike the Weimar Republic, which was replaced by the Nazis, the Continental Congress was replaced by the United States of America, which turned out to be a pretty good government. So, hyperinflation does not always lead to tyranny, though that is something to beware of whenever one contemplates debasing the currency.

        Today, in every city, there is a small contingent of people making pests of themselves at city council meetings by insisting that payday and title loan companies should be banned as usurious. In their public pronouncements, they do not use the word “socialism,” though it is organizations like Socialist Alternative who are sponsoring them. Montagne’s arguments are similar, though he goes much farther when he insists that loaning money at any interest rate, not just a high one, is usury. He bases this conclusion on religious, not economic, arguments.

        “Judaism, Christianity, and Islam (in chronological order), all derive from the Old Testament, in which a scattering of commandments forbid the practice of usury. Islam, in its further works is perhaps the most strictly compulsive in its observance of these commandments,” writes Montagne. He goes on to quotation Webster’s Dictionary, which gives archaic, formal and modern definitions of the word “usury” as 1) interest, 2) the lending of money with an interest charge for its use; and 3) an unconscionable or exorbitant amount of interest. Montagne takes this as evidence that the “money masters” have conspired to change the language in order to allow loaning money at low rates, where it had previously been prohibited altogether.

        Invoking religious edicts is clearly a conversation stopper. Of course, it is a free country and, if one’s religion prohibits borrowing or lending money at interest, nobody is going to make one do so. However, America is not a theocracy. If one wants to impose this rule on everybody, then one must present an economic, not a religious, rationale for it. Thus, except for a couple of quick comments about Montagne’s religious beliefs, I will discuss only the four premises listed above and ignore any references that Montagne makes to religious edicts.

        Somewhat incongruously, every page of Montagne’s website begins with a portrait of George Washington, though he was not an economist and, as far as I know, had nothing to say on the subject of loaning money at interest. However, he did live during the time of Adam Smith, when it was widely believed that people trade things that are of equal value. This belief was one of the first misconceptions to fall before the rise of modern economic theory. (In Smith’s day, there was no economic theory per se; there was just the study of political economy – the budgeting of government expenses.)

        If I buy a candy bar for 89¢, I do so because candy bars are not equal in value to 89¢; they are greater in value, at least to me. Obviously, the candy store owner has just the opposite view – he’d rather have the 89¢. Why does the candy store owner have such a different valuation of the candy bar? Is he just a stupid person who doesn’t know how good they taste? No. It’s because he has a lot of them – whole shelves full. I, on the other hand, have none – and I’m hungry. So we both come away from the trade with something of greater value than what we brought to it.

        Montagne’s first premise is wrong. Neither now nor in the days of barter was it true that “no one takes from the trade anything but the equal of what they contribute to it.” In fact, they always take something of greater value. It is not because of a vague “propensity to truck and barter” (Adam Smith) that people enter into trades, but because they specifically intend to come away from the trade with something of greater value than what they brought to it.

        In my Critique of Austrian Economics, I write:

        Ever since Smith’s 500-page tome (The Wealth of Nations, 1776) got itself attached to America’s Bicentennial celebration, popular bookstores have stocked multiple editions of it to the exclusion of all other economic treatises. Apparently people buy them to decorate their offices, since almost nobody has read past the pin factory story. Smith’s reputation has outlived his contributions while Menger dashes popular misconceptions that are as prevalent today as they were a century ago.

        In fact, the primary contribution of Carl Menger’s 1871 book, Principles of Economics, is the theory of marginal utility, which is exactly what Montagne needs to learn. The idea that people come away from trades with something of greater value than what they brought to them and that their valuation of things depends on how many of those items they already own is the foundation of all modern schools of economics. It is for the invention of marginal utility (by Menger and, independently, by Jevons) that 1871 is considered the year economics became a science, comparable to when chemistry detached itself from alchemy. Frankly, it is amazing to find someone now, in the twenty-first century, blithely championing ideas from a hundred years before economics even began.

        Montagne’s second premise is no better. He does not seem to understand the concept of time preference. People value the same item more if they receive it sooner rather than later. How much more determines the rate of interest that they are willing to pay and is the inverse of the mean of the Distribution of Wealth over the Capital Structure, DWCS, as I proved in my Critique of Austrian Economics. In my Rejoinder to Mr. Murphy, I write,

        To get an intuitive feel for what the mean of the DWCS represents, ask yourself, “How much of my wealth is in my house, which is intended to provide shelter for twenty years, how much is in my car, which is intended to provide transportation for five years, and how much is in peaches or fashionable clothes for my girlfriend, which will be valuable for about a week before becoming overripe or going out of style?

        For wealthy people, the mean of their personal DWCS is around twenty years, that is, most of their wealth is in long-term projects. Their interest rate is about 5%, slightly less than what they get on certificates of deposit. For middle-class people, the mean of their DWCS is around five years, that is, most of their wealth is in their car. Their interest rate is about 20%, slightly more than what they pay on their credit cards. For people living in hardscrabble conditions, their horizon does not extend beyond a month and their yearly interest rate is about 1500%. This is slightly more than what they pay at the pawn shop when hocking their possessions.

        So, in answer to Mr. Montagne, when one person loans money to another at interest, it does not imply that the latter is being cheated; only that two people have different time preferences. They made a trade based on that difference in the same way that the candy store owner and I were able to make a trade because we had different valuations of a candy bar. The only thing new about this theory is that they are trading present goods for future goods, whereas the 89¢ and the candy bar that I traded it for both existed in the present.

        The people who would ban payday and title loan companies have their hearts in the right place, as they are sympathetic towards the poor. But such do-gooders do not understand that putting a high value on present over future goods is a symptom of poverty, not the cause of it. Poor people aren’t stupid; when they hock their property or take out a loan against an upcoming paycheck, they know that they are paying a high rate of interest. They don’t need Johnny Economist to tell them that. They borrow at that rate because the alternatives are worse.

        For instance, if a workingman’s vehicle has been impounded, the towing company is charging $25 per day and it will seize the vehicle in a month. But right now he can get that car back for the $100 towing charge. An interest rate of 1500% per year may seem exorbitant, but he doesn’t need the loan for a year – just for one week until payday. It is actually much more economical to visit the payday loan company than to leave the vehicle at the impound lot. Also, without a car, he could very well get fired for tardiness. And keeping his job means everything to him.

        The people who would ban payday and title loan companies just don’t understand what the poor are up against. And Montagne is far more extreme than they are, as he would ban the loaning of money at any interest rate. Montagne claims to have the best interests of the poor in mind, but these are the very people who would be hurt the most by his proposals.

        In regards to Montagne’s third premise, even if there were people systematically cheating the rest of us, that would not make an economic collapse “inevitable.” After all, their income is a part of national income statistics in the same way that Montagne’s and mine are. Economists count everybody’s income when they compile those statistics, not just the incomes of the people that they like.

        Böhm-Bawerk denounces “the tendency among English economists – often and quite justifiably censored – to regard workers as producing machines; that view made their wages a component part of production costs, and counted them as a deduction from national wealth instead of a part thereof” (1959, v. 2 pp. 72-73). Montagne is making exactly the opposite mistake: He is counting only the proletariat’s wages toward national income, while excluding the income of those wicked money lenders who prey on them.

        During the Middle Ages, the nobility had everybody over a barrel in the same way that Montagne imagines that modern money lenders have us over a barrel, but feudalism did not collapse in the way that Montagne envisions and, when it did, it was due more to luck than inevitability. Feudalism lasted for hundreds of years and it could have gone on indefinitely if gold had not been discovered in the New World. The resulting inflation made share cropping contracts worth less to landowners. There were tradesmen in town making several times more than noblemen in the countryside were getting from their share of the corn grown on their property. Also, the Industrial Revolution just made corn less important to society as a whole – during the Middle Ages it had been the only thing of value. But none of this has anything to do with the “mathematically perfected” timeline for worldwide economic collapse that Montagne has calculated.

        Edward Flaherty has already addressed the idea that any monetary system subject to interest ultimately terminates itself under insoluble debt in his rebuttal of Jaikaran’s book, The Debt Virus:

        Jaikaran’s main warning is that if we wished to repay all the debt, we would be unable to do so because of the shortage of money. But why would we wish to retire all the outstanding debt in the economy? Loans and bonds have a variety of maturities and only the most remarkable synchronicity would have them all, or any appreciable portion of them, come due at once.

        The same dollars get used over and over again. If you made a note of the serial numbers on the bills you use to pay your mortgage, you would find that you are using the exact same bills the following month and the month after that. This is because the banker has spent the money and it circulated around the community until you earned it back.

        Only if everybody everywhere had to pay off all their debts simultaneously would they have trouble coming up with the currency to do that. But that never happens because their loan agreements specify monthly payments. Your banker cannot just call you up and demand the entire remaining balance on your loan tomorrow. That would be illegal.

        Remarkably, the Austrians conceded to Montagne his third premise. He quotes a Ron Paul supporter: “While an interest based monetary system eventually breaks down because of greed, corruption and the intractable problem of insoluble debt, there is no reasonable alternative.”

        Leaderless youth! Paul has given these kids no guidance, only bumper sticker slogans. They let Montagne’s labor theory of value go unchallenged, conceded to him the kernel of his theory, the “intractable problem of insoluble debt,” and then beat on him with a sponge. “Math cannot predict human action!!!”

        Finally, in regards to Montagne’s fourth premise, this is basically dialectical materialism, which should be familiar to any critic of Marx. Montagne has sent me an e-mail claiming that he is not a socialist, in spite of quotations like this, “We have in effect two conflicting philosophies. One wants earnings for its work equivalent to its work. The other wants unearned gain which can only be taken at the cost of earning equivalent to real work,” which sounds like it came directly out of Das Capital. Notice Montagne’s reliance on the labor theory of value and his talk of class struggle and unearned gain (surplus value), all of which are hallmarks of Marxist writing.

        The easy answer is that, just as society is no longer partitioned into workers and capitalists but has many prosperous self-employed tradesmen and many salarymen who own stocks, neither is it partitioned into debtors and creditors. We no longer have company towns where the residents have made serfs of themselves by borrowing more from the company store than they can ever repay. Today, most people are simultaneously both creditors and debtors.

        To judge whether or not Montagne is a socialist, let us consider his vision for the future:

        For example, a $100,000 home with a 100 year lifespan would be paid for at the overall rate of $1000 per year or $83.33 per month; and the earning this alone would immediately free should we implement mathematically perfected economy™ immediately, reflect the degree to which we would prosper further, without any other improvement whatever.

        But we do not buy houses from the government, we buy them from private developers, and they expect to get paid for those houses. Developers hire contractors (carpenters, plumbers, electricians, etc.) and they demand cash on the barrel head. Unless forced to do so, no developer in his right mind is going to spend his private funds to hire contractors in the here-and-now if the only expected return is Montagne’s promise of $83 a month for the next hundred years. And if Montagne intends to use force, then he is a socialist. That is what the word “socialism” means: Forcing people to provide things like houses so that the government can distribute them to who they choose at a price that they set.

        I stand by my assessment of Montagne. Mathematically Perfected Economy™ is straight-out socialism in the guise of a pseudo-religious attack on money lenders.

        In conclusion, to Montagne, Cook, Zarlenga and anyone else who claims that they can open the floodgates of prosperity by spending paper money directly into the economy, I say: “The Debt Virus Theory is not worth a Continental!”

        I think that settles it. However, I do have two questions for Mr. Montagne: 1) Why did you choose to illustrate every page of a website about economic theory with a photo of yourself in the woods posing with an elk you just shot? 2) If you were on a solo bow hunt seven miles into the wilderness, how did you ever pack that big animal out of there? Seven miles is a long ways to venture from your pickup truck. (I can’t resist posting a joke here.) Incidentally, when taking a self-portrait, it’s a good idea to look into the sun so that your face isn’t in shadow – just a hint.


        Some Debt-Virus proponents have responded to this paper by quoting the Wikipedia article on Early American Currency as a rebuttal to my claim that the Continental collapsed because it was spent directly into the economy on soldiers’ wages without obtaining any assets that could be sold if it became necessary to withdraw Continentals from circulation. I respond:

        Wikipedia writes, “a primary problem was that monetary policy was not coordinated between Congress and the states, which continued to issue bills of credit.” But this does not make sense. If Continentals were sound, then why would the Continental Congress have to coordinate with unsound state-issued curencies? Does the U.S. Treasury coordinate with Zimbabwe?

        Wikipedia writes, “another problem was that the British successfully waged economic warfare by counterfeiting Continentals on a large scale,” and quotes Benjamin Franklin:

        The artists they employed performed so well that immense quantities of these counterfeits which issued from the British government in New York, were circulated among the inhabitants of all the states, before the fraud was detected. This operated significantly in depreciating the whole mass….

        I do not believe that this is true. The English did not foist counterfeit Continentals on us any more than (as G. W. Bush would have had us believe) the North Koreans foist counterfeit dollars on us. Franklin was just trying to deflect the blame from himself. Printing was done with hand-carved wood blocks. The printer does not have to be a good artist. His “bald eagle” can look like a penguin and it does not matter because all that is required of him is that he create a unique, easily recognizable image. But the counterfeiter must look at a sample bill and then carve a wood block with left and right reversed that exactly replicates every stroke and cut on the original. Then there is the problem of every bill being hand-signed in ink with a quill pen. Then, granting the English these fantastic artistic skills, what good does a warehouse full of fake Continentals do? Englishmen in America were being shot on sight, so who is going to volunteer to distribute the bills? What would they buy with them? American soldiers mostly saved their Continentals because the wartime economy was at a standstill. It was only after the war when they attempted to buy livestock and building materials to improve their farms that they learned that Continentals were worthless and that the sellers were all demanding Spanish or other foreign currency.

        The Debt-Virus theorists are arguing against themselves. Suppose that a time traveler has delivered both a color copier and a helicopter to King George so that he can replicate Continentals and distribute them to the unsuspecting Americans. Since the fake Continentals are “debt free” in the Debt-Virus lexicon, that is, they were spent directly into the economy rather than being loaned out, then, using the Debt-Virus theorists’ own twisted logic, their distribution should not be inflationary. But the whole point of conjuring up these imaginary counterfeiters is to explain away the hyperinflation that everybody knows existed. If re-defining “inflation” to refer only to money that enters circulation through loans is all that it takes to justify their own printing operation, then consistency requires that this word play should also justify other people’s printing operations. If the Debt-Virus promoters really believed their own theory, then they would not restrict the printing of debt-free currency to the U.S. Treasury but would let anybody with a color printer get in on the fun. As long as their funny money is debt-free, it is not inflationary. Right?



        Böhm-Bawerk, Eugen von. [1921] 1959. Capital and Interest. 3 vols. George D. Huncke and Hans F. Sennholz, trans. South Holland, IL: Libertarian Press

        Marx, Karl. [1867] 1976. Capital. vol. 1. New York, NY: Penguin

        Menger, Carl. [1871] 1981. Principles of Economics. Dingwall and Hoselitz trans. New York, NY: New York University Press

        Muravchik, Joshua. 2004. “The Rise and Fall of Socialism.” in Economic Theories and Controversies. Hillsdale, MI: Hillsdale College Press

        Smith, Adam. [1776] 1976. An Inquiry into the Nature and Causes of the Wealth of Nations. Chicago, IL: The University of Chicago Press

    • alaska3636 permalink

      Nailed it. Thanks for saving me the time and doing such so eloquently.

  3. moses permalink


    Free-Money Theory of Interest on Capital

    Chapter 1.


    As touchstone for the theory of interest developed below, and to facilitate the removal of ingrained prejudice that still obfuscates readers’ mind on this issue, let me begin with the following Robinsonade.1
    Robinson Crusoe decided to build a canal, towards the construction of which he estimated three years of uninterrupted work. He had therefore to lay in provisions for three years.
    He slaughtered some pigs, cured their flesh with salt, filled a deep trench with cereals and covered it carefully with soil. He tailored a pair of buckskin trousers and nailed them up in a chest, enclosing also the stink-glands of a skunk as a moth repellent.
    He provided amply and wisely, he thought, for the next three years.
    As he sat down calculating for the last time whether his “capital” was enough for the project, he was startled at the approach of a stranger striding towards him.
    “Hallo!” shouted the stranger as he approached, “my ship has run aground here, and here am I on this island. Will you help me with some provisions until I have brought a field into cultivation and harvested my first crop?”
    At these words Crusoe’s thoughts flew from his provisions to interest and the attractions of the life of a gentleman of independent means. He hastened a “yes.”
    “How splendid!” replied the stranger, “but let me tell you at once that I shall pay no interest, preferring hunting and fishing. My religion forbids me to pay, or receive, interest.”

    Robinson Crusoe: What an admirable religion! But on what grounds do you expect me to advance you provisions from my stores if you pay me no interest?

    Stranger: From pure egoism, my dear fellow; from your self-interest rightly understood. You gain, and hugely at that.

    R.C.: That, stranger, you have yet to prove. I must say I see no advantage in lending you my provisions interest-free.

    S.: I shall prove it at once. If you can follow my proof, you will agree to an interest-free loan, and thank me into the bargain. I need, first of all, clothes, for as you see, I am naked. Have you a supply of clothes?

    R.C.: That chest is packed with them.

    S.: But Crusoe! I had more respect for your intelligence. Fancy nailing up clothes for three years in a chest! Buckskin trousers, the favourite food of moths! And buckskins must be kept aired and rubbed with fat, otherwise they become hard and brittle.

    R C.: That is true, but what else could I do? They would be no safer in my cupboard: on the contrary, for it is infested with rats and mice besides moths.

    S.: Rats and mice would get them also in the chest. Look how they have already started to gnaw their way in!

    R.C.: How true! One doesn’t know what to do against these creatures.

    S.: You don’t know how to protect yourself against mice, and assure that you know how to count? Let me tell you how people like you at home protect themselves against mice, rats, moths, thieves, against brittleness, dust and mildew. Lend me these clothes for one, two or three years and I promise to make new ones for you as soon as you require them. You will receive back as many pieces of clothing as you have lent me, and the new suits will be far superior to those from the chest. On top of that you will not stink of skunk glands. Do you agree?

    R.C.: Yes, stranger, I will lend you the chest full of clothes; I see that in this case the loan, even at no interest, is to my advantage.2

    S.: Now show me your wheat; I need some for bread and seed.

    R.C.: I have is buried it in that hole in the ground.

    S.: Wheat buried for three years in a hole? What about mildew and beetles?

    R.C.: I have thought of it, but what could I do? I have considered the thing from all angles and found nothing better.

    S.: Bend down. Do you see beetles crawling on the surface? Do you see the dirt? And this spreading patch of mildew? It is high time to take out the wheat and air it.

    R.C.: This capital will ruin me! If only I could find some way of protecting myself against the thousand destructive forces of nature!

    S.: Let me tell you, Robinson, how we manage at home. We build a dry and airy shed and shake out the wheat on the boarded floor. Every three weeks the whole mass is turned over with wooden shovels. We also keep a number of cats; we set mousetraps and insure against fire. In this way we keep the loss down to 10% per year.

    R.C.: But the labour, and the expense!

    S.: You shirk work and want no expense? Let me tell you then what to do. Lend me your wheat and I shall replace it, pound for pound, sack for sack, with fresh wheat from my harvest. You thus save the labour of building a shed and turning over the wheat; you need feed no cats, you suffer no loss of weight, and instead of stale corn you will have fresh, nutritious bread.
    R.C.: I accept wholeheartedly.

    S.: That is, you will lend me your wheat interest-free?

    R.C.: Certainly: at no interest and with my heartfelt thanks.

    S.: But I can use only part of the wheat; I don’t need it all.

    R.C.: Suppose I give you the whole store with the understanding that for every ten sacks lent you give me back nine sacks?

    S.: I must decline your offer, for it would mean interest – not indeed positive, but negative. The receiver, not the giver of the loan, would be a capitalist, and my religion does not permit usury; even negative interest is forbidden. I propose therefore the following agreement. Entrust me with the supervision of your wheat, the construction of the shed, and whatever else is necessary. In return you can pay me wages of two sacks, annually, from every ten sacks. Do you agree?

    R.C.: It makes no difference to me whether your service comes under the heading of usury or labour. I give you then ten sacks and you give me back eight. Agreed!

    S.: But I need other articles: a plough, a cart and hand tools. Do you consent to lend them, also, at no interest? I promise to return everything in perfect order, a new spade for a new spade, a new, rust-free chain for a new chain, and so forth.

    R.C.: Of course I consent. All I get at present from my stores is work. Lately the river overflowed and flooded the shed, covering everything with mud. Then a storm blew off the roof and rain damaged everything. Now we have drought, and the wind is blowing sand and dust in. Rust, decay, breakage, drought, light, darkness, dry rot and ants keep up a relentless attack. We can congratulate ourselves here upon having, at least, no thieves or arsonists. How delighted I am that by means of a loan I can now store my belongings without expense, labour, loss or vexation, until I need them.

    S.: That is, you now see the advantage of lending me your provisions interest-free?3

    R.C.: Of course I do. But the question now occurs to me, why do similar stores of provisions at home bring their possessors interest?

    S.: You must seek the explanation in money, which acts there as intermediary for such transactions.

    R.C.: What? The cause of interest lies in money? That cannot be. Listen to Marx on money and interest: “The capacity for work is the source of interest (surplus value). The interest, which converts money into capital, cannot be derived from money. If it is true that money is a medium of exchange, it does no more than pay the price of the commodity it purchases. If money remains unvaried, its value does not change. Hence the surplus value (interest) must come from the commodities bought, as they will be sold dearer. Such change cannot take place either when buying or when selling; in either case equivalent values are exchanged. We are therefore forced to the conclusion that the change originates in the use of the commodity after its purchase and before its re-sale.” (Capital I, 6).

    S.: How long have you been on this island?

    R.C.: Thirty years.

    S.: I thought so! You still appeal to the theory of value. My dear Robinson, that theory is dead and buried. No one supports it today.4

    R.C.: Marx’s theory of interest dead and buried? It isn’t true. Even if no one else defends it, I will.

    S.: Well then, defend it, not in words but in deeds against me. I hereby break off the bargain we have just made. You have here, in your supplies, from their nature and destination, the purest form of what is usually called capital. But I challenge you to take up the position of a capitalist towards me. I need your stuff. No worker has ever appeared before a capitalist as naked as I stand here before you. Never has there been so clear an illustration of the relation between the owner of capital and the individual in need of it. And now try to exact interest! Shall we begin our bargain all over again?

    R.C.: I give up! Rats, moths and rust have broken my power as a capitalist. But tell me, what is your explanation of this whole thing?

    S.: The explanation is simple enough. If there were a monetary system on this island and I, as a shipwrecked sailor needed a loan, I would have to apply to a moneylender for money to buy the things that you have just lent me at no interest. But a moneylender has no worry about rats, moths, rust and roof repairing, so I could not have taken up the position towards him that I have taken towards you. The loss inseparable from the ownership of goods (look, there goes a dog running off with one of your – or rather my – buckskins!) is borne not by the moneylenders, but by those who have to store them. The moneylender is carefree, unmoved by the arguments that found the chinks in your armour. You did not nail up your chest of buckskins when I refused to pay interest; the nature of your capital made you willing to continue bargaining. Not so the money-capitalist; he would bang the door of his strong room on my face if I dared say I would pay no interest. Yet I do not need the money itself, I need it only to buy buckskins. The buckskins you lend me at no interest, but I must pay interest on the money I borrow to buy buckskins!

    R.C.: Then the cause of interest is to be sought in money? And Marx was mistaken? Even where he says: “In real commercial capital, the circuit (money – wares – excess money) = purchases, i.e. buying so as to sell dearer, appears most clearly. On the other hand all the movement takes place within that circulation all by itself. It is therefore impossible to explain how money becomes commercial capital except by that circulation. The exchanged products are equivalent. The surplus comes from the double swindle by the parasitic trader, who buys from the producers to sell to consumers. If the exploitation of commercial capital cannot be explained in terms of naked cheating by the producer, it belongs to the large line of middlemen.” (Capital, 6th Ed. Chapter I).

    S.: He is utterly in error as much as before. And as he was mistaken about money, the central nervous system of economic life, he must be mistaken about everything else. He committed the error, as did all his disciples, of excluding money from the scope of their inquiry.

    R.C.: Our negotiations have convinced me of this. For Marx money is simply a medium of exchange, but money does more, it seems, than “merely pay the price of the commodities it purchases,” as he asserted. When the borrower refuses to pay interest, the banker can close the door of his safe without experiencing any of the cares that beset the owner of goods. The banker owes this privilege exclusively to the intrinsic superiority of money over goods. That is the root of the matter.

    S.: Rats, moths and rust are powerful logicians! How convincing they are!

    • marxbites permalink

      Sound Money, Monetary Freedom and the State
      Tuesday, August 07, 2012 – by Richard Ebeling

      Dr. Richard Ebeling (The following testimony was delivered before the House of Representatives Subcommittee on Domestic Monetary Policy and Technology, chaired by Congressman Ron Paul (R-Texas), on “Sound Money: Parallel Currencies and the Roadmap to Monetary Freedom,” in Washington, D.C. on August 2, 2012.)

      “The gold standard alone is what the nineteenth-century freedom-loving leaders (who championed representative government, civil liberties, and prosperity for all) called “sound money.” The eminence and usefulness of the gold standard consists in the fact that it makes the supply of money depend on the profitability of mining gold, and thus checks large-scale inflationary ventures on the part of governments.”

      Ludwig von Mises

      To discuss a possible roadmap to monetary freedom in the United States requires us to first determine what may be viewed as a “sound” or “unsound” money. Through most of the first 150 years of U.S. history, “sound money” was considered to be one based on a commodity standard, most frequently either gold or silver. In contrast, the history of paper, or fiat, monies was seen as an account of abuse, mismanagement and financial disaster, and thus “unsound” money.

      The histories of the Continental Notes during the American Revolution, the Assignats during the French Revolution, and then Greenbacks and the Confederate Notes during the American Civil War, all warned of the dangers of unrestricted and discretionary government power over the monetary printing press. This view was summed up in the middle of the nineteenth century by the famous British economist, John Stuart Mill, whose “Principles of Political Economy” was a widely used textbook for decades not only in his native Great Britain, but in the United States, as well:

      The issuers may add to it indefinitely, lowering its value and raising prices in proportion; they may, in other words depreciate the currency without limit. Such a power, in whomsoever vested, is an intolerable evil…. To be able to pay off the national debt, defray the expenses of government without taxation, and in fine, to make the fortunes of the entire community, is a brilliant prospect, when once a man is capable of believing that printing a few characters on bits of paper will do it . . . There is therefore a preponderance of reasons in favor of a convertible, in preference to even the best-regulated inconvertible currency. The temptation to over-issue, in certain financial emergencies is so strong, that nothing is admissible which can tend, in however slight a degree, to weaken the barriers that restrain it.

      Episodes of great inflation in countries like Germany, Austria, and China in the twentieth century only have reinforced the advocates of “sound money” on the dangers of paper money in the hands of any political authority

      The importance of a monetary system based on gold, therefore, is that it limits the range of discretion open to governments to manipulate the quantity and value of money. The fundamental rule that the supply of money in the economy is anchored to the profitability of gold production as determined by market forces depoliticizes the monetary system to a significant degree.

      Given an established redemption ratio between bank notes and deposit accounts and a quantity of gold on deposit in banks; given fixed reserve requirements on checking and other forms of bank deposits; given an established rule of the right of free import and export of gold between one’s own country and the rest of the world; and assuming that the political authority with responsibility over the country’s monetary system does not interfere with these conditions and rules, then political influences on the value and quantity of money would be minimized.

      The Gold Standard in Practice

      In the second half of the nineteenth century most of the major nations of the world put into place national monetary systems based on gold. By the fact that such a large number of countries had each linked their respective currencies to gold at some fixed rate of redemption in this manner, there emerged an international gold standard. A person in any one of those countries could enter any number of established, authorized banks and trade in a certain quantity of bank notes for a stipulated sum of gold, in the form of either coin or bullion. He could transport that sum of gold to any of the other gold-based countries and readily convert it at a fixed rate of exchange into the currency of the country to which he had traveled.

      As Murray Rothbard expressed it in, “What Has Government Done to Our Money?”:

      “The world was on a gold standard, which meant that each national currency (the dollar, pound, franc, etc.) was merely a name for a certain definite weight of gold. The “dollar,” for example, was defined as 1/20 of a gold ounce, the pound sterling as slightly less than 1/4 of a gold ounce…. This meant that the “exchange rates” between various national currencies were fixed, not because they were arbitrarily controlled by government, but in the same way that one pound of weight is defined as being equal to sixteen ounces.”

      Why did governments recognize and (with occasional exceptions) follow the rules of the gold standard through most of the nineteenth century? Because the gold standard was considered an integral element in the reigning political philosophy of the time, classical liberalism. As the German free-market economist Wilhelm Roepke explained in “International Order and Economic Integration”:

      “The international ‘open society’ of the nineteenth century was the creation of the “‘iberal spirit’ in the widest sense, [guided by] the liberal principle that economic affairs should be free from political direction, the principle of a thorough separation between the spheres of government and of economy . . . The economic process was thereby removed from the sphere of officialdom, of public and penal law, in short from the sphere of the ‘state’ to that of the ‘market,’ of private law, of property, in short to the sphere of ‘society.’ ”

      At the same time, said Roepke,

      “This [liberal] principle also solved an extremely important special problem of international integration . . . i.e., the problem of an international monetary system . . . in the form of a gold standard . . . It was a monetary system which rested upon the structural similarity of the national systems, and which made currency dependent, not upon political decisions of national governments and their direction, but upon the objective economic laws, which applied once a national currency was linked to gold . . . But it was at the same time a phenomenon with a moral foundation . . . The obligations, namely, which a conscientious conformity with the rules of the gold standard imposed upon all participating countries formed at the same time a part of that system of written and unwritten standards which . . . comprised the [international] liberal order.”

      In the nineteenth century, the ruling idea had been liberty. The wealth of nations was seen as arising from individual freedom in a social order respecting private property in the means of production. The relationships among men, it was believed, should be based on voluntary exchange for mutual benefit. Just as there were no inherent antagonisms among men in a free market within the same nation, there were no inherent antagonisms among men living in different nations. The mutual gains from trade could be expanded by extending the principle of division of labor to a global scale. If men were to benefit from those possibilities, a stable, sound, and trustworthy monetary order had to assist in the internationalization of trade. Gold was considered the commodity most proven through the ages to serve that function. And preservation of the gold standard, therefore, was given a prominent place among the limited duties assigned to the classical-liberal state in that earlier era.

      In the nineteenth century there also was a greater humility among those who constructed and implemented various government economic policies. There was a general agreement with Adam Smith’s observation that “the statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate, and which would nowhere be so dangerous as in the hands of a man who had the folly and presumption enough to fancy himself fit to exercise it.”

      The Gold Standard, Central Banking, and Changing Monetary Policy Goals

      The classical liberals were deeply suspicious of government abuse of the printing press. They believed that only a monetary system under which all bank-issued notes and other deposit claims were redeemable on demand for gold could act as a sufficient check against the abuse and debasement of a currency.

      However, even in the high-water mark of classical liberalism in the nineteenth century, practically all advocates of the free market and free trade believed that money was the one exception to the principle of private enterprise. The international monetary order of the last century, of which Wilhelm Roepke spoke in such glowing terms, was nonetheless the creation of a planning mentality. The decision to “go on” the gold standard in each of the major Western nations was a matter of state policy.

      A central-banking structure for the management and control of a gold-backed currency was established in each country by its respective government, either by giving a private bank the monopoly control over gold reserves and issuing banknotes or by establishing a state institution assigned the task of managing the monetary system within the borders of a nation. The United States was the last of the major Western nations to establish a central bank, but it finally did so in 1913.

      Central-banking authorities were given the power and responsibility to manage the gold reserves at their disposal and the quantity of notes and other bank deposit claims outstanding to maintain the soundness of the monetary system and to counteract various short-term fluctuations in the national currency’s foreign-exchange rate, the balance of payments, and the quantity of financial credit available in the country’s economy. Their policy “tools” included manipulation of short-term interest rates and the buying and selling of private-sector bills of trade and securities.

      While the goals for monetary policy may have been considered modest and limited in the eyes of the classical liberals of the nineteenth century, it remained a fact that the monetary system was a subject for national government policy. In an era of relatively unrestricted free-market capitalism, money and the monetary system were a “nationalized industry.” And as such, even most of the advocates of economic liberty argued for monetary socialism and monetary central planning. They failed to call for and defend the privatization of the most important commodity in a market economy – the medium of exchange.

      What they forgot was that once a government has control and responsibility for the monetary system within a country, little was outside the power of that government to influence and manipulate. This was clearly stated by a prominent German economist named Gustav Stolper while a refugee in the United States from war-torn Europe during the Second World War:

      “Hardly ever do the advocates of free capitalism realize how utterly their ideal was frustrated at the moment the state assumed control of the monetary system . . . A “free” capitalism with government responsibility for money and credit has lost its innocence. From that point on it is no longer a matter of principle but one of expediency how far one wishes or permits governmental interference to go. Money control is the supreme and most comprehensive of all government controls short of expropriation.”

      As a result, when economic collectivism, socialism, and interventionism gained popularity and power in the early decades of the twentieth century, money was the one area in which the central-planning ideal was already triumphant. For a hundred years, now, in the United States it had been taken for granted that the state should have either direct or indirect monopoly control over the supply of money in the market.

      In the nearly one hundred years since the First World War, the goals assigned to monetary central planning changed, but the instrument for their application remained the same – central bank management of the money supply. In the 1920s, Federal Reserve policy was heavily focused on “price level” stabilization; its result was generating a variety of imbalances between saving and investment that set the stage for the Great Depression.

      Beginning in the 1930s, under the growing influence of Keynesian Economics the goal was to influence the levels of aggregate employment and output in the economy. After the disastrous experience with Keynesian-generated “stagflation” in the 1970s – a combination of significantly rising prices and persistently high unemployment – the monetary authorities in the 1980s and 1990s focused on slowing down and “controlling” inflation. In the late 1990s, the Federal Reserve switched back to a more “activist” monetary policy that fed the excesses of the “high tech” bubble that went bust shortly after the turn of the new century. Then, in 2003, fearful of hypothetical “deflationary” forces, the Federal Reserve went on a policy of monetary expansion that created the monetary and credit wherewithal that produced the housing and investment and consumer spending boom that went dramatically burst in 2008 – and from which we are still attempting to recover, especially in terms of employment .

      In addition, throughout the last century, governments – including the United States government – loosened the limits that gold placed on the ability of their central banks to expand the money supply and manipulate the amount of credit created and issued through the banking system to further changing monetary and fiscal goals. For decades, now, governments – including the United States government – have completely eliminated this “break” on their discretionary monetary policy by virtually ending any connection between the paper currencies they control and gold.

      The world economy operates in an economic environment of paper monies under the monopoly control central banks.

      Central Banking is a Form of Central Planning – With the Same Defects

      One of the primary benefits of economic freedom is that it decentralizes the negative effects that may arise from ordinary human error. Every one of us makes decisions that we hope will produce outcomes we desire.

      Yet the actual outcomes from our actions often fail to match up to the hopes that motivated them. A businessman who misreads market trends in planning his private company’s production and marketing strategies may experience losses that require him to cut back his activities, resulting in some of his employees’ losing their jobs and in resource suppliers’ experiencing fewer sales because the loss-suffering businessman reduces his orders for what they have for sale.

      But the negative ripple effects from his entrepreneurial mistakes are localized within one corner of the overall market. Other sectors of the market need not be directly penalized or subject to the unfortunate effects of his poor judgment. Profit-making enterprises can freely go about their business hiring, producing, and then selling the goods that they have more correctly anticipated the consuming public actually desires to buy.

      Under government central planning, however, errors committed by the central planners are more likely to have an impact on the economy as a whole. Every sector of the economy is directly interlocked within the centrally planned blueprint for the allocation of resources, the quantities of different goods and services to be produced, and the distribution of the output to the consuming public.

      Centralized failures in resource use or production decisions more directly affect every sector of the economy, since nothing can happen in any of the government-run industries independently of how the central planners try to fix their mistakes. Everyone more directly feels the consequences of the central planners’ errors and must wait for those planners to devise a revised central plan to correct the problem.

      Monetary central planning suffers from the same sort of defect. Changes in the money supply emanate from one central source and are determined by the monetary central planners’ conceptions of the “optimal” or desired quantity of money that should be available in the economy. Their central decision can indirectly influence the pattern of interest rates (at least in the short run) and the market structure of relative prices and inevitably bring about changes in the general value, or purchasing power, of the monetary unit. The monetary central planners’ policies work their way through the entire economy, possibly bringing about a cycle of an inflationary boom followed by general economic downturn or even depression.

      Halting the inflation and bringing an unsustainable boom to an end depends upon the monetary central planners’ discovery that things “may have gone too far” and a decision by them to reverse the course of monetary policy. Many, if not most, sectors of the market will then have to modify and correct investment, production, and employment decisions that had been made under the false, inflationary price signals the central planners’ monetary policy has artificially created. Capital, wealth, and income spending patterns in the market will have been misdirected and partly wasted because of the errors committed by the monetary central planners.

      The opponents of central banking have argued that the occurrence of such errors would be less frequent and discovered more quickly under a system of competitive free banking. Any private bank that “over-issued” its currency would soon discover its mistake through the feedback of a loss of gold or other reserves through the interbank clearing process and withdrawal by its depositors. The bank would realize the necessity of reversing course to ensure that its gold- and other-reserve position was not seriously threatened and avoid the risk of losing the confidence of its own customers because of heavy withdrawals by depositors.

      Moreover, the effect of such a private bank’s following a “loose” and “easy” monetary policy would be localized by the fact that only its banknotes and check money would be increasing in supply because of the additional spending of those to whom that bank had extended additional loans. It could neither force an economy-wide monetary expansion throughout the entire banking system nor create an economy-wide price-inflationary effect. Any negative consequences, while being unfortunate, would be limited to a relatively narrow arena of market decisions and transactions.

      Free Banking and the Benefits of Market Competition

      One of the strongest arguments that advocates of the free market have made over the last 200 years has been to point out the benefits of competition and the harmfulness of government-supported monopoly. In a competitive market, individuals are at liberty to creatively transform the existing patterns of producing and consuming in ways they think will make life better and less expensive for themselves and other members of society as a whole.

      Wherever legalized monopoly exists, the privileged producer is protected from potential rivals who would enter his corner of the market and supply an alternative product or service to those consumers who might prefer it to the one marketed by the monopolist. Innovation and opportunity are either prevented or delayed from developing in this politically guarded sector of the economy. Production methods remain unchanged or are modified only with great delay. Product improvements are slow in being developed and introduced. Incentives for cost efficiencies are less pressing and, when utilized, are often only sluggishly passed on to consumers in the form of lower sale prices.

      Those who have the vision and daring to enter the market and successfully innovate and create newer or better products than the existing suppliers are offering are stymied or blocked from doing so in the protected sectors of the economy. They are forced to apply their entrepreneurial drive in less-profitable directions or are dissuaded by the political restrictions from even attempting to do so. The product improvements they would have supplied to the consuming public remain invisible “might-have-beens” lost to society.

      Furthermore, as Friedrich A. Hayek especially emphasized, market competition is the great discovery procedure through which it is determined who can produce the better product with the most desired features and qualities and at the lowest possible price at any given time. It is the peaceful market method through which each participant in the social system of division of labor finds his most highly valued use as judged by the relative pattern and intensity of consumer demand for the various goods supplied. Competition’s dynamic quality is that it is a never-ending process. In the arena of exchange, every day offers new opportunities and allows entrepreneurs and innovators to create new opportunities that they are free to test on the market in terms of possible profitability.

      Every political restriction or barrier placed in the way of competition, therefore, closes the door on some potential creativity, risk-taking, and entrepreneurial discovery of more efficient and rational uses of men, materials, and money in the interdependent and mutually beneficial relationships of market specialization and cooperation. The choice is always between market freedom and political constraint, between the competitive process and governmentally created monopoly.

      This general argument in favor of market competition and against politically provided monopoly is no less valid in the arena of money and banking. The participants in the market may choose money they find most advantageous to use, or government can impose the use of a medium of exchange on society and monopolize control over its supply and value. The benefit from market-chosen money is that it reflects the preferences and uses of the exchange participants themselves. Participants in the market process will sort out which commodities offer those qualities and characteristics most useful and convenient in a medium of exchange. As the Austrian economists persuasively demonstrated, while money is one of those social institutions that are “the results of human action but not of human design,” it nonetheless remains the spontaneous composite outcome of multitudes of individual choices freely made by buying and selling in the marketplace.

      The alternative is what the American economist Francis A. Walker referred to in 1887 as “political money.” Political money is one that the government determines shall be used as money and whose supply “is made to depend upon law or the will of the ruler.” He warned that under the best of circumstances the successful management of a government-controlled money would “depend upon an exercise of prudence, virtue and self-control, beyond what is reasonably and fairly to be expected of men in masses, and of rulers and legislators as we find them.” Governments would, in the long run, always be tempted to abuse the printing press for various political reasons.

      But besides the dangers of political mischief, the fact is that the government monetary monopoly prevents the market from easily discovering whether, over time, market participants would find it more advantageous to use some particular commodity or several alternative commodities as different types of media of exchange to serve changing and differing purposes. The “optimal” supply of money becomes an arbitrary decision by the central monetary monopoly authority rather than the more natural market result of the interactions between market demanders desiring to use money for various purposes and market suppliers supplying the amount of commodity money that reflects the profitability of mining various metals and minting them into money-usable forms.

      But commodity money, as history has shown, has its inconveniences in everyday transactions in the market. There are benefits from financial depositories for purposes of safety and lowering the costs of facilitating transactions. But what type of financial and banking institutions would market participants find most useful and desirable under a regime of money and banking freedom? The answer is that we don’t know at this time precisely because government has monopolized the supplying of money; and it imposes, through various state and federal regulations, an institutional straitjacket that prevents the discovery of the actual and full array of preferences and possibilities that a free market in monetary institutions might be able to provide and develop over time.

      The increasing globalization of commerce, trade, and financial intermediation during the last several decades has certainly demonstrated that there is a far greater range of possibilities that market suppliers of these services could provide and for which there are clear and profitable market demands than traditionally thought 20 or 30 years ago. But even in this more vibrant global competitive environment, it remains the case that whatever options have begun to emerge has done so in a restrictive climate of national and international governmental regulations, agreements, and constraints.

      Suppose that monetary and banking freedom were established. What type of banking system would then come into existence? Some advocates of monetary freedom have insisted that a free banking system should be based on a 100 percent commodity money reserve. Others have argued that a free banking system would be based on a form of fractional-reserve banking, with the competitive nature of the banking structure serving as the check and balance on any excessive note issue by individual banks.

      Until monetary and banking freedom is established, we have no way of knowing which of the two alternatives would be the most preferred. This is for the simple reason that under the present government-managed and government-planned monetary and banking system, market competition is not allowed to demonstrate which options suppliers of financial intermediation might find it profitable to offer and which options users of money and financial institutions would decide are the ones best fitting their needs and preferences.

      Given the diversity in people’s tastes and preferences, the differing degrees of risk people are willing to bear for a promised interest return on their money, and the variety of market situations in which different types of monetary and financial instruments might be most useful for certain domestic and international transactions, it probably would be the case that a spectrum of financial institutions would come into existence side by side. At one end of this spectrum would be 100 percent reserve banks that guaranteed complete and immediate redemption of all commodity money deposits, even if every depositor were to appear at that bank within a very short period of time.

      Along the rest of the spectrum would be various fractional-reserve banks at which lower or no fees would be charged for serving as a warehousing facility for deposited commodity money. Their checking accounts might offer different interest payments depending on the fractional-reserve basis on which they were issued and on the degree of risk or uncertainty concerning the banks’ ability to redeem all deposits immediately under exceptional circumstances.

      Some banks might offer both types: they might issue some bank notes and checking accounts that were guaranteed to be 100 percent redeemable on the basis of commodity money deposited against them; and they might issue other bank notes and checking accounts that, under exceptional circumstances, were not 100 percent redeemable.

      And these banks might offer “option clauses” stipulating that if any designated notes or checking accounts were not redeemed on demand for some limited period of time, the note and account holder would receive a compensating rate of interest for the inconvenience and cost to himself.

      Whether most banks would be closer to the 100 percent reserve end of this spectrum or farther from it is not – and cannot be – known until the monetary and banking system is set free from government regulation, planning, and control. As long as the government remains as the monetary monopolist, there is just no way to know all the possibilities that the market could or would generate. Indeed, for all we know, the market might devise and evolve a monetary and banking system different from that conceived even by the most imaginative free-banking advocates.

      Competition is thwarted by government monopoly money, and the creative possibilities that only free competition can discover remain invisible “might- have-beens.” How then can the existing system be moved towards a regime of monetary and banking freedom?

      For a System of Monetary and Banking Freedom

      The great tragedy of the twentieth century was the arrogant and futile belief that man can master, control, and plan society. Man has found it difficult to accept that his mind is too finite to know enough to organize and direct his overall social surroundings according to an overarching design. The famous American journalist, Walter Lippmann, neatly explained the nature of this problem in his 1937 book, “An Inquiry into the Principles of the Good Society”:

      “The thinker, as he sits in his study drawing his plans for the direction of society, will do no thinking if his breakfast has not been produced for him by a social process that is beyond his detailed comprehension. He knows that his breakfast depends upon workers on the coffee plantations of Brazil, the citrus groves of Florida, the sugar fields of Cuba, the wheat farms of the Dakotas, the dairies of New York; that it has been assembled by ships, railroads, and trucks, has been cooked with coal from Pennsylvania in utensils made of aluminum, china, steel, and glass. But the intricacy of one breakfast, if every process that brought it to the table had deliberately to be planned, would be beyond the understanding of any mind. Only because he can count upon an infinitely complex system of working routines can a man eat his breakfast and then think about a new social order. The things he can think about are few compared with those that he must presuppose…. Of the little he has learned, he can, moreover, at any one time comprehend only a part, and of that part he can attend only to a fragment. The essential limitation, therefore, of all policy, of all government, is that the human mind must take a partial and simplified view of existence. The ocean of experience cannot be poured into the bottles of his intelligence…. Men deceive themselves when they imagine that they can take charge of the social order. They can never do more than break in at some point and cause a diversion.”

      Money is one of those institutions that owes its origin and early development to social processes beyond what individual minds could have fully anticipated or comprehended. But money’s evolution has been constantly “diverted” from what would have been its market-determined course by governments and political authorities that saw in its control an ability to plunder the wealth of entire populations.

      Debasement and depreciation of media of exchange through monetary manipulation has been the hallmark of recorded history. To prevent such abuses and their deleterious effects, advocates of freedom supported the gold standard to impose an external check on monetary expansion. Paper money was to be “convertible,” redeemable on demand to banknote and checking account holders at a fixed ratio of redemption.

      But even this limit on government-managed money was eliminated in the twentieth century by the hubris of the central-planning mentality, under which money, too, was to be completely under the control of the monetary central planners as part of the vision of designing and directing the economic affairs of society.

      Monetary central planning is one of the last vestiges of generally accepted out-and-out socialist central planning in the world. The fact is that even if monetary policy could somehow be shielded from the pressures and pulls of ideological and special-interest politics, there is no way to successfully centrally manage the monetary system.

      Government can no more correctly plan for the “optimal” quantity of money or the properly “stabilized” general scale of prices than it can properly plan for the optimal supply and pricing of shoes, cigars, soap, or scissors.

      The best monetary policy, therefore, is no monetary policy at all. The need for monetary policy would be eliminated by abolishing government monopoly control and regulation over the monetary and banking system.

      As Austrian economist Hans Sennholz once concisely expressed it,

      “We seek no reform law, no restoration law, no conversion or parity, no government cooperation: merely freedom…. In freedom, the money and banking industry can create sound and honest currencies, just as other free industries can provide efficient and reliable products. Freedom of money and freedom of banking, these are the principles that must guide our steps.”

      An Agenda for Monetary Freedom

      So what steps might be undertaken to move the American economy in the direction of establishing a regime of monetary freedom? At a minimum, they should include the following:

      1. The repeal of the Federal Reserve Act of 1913, and all complementary and related legislation giving the federal government authority and control over the monetary and banking system.

      2. The repeal of legal-tender laws, that gives government power to specify the medium through which all debts and other financial obligations, public and private, may be settled. Individuals, in their domestic and foreign transactions, would determine through contract the form of payment they mutually found most satisfactory for fulfilling all financial obligations and responsibilities into which they entered.

      3. Repeal all restrictions and regulations on the free entry into the banking business and in the practice of interstate banking.

      4. Repeal all restrictions on the right of private banks to issue their own bank notes and to open accounts denominated in foreign currencies or in weights of gold and silver.

      5. Repeal of all federal and state government rules, laws, and regulations concerning bank-reserve requirements, interest rates, and capital requirements.

      6. Abolish the Federal Deposit Insurance Corporation. Any deposit insurance arrangements and agreements between banks and their customers and between associations of banks would be private, voluntary, and market-based.

      In the absence of government regulation and monopoly control, a free monetary and banking system would exist; it would not have to be created, designed, or supported. A market-based system would naturally emerge, take form, and develop out of the prior system of monetary central planning.

      What would be its shape and structure over time? What innovations and variety of services would a network of free, private banks offer to the public over time? What set of market-determined commodities might be selected as the most convenient and useful media of exchange? What types of money substitutes would be supplied and demanded in a free-market world of commerce and finance? Would many or most banks operate on the basis of fractional or 100% reserves?

      There are no definite answers to these questions, nor can there be. It is deceptive to believe, as Walter Lippmann explained, that we could comprehend and anticipate all the outcomes that will arise from all the market interactions and discovered opportunities that the complex processes of the free society would generate. It is why liberty is so important. It allows for the possibilities that can only emerge if freedom prevails. It’s why monetary freedom, too, must be on the agenda for economic liberty in this new twenty-first century.

      • Complete and utter bs.

        • marxbites permalink

          Sez you.

          Show us a single historical or economic untruth in Ebeling’s statement then.

          • seza….In freedom, the money and banking industry can create sound and honest currencies, just as other free industries can provide efficient and reliable products. Freedom of money and freedom of banking, these are the principles that must guide our steps.”

            there´s ur bs

            Why are we trying to survive in a state of repeated economic collapse instead of progressing toward Mathematically Perfected Currency ?. Because of bankers.

            How can we begin progressing toward Mathematically Perfected Currency and create this for ourselves ?. Kill all the Bankers !

            • marxbites permalink

              The statement already shows and proves that free banking and sound money have worked when not overlorded by Int’l banksters and their now fully puppeted client corporate states who sanction the criminals.

              Again I’m all for expropriating the top wealth of the world to the extent their wealth derived from political corruption vs the market of no special privilege to anyone.

              Wherefore art thou oh gibbet for the BIS and all its evil minions?

              I’m all for that too. No greater continuing crimes against humanity has been perpetrated than by the shylocks and their debt issue fiat that funds all sides of all wars of their own promotion.

              “If my sons did not want wars, there’d be none”

              • The Austrians/Paulians tell you, that they want a return to Constitutional money; and to sound money. No bigger lie can be told!

                Why not? Check out their forums. Gold bugs everywhere; and what they want is NOT for gold to return to its Constitutionally defined value! They want to make out like the Federal Reserve! Speaking about hypocrits!

                Worse then is the lie that they want to “end the Fed.”
                Why? As I have described, the fatal fault of the imposed monetary system is interest; and all further faults merely result from further failure to solve inflation and deflation. The Austrians, and Mr. Paul in particular, not only advocate interest; they advocate ELEVATED RATES OF INTEREST.

                Effectively, what they want is to remove the embossed letters which now say “Federal Reserve Bank,” and replace them with “Ron Paul’s ‘COMPETING’ Bank(s)” — a principle which he refuses to debate, further define, or justify. Of course, any ostensible “competition” would ostensibly, on the contrary, drive interest rates down. But Mr. Paul tells us that we wouldn’t have borrowed ourselves into this debt mess if higher rates of interest had discouraged excessive/reckless borrowing.

                Mr. Paul has never done the math: he tells you that all of you are going to benefit somehow therefore — oh and we so willingly believe this preposterous notion, don’t we? — he tells us we will benefit paying perhaps 17% interest on our homes than 5%. Sounds really like a good idea, doesn’t it? Especially since the rate of interest is the rate of multiplication of artificial indebtedness — higher rates of which instead necessitate greater rates of borrowing to maintain a vital circulation.

                Unfortunately, most people who exalt Austrian “economics” hardly know the first thing about it. They reject math — most of which is little more than counting — as if you could understand otherwise; and they could have possibly determined solution otherwise. In no legitimate discipline or walk of life does such reckless abandonment of principle hold.

                But Mr. Hayek, God of the Austrians tells us why they advocate interest and the current banking model — which are our very problem. See Hayek’s article at Mises org: “A Free Market Monetary System,” I think it’s called. Anyway, he thus justifies interest, that it makes banking “an extremely profitable business.”

                That’s right. There IS no justification, just an outright confession of the motive.

                The beginning of knowledge is the discovery of something we do not understand. Once you understand (MPE) supporting anything else is economic suicide!! The solution to your fate is Mathematically Perfected Economy, ….but will you listen?

                • marxbites permalink


                  Why not? Check out their forums. Gold bugs everywhere; and what they want is NOT for gold to return to its Constitutionally defined value! They want to make out like the Federal Reserve! Speaking about hypocrits!

                  Worse then is the lie that they want to “end the Fed.”
                  Why? As I have described, the fatal fault of the imposed monetary system is interest; and all further faults merely result from further failure to solve inflation and deflation. The Austrians, and Mr. Paul in particular, not only advocate interest; they advocate ELEVATED RATES OF INTEREST.


                  Horse feathers, they want REAL money not defaultable false receipts. They want commodity money to be worth what the market deems it to be. And real money risk capital will be loaned at whatever rate the savings base supports. According to Charles Adams, famous author on the history of taxes, that rate was approx 2-3%.

                  ALL intererst is NOT bad. Its the price we pay to have today what we aren’t willing first to save up for.

                  Interest on debt money from thin air is the real crime we agree upon. And IMO the TRUE definition of usury.

                  Is this some kind of religious fanatism on MPE’s parts?

                  In MPE are we expected to again trust untrustworthy bureaucrats to again promise to stay honest?

                  I really dont care what we barter with, as long as NO ONE but the market of supply/demand adds to the money as needed by production vs press, no matter what is chosen, as were universally accepted gold and silver over thousands of years for their supreme attributes of commodities of intermediary exchange and stores of value.

                  Who’s ONLY failures were it’s interferences by govts and the banksters that rule them, such as the suspensions of redemptions of specie all throughout the 19th and 20th C’s and esp since Nixon’s repudiation for his master & shylock Rockefeller.

                  Ever read A. Jackson’s veto of the 2nd BankUS rechartering?


                  For all his other faults, this was indeed the “shit”.

                  America paid off all her debts, and specie based money itself cost ZERO interest, as was const’l to begin with.

                  No fixed price, just fixed weight & fineness.

                  Nice try but you aren’t making any good arguments based on the reality of the success and prosperity under an unfettered specie std.

                  And despite the bank nationalizations ending free banking during the CW, the 1880’s under the then gold std had the hishest economic growth rates in America’s entire history, and with hardly any nat’l debt whatsoever.

                • marxbites permalink

                  BTW even IF you hate the metals as stores of value, I suggest you get at least SOME no matter where in the world you are.

                  For Au & Ag, and likely other REE will once again be the ONLY and last money “men” standing. It has NEVER not been thus in all of history.

                  IMO silver has the greatest potential to protect what wealth one has earned and saved among whats easily acquired for the time being until the SHTF.

                  • This forum/site is about solution, not protection. Give Chris Martinson a try. Rite up ur alley

        • marxbites permalink


          Besides people’s acquisition of esplly silver is the vast naked short Achilles heel of the banksters with which we as the human race can destroy them. And also allow us to not use their fiat of mass control and impoverishment, ALL voluntarily.

          • Here´s a discussion from late last year between Robert Murphy (AE), and Mike Montagne. If you have the time

  4. marxbites permalink


    3. Their ‘misunderstanding’ of the business cycle
    Yes, Austrian Economics is wrong about the business cycle, their main pride. Their heroes Mises and von Hayek noted that busts usually were preceded by booms. Booms caused by ‘too lax’ credit by the banks. This results in overinvestment, or ‘malinvestment’ after which a corrective bust is unavoidable.

    In this way Austrianism actually makes people call for the bust to happen as soon as possible: the longer it is postponed, they say, the worse it will get. This is not entirely untrue, but considering the easy way deflation can be managed, it amounts to having people call for their own destruction unnecessarily.


    This is pure BS A, the Austrians call for NO interventionist fiat monetary expansions to begin with, DUH!!!!!

    AND they only care for the deflation innovations bring, and NOT from the contraction of currencies as WS did to us by shrinking the money supply by a third.

    They call for NOT reinflating the inflation, but stopping fiat issue and allowing the malinvestments entreprenuers are fooled into to be liquidated.

    As Turgot said “markets level”, IF left alone w/out more interventions to do so.

    I just hope the world doesn’t fall for more of THEIR fiat in a world currency when the SHTF and with even greater powers than they already have, as Dodd-Frank just handed the sobs.

    I’m all for a global Jubilee on debt to shylock, crimes against humanity trials, and the reconfiscation of all they’ve stolen via their false receipts these hundreds of years.

    Problem is they ARE the military & intelligence globally. They OWN every country.

  5. marxbites permalink

    This kinda urinates all over your bogus claims that Rothbard, & Austrians generally, have ANY love of or are useful idiots in service to shylock and its govts of corporate state puppets they LONG have stated they abhor and have endeavoured to expose.

    BTW, Murray is who I thank most for leading me out of my RWR-ite dupedom.

    Repudiating the National Debt
    by Murray N. Rothbard

    In the spring of 1981, conservative Republicans in the House of Representatives cried. They cried because, in the first flush of the Reagan Revolution that was supposed to bring drastic cuts in taxes and government spending, as well as a balanced budget, they were being asked by the White House and their own leadership to vote for an increase in the statutory limit on the federal public debt, which was then scraping the legal ceiling of $1 trillion. They cried because all of their lives they had voted against an increase in public debt, and now they were being asked, by their own party and their own movement, to violate their lifelong principles. The White House and its leadership assured them that this breach in principle would be their last: that it was necessary for one last increase in the debt limit to give President Reagan a chance to bring about a balanced budget and to begin to reduce the debt. Many of these Republicans tearfully announced that they were taking this fateful step because they deeply trusted their president, who would not let them down.

    Famous last words. In a sense, the Reagan handlers were right: there were no more tears, no more complaints, because the principles themselves were quickly forgotten, swept into the dustbin of history. Deficits and the public debt have piled up mountainously since then, and few people care, least of all conservative Republicans. Every few years, the legal limit is raised automatically. By the end of the Reagan reign the federal debt was $2.6 trillion; now it is $3.5 trillion and rising rapidly. And this is the rosy side of the picture, because if you add in “off-budget” loan guarantees and contingencies, the grand total federal debt is $20 trillion.

    Before the Reagan era, conservatives were clear about how they felt about deficits and the public debt: a balanced budget was good, and deficits and the public debt were bad, piled up by free-spending Keynesians and socialists, who absurdly proclaimed that there was nothing wrong or onerous about the public debt. In the famous words of the left-Keynesian apostle of “functional finance,” Professor Abba Lernr, there is nothing wrong with the public debt because “we owe it to ourselves.” In those days, at least, conservatives were astute enough to realize that it made an enormous amount of difference whether — slicing through the obfuscatory collective nouns — one is a member of the “we” (the burdened taxpayer) or of the “ourselves” (those living off the proceeds of taxation).

    Since Reagan, however, intellectual-political life has gone topsy-turvy. Conservatives and allegedly “free-market” economists have turned handsprings trying to find new reasons why “deficits don’t matter,” why we should all relax and enjoy the process. Perhaps the most absurd argument of Reaganomists was that we should not worry about growing public debt because it is being matched on the federal balance sheet by an expansion of public “assets.” Here was a new twist on free-market macroeconomics: things are going well because the value of government assets is rising! In that case, why not have the government nationalize all assets outright? Reaganomists, indeed, came up with every conceivable argument for the public debt except the phrase of Abba Lerner, and I am convinced that they did not recycle that phrase because it would be difficult to sustain with a straight face at a time when foreign ownership of the national debt is skyrocketing. Even apart from foreign ownership, it is far more difficult to sustain the Lerner thesis than before; in the late 1930s, when Lerner enunciated his thesis, total federal interest payments on the public debt were $1 billion; now they have zoomed to $200 billion, the third-largest item in the federal budget, after the military and Social Security: the “we” are looking ever shabbier compared to the “ourselves.”

    To think sensibly about the public debt, we first have to go back to first principles and consider debt in general. Put simply, a credit transaction occurs when C, the creditor, transfers a sum of money (say $1,000) to D, the debtor, in exchange for a promise that D will repay C in a year’s time the principal plus interest. If the agreed interest rate on the transaction is 10 percent, then the debtor obligates himself to pay in a year’s time $1,100 to the creditor. This repayment completes the transaction, which in contrast to a regular sale, takes place over time.

    So far, it is clear that there is nothing “wrong” with private debt. As with any private trade or exchange on the market, both parties to the exchange benefit, and no one loses. But suppose that the debtor is foolish, gets himself in over his head, and then finds that he can’t repay the sum he had agreed on? This, of course is a risk incurred by debt, and the debtor had better keep his debts down to what he can surely repay. But this is not a problem of debt alone. Any consumer may spend foolishly; a man may blow his entire paycheck on an expensive trinket and then find that he can’t feed his family. So consumer foolishness is hardly a problem confined to debt alone. But there is one crucial difference: if a man gets in over his head and he can’t pay, the creditor suffers too, because the debtor has failed to return the creditor’s property. In a profound sense, the debtor who fails to repay the $1,100 owed to the creditor has stolen property that belongs to the creditor; we have here not simply a civil debt, but a tort, an aggression against another’s property.

    In earlier centuries, the insolvent debtor’s offense was considered grave, and unless the creditor was willing to “forgive” the debt out of charity, the debtor continued to owe the money plus accumulating interest, plus penalty for continuing nonpayment. Often, debtors were clapped into jail until they could pay — a bit draconian perhaps, but at least in the proper spirit of enforcing property rights and defending the sanctity of contracts. The major practical problem was the difficulty for debtors in prison to earn the money to repay the loan; perhaps it would have been better to allow the debtor to be free, provided that his continuing income went to paying the creditor his just due.

    As early as the 17th century, however, governments began sobbing about the plight of the unfortunate debtors, ignoring the fact that the insolvent debtors had gotten themselves into their own fix, and they began to subvert their own proclaimed function of enforcing contracts. Bankruptcy laws were passed which, increasingly, let the debtors off the hook and prevented the creditors from obtaining their own property. Theft was increasingly condoned, improvidence was subsidized, and thrift was hobbled. In fact, with the modern device of Chapter 11, instituted by the Bankruptcy Reform Act of 1978, inefficient and improvident managers and stockholders are not only let off the hook, but they often remain in positions of power, debt-free and still running their firms, and plaguing consumers and creditors with their inefficiencies. Modern utilitarian neoclassical economists see nothing wrong with any of this; the market, after all, “adjusts” to these changes in the law. It is true that the market can adjust to almost anything, but so what? Hobbling creditors means that interest rates rise permanently, to the sober and honest as well as the improvident; but why should the former be taxed to subsidize the latter? But there are deeper problems with this utilitarian attitude. It is the same amoral claim, from the same economists, that there is nothing wrong with rising crime against residents or storekeepers of the inner cities. The market, they assert, will adjust and discount for such high crime rates, and therefore rents and housing values will be lower in the inner-city areas. So everything will be taken care of. But what sort of consolation is that? And what sort of justification for aggression and crime?

    In a just society, then, only voluntary forgiveness by creditors would let debtors off the hook; otherwise, bankruptcy laws are an unjust invasion of the property rights of creditors.

    One myth about “debtors'” relief is that debtors are habitually poor and creditors rich, so that intervening to save debtors is merely a requirement of egalitarian “fairness.” But this assumption was never true: in business, the wealthier the businessman the more likely he is to be a large debtor. It is the Donald Trumps and Robert Maxwells of this world whose debts spectacularly exceed their assets. Intervention on behalf of debtors has generally been lobbied for by large businesses with large debts. In modern corporations, the effect of ever-tightening bankruptcy laws has been to hobble the creditor-bondholders for the benefit of the stockholders and the existing managers, who are usually installed by, and allied with, a few dominant large stockholders. The very fact that a corporation is insolvent demonstrates that its managers have been inefficient, and they should be removed promptly from the scene. Bankruptcy laws that keep prolonging the rule of existing managers, then, not only invade the property rights of the creditors; they also injure the consumers and the entire economic system by preventing the market from purging the inefficient and improvident managers and stockholders and from shifting the ownership of industrial assets to the more efficient creditors. Not only that; in a recent law review article, Bradley and Rosenzweig have shown that the stockholders, too, as well as the creditors, have lost a significant amount of assets due to the installation of Chapter 11 in 1978. As they write, “if bondholders and stockholders are both losers under Chapter 11, then who are the winners?” The winners, remarkably but unsurprisingly, turn out to be the existing, inefficient corporate managers, as well as the assorted lawyers, accountants, and financial advisers who earn huge fees from bankruptcy reorganizations.

    In a free-market economy that respects property rights, the volume of private debt is self-policed by the necessity to repay the creditor, since no Papa Government is letting you off the hook. In addition, the interest rate a debtor must pay depends not only on the general rate of time preference but on the degree of risk he as a debtor poses to the creditor. A good credit risk will be a “prime borrower,” who will pay relatively low interest; on the other hand, an improvident person or a transient who has been bankrupt before, will have to pay a much higher interest rate, commensurate with the degree of risk on the loan.

    Most people, unfortunately, apply the same analysis to public debt as they do to private. If sanctity of contracts should rule in the world of private debt, shouldn’t they be equally as sacrosanct in public debt? Shouldn’t public debt be governed by the same principles as private? The answer is no, even though such an answer may shock the sensibilities of most people. The reason is that the two forms of debt-transaction are totally different. If I borrow money from a mortgage bank, I have made a contract to transfer my money to a creditor at a future date; in a deep sense, he is the true owner of the money at that point, and if I don’t pay I am robbing him of his just property. But when government borrows money, it does not pledge its own money; its own resources are not liable. Government commits not its own life, fortune, and sacred honor to repay the debt, but ours. This is a horse, and a transaction, of a very different color.

    For unlike the rest of us, government sells no productive good or service and therefore earns nothing. It can only get money by looting our resources through taxes, or through the hidden tax of legalized counterfeiting known as “inflation.” There are some exceptions, of course, such as when the government sells stamps to collectors or carries our mail with gross inefficiency, but the overwhelming bulk of government revenues is acquired through taxation or its monetary equivalent. Actually, in the days of monarchy, and especially in the medieval period before the rise of the modern state, kings got the bulk of their income from their private estates — such as forests and agricultural lands. Their debt, in other words, was more private than public, and as a result, their debt amounted to next to nothing compared to the public debt that began with a flourish in the late 17th century.

    The public debt transaction, then, is very different from private debt. Instead of a low-time-preference creditor exchanging money for an IOU from a high-time-preference debtor, the government now receives money from creditors, both parties realizing that the money will be paid back not out of the pockets or the hides of the politicians and bureaucrats, but out of the looted wallets and purses of the hapless taxpayers, the subjects of the state. The government gets the money by tax-coercion; and the public creditors, far from being innocents, know full well that their proceeds will come out of that selfsame coercion. In short, public creditors are willing to hand over money to the government now in order to receive a share of tax loot in the future. This is the opposite of a free market, or a genuinely voluntary transaction. Both parties are immorally contracting to participate in the violation of the property rights of citizens in the future. Both parties, therefore, are making agreements about other people’s property, and both deserve the back of our hand. The public credit transaction is not a genuine contract that need be considered sacrosanct, any more than robbers parceling out their shares of loot in advance should be treated as some sort of sanctified contract.

    Any melding of public debt into a private transaction must rest on the common but absurd notion that taxation is really “voluntary,” and that whenever the government does anything, “we” are willingly doing it. This convenient myth was wittily and trenchantly disposed of by the great economist Joseph Schumpeter: “The theory which construes taxes on the analogy of club dues or of the purchases of, say, a doctor only proves how far removed this part of the social sciences is from scientific habits of mind.” Morality and economic utility generally go hand in hand. Contrary to Alexander Hamilton, who spoke for a small but powerful clique of New York and Philadelphia public creditors, the national debt is not a “national blessing.” The annual government deficit, plus the annual interest payment that keeps rising as the total debt accumulates, increasingly channels scarce and precious private savings into wasteful government boondoggles, which “crowd out” productive investments. Establishment economists, including Reaganomists, cleverly fudge the issue by arbitrarily labeling virtually all government spending as “investments,” making it sound as if everything is fine and dandy because savings are being productively “invested.” In reality, however, government spending only qualifies as “investment” in an Orwellian sense; government actually spends on behalf of the “consumer goods” and desires of bureaucrats, politicians, and their dependent client groups. Government spending, therefore, rather than being “investment,” is consumer spending of a peculiarly wasteful and unproductive sort, since it is indulged not by producers but by a parasitic class that is living off, and increasingly weakening, the productive private sector. Thus, we see that statistics are not in the least “scientific” or “value-free”; how data are classified — whether, for example, government spending is “consumption” or “investment” — depends upon the political philosophy and insights of the classifier.

    Deficits and a mounting debt, therefore, are a growing and intolerable burden on the society and economy, both because they raise the tax burden and increasingly drain resources from the productive to the parasitic, counterproductive, “public” sector. Moreover, whenever deficits are financed by expanding bank credit — in other words, by creating new money — matters become still worse, since credit inflation creates permanent and rising price inflation as well as waves of boom-bust “business cycles.”

    It is for all these reasons that the Jeffersonians and Jacksonians (who, contrary to the myths of historians, were extraordinarily knowledgeable in economic and monetary theory) hated and reviled the public debt. Indeed, the national debt was paid off twice in American history, the first time by Thomas Jefferson and the second, and undoubtedly the last time, by Andrew Jackson.

    Unfortunately, paying off a national debt that will soon reach $4 trillion would quickly bankrupt the entire country. Think about the consequences of imposing new taxes of $4 trillion in the United States next year! Another way, and almost as devastating, a way to pay off the public debt would be to print $4 trillion of new money — either in paper dollars or by creating new bank credit. This method would be extraordinarily inflationary, and prices would quickly skyrocket, ruining all groups whose earnings did not increase to the same extent, and destroying the value of the dollar. But in essence this is what happens in countries that hyper-inflate, as Germany did in 1923, and in countless countries since, particularly the Third World. If a country inflates the currency to pay off its debt, prices will rise so that the dollars or marks or pesos the creditor receives are worth a lot less than the dollars or pesos they originally lent out. When an American purchased a 10,000 mark German bond in 1914, it was worth several thousand dollars; those 10,000 marks by late 1923 would not have been worth more than a stick of bubble gum. Inflation, then, is an underhanded and terribly destructive way of indirectly repudiating the “public debt”; destructive because it ruins the currency unit, which individuals and businesses depend upon for calculating all their economic decisions.

    I propose, then, a seemingly drastic but actually far less destructive way of paying off the public debt at a single blow: outright debt repudiation. Consider this question: why should the poor, battered citizens of Russia or Poland or the other ex-Communist countries be bound by the debts contracted by their former Communist masters? In the Communist situation, the injustice is clear: that citizens struggling for freedom and for a free-market economy should be taxed to pay for debts contracted by the monstrous former ruling class. But this injustice only differs by degree from “normal” public debt. For, conversely, why should the Communist government of the Soviet Union have been bound by debts contracted by the Czarist government they hated and overthrew? And why should we, struggling American citizens of today, be bound by debts created by a past ruling elite who contracted these debts at our expense? One of the cogent arguments against paying blacks “reparations” for past slavery is that we, the living, were not slaveholders. Similarly, we the living did not contract for either the past or the present debts incurred by the politicians and bureaucrats in Washington.

    Although largely forgotten by historians and by the public, repudiation of public debt is a solid part of the American tradition. The first wave of repudiation of state debt came during the 1840s, after the panics of 1837 and 1839. Those panics were the consequence of a massive inflationary boom fueled by the Whig-run Second Bank of the United States. Riding the wave of inflationary credit, numerous state governments, largely those run by the Whigs, floated an enormous amount of debt, most of which went into wasteful public works (euphemistically called “internal improvements”), and into the creation of inflationary banks. Outstanding public debt by state governments rose from $26 million to $170 million during the decade of the 1830s. Most of these securities were financed by British and Dutch investors.

    During the deflationary 1840s succeeding the panics, state governments faced repayment of their debt in dollars that were now more valuable than the ones they had borrowed. Many states, now largely in Democratic hands, met the crisis by repudiating these debts, either totally or partially by scaling down the amount in “readjustments.” Specifically, of the 28 American states in the 1840s, 9 were in the glorious position of having no public debt, and 1 (Missouri’s) was negligible; of the 18 remaining, 9 paid the interest on their public debt without interruption, while another 9 (Maryland, Pennsylvania, Indiana, Illinois, Michigan, Arkansas, Louisiana, Mississippi, and Florida) repudiated part or all of their liabilities. Of these states, four defaulted for several years in their interest payments, whereas the other five (Michigan, Mississippi, Arkansas, Louisiana, and Florida) totally and permanently repudiated their entire outstanding public debt. As in every debt repudiation, the result was to lift a great burden from the backs of the taxpayers in the defaulting and repudiating states.

    Apart from the moral, or sanctity-of-contract argument against repudiation that we have already discussed, the standard economic argument is that such repudiation is disastrous, because who, in his right mind, would lend again to a repudiating government? But the effective counterargument has rarely been considered: why should more private capital be poured down government rat holes? It is precisely the drying up of future public credit that constitutes one of the main arguments for repudiation, for it means beneficially drying up a major channel for the wasteful destruction of the savings of the public. What we want is abundant savings and investment in private enterprises, and a lean, austere, low-budget, minimal government. The people and the economy can only wax fat and prosperous when their government is starved and puny.

    The next great wave of state debt repudiation came in the South after the blight of Northern occupation and Reconstruction had been lifted from them. Eight Southern states (Alabama, Arkansas, Florida, Louisiana, North Carolina, South Carolina, Tennessee, and Virginia) proceeded, during the late 1870s and early 1880s under Democratic regimes, to repudiate the debt foisted upon their taxpayers by the corrupt and wasteful carpetbag Radical Republican governments under Reconstruction.

    So what can be done now? The current federal debt is $3.5 trillion. Approximately $1.4 trillion, or 40 percent, is owned by one or another agency of the federal government. It is ridiculous for a citizen to be taxed by one arm of the federal government (the IRS) to pay interest and principal on debt owned by another agency of the federal government. It would save the taxpayer a great deal of money, and spare savings from further waste, to simply cancel that debt outright. The alleged debt is simply an accounting fiction that provides a mask over reality and furnishes a convenient means for mulcting the taxpayer. Thus, most people think that the Social Security Administration takes their premiums and accumulates it, perhaps by sound investment, and then “pays back” the “insured” citizen when he turns 65. Nothing could be further from the truth. There is no insurance and there is no “fund,” as there indeed must be in any system of private insurance. The federal government simply takes the Social Security “premiums” (taxes) of the young person, spends them in the general expenditures of the Treasury, and then, when the person turns 65, taxes someone else to pay the “insurance benefit.” Social Security, perhaps the most revered institution in the American polity, is also the greatest single racket. It’s simply a giant Ponzi scheme controlled by the federal government. But this reality is masked by the Social Security Administration’s purchase of government bonds, the Treasury then spending these funds on whatever it wishes. But the fact that the SSA has government bonds in its portfolio, and collects interest and payment from the American taxpayer, allows it to masquerade as a legitimate insurance business.

    Canceling federal agency-held bonds, then, reduces the federal debt by 40 percent. I would advocate going on to repudiate the entire debt outright, and let the chips fall where they may. The glorious result would be an immediate drop of $200 billion in federal expenditures, with at least the fighting chance of an equivalent cut in taxes.

    But if this scheme is considered too draconian, why not treat the federal government as any private bankrupt is treated (forgetting about Chapter 11)? The government is an organization, so why not liquidate the assets of that organization and pay the creditors (the government bondholders) a pro-rata share of those assets? This solution would cost the taxpayer nothing, and, once again, relieve him of $200 billion in annual interest payments. The United States government should be forced to disgorge its assets, sell them at auction, and then pay off the creditors accordingly. What government assets? There are a great deal of assets, from TVA to the national lands to various structures such as the Post Office. The massive CIA headquarters at Langley, Virginia, should raise a pretty penny for enough condominium housing for the entire work force inside the Beltway. Perhaps we could eject the United Nations from the United States, reclaim the land and buildings, and sell them for luxury housing for the East Side gliterati. Another serendipity out of this process would be a massive privatization of the socialized land of the western United States and of the rest of America as well. This combination of repudiation and privatization would go a long way to reducing the tax burden, establishing fiscal soundness, and desocializing the United States.

    In order to go this route, however, we first have to rid ourselves of the fallacious mindset that conflates public and private, and that treats government debt as if it were a productive contract between two legitimate property owners.

  6. On this site, I am reading two reproaches vis-a-vis banks and the banking system:

    – They cause a scarcity of money, and therefore deflation.
    – They create ever more money at will for which they demand interest.

    How can both these statements be true? What are they actually doing: cause there to be less money, or more?

    • they cause the boom bust cycle: inflations alternated with deflations.

        • by not lending they deflate. Nowadays they have BIS and the Central Banks organize it, for instance with ‘regulation’ or ‘lack of regulation’, or raising capital reserve requirements. Or by creating derivatives that they know will create insolvency. In earlier times banks just wrote ‘call in loans at this or that date’ in Banker Magazine.

          This gives them a number of goodies: 1. during deflation only the rich have money, which gives them a chance to buy up everything for almost nothing. Hence the rich say: during depression assets return to their rightful owner. 2. the problems of deflations gives them a chance to push through the ‘solutions’ they wanted anyway: the problem-reaction-solution paradigm, or hegelian dialectic. In Europe this is clearly visible in their desire to kick a fiscal union (EU) through the throat of an unwilling population. 3. The chaos is often used to foment war. the Great Depression is the best example of this. Since they seem to want WW3, the timing for the current Even Greater Depression seems about right.

          • marxbites permalink

            “Their outright lies
            1. Deflation is declining prices. Great, right?
            This is a lie, not because this definition is not fairly widely used, but because Austrian Economists define inflation as a growing money supply. So this is a clear ‘inconsistency’, but just a little too comfortable for them not to be considered an outright lie.

            Often those mentioning this will say: prices decline because of technology. Rothbard was famous for this nonsense. Sure they sometimes decline because of technology. For instance cell phones and computers. But that has nothing to do with deflation in the real sense of the word and Austrian Economists know it. How do I know they do? Because they continue this nonsense, even when corrected.”

            THIS, is an outright lie.

            Tech HASN’T raised all humanity’s boats since serfs became property owners?

            Quite laughable indeed.

            Austrians are NOT pro-elites, they are pro non-aggression and pro voluntary free markets in all, including currency.

  7. yall gonna like this

    • bourchakoun permalink

      Anthony – one question on a different note: Have you tried to contact Mike Adams or Alex Jones for an interview on their respective shows? They both clearly favor – who knows – willingly or unwittingly the Austrian Economics doctrine. A meeting with you, also Karl Denninger as well as Bill Still would do good. Or expose anyone for what he really is – an erring man or a very very clever agent.

      Of course social credit is superior to the Greenback approach, but even social credit has some fallacies – not monetary – more spiritual and psychological as it might induce an even greater slacker mentaliy. But that is of course only hypothetical, because when being able to solve the money issue, a reboot of medicine, suppressed (unprofitable for them) science and technology would follow in suit. The same would go for social and psychological sciencies….


      • Hi Bourchakoun,

        I fear I burned my bridges regarding Jones long ago 🙂

        There are a couple of articles on this site that leave little to guess about my impression of his integrity………

        Your point about SC is well understood. It’s the same basic argument against a Basic Income.

        In the old days people used to live off the land. They ‘worked’ a couple of hours a day to catch a rabbit or harvest some fruits. That’s all.

        In the middle ages, a man only worked 14 weeks per year to feed his family. The rest of the time he studied, travelled throughout Europe, or voluntarily worked on his local Cathedral project. Did you know that?

        Mankind was not created to slave away all day.

        Because of scarce money through usury we are continuously stressed and fearing we are not working hard enough.

        Take usury away and the great relaxation can begin.

        • bourchakoun permalink

          Well – your articles on Jones might be out there, but who knows – I guess that you have not tried? Mike Adams of Naturalnews is an option too. Anyway – I was just wondering, because I believe that there is a chance that those guys are not agents, but erring men, but it would not surprise me either way.

          Well – I forgot about the Middle Ages – actually with advanced technology and technological unemployment as they call it, 14 weeks should be the norm anyway. I know traders, who work 2 months and then travel for the next month. That is an option too – ideally occupations not spent trading, but teaching, science and researching, healing, improving production and administration. Either way – such a system can probably deal with full-time slackers in due time, as that kind of lifestile does not leave the people really happy anyway. So guess – you are right.

          Still would be great for you to try real contact at those venues – Mike Adams and Jones – and see what happens. Please let us know what the response was if any 🙂

          Remember – the Republic Radio viewpoint was completely unaware of the NWO for a long long time…..

        • “Because of scarce money through usury we are continuously stressed and fearing we are not working hard enough.”

          OK, so let’s forbid the so much hated fractional reserve banking so the money supply shrinks to less than a tenth of what it is now, and make the situation far worse.

          • Fractional reserve banking is indeed ridiculous. The most bizarre way of creating credit imaginable. Its ways serve only one aim: obscuring the fact they create all the money we borrow.

            Check the article on Mutual Credit how all the credit that we will ever need can be created at close to zero cost without any reservers, deposits or savers.

            the problem is not money creation. The problem is charging 300k interest over 30 years over a freshly printed 200k mortgage.

          • bourchakoun permalink

            The famous Obamanesque I give them 1 trilllion and they make 10 trillion out of it did not even work for 1 trillion (more like 150 bio. $ was put back into the credit system by the banks – and even that number is unclear, whether it went only to their cronies). Even in a Bill-Still-System, where 100% of money is issued through the state and given to the banks and also spent by the state into existence for ALL state expenses – the banks and companies could make money scarce by refusing to invest or lend – the banking families have enough reserves left to not earn anything for years and decades until the people starve and demand THEIR system back. However in many countries there are many banks not completely under their control as in Germany, Austria, Switzerland with local “Sparkassen” as well as credit unions in many States and there are many ways in order to issue money through the people through a mixture of Greenback state spending and social credit – Canada did it like that during the depression time. Introducing a de-facto-tax on money even at a modest degree of 2-3% would also help investments.

            Even Milton Friedman stated in private conversations that a real reform must include the abolishment of the Fractional Resere system.

            • marxbites permalink

              Friedman even capitulated to the Austrians before he died too, who have always seen unbacked fractional fiat as the property theft it certainly is, and prime enabler of the violent empires of welfare/warfare statism.

              • You still don’t get it marxbites. Have you read the article about the gary north’s 50 year lie?

                That’s the essence my friend; that’s what it is all about.

                It matters not what we use as money. It matters not what backs the money.

                It matters what we pay for the money.

                • bourchakoun permalink

                  And I can bet my life that neither Warren Buffett, Bill Gates and none of the Rockefeller, Rothschild, Li, Van Dyun etc. families will ever meet Steve Jobs’ fate. You either are born at the top or you do the utmost to further the agenda and are thus more “valuable” to them. Buffett – money laundering and furthering the financial agenda and Gates with vaccines, depopulation, GMO etc. There are many ways to the top – accumulating wealth is just the first step. Quite a few billionaires who know about the NWO, but do not actively work for them, are leaving the US right now.

              • bourchakoun permalink

                What Friedman proposed in public and what in private was completely different – I was told by someone who was in contact with him privately. The real Money Power agents know about the financial scams of fractional reserve banking, vaccination and medical scams – they avoid those things for themselves and their families and propose it for all the unwashed masses below. Interest rate fractional reserve generation system is a long-term pyramid scam, which must fall sooner or later – sometimes certain countries can shift and bankrupt others in order to prolong the scam, but in the end they fail and the money power is left with all assets and the people are holding the empty bag – camping in the field while their houses are empty and jobs have left the country with 20% unemployment.

                Their long-term plan is going swell – read the Agenda 21 of the UN. The Big City States should replace all Countries by 2050 to 2070 – so far the alternatives have made only minor dents in their plans. Financial reform – zero progress, small victory at keeping at least high-level-nutrients available and fluoridization partly off, some minor setbacks for them at selling Syria, Kony 2012 and the like – but these are just cosmetics. In 20 years blogs like this will likely fall into the category of Authority Defiance Disorder – just one agent needs to spawn some violent desires and this thing gets closed and Anthony gets a visit by the AIVD (the Netherlands Homeland Security service).
                Recently the first people were fined and arrested for some negative comments at Facebook or twitter in the UK.

                It certainly does not look good – and as far as the money issue is concerned even most “awake ” people out there suck up all the money-power propaganda.

                • Hey! Are you Dutch?

                  This certainly is a prescient comment…….

                  • bourchakoun permalink

                    Nope – though I spent a couple of summers in the Netherlands and like the country quite a lot.

                    The global secret services demand new powers and as things will get tougher, they will have to clamp down on the internet sooner or later. Personal ID for internet login is already proposed, websites already are getting closed down, people arrested for Facebook and twitter comments. During the Egypt “revolutions” they shut down Facebook as well as some of the local websites, to make communication more difficult.

                    Enjoy the “freedoms” while we can and enlarge their personality-profile of each of US while we do it 🙂 The internet is a two-edged-sword – total information and absolute profiling of every citizen like never before.

                • marxbites permalink


                  “The real Money Power agents know about the financial scams of fractional reserve banking, vaccination and medical scams..”

                  KNOW about it? Hell they created it ALL, right?

                  Whether the “Protocals” were authentic or not, the result is a pure carbon copy of that stated agenda to a T.

                  • bourchakoun permalink

                    Most agents are only working for them and often it is up to them to find out about a lot of things. A politician, scientist or even high-level administrator might be working for them at some foundation, UN, CFR and the like and still vaccinate and food-poison his kids (MSG, Sweeteners, GMO, fluoride-tablets 🙂 etc.), though usually they come in contact with people who enlighten them on those subjects sooner or later. A banker knows about the financial scam, but might be unaware of the medical scam and a high-level doctor vice-versa. If they do not find out – then they do not deserve to survive according to the Illuminati doctrine – it is not as if they have much brotherly love left between each other – they only work together – mostly against all of the unwashed masses, who were so pathetic and unable to scrap together 500 Mio. $ net wealth minimum.

        • Todd Altman permalink

          Anthony, I encourage you to try rebuilding that burnt bridge (as Mark Dice did in recent months), because Alex is not nearly as evil as you make him out to be. I myself find myself SCREAMING at my computers speakers at times when he starts parroting Austrian School talking points, but I still know the difference between (a) a self-obsessed sociopath and (b) someone who, despite being misguided on certain economic issues, is nevertheless sincerely interested in making the world a better place for everyone, when I see it. And I’m convinced Alex falls in the latter category, not the former.

    • bourchakoun permalink

      Yes – Steve Jobs died of stupid cancer. Medical Scam effects people even more directly than financial scam. Only few owners and merited high-level serfs deserve Illuminati-high-level health care, which is actually based on orthomolecular medicine with technological improvements anyway. Steve Jobs could have saved himself even in the Netherlends, where there is at least one clinic and quite a few orthomolecular doctors – 100.000 mg Vitamin C given intravenously (works like 1.2 Mio. to 1.6 Mio. mg vitamin C orally) 3-4 times a week plus a concoction of herbs of ESSIAC AND HOXSEY recipy (freely available), plus supplements and change of diet for 12 weeks would have likely healed him.
      Death of a loved one hurts more than financial ripoff, though in countries like the US it goes hand in hand bankrupting the people before death.
      Anyway – a bit off the topic – I respect your efforts and in future your life-threatening efforts 🙂

  8. marxbites permalink

    A Short History of US Credit Defaults
    Mises Daily: Friday, July 15, 2011 by John S. Chamberlain

    On July 13th, the president of the United States angrily walked out of ongoing negotiations over the raising of the debt ceiling from its legislated maximum of $14.294 trillion dollars. This prompted a new round of speculation over whether the United States might default on its financial obligations. In these circumstances, it is useful to recall the previous instances in which this has occurred and the effects of those defaults. By studying the defaults of the past, we can gain insights into what future defaults might portend.

    The Continental Currency Default of 1779
    The first default of the United States was on its first issuance of debt: the currency emitted by the Continental Congress of 1775. In June of 1775 the Continental Congress of the United States of America, located in Philadelphia, representing the 13 states of the union, issued bills of credit amounting to 2 million Spanish milled dollars to be paid four years hence in four annual installments. The next month an additional 1 million was issued. A third issue of 3 million followed. The next year they issued an additional 13 million dollars of notes. These were the first of the “Continental dollars,” which were used to fund the war of revolution against Great Britain. The issues continued until an estimated 241 million dollars were outstanding, not including British forgeries.

    Congress had no power of taxation, so it made each of the several states responsible for redeeming a proportion of the notes according to population. The administration of these notes was delegated to a “Board of the Treasury” in 1776. To refuse the notes or receive them below par was punishable by having your ears cut off and other horrible penalties.

    The notes progressively depreciated as the public began to realize that neither the states nor their Congress had the will or capacity to redeem them. In November of 1779, Congress announced a devaluation of 38.5 to 1 on the Continentals, which amounted to an admission of default. In this year refusal to accept the notes became widespread, and trade was reduced to barter, causing sporadic famines and other privations.

    Eventually, Congress agreed to redeem the notes at 1,000 to 1. At a rate of 0.82 troy ounces to the Spanish milled dollar and $36 (2011) dollars to the troy ounce of silver, this first default resulted in a cumulative loss of approximately $7 billion dollars to the American public.

    Benjamin Franklin characterized the loss as a tax. Memory of the suffering and economic disruption caused by this “tax” and similar bills of credit issued by the states influenced the contract clause of the Constitution, which was adopted in 1789:

    No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts.

    The Default on Continental Domestic Loans
    In addition to its currency issuance, the Continental Congress borrowed money both domestically and abroad. The domestic debt totaled approximately $11 million Spanish dollars. The interest on this debt was paid primarily by money received from France and Holland as part of separate borrowings. When this source of funding dried up, Congress defaulted on its domestic debt starting on March 1, 1782. Partial satisfaction of these debts was made later by accepting the notes for payments of taxes and other indirect considerations. By the Funding Act of 1790, Congress repudiated these loans entirely, but offered to convert them to new ones with less favorable terms, thereby memorializing the default in the form of a Federal law.

    The Greenback Default of 1862
    After the Revolutionary War, the Congress of the United States made only limited issuance of debt and currency, leaving the problems of public finance largely to the states and private banks. (These entities defaulted on a regular basis up to the Panic of 1837, in which a crescendo of state defaults led to the invention of the term “repudiation of debts.”) In August of 1861, this balance between local and federal finance switched forever when the Civil War induced Congress to create a new currency which became known as the “greenback” due to the green color of its ink. The original greenbacks were $60 million in demand notes in denominations of $5, $10, and $20 which were redeemable in specie at any time at a rate of 0.048375 troy ounces of gold per dollar. Less than five months later, in January of 1862, the US Treasury defaulted on these notes by failing to redeem them on demand.

    After this failure, the Treasury made subsequent issues of greenbacks as “legal-tender” notes which were not redeemable on demand, except through foreign exchange, and could not be used to pay customs duties. Depending on the fortunes of war, these notes traded at a discount ranging from 20 percent to 40 percent. By the stratagem of monetizing this currency with bonds and paying only the interest on those bonds in gold acquired through customs fees, Lincoln’s party financed the Civil War with no further defaults.

    The Liberty Bond Default of 1934
    The financing of the United States government stepped up to a whole new level upon its entry into the Great War, now known as “World War I.” The new enterprises of the government included merchant-fleet maintenance and operation, production of ammunition, feeding and equipping soldiers entirely at its own expense, and many other expensive things it had never done before or done only on a much smaller scale.

    To finance these activities, Congress issued a series of debentures known as “Liberty Bonds” starting in 1917. The preliminary series were convertible into issues of later series at progressively more favorable terms until the debt was rolled into the fourth Liberty Bond, dated October 24, 1918, which was a $7 billion dollar, 20-year, 4.25 percent issue, payable in gold at a rate of $20.67 per troy ounce.

    By the time Franklin Roosevelt entered office in 1933, the interest payments alone were draining the treasury of gold; and because the treasury had only $4.2 billion in gold it was obvious there would be no way to pay the principal when it became due in 1938, not to mention meet expenses and other debt obligations. These other debt obligations were substantial. Ever since the 1890s the Treasury had been gold short and had financed this deficit by making new bond issues to attract gold for paying the interest of previous issues. The result was that by 1933 the total debt was $22 billion and the amount of gold needed to pay even the interest on it was soon going to be insufficient.

    In this exigency Roosevelt decided to default on the whole of the domestically-held debt by refusing to redeem in gold to Americans and devaluing the dollar by 40 percent against foreign exchange. By taking these steps the Treasury was able to make a partial payment and maintain foreign exchange with the critical trade partners of the United States.

    If we price gold at the present-day value of $1,550 per troy ounce, the total loss to investors by the devaluation was approximately $640 billion in 2011 dollars. The overall result of the default was to intensify the depression and trade reductions of the 1930s and to contribute to fomenting World War II.

    The Momentary Default of 1979
    The Treasury of the United States accidentally defaulted on a small number of bills during the 1979 debt-limit crisis. Due to administrative confusion, $120 million in bills coming due on April 26, May 3, and May 10 were not paid according to the stated terms. The Treasury eventually paid the face value of the bills, but nevertheless a class-action lawsuit, Claire G. Barton v. United States, was filed in the Federal court of the Central District of California over whether the treasury should pay additional interest for the delay. The government decided to avoid any further publicity by giving the jilted investors what they wanted rather than ride the high horse of sovereign immunity. An economic study of the affair concluded that the net result was a tiny permanent increase in the interest rates of T-bills.

    What Will Happen in August of 2011?
    Many people are wondering about the possibility of a default by the Treasury on August 3, 2011, when, according to the Treasury’s projections, it will no longer be able to meet all expenses without additional borrowing.

    In this event, it is unlikely a default will occur. Historically, governments prioritize debt service above all other expenses. If the expansion of funds via debt becomes impossible, the Treasury will cease paying other expenses first, starting with “nonessential” discretionary expenditures, and then move on to mandatory expenditures and entitlements as a last resort.
    In extremis, what will happen is that all the losses will be foisted onto the Federal Reserve. The Fed holds something on the order of $1.6 trillion in debt issued by the Treasury of the United States. By having the Federal Reserve purchase blocks of Treasury debt and defaulting on these non-investor-held securities, the United States can postpone a default against real investors essentially forever.

  9. “AUSTRIANS AREN’T, never have been and never will be. They DETEST the banksters and their impoverishing fiat from thin air PLUS interest.”

    they don’t detest the bankers: it’s all a total charade. The bankers LOVE gold.

    The Bankers don’t care whether we pay interest over Gold or over Paper. They want the interest,that’s all. This is the basic lie of Austrianism, as Gary North has been defending it for 50 years. Read this:
    Gary North, the Lie he has been sitting on for 50 years

    Here’s why the bankers LOVE Gold as currency

    • marxbites permalink

      There is a HUGE difference for being rightly compensated for the opportunity costs of loaning one’s REAL risk money at interest, as opposed to loaning costless debt money fiat at interest of the shylocks, Mon Ami.

      One is voluntary, the other is theft through force.

      • that’s the hoax marxbites.

        They own all the gold. They couldn’t care less if they rake in through a Gold monopoly or a paper monopoly.

        Free market for currencies is also a hoax, in the Austrian sense anyway, because a really free market would see no gold circulate.

        But the ‘free market’ the Daily Bell etc are selling will be enforced by the Trillions behind the Money Power and they will force a gold monopoly through monopoly capitalism.

  10. hi Marxbites!
    Well, you certainly confirmed my take on their positions!

    But it’s all nonsense: do you really believe that the tanking housing market is doing anybody any good? Except the few billionaires who are buying?

    nobody else has the purchasing power my friend: they are suffocating in debt, worsened by the deflation.

    You fell for it. Not to worry, just get real.

  11. Contracts are always set in nominal terms, not in real terms. So when real prices change, there are winners and losers. When prices go up, sellers are winners as are debtors. Buyers are losers, as are creditors. When prices go down, the sellers and the debtors turn into losers. So beyond any real economy effects inflation has on business through accounting, inflation and deflation act as transfers of income, creating winners and losers.

    Despite perceptions that the Austrians were deflationists, Friedrich von Hayek famously said: “I am not only against inflation but I am also against deflation.” As such, the goal of economic policy making is to prevent price volatility – to prevent levels of inflation or deflation.

    Only MPE accomplishes his.

    • MPE accomplishes price stability, although I don’t mind really about inflation.

      But the Austrians ARE Deflationists, whatever von Hayek said 50 years ago. Just look at Marx Bites’s comment.

      • marxbites permalink

        They R NOT deflationists EXCEPT for the GOOD kind of deflation that productivity innovations bring.

        There are TWO KINDS Anthony, the GOOD as above, or the bad that ALWAYS results from monetary expansions, eg, the proverbial bust.

        • so why was Ron Paul going to take 1 trillion out of the budget, knowing full well it would destroy the economy?

          • marxbites permalink

            No it wouldn’t Anthony. It has to be borrowed from shylock, PLUS interest.

            Our current debt alone is 16T.

            Better to borrow the dollar into total worthlessness is it? Being we only have about 4% left of the 1932 dollar’s value left to depreciate to ZERO.

            SPENDING via borrowing vs production/savings is the entire world’s MAIN problem.

            Austrians DESPISE shylock with a passion. Rothbard absolutely HATED the Rockefellers and their ilk, and spent his entire career exposing the nexus between power and American policies PROVING their disparate power over govt that literally negates our own.

            • I know that this is your position Marxbites. I understand, I’m not looking to aggravate

              But the problem is there: read the why bankers love gold story and also top ten lies and mistakes of austrian economics.

              And, while you’re at it: how the rockefellers and the volker fund financed Mises, Hayek, rothbard, gary north and all the rest of them.

              It’s all there. Austrianism denies usury is a problem. They want to have us pay interest for gold. In gold.

              • marxbites permalink

                Lets say I have a lawn mower, that for illustration only, cost me $200 and has a useful lifespan of 200 hrs (made in China right?).

                Since I dont use it every day, it occurs to me that I might rent it out at a few percent more than the $1/hour it cost me.

                My neighbor who’s own mower is in the shop is eager to voluntarily rent mine by the hr while his is being repaired.

                Where’s a single smidgeon of immorality in the above arrangement?

                Why is it not the same as if I loaned my neighbor the money to get his fixed and he was willing to pay me back 5% more then I lent him with zero coercion?

                IMO ALL interest is NOT usury, just when its leveled upon money shylock creates from ZERO production or with any real value INVOLUNTARILY, eg by state force.

            • “Rothbard absolutely HATED the Rockefellers and their ilk”

              Are you sure about that? Maybe he was simply a good actor…


              And have a look at this:

              • the spam filter is after you TTU, I don’t know why!

              • marxbites permalink

                Have YOU listened to, or read, hundreds of hours of Rothbards audiobooks and scholarship like I have?

                I rather doubt it.

                Here’s a taste of the excellent essay that was most responsible for lifting the power elite scales from my own long duped eyes. See if you can detect ANY slack Murray gives these SOBs whatsoever please.


                Wall Street, Banks, and American Foreign Policy
                by Murray N. Rothbard

                Businessmen or manufacturers can either be genuine free enterprisers or statists; they can either make their way on the free market or seek special government favors and privileges. They choose according to their individual preferences and values. But bankers are inherently inclined toward statism.

                Commercial bankers, engaged as they are in unsound fractional reserve credit, are, in the free market, always teetering on the edge of bankruptcy. Hence they are always reaching for government aid and bailout.

                Investment bankers do much of their business underwriting government bonds, in the United States and abroad. Therefore, they have a vested interest in promoting deficits and in forcing taxpayers to redeem government debt. Both sets of bankers, then, tend to be tied in with government policy, and try to influence and control government actions in domestic and foreign affairs.

                In the early years of the 19th century, the organized capital market in the United States was largely confined to government bonds (then called “stocks”), along with canal companies and banks themselves. Whatever investment banking existed was therefore concentrated in government debt. From the Civil War until the 1890s, there were virtually no manufacturing corporations; manufacturing and other businesses were partnerships and had not yet reached the size where they needed to adopt the corporate form. The only exception was railroads, the biggest industry in the U.S. The first investment banks, therefore, were concentrated in railroad securities and government bonds.

                The first major investment-banking house in the United States was a creature of government privilege. Jay Cooke, an Ohio-born business promoter living in Philadelphia, and his brother Henry, editor of the leading Republican newspaper in Ohio, were close friends of Ohio U.S. Senator Salmon P. Chase. When the new Lincoln Administration took over in 1861, the Cookes lobbied hard to secure Chase the appointment of Secretary of the Treasury. That lobbying, plus the then enormous sum of $100,000 that Jay Cooke poured into Chase’s political coffers, induced Chase to return the favor by granting Cooke, newly set up as an investment banker, an enormously lucrative monopoly in underwriting the entire federal debt.

                Cooke and Chase then managed to use the virtual Republican monopoly in Congress during the war to transform the American commercial banking system from a relatively free market to a National Banking System centralized by the federal government under Wall Street control. A crucial aspect of that system was that national banks could only expand credit in proportion to the federal bonds they owned – bonds which they were forced to buy from Jay Cooke.

                Jay Cooke & Co. proved enormously influential in the post-war Republican administrations, which continued their monopoly in under-writing government bonds. The House of Cooke met its well-deserved fate by going bankrupt in the Panic of 1874, a failure helped along by its great rival, the then Philadelphia-based Drexel, Morgan & Co.

                J.P. Morgan

                After 1873, Drexel, Morgan and its dominant figure J.P. Morgan became by far the leading investment firm in the U.S. If Cooke had been a “Republican” bank, Morgan, while prudently well connected in both parties, was chiefly influential among the Democrats. The other great financial interest powerful in the Democratic Party was the mighty European investment-banking house of the Rothschilds, whose agent, August Belmont, was treasurer of the national Democratic party for many years.

                The enormous influence of the Morgans on the Democratic administrations of Grover Cleveland (1884–88, 1892–96) may be seen by simply glancing at their leading personnel. Grover Cleveland himself spent virtually all his life in the Morgan ambit. He grew up in Buffalo as a railroad lawyer, one of his major clients being the Morgan-dominated New York Central Railroad. In between administrations, he became a partner of the powerful New York City law firm of Bangs, Stetson, Tracey, and MacVeagh. This firm, by the late 1880s, had become the chief legal firm of the House of Morgan, largely because senior partner Charles B. Tracey was J.P. Morgan’s brother-in-law. After Tracey died in 1887, Francis Lynde Stetson, an old and close friend of Cleveland’s, became the firm’s dominant partner, as well as the personal attorney for J.P. Morgan. (This is now the Wall St. firm of Davis, Polk, and Wardwell.)

                Grover Cleveland’s cabinets were honeycombed with Morgan men, with an occasional bow to other bankers. Considering those officials most concerned with foreign policy, his first Secretary of State, Thomas F. Bayard, was a close ally and disciple of August Belmont; indeed, Belmont’s son, Perry, had lived with and worked for Bayard in Congress as his top aide. The dominant Secretary of State in the second Cleveland Administration was the powerful Richard Olney, a leading lawyer for Boston financial interests, who have always been tied in with the Morgans, and in particular was on the Board of the Morgan-run Boston and Maine Railroad, and would later help Morgan organize the General Electric Company.

                The War and Navy departments under Cleveland were equally banker-dominated. Boston Brahmin Secretary of War William C. Endicott had married into the wealthy Peabody family. Endicott’s wife’s uncle, George Peabody, had established a banking firm which included J.P. Morgan’s father as a senior partner; and a Peabody had been best man at J.P.’s wedding. Secretary of the Navy was leading New York City financier William C. Whitney, a close friend and top political advisor of Cleveland’s. Whitney was closely allied with the Morgans in running the New York Central Railroad.

                Secretary of War in the second Cleveland Administration was an old friend and aide of Cleveland’s, Daniel S. Lamont, previously an employee and protégé of William C. Whitney. Finally, the second Secretary of the Navy was an Alabama Congressman, Hilary A. Herbert, an attorney for and very close friend of Mayer Lehman, a founding partner of the New York mercantile firm of Lehman Brothers, soon to move heavily into investment banking. Indeed, Mayer’s son, Herbert, later to be Governor of New York during the New Deal, was named after Hilary Herbert.

                The great turning point of American foreign policy came in the early 1890s, during the second Cleveland Administration. It was then that the U.S. turned sharply and permanently from a foreign policy of peace and non-intervention to an aggressive program of economic and political expansion abroad. At the heart of the new policy were America’s leading bankers, eager to use the country’s growing economic strength to subsidize and force-feed export markets and investment outlets that they would finance, as well as to guarantee Third World government bonds. The major focus of aggressive expansion in the 1890s was Latin America, and the principal Enemy to be dislodged was Great Britain, which had dominated foreign investments in that vast region.

                In a notable series of articles in 1894, Bankers’ Magazine set the agenda for the remainder of the decade. Its conclusion: if “we could wrest the South American markets from Germany and England and permanently hold them, this would be indeed a conquest worth perhaps a heavy sacrifice.”

                Long-time Morgan associate Richard Olney heeded the call, as Secretary of State from 1895 to 1897, setting the U.S. on the road to Empire. After leaving the State Department, he publicly summarized the policy he had pursued. The old isolationism heralded by George Washington’s Farewell Address is over, he thundered. The time has now arrived, Olney declared, when “it behooves us to accept the commanding position… among the Power of the earth.” And, “the present crying need of our commercial interests,” he added, “is more markets and larger markets” for American products, especially in Latin America.

                Good as their word, Cleveland and Olney proceeded belligerently to use U.S. might to push Great Britain out of its markets and footholds in Latin America. In 1894, the United States Navy illegally used force to break the blockade of Rio de Janeiro by a British-backed rebellion aiming to restore the Brazilian monarchy. To insure that the rebellion was broken, the U.S. Navy stationed war-ships in Rio harbor for several months.

                During the same period, the U.S. government faced a complicated situation in Nicaragua, where it was planning to guarantee the bonds of the American Maritime Canal Company, to build a canal across the country. The new regime of General Zelaya was threatening to revoke this canal concession; at the same time, an independent reservation, of Mosquito Indians, protected for decades by Great Britain, sat athwart the eastern end of the proposed canal. In a series of deft maneuvers, using the Navy and landing the Marines, the U.S. managed to bring Zelaya to heel and to oust the British and take over the Mosquito territory…………

                Cont at


                This is LOADED with what the mudstream media and academe NEVER EVER reveal to us. His Rockefeller stuff comes later, but most all his work is 100% critical of ALL power elites, the MAIN targets of his voluminous ANTI-STATIST scholarship.

              • marxbites permalink

                Here’s more.

                See how “MUCH” Murray “LOVES” these criminals do ya now?

                Rockefeller, Morgan, and War
                Mises Daily: Tuesday, November 01, 2011 by Murray N. Rothbard

                [Wall Street, Banks, and American Foreign Policy (1984)]

                During the 1930s, the Rockefellers pushed hard for war against Japan, which they saw as competing with them vigorously for oil and rubber resources in Southeast Asia and as endangering the Rockefellers’ cherished dreams of a mass “China market” for petroleum products. On the other hand, the Rockefellers took a noninterventionist position in Europe, where they had close financial ties with German firms such as I.G. Farben and Co., and very few close relations with Britain and France.
                The Morgans, in contrast, as usual deeply committed to their financial ties with Britain and France, once again plumped early for war with Germany, while their interest in the Far East had become minimal. Indeed, US ambassador to Japan Joseph C. Grew, former Morgan partner, was one of the few officials in the Roosevelt administration genuinely interested in peace with Japan.

                World War II might therefore be considered, from one point of view, as a coalition war: the Morgans got their war in Europe, the Rockefellers theirs in Asia. Such disgruntled Morgan men as Lewis W. Douglas and Dean G. Acheson (a protégé of Henry Stimson), who had left the early Roosevelt administration in disgust at its soft-money policies and economic nationalism, came happily roaring back into government service with the advent of World War II. Nelson A. Rockefeller, for his part, became head of Latin American activities during World War II, and thereby acquired his taste for government service.

                After World War II, the united Rockefeller–Morgan–Kuhn, Loeb eastern Establishment was not allowed to enjoy its financial and political supremacy unchallenged for long. “Cowboy” Sun Belt firms, maverick oil men and construction men from Texas, Florida, and southern California began to challenge the eastern Establishment “Yankees” for political power. While both groups favor the Cold War, the Cowboys are more nationalistic, more hawkish, and less inclined to worry about what our European allies are thinking. They are also much less inclined to bail out the now Rockefeller-controlled Chase Manhattan Bank and other Wall Street banks that loaned recklessly to Third World and Communist countries and expect the US taxpayer — through outright taxes or the printing of US dollars — to pick up the tab.

                It should be clear that the name of the political party in power is far less important than the particular regime’s financial and banking connections. The foreign-policy power for so long of Nelson Rockefeller’s personal foreign affairs adviser, Henry A. Kissinger, a discovery of the extraordinarily powerful Rockefeller–Chase Manhattan Bank elder statesman John J. McCloy, is testimony to the importance of financial power — as is the successful lobbying by Kissinger and Chase Manhattan’s head, David Rockefeller, to induce Jimmy Carter to allow the ailing shah of Iran into the US — thus precipitating the humiliating hostage crisis.

                Despite differences in nuance, it is clear that Ronald Reagan’s originally proclaimed challenge to Rockefeller-Morgan power in the Council of Foreign Relations (CFR) and to the Rockefeller-created Trilateral Commission has fizzled, and that the “permanent government” continues to rule regardless of the party nominally in power. As a result, the much-heralded “bipartisan-foreign-policy” consensus imposed by the Establishment since World War II seems to remain safely in place.

                David Rockefeller, chairman of the board of his family’s Chase Manhattan Bank from 1970 until recently, established the Trilateral Commission in 1973, with the financial backing of the CFR and the Rockefeller Foundation. Joseph Kraft, syndicated Washington columnist who himself has the distinction of being both a CFR member and a Trilateralist, has accurately described the CFR as a “school for statesmen” that “comes close to being an organ of what C. Wright Mills has called the Power Elite — a group of men, similar in interest and outlook, shaping events from invulnerable positions behind the scenes.”

                The idea of the Trilateral Commission was to internationalize policy formation, the commission consisting of a small group of multinational corporate leaders, politicians, and foreign-policy experts from the United States, Western Europe, and Japan, who meet to coordinate economic and foreign policy among their respective nations.

                Perhaps the most powerful single figure in foreign policy since World War II, a beloved adviser to all presidents, is the octogenarian John J. McCloy. During World War II, McCloy virtually ran the War Department as assistant to aging Secretary Stimson; it was McCloy who presided over the decision to round up all Japanese Americans and place them in concentration camps in World War II, and he is virtually the only American left who still justifies that action.

                Before and during the war, McCloy, a disciple of Morgan lawyer Stimson, moved in the Morgan orbit; his brother-in-law, John S. Zinsser, was on the board of directors of J.P. Morgan & Co. during the 1940s. But, reflecting the postwar power shift from Morgan to Rockefeller, McCloy moved quickly into the Rockefeller ambit. He became a partner of the Wall Street corporate law firm of Milbank, Tweed, Hope, Hadley & McCloy, which had long served the Rockefeller family and the Chase Bank as legal counsel.

                From there he moved to become chairman of the board of the Chase Manhattan Bank, a director of the Rockefeller Foundation, and of Rockefeller Center, Inc., and finally, from 1953 until 1970, chairman of the board of the Council on Foreign Relations. During the Truman administration, McCloy served as president of the World Bank and then US high commissioner for Germany. He was also a special adviser to President John F. Kennedy on disarmament, and chairman of Kennedy’s Coordinating Committee on the Cuban Crisis. It was McCloy who “discovered” Professor Henry A. Kissinger for the Rockefeller forces. It is no wonder that John K. Galbraith and Richard Rovere have dubbed McCloy “Mr. Establishment.”

                A glance at foreign-policy leaders since World War II will reveal the domination of the banker elite. Truman’s first secretary of defense was James V. Forrestal, former president of the investment banking firm of Dillon, Read & Co., closely allied to the Rockefeller financial group. Forrestal had also been a board member of the Chase Securities Corporation, an affiliate of the Chase National Bank.

                Another Truman defense secretary was Robert A. Lovett, a partner of the powerful New York investment banking house of Brown Brothers Harriman. At the same time that he was secretary of defense, Lovert continued to be a trustee of the Rockefeller Foundation. Secretary of the Air Force Thomas K. Finletter was a top Wall Street corporate lawyer and member of the board of the CFR while serving in the cabinet. Ambassador to Soviet Russia, ambassador to Great Britain, and secretary of commerce in the Truman administration was the powerful multimillionaire W. Averell Harriman, an often-underrated but dominant force with the Democratic Party since the days of FDR. Harriman was a partner of Brown Brothers Harriman.

                Also ambassador to Great Britain under Truman was Lewis W. Douglas, brother-in-law of John J. McCloy, a trustee of the Rockefeller Foundation, and a board member of the Council on Foreign Relations. Following Douglas as ambassador to the Court of St. James was Walter S. Gifford, chairman of the board of AT&T, and member of the board of trustees of the Rockefeller Foundation for almost two decades. Ambassador to NATO under Truman was William H. Draper Jr., vice president of Dillon, Read & Co.

                Also influential in helping the Truman administration organize the Cold War was director of the policy-planning staff of the State Department, Paul H. Nitze. Nitze, whose wife was a member of the Pratt family, associated with the Rockefeller family since the origins of Standard Oil, had been vice president of Dillon, Read & Co.

                When Truman entered the Korean War, he created an Office of Defense Mobilization to run the domestic economy during the war. The first director was Charles E. (“Electric Charlie”) Wilson, president of the Morgan-controlled General Electric Company, who also served as board member of the Morgans’ Guaranty Trust Company. His two most influential assistants were Sidney J. Weinberg, ubiquitous senior partner in the Wall Street investment-banking firm of Goldman Sachs & Co., and former general Lucius D. Clay, chairman of the board of Continental Can Co., and a director of the Lehman Corporation.

                Succeeding McCloy as president of the World Bank, and continuing in that post throughout the two terms of Dwight Eisenhower, was Eugene Black. Black had served for 14 years as vice president of the Chase National Bank, and was persuaded to take the World Bank post by the bank’s chairman of the board, Winthrop W. Aldrich, brother-in-law of John D. Rockefeller, Jr.

                The Eisenhower administration proved to be a field day for the Rockefeller interests. While president of Columbia University, Eisenhower was invited to high-level dinners where he met and was groomed for president by top leaders from the Rockefeller and Morgan ambits, including the chairman of the board of Rockefeller’s Standard Oil of New Jersey, the presidents of six other big oil companies, including Standard of California and Socony-Vacuum, and the executive vice president of J.P. Morgan & Co.

                One dinner was hosted by Clarence Dillon, the multimillionaire retired founder of Dillon, Read & Co., where the guests included Russell B. Leffingwell, chairman of the board of both J.P. Morgan & Co. and the CFR (before McCloy); John M. Schiff, a senior partner of the investment-banking house of Kuhn, Loeb & Co.; the financier Jeremiah Milbank, a director of the Chase Manhattan Bank; and John D. Rockefeller, Jr.

                Even earlier, during 1949, Eisenhower had been introduced through a special study group to key figures in the CFR. The study group devised a plan to create a new organization called the American Assembly — in essence an expanded CFR study group — whose main function was reputedly to build up Eisenhower’s prospects for the presidency. A leader of the “Citizens for Eisenhower” committee, who later became Ike’s ambassador to Great Britain, was the multimillionaire John Hay Whitney, scion of several wealthy families, whose granduncle, Oliver H. Payne, had been one of the associates of John D. Rockefeller, Sr. in founding the Standard Oil Company. Whitney was head of his own investment concern, J.H. Whitney & Co., and later became publisher of the New York Herald Tribune.

                “It should be clear that the name of the political party in power is far less important than the particular regime’s financial and banking connections.”
                Running foreign policy during the Eisenhower administration was the Dulles family, led by Secretary of State John Foster Dulles, who had also concluded the US peace treaty with Japan under Harry Truman. Dulles had for three decades been a senior partner of the top Wall Street corporate-law firm of Sullivan & Cromwell, whose most important client was Rockefeller’s Standard Oil Company of New Jersey. Dulles had been for 15 years a member of the board of the Rockefeller Foundation, and before assuming the post of Secretary of State was chairman of the board of that institution.

                Most important is the little-known fact that Dulles’s wife was Janet Pomeroy Avery, a first cousin of John D. Rockefeller Jr. Heading the supersecret Central Intelligence Agency during the Eisenhower years was Dulles’s brother, Allen Welsh Dulles, also a partner in Sullivan & Cromwell. Allen Dulles had long been a trustee of the CFR and had served as its president from 1947 to 1951. Their sister, Eleanor Lansing Dulles, was head of the Berlin desk of the State Department during that decade.

                Undersecretary of State, and the man who succeeded John Foster Dulles in the spring 1959, was former Massachusetts governor Christian A. Herter. Herter’s wife, like Nitze’s, was a member of the Pratt family. Indeed, his wife’s uncle, Herbert L. Pratt, had been for many years president or chairman of the board of Standard Oil Company of New York. One of Mrs. Herter’s cousins, Richardson Pratt, had served as assistant treasurer of Standard Oil of New Jersey up to 1945. Furthermore, one of Herter’s own uncles, a physician, had been for many years treasurer of the Rockefeller Institute for Medical Research.

                Herter was succeeded as Undersecretary of State by Eisenhower’s ambassador to France, C. Douglas Dillon, son of Clarence, and himself chairman of the Board of Dillon, Read & Co. Dillon was soon to become a trustee of the Rockefeller Foundation.

                Perhaps to provide some balance for his banker-business coalition, Eisenhower appointed as secretary of defense three men in the Morgan rather than the Rockefeller ambit. Charles B. (“Engine Charlie”) Wilson was president of General Motors, member of the board of J.P. Morgan & Co. Wilson’s successor, Neil H. McElroy, was president of Proctor & Gamble Co. His board chairman, R.R. Deupree, was also a director of J.P. Morgan & Co.

                The third secretary of defense, who had been undersecretary and secretary of the Navy under Eisenhower, was Thomas S. Gates Jr., who had been a partner of the Morgan-connected Philadelphia investment-banking firm of Drexel & Co. When Gates stepped down as defense secretary, he became president of the newly formed flagship commercial bank for the Morgan interests, the Morgan Guaranty Trust Co.

                Serving as Secretary of the Navy and then Deputy Secretary of Defense (and later secretary of the Treasury) under Eisenhower was Texas businessman Robert B. Anderson. After leaving the Defense Department, Anderson became a board member of the Rockefeller-controlled American Overseas Investing Co., and, before becoming Secretary of the Treasury, he borrowed $84,000 from Nelson A. Rockefeller to buy stock in Nelson’s International Basic Economy Corporation.

                Head of the important Atomic Energy Commission during the Eisenhower years was Lewis L. Strauss. For two decades, Strauss had been a partner in the investment banking firm of Kuhn, Loeb & Co. In 1950, Strauss had become financial adviser to the Rockefeller family, soon also becoming a board member of Rockefeller Center, Inc.

                A powerful force in deciding foreign policy was the National Security Council, which included on it the Dulles brothers, Strauss, and Wilson. Particularly important is the post of national-security adviser to the President. Eisenhower’s first national security adviser was Robert Cutler, president of the Old Colony Trust Co., the largest trust operation outside New York City. The Old Colony was a trust affiliate of the First National Bank of Boston.

                After two years in the top national-security post, Cutler returned to Boston to become chairman of the board of Old Colony Trust, returning after a while to the national-security slot for two more years. In between, Eisenhower had two successive national security advisers. The first was Dillon Anderson, a Houston corporate attorney, who did work for several oil companies. Particularly significant was Anderson’s position as chairman of the board of a small but fascinating Connecticut firm called Electro-Mechanical Research, Inc. Electro-Mechanical was closely associated with certain Rockefeller financiers; thus, one of its directors was Godfrey Rockefeller, a limited partner in the investment banking firm of Clark, Dodge & Co.

                After more than a year, Anderson resigned from his national security post and was replaced by William H. Jackson, a partner of the investment firm of J.H. Whitney & Co. Before assuming his powerful position, Dillon Anderson had been one of several men serving as special hush-hush consultants to the National Security Council. Another special adviser was Eugene Holman, president of Rockefeller’s Standard Oil Company of New Jersey.

                We may mention two important foreign-policy actions of the Eisenhower administration which seem to reflect the striking influence of personnel directly tied to bankers and financial interests. In 1951, the regime of Mohammed Mossadegh in Iran decided to nationalize the British-owned oil holdings of the Anglo-Iranian Oil company. It took no time for the newly established Eisenhower administration to intervene heavily in this situation. CIA director and former Standard Oil lawyer Allen W. Dulles flew to Switzerland to organize the covert overthrow of the Mossadegh regime, the throwing of Mossadegh into prison, and the restoration of the Shah to the throne of Iran.

                After lengthy behind-the-scenes negotiations, the oil industry was put back into action as purchasers and refiners of Iranian oil. But this time the picture was significantly different. Instead of the British getting all of the oil pie, their share was reduced to 40 percent of the new oil consortium, with five top US oil companies (Standard Oil of New Jersey, Socony-Vacuum — formerly Standard Oil of NY, and now Mobil — Standard Oil of California, Gulf, and Texaco) getting another 40 percent.
                It was later disclosed that Secretary of State Dulles placed a sharp upper limit on any participation in the consortium by smaller independent oil companies in the United States. In addition to the rewards to the Rockefeller interests, the CIA’s man-on-the-spot directing the operation, Kermit Roosevelt, received his due by quickly becoming a vice president of Mellon’s Gulf Oil Corp.

                This article is excerpted from Wall Street, Banks, and American Foreign Policy, chapter 8, “Rockefeller, Morgan, and War” (1984; 2011).

  12. If we want to understand the present system, I don’t think it’s a good idea to first define it as something it is not, and then attempt to explain the rest in a false context.

    Because the banking system never gives up consideration commensurable to the debts it falsifies to itself, therefore our promissory obligations remain representations of entitlement so long as they are unfulfilled; and therefore likewise, paid principal is strictly to be retired from circulation, as payment cancels/nullifies their former representation of entitlement.

    Thus the banking system is a mere publisher of further representations of our promissory obligations to each other; it has no property or entitlement at stake (as ostensibly/falsely justifies “interest”); and our promissory obligations rightly remain obligations to pay and to retire principal at an essential rate of payment — which, owing to the concerns of both the creditor and obligor, must equate to the rate of consumption of the related property over the proprietary determinate lifespan of the related property.

    1. Banks are not the creators of the money; we are the creators of the money. The banking system merely publishes further representations of our promissory obligations to each other — and *that* (our promissory obligations) is what the money is created/comprised of.

    2. It is correct only to say that the banking system *CLAIMS* to work according to fractional reserve “principles” (falsifications of principle).


    They are not even the creators of the money!
    Thus they can’t *rightly* claim to be creating money in regard to *any* “principle” — whatever that purported principle is.

    You can only truly understand *purported* fractional reserve policy therefore in this light.
    A tendency to relate to fractional reserve otherwise stems from poor diligence (purported Austrian economics for instance), blaming excessive indebtedness on fractional reserve policy. Nothing could be further from the truth, for the following reasons:

    First of all, fractional reserve policy stems from the deficiencies of the gold standard. As Benjamin Franklin indicates in his 1729 “Nature and Necessity of a Paper Currency,” it was impossible to sustain the further prosperity the colonies were capable of, by adhering to their precious metal monetary standards. When the deficient volumes of gold and silver were augmented by (substantial) further paper currency, the colonists found they could sustain further prosperity.

    Why was this impossible otherwise?

    The answer to that question is simple: any volume of circulation which is insufficient to represent all entitlement, deprives us of an ability to sustain so much prosperity.

    But this is the underlying reason the gold/silver standards of the world are effectively repealed by additional issuance of further currency (generally paper, but also further metals).

    Fractional reserve policy therefore relates to addressing the inherent deficiencies of artificial precious metal (or commodity) “monetary standards.”

    Yet the whole idea of “reserves” is itself preposterous. First of all, the only reason you might “need” them is if the currency fails; and the only reason it will fail is if you tolerate the present obfuscation of our promissory obligations to each other; and thus, even if you do deem that you need them to redeem the currency at such a time of failure, that doesn’t fix the problem, because the reason for the failure is a terminal sum of falsified debt.

    The purported Austrian economists want to restore the gold standard, only because they refuse to understand/acknowledge a) that the gold standard can only fail to provide sufficient representation; and b) because they likewise refuse to acknowledge that interest multiplies initial sums of falsified debt into terminal sums of falsified debt.

    Thus, as the Austrians advocate banking and even elevated rates of interest (purportedly to discourage excessive borrowing), they are advocating returning to the original causes of failure in both forms: a) a return to a (finite, limited) commodity standard imposes deficient powers of representation; and b) higher rates of interest multiply falsified debt at escalated rates, as we are forced to borrow greater sums of periodic interest back into circulation, and this increases the sum of falsified debt at a greater rate.

    Thus the so-called Austrians promote a faster rate of failure with an even far more limited and preclusive circulation.

    That should put fractional reserve policy and its adversaries into perspective.
    But the reason mathematically perfected economy™ needs no “reserves” is, MPE™ makes the very represented property the “reserve” of faulted systems. That is, only under MPE™ do you have adequate representation (even at virtually no cost); no multiplication of debt or cost; and immutable value of property and entitlement, in a fact of perpetual redeemability.
    All that may be a lot to get your brain around from a simple eradication of interest and obligatory schedule of payment, so give it some thought. Test how these principles alone fulfill all these objectives, and you’ll better understand what money is created of, who its creators are, who the real creditors are, and what the issues of former trials such as precious metal monetary standards are. When you understand the latter, it is a simple matter to put fractional reserve policy into perspective; and when you do understand it in these terms, you’ll likewise see this explanation even fits the historical pattern of its inception.


    Because the faults of the gold/silver standard doomed the standard to fractional reserve policy. But that isn’t why we suffer a terminal escalation of debt.

    I should probably make another thing clear about fractional reserves:

    A *central bank* requirement for 10% reserves means generally that the faux creator is required to have 10$ in gold (or other specific material [“dollars”]) for every 100$ falsely created (which purported principle is to be distinguished from applicability to all further, downstream *lending*).
    As you say then, different requirements for *lending* may alleviate any ostensible restriction on the overall volume of circulation; but that would only apply if downstream/peripheral banks can also either create money or loan multiple instances of the same money.
    All that means however (if it is the case in the particular system), is that “fractional” “reserve” limitations are really no limitation at all.

    But what would drive that subversion of purported principle (or pretention of principle)?

    The very obfuscation of the currency.


    Because it and it alone imposes a need to persist in a perpetual escalation of further faux “borrowing,” merely to maintain a vital circulation, so long as it is possible to maintain a vital circulation (until a terminal sum of debt destroys credit-worthiness to borrow further).

    • marxbites permalink

      “Thus, as the Austrians advocate banking and even elevated rates of interest (purportedly to discourage excessive borrowing), they are advocating returning to the original causes of failure in both forms: a) a return to a (finite, limited) commodity standard imposes deficient powers of representation; and b) higher rates of interest multiply falsified debt at escalated rates, as we are forced to borrow greater sums of periodic interest back into circulation, and this increases the sum of falsified debt at a greater rate.

      Thus the so-called Austrians promote a faster rate of failure with an even far more limited and preclusive circulation.”


      The Austrians favor a voluntary system of commodity money not controlled by ANY special interests, but by the decisions and choices of individual market participants, as mankind had come to over millenia before shylock learned he could issue unbacked paper at interest the same way Caesars debased their own state issued coin.

      Under a NON-bastardized full redemption gold standard there can BE no debt as we now have cranking out exponentially compounding interest expenses.

      Usury IMO is charging interest on money from nothing. OTOH if I risk loaning you my REAL money for a period of time, I fully expect to be compensated for that risk as well as the opportunity costs of not having my money at hand.

      On a gold std the interest for risk loan capital comes from PRODUCTION, like mining.

      The best economists understand fiat currencies as the “false receipts” that enrich the statists at the people’s expense.

      • YOUR QUOTE: ¨I fully expect to be compensated for that risk as well as the opportunity costs of not having my money at hand.¨

        But under MPE nobody would have to borrow from you, because that same credit is available free of interest if creditworthiness is in check. We leave the subprime market for the Austrians to service 🙂

  13. Anthony,

    I’m sure you understand this, but the statists are just a bunch of liars. On top of that, they are thieves. When any economy uses interest/usury the instability will always be present in the economy. Almost any system that does not include interest will work. But the statist is not interested in the well-being of the people in general. They are evil people whose only goal is the destruction of mankind. Freedom, happiness, goodness, high moral values, are not things that are promoted by the statist. They are too busy stealing from the producers.

    So when a statist speaks, I wouldn’t pay any more attention to them We have to stop feeding the beast. When they start talking, just walk away. Don’t turn on the statist TV. Don’t listen to statist talk radio. And there’s no point in debating them because they don’t really have any authority over anything. How can a liar have any power? The only way they do is because we all are too ignorant to know how to get away from their bullshit. We can certainly save a lot of time by simply not paying any attention to them because it will only twist our own minds if we listen to them.

    • I know Al, but I can’t help myself. I just like to poke a little fun at them every now and again, and I have been behaving for months now.

      Meanwhile, many people do fall for their nonsense and I guess there is a market for a little truth about the issue.

  14. marxbites permalink

    What a buttload of pathetic misinformed malarky, WADR Anthony.

    Are YOU on the banksters side or WHAT????

    AUSTRIANS AREN’T, never have been and never will be. They DETEST the banksters and their impoverishing fiat from thin air PLUS interest.

    Deflation IS GOOD.

    Dont you know we ALL want lower vs HIGHER prices? Since lowering prices = rising stds of living.

    In Defense of Deflation
    Mises Daily: Tuesday, August 10, 2010 by Doug French

    The Obama stimulus and bailouts haven’t decreased unemployment rates or bankruptcy filings while home prices and home sales have fallen and can’t get up. PIMCO’s Bill Gross told Bloomberg this can all be fixed with nearly zero interest rates and additional debt to stimulate the animal spirits of investors and entrepreneurs. The federal-funds rate has been pegged at 0 to .25% since December 16, 2008, and Uncle Sam’s debt is $13.3 trillion and counting. If this hasn’t goosed the animal spirits, what will?

    The failure of central bankers to make things all better again by creating some money and lowering some interest rates has the financial press fretting about deflation and thinking the US economy is turning Japanese. James Bullard, who heads the Federal Reserve Bank of St. Louis, came out with a paper entitled “Seven Faces of ‘The Peril’.” He concludes that the Federal Open Market Committee’s (FOMC’s) “extended period language may be increasing the probability of a Japanese-style outcome for the U.S.” To avoid that outcome, Bullard argues that the Fed’s most important tool is quantitative easing — printing money to buy government debt.

    The Wall Street Journal’s James B. Stewart claims deflation is bad because “deflation erodes profits and asset values,” in his “Smartmoney” column.

    People wait to buy expecting lower prices, reducing demand. Lower profits cause companies to cut expenses, including employees. It is a downward spiral that, if Japan’s experience is any indication, is difficult to arrest.

    Mr. Stewart is wrong on all counts. Profits are the difference between the price we sell a good for and the price it costs to produce that good. As Jörg Guido Hülsmann makes clear in his book Deflation & Liberty, “In a deflation, both sets of prices drop, and as a consequence for-profit production can go on.”

    And while asset values may drop, the assets don’t go away. The real wealth of the nation — assets used for production — are still available to produce. However, it may be that because the debt is liquidated on those assets as prices fall, new owners will own and operate the assets, but commerce and production will certainly carry on.

    Lower prices increase demand; they do not reduce or delay it. That’s why more and more people own flat-screen TVs, cellular telephones, and laptop computers: the prices of these goods have fallen, and people with lower incomes can afford them. And there are more low-income people than high-income people.

    Lower prices don’t mean lower profits; nor do they mean that employees will be laid off. More demand for a good or service means more employees needed to produce those goods and services. “There is no reason why inflation should ever reduce rather than increase unemployment,” Hülsmann writes.

    People become unemployed or remain unemployed when they do not wish to work, or if they are forcibly prevented from working for the wage rate an employer is willing to pay. Inflation does not change this fact.

    Hülsmann goes on to point out that only if workers underestimate the amount of money created by the central bank and therefore reduce their real wage-rate demands will unemployment be reduced. “All plans to reduce unemployment through inflation therefore boil down to fooling the workers — a childish strategy, to say the least.”

    Of course, Mr. Bullard over at the St. Louis Fed doesn’t mention anything in his paper about individuals attaining their goals through subjective knowledge and pricing decisions. Instead he draws lots of lines on graphs and talks about Taylor-type policy rule, zero bound, the Fisher relation, “targeted” steady states, and lots of stuff that has nothing to do with economics.

    So while the bond-buying Mr. Gross says zero rates will arouse the animal spirits in all of us, Mr. Bullard worries that “promising to remain at zero for a long time is a double-edged sword.” Bullard writes that zero rates are “consistent with the idea that inflation and inflation expectations should rise in response to [that] promise.” But in the same paragraph he continues,

    But the policy is also consistent with the idea that inflation and inflation expectations will instead fall, and that the economy will settle in the neighborhood of the unintended steady state, as Japan has in recent years.

    Wow, no wonder Keynesian central banking is so hard. You’re damned if you cut rates and damned if you don’t. “I moved the line on the graph. Let’s see some animal spirits for crying out loud!”

    In the real world, banks aren’t lending because, as Murray Rothbard points out in America’s Great Depression, if rates are too low, bankers have no incentive to lend, especially in a risky economic environment. Also, as Professor Jeffrey Herbener wrote in the Asian Wall Street Journal, “with distressed banks, reflation fails to induce another bank credit expansion.”

    Keynesians have mistaken the impotency of the Bank of Japan to restart credit expansion in the 1990s as a liquidity trap. But the problem is not that interest rates are so low everyone expects them to rise and therefore hoards cash. Banks refuse to lend because of the overhang of bad debt. Any cash infusion is held as reserve against it. Businesses refuse to borrow because of their debt burden, built up to expand capacity during the boom, and their over-capacity resulting from their malinvestments.

    Japan has tried every stimulus trick in the book — in addition to holding rates at zero — and still its economy has been in a funk for two decades. But firing a worker in Japan is virtually forbidden and don’t get the idea that consumer prices have fallen through the floor. According to the International Monetary Fund (IMF), last year saw the biggest drop in consumer prices at 1.13%, after prices rose 1.4% the year before. The chart of Japan’s inflation rate is essentially flat. Not exactly the deadly deflationary spiral it’s made out to be.

    Hülsmann explains that the Japanese government hasn’t allowed deflation to heal their economy, with “the only result of this policy [being] to give a zombie life to the hopelessly bureaucratic and bankrupt conglomerates that control Japanese industry, banking and politics.”

    As for Bullard’s quantitative-easing (QE) idea, the Bank of Japan has done plenty of it, buying not only government bonds but corporate debt and stocks as well. Bullard’s colleagues over at the San Francisco Fed have studied whether it worked. In a 2006 report, Vice President Mark M. Spiegel wrote that QE lowered long-term interest rates and “there appears to be evidence that the program aided weaker Japanese banks and generally encouraged greater risk-tolerance in the Japanese financial system.”

    Spiegel concluded, “In strengthening the performance of the weakest Japanese banks, quantitative easing may have had the undesired impact of delaying structural reform.”

    “Deflation is one of the great scarecrows of present day economic policy and monetary policy in particular,” Hülsmann told his Economics of Deflation class at this year’s Mises University. It seems a nation will destroy its finances battling the nonthreat. The Organization for Economic Cooperation and Development (OECD) says the Bank of Japan “needs to keep interest rates close to zero and continue its asset-purchase program until there is a ‘definitive’ end to deflation,” Bloomberg reports. But in the same report the OECD worried that the Bank of Japan’s ability to stimulate would be curtailed by Japan’s public-debt-to-GDP ratio approaching 200%.
    Sounds like the folks at the OECD, like Mr. Bullard, can’t make up their minds. What Austrians know for sure is that, as Professor Hülsmann makes clear, “the dangers of deflation are chimerical, but its charms are very real.” Inflation, on the other hand, only helps those who are massively indebted and inefficient — governments.

    • This is the problem Marxbites:

      Winston Churchill, who was involved in the reinstatement of the Gold Standard in Britain in the twenties testified to the House of Commons in 1935, when the deflation of the Great Depression had made Gold untenable:
      “Look at the enormously increased volume of commodities which have to be created in order to pay off the same mortgage debt or loan. Minor fluctuation might well be ignored, but I say quite seriously that this monetary convulsion has now reached a pitch where I am persuaded that the producers of new wealth will not tolerate indefinitely so hideous an oppression. . . . I therefore point to this evil, and to the search for the method’s of remedying it as the first, second and third of all the problems which should command and rivet our thoughts.”

      I also responded with another comment, you can find it higher up. And I have another one for you.

      • marxbites permalink

        Winney was FULLY a Rothschild puppet, or didn’t YOU know that?

        The LARGEST cause of the GD was the 20’s monetary expansion Benny Strong wrought upon us so the stinkin Brits COULD go back on gold at the pre-war pre-inflationary exch rate.

        Churchill, FDR, Stalin & Mussolini were merely a regular mutual admiration society of like-minded dictators. In fact Hitler made the cover of Time in the early 30’s.

        Funny how the anti-bankster Hitler was also actually their own puppet to boot. But then, thats how shylock ALWAYS rolls.

        “If my sons did not want wars there wouldn’t be any”

        Guess who?

        GOLD NEVER failed anybody ever, only banksters seeking REAL WEALTH in exchange for worthless fiat is what always queered the system. The 1800’s included when Govt serially allowed shylock the special privileges of even stopping depositor redemptions of bank notes for specie.

        • Of course I know ‘Winney’ was a Rothschild Puppet and Jewish to boot.

          And of course a depression is usually preceded by easy money. That’s how the Money Power works.

          The point is: they create the boom/bust cycle. On purpose.

          Gold failed everybody all of the time, except the inventors of Austrian Economics: the bankers, who have owned all the gold for as long as people can remember.

          • marxbites permalink

            WRONG, the Banksters are WHO didn’t follow the rules per usual. They issued MORE paper than specie in reserves creating inflation when we were SUPPOSED to be on a 100% backing.

            They CHEATED, however GOLD NEVER FAILED ANYONE, the Banksters DID.

            You just NEVER actually really read any Rothbard but for his critics have you?

            You are pre-conditioned, as I used to be myself.

            Austrian economistss are the globes almost sole anti-statists among economists.

            Who cares if they, some 70 yrs ago, took money from Rockefeller? Doesn’t mean they haven’t rightly excoriated them as the criminals they fully deserve the moniker of.

            IN fact very few schools of economics are as completely critical of TPTB as are the Austrians.

            Read Rothbards Wall Street, Banks and American Foreign Policy.


            I DARE you to show ANY proof that Austrians EVER supported the shylocks much less the corporate state now fully under their control..

            It NEVER happened Anthony.

            • Well, I certainly offered a great deal of proof that the shylocks offered the Austrians a great deal of help. And not 70 years ago, but up to today. Just check How the Money Power Spawns Libertarians I also showed why: because they support usury, deflation and Gold, while blaming the state for everything and ignoring money power.

              • marxbites permalink

                Pure BALDERDASH Anthony.

                The Austrians are non-stop critics of the evil money powers my friend.

                Rothbard spent his entire career sussing out that very nexus between the monied elites and the brutal subhuman policies of empire.

                “This is the classic Austrian case against Fractional Reserve Banking.

                Let’s bury it forever.

                Consider this: what do you think the Money Power cares whether it gets $150,000 interest over a $100k mortgage in Gold or in Paper?
                My hunch is they would like to see us sweat for Gold even more than for Paper. They have been worshiping the Golden Calf ever since the days of Moses, after all. Yes, this is a very old story. So it is perhaps not so surprising that our favorite Libertarian has such an outright Old Testamental world view.

                Gary North is trying to make us believe that the choice at hand is to pay our Masters in Gold or in Paper.

                But the real question is:

                Would you prefer to pay $150,000 interest on your mortgage in Gold, or pay no interest at all?”

                More pure bunk.

                Under free banking with 100% reserves, the levels of depositor savings is what governs the interest rate, historically when unfettered by statists, usually runs 2-3% MAX, where more savings = lower rates, and visa versa.

                Money evolved organically as commodities from shells to salt, to Au & Ag finally, and NOT by some rulers dictat.

    • Oh man, it’s really all there, isn’t it.
      ‘Wonderful, tv’s get cheaper, now the poor can buy one’.

      Like I said: that’s not deflation, that’s prices going down due to tech. Typical Austrian lie.

      Nowhere is it mentioned in the article the debts appreciate in real terms. Destroying the extra purchasing power due to declining prices.

      This one is also nice:
      “And while asset values may drop, the assets don’t go away. The real wealth of the nation — assets used for production — are still available to produce. However, it may be that because the debt is liquidated on those assets as prices fall, new owners will own and operate the assets, but commerce and production will certainly carry on.”

      Yes. New owners. And who do you think these new owners will be? The Poor?

      • marxbites permalink

        Can More Inflation Revive the US Economy?
        The fall in the headline consumer price index (CPI) in April for the second consecutive month has raised concern that the US economy might have fallen into a deflationary black hole. Year on year, the CPI fell by 0.7% in April after declining by 0.4% in the month before. For most experts, the emergence of deflation poses a serious threat to the economy. It is held that a fall in prices causes consumers to postpone their expenditure. Furthermore, deflation also raises real interest rates and the debt burden, thereby depressing further the overall demand for goods and services, so it is argued. After falling to negative 3.6% in July 2008, the real federal funds rate has been in an uptrend, climbing to positive 0.9% in April this year.

        So how does one counter deflation? Some economists propose policies to promote a higher rate of inflation.

        According to Harvard professors of economics Gregory Mankiw and Kenneth Rogoff, a higher rate of inflation will set the platform for a decline in real interest rates and for an increase in current consumer expenditure. Additionally a higher rate of inflation will work towards the reduction of the debt burden. This, they contend, will provide a necessary boost to economic activity.

        So what is the level of inflation required to pull the economy from a deflationary black hole? Some experts, such as Rogoff, hold that 6 percent is the right figure:

        I’m advocating 6 percent inflation for at least a couple of years. It would ameliorate the debt bomb and help us work through the deleveraging process.

        So it seems that in the current economic setup a little bit of inflation is the correct remedy for the economy.

        But how can something normally regarded as bad news — something that destroys the economy — at the same time promote economic health? Our Harvard professors don’t try to provide an answer to this question. All that matters for them is that a higher rate of inflation is going to revive consumer outlays, which they hold is going to strengthen the economy.

        Are Increases in the Consumer Price Index What Inflation Is All About?
        The main problem with this way of thinking is the definition of inflation. Most economists hold that inflation is a general rise in prices that can be captured by the consumer price index, but they disagree about the causes of inflation. In one camp are the monetarists, who argue that changes in money supply cause changes in the CPI. In the other camp, we have economists who argue that inflation is caused by various real factors. These economists have doubts about the proposition that changes in money supply cause changes in the CPI. They believe that it is likely to be the other way around.

        We suggest that inflation is not rises in prices as such but the debasement of money.

        Historically, inflation originated when a ruler would force the citizens to give him all the gold coins under the pretext that a new gold coin was going to replace the old one. In the process, the king would falsify the content of the gold coins by mixing it with some other metal and return to the citizens diluted gold coins.

        The ruler can now use the stolen gold and mint coins for his own use. What was now passing as a pure gold coin was in fact a diluted gold coin. The expansion in the diluted coins that masquerade as pure gold coins is what inflation is all about. As a result of inflation, the ruler could engage in an exchange of nothing for something. (He could now divert real resources to himself).

        Under the gold standard, the technique of abusing the medium of the exchange became much more advanced through the issuance of paper money unbacked by gold. Inflation therefore means here an increase in the amount of paper receipts that are not backed by gold yet masquerade as true representatives of money proper, gold. Again, the holder of unbacked money engages in an exchange of nothing for something.

        In the modern world, the money proper is no longer gold but rather paper money; hence inflation in this case is purely the increase in the stock of paper money. Please note: we don’t say that inflation is about general increases in prices. Also note that we don’t say that the increase in the money supply causes inflation. What we are saying is that inflation is the increase in the money supply.

        Once it is realized that inflation is about increases in the money supply, it becomes clear why it is bad news. When money increases, there are always first recipients of money who can buy more goods and services at still unchanged prices. The second recipients of money also enjoy the new money. However, the successive recipients derive less benefit as prices of goods and services begin to rise.
        So long as the prices of goods they sell are rising much faster than the prices of goods they buy, the successive recipients of new money still benefit. The sufferers are those individuals who get the new money last — or not at all. They find that the prices of goods they buy have increased while the prices of goods and services they offer have hardly moved. In other words, monetary growth or inflation causes a redistribution of wealth.

        On closer inspection, we can also establish that monetary injections give rise to demand for goods and services, which is not supported by the production of goods and services, implying that monetary growth leads to an economic impoverishment of wealth generators. Furthermore, monetary inflation gives rise to the menace of the boom-bust economic cycle.

        Once it is established that the subject matter of inflation is the expansion of the money stock, we can attempt to ascertain whether the use of inflation can help to revive the US economy.

        Monetary Inflation and Prices
        What is the price of a good? It is the amount of money asked per unit of a good. Observe that, without money, one cannot even begin to discuss what prices are. Yet most economists, while discussing prices, never even mention money.

        For mainstream economists, an increase in economic activity is almost always seen as a trigger for a general rise in prices, which they erroneously label “inflation.” But why should an increase in the production of goods lead to a general increase in prices? If the money stock stays intact, then we will have a situation of less money per unit of a good — a fall in prices. This conclusion is not affected even if the so-called economy operates very close to “potential output” (another dubious term used by mainstream economists).

        Another popular explanation for a general rise in prices is the increase in wages once the economy is close to the potential output. If the amount of money remains unchanged then it is not possible to raise all the prices of goods and wages. So again, the trigger for a general rise in prices has to be monetary expansion.

        An increase in the price of a particular good means that more money is now paid for this good. Likewise, if for a given stock of goods an increase in the money supply occurs, all other things being equal, this would mean that more money is going to be exchanged for the unit of this stock of goods. This means that the price of a good has now gone up.

        Observe that in this case the increase in money supply (i.e., inflation) is associated with the increase in the prices of goods. (We have seen that most economists and commentators define inflation as a general rise in prices, which is summarized by the so-called consumer price index. Note again that, while a general rise in prices may be associated with inflation, it is however not inflation).

        But now consider the following case: the rate of growth in money is in line with the rate of growth in goods. Consequently, there is no change in the prices of goods. Do we have inflation here or don’t we?

        For most economists, if an increase in the money supply is exactly matched by the increase in the production of goods, then this is fine, since no increase in general prices has taken place and therefore no inflation has emerged. We suggest that this way of thinking is false since inflation has taken place, i.e., the money supply has increased. This increase cannot be undone by the corresponding increase in the production of goods and services.

        For instance, once a king has created more diluted gold coins that masquerade as pure gold coins, he is able to exchange nothing for something irrespective of the rate of growth of the production of goods. Regardless of what the production of goods is doing, the king is now engaging in an exchange of nothing for something, i.e., diverting resources to himself by paying nothing in return.

        The same logic can be applied to paper-money inflation. The exchange of nothing for something that the expansion of money sets in motion cannot be undone by the increase in the production of goods. The increase in money supply — i.e., the increase in inflation — is going to set in motion all the negative side effects that money printing does, including the menace of the boom-bust cycle, regardless of the increase in the production of goods.

        Following our conclusion that inflation is about increases in money supply, it obviously cannot be beneficial for economic growth, as our Harvard professors have suggested. On the contrary, an increase in inflation results in the economic impoverishment, by diverting real wealth from wealth generators to the holders of newly printed money. It leads to consumption without supporting production.

        Inflation and the Pool of Real Savings
        Is it true that inflation helps to alleviate the debt burden in the economy? What raises the debt burden is the declining ability of individuals to create real wealth. Obviously, then, more inflation weakens the ability to create real wealth and can only increase and not reduce the debt burden.

        Printing money can only temporarily help the first receivers of newly printed money. It cannot, however, help all the individuals in the economy. We can thus conclude that inflation can only raise and not lower the overall debt burden in the economy.
        That inflation is a destructive process cannot always be seen when the underlying bottom line of the economy is still ok. For instance, when authorities are increasing the money-supply rate of growth while the pool of real savings is still in good shape, economic activity follows suit.

        It is easy then to conclude that inflation and economic growth are moving in tandem. Once, however, the pool of real savings is in trouble, no monetary pumping can revive economic activity. (Remember, every activity, whether of wealth or non-wealth-generating nature, must be funded. Funding cannot be replaced with printing more money, i.e., more inflation. Funding is about real savings).

        On the contrary, an increase in the rate of inflation, as recommended by our Harvard professors, further weakens the process of real savings formation — the key for economic growth. Good examples in this regard are the Great Depression of 1930s and Japanese depression of 1990s.

        The importance of correct definition of inflation cannot be emphasized enough. Failing to identify, i.e., define inflation can produce nasty surprises. For instance, for most experts the key for a healthy economy is price stability. If general rises in prices follow a stable growth path economists are of the view that this points to a stable economic growth.

        Now we have seen that while increases in money supply (i.e., inflation) are likely to be revealed in price increases as registered by the CPI, this need not always be the case. We have seen that prices are determined by real and monetary factors.

        Consequently it can occur that if the real factors are pulling things in an opposite direction to monetary factors no visible change in prices might take place. In other words, while money growth is buoyant, i.e., inflation is high; prices might display low and stable increases.

        Clearly, if we were to regard inflation as rises in the CPI, we would reach misleading conclusions regarding the state of the economy. (The increase in money supply regardless of the CPI rate of growth diverts real wealth from wealth generating activities to various non-productive activities thereby weakening the bottom line of an economy).

        On this Rothbard wrote,

        The fact that general prices were more or less stable during the 1920s told most economists that there was no inflationary threat, and therefore the events of the great depression caught them completely unaware. (America’s Great Depression, p. 153)

        This means that the loose monetary policy of the Fed back then had significantly weakened the pool of real savings, notwithstanding the stable CPI. Hence analysts who ignore monetary pumping and only pay attention to changes in the CPI run the risk of overlooking what is really going on in the economy.

        The whole idea that there is the need for more inflation in order to revive the economy seems preposterous given the fact that the Fed has been aggressively inflating since the end of last year. The yearly rate of growth of monetary pumping as depicted by the Fed’s balance sheet jumped from 3.8% in August last year to 152.8% by December 2008. At the end of April, the yearly rate of growth stood at 138.6%.

        The growth momentum of our monetary measure, AMS, displays buoyancy. The yearly rate of growth of AMS jumped from 2% in August last year to 12.6% in May this year.

        Some prominent US economists such as Harvard professors Gregory Mankiw and Kenneth Rogoff are advocating that the Fed should aim at a higher rate of inflation in order to revive the US economy. So it seems that in the current economic setup a little bit of inflation is the correct remedy for the economy.

        But how can something that is normally regarded as bad news, something that destroys the economy, at the same time promote economic health? Our Harvard professors don’t try to provide an answer to this question.
        We find this way of thinking is extraordinary, given that the Fed is already pursuing very loose monetary policy. Following our conclusion that inflation is about increases in money supply, it obviously cannot be beneficial for economic growth, as our Harvard professors have suggested.

        On the contrary, an increase in inflation results in the destruction of economy’s fundamentals and leads to economic impoverishment.

      • marxbites permalink

        End the BOOMS of monetary expansions of, the money from thin air plus interest uber-privileged cartelists, and we wont have the busts they know always comes when they stop inflating to take unfair advantage of and front run as we know they do.

        • we agree on that marxbites!

          the question is: how?

          • marxbites permalink

            A FREE market of consumer chosen currencies not under anyone’s control.

        • money from thin air is only a problem when compound interest is attached to it. Fiat money without interest is a pure medium of exchange that cannot be manipulated, horded, or shorted on an exchange like gold.

          What austrians fail to understand is that never in the history of the use of gold has not devolved into fractional lending. Never.

          They also fail to realize that interest free fiat has never fail to bring about indefinite prosperity. 700 yrs of tally sticks ended not because of deflation or run away hyperinflation, but cromwell striking a deal with the jews. There are many other historical examples that fail to make the history books because the elites that commisioned all the historians to write them were the same that founded austrian economics; Rockefellers & Rothchilds.

          • marxbites permalink

            BTW, ONLY voluntary media of exchange can qualify as just and moral, and NONE by force.

            • Which currency is just and moral and cannot harm us in any respect?

              • marxbites permalink

                Anything voluntary

                • One of the main functions of money is to provide liquidity to trade. Arguing which currency will be used will put a strain on that. Myself for instance will only accept an immutable currency. Which currencies would you accept voluntarily?

                  • marxbites permalink

                    Stuck with the paper fiats for now aren’t we, and not voluntarily. Though I understand some in the EU are reverting to their pre-EU coinage again.

                    My druthers are for universally accepted commodity currencies with intrinsic value, or fully redeemable paper receipts for same.

                    As long as its in the markets hands vs govts or shylock’s.

                    You seen this yet Holland, by Frank Vanderlip’s (ex-FEDhead) great grandson?

                    ESF = Exchange Stabilization Fund, created in the wake of the FDR’s gold confiscation.

                    What I have been afraid to blog about: The ESF and Its History_Part 1

                    Its not very long, but jammed packed with seldom seen info.

                    Whats your take?

                    • The reason fiat currencies have never worked is not that people are flawed; it is because the particular brand of fiat to which fiat has always been restricted, itself is flawed. How in fact can we prove so?

                      In the case of what you only call “fiat,” what we have is an obfuscation of a promissory note. It isn’t *the paper* which is responsible for the ramifications of this obfuscation — it’s the obfuscation:
                      All that we are allowing central banks to do is to publish our promissory notes to each other. This perpetrates two very serious crimes.

                      1. Whereas a promissory note is retired from circulation to the extent it is paid off, the obfuscation first wrongs us by allowing the pretended banking system to take possession of the notes. This as much as launders all money into the possession of the pretended banking system, and from the very outset of any initial “debt” (which is NOT a debt to the banking system at all), artificially enriches the banking system so much as all the principal which is ever coercively “financed” this way.

                      2. Worse, virtually all property is necessarily financed this way, because interest forces us to maintain a vital circulation by perpetually borrowing interest and principal back into general circulation, as ever greater and eventually terminal sums of debt.

                      So then, it isn’t the paper; it’s the interest.

                      Your precious metal monetary standard has no power whatever to arrest this perpetual multiplication of artificial indebtedness by interest; nor can the relatively minuscule quantity of monetary gold in the world sustain the world’s industry; in fact, interest will ultimately transfer title to all property (including gold) to the pretended banking system.

                      Obviously, you’ve never actually done the math.

                      WAKE UP.

                    • marxbites permalink

                      Interest on money created AS DEBT, no duh.

                      They can NEVER create enough to pay off the debt when each NOTE equals principle and interest greater than itself, an exponential function. The bastards just learned to restrain the new issue to a few percent/yr of their false receipts.

                      Interest charged on the loan of risk capital, IF a commodity or its fully redeemable paper receipt, does NOT create the same problem as money created for free as debt.

                      One borrows to buy today what he would otherwise have to save for. He understands he’s paying a premium for his shortened time preference.

                      I am FULLY awake.

                      Couldn’t be bothered to watch the ESF video then?

                    • Shit I forgot. I´m discussing things with an Austrian. Keep the sentences short, rooted in myth and faith, and as thus wholly indefensible or indescribable. “We need small government, let free markets be free, don’t you love liberty and freedom, we need to take our country back!”
                      Stuff like that is what they respond to. I bother with all of these ‘details’ about ‘how things actually work’ and it sets off their ‘liberal educated elite’ sensors – causing the thinking portion of the brain to shut down

                    • marxbites permalink

                      So BIG govt is your deal eh? MORE central planners for you huh?

                      And maybe you’ll notice I haven’t needed to use any four letter words.

                      I dont need your nasty attitude.

          • marxbites permalink

            “What austrians fail to understand is that never in the history of the use of gold has not devolved into fractional lending. Never.”

            And ALWAYS 100% attributable to crooked banksters themselves for issuing more paper than specie on deposit, and NOT GOLD itself, duh.

            “because the elites that commisioned all the historians to write them were the same that founded austrian economics; Rockefellers & Rothchilds.”

            Pure BS. Carl Menger is the father of Austrian classical liberal economics, the same economics as the Turgot’s, eg, of Jefferson’s own following.

            BTW, what all the Rothbard critics get DEAD WRONG, is that he broke off with Rand, Cato Inst, Buckley & the Friedmanites for what they all got wrong in his opinion, and esplly Friedman & Cato.

            • REN permalink

              How about Guernsey’s money system? Benjamin Franklin’s Philadelphia colony? WW2 experience in Canada 1938-1974 with their state bank? Even the state bank of North Dakota. Japan’s Postal Bank? The current Kiwi Postal Bank. How about the Kings perod of the Roman empire circa 790 BC. Solon’s reforms?

              Austrian’s cherry pick history to serve their false dialectic. OH yes, the free banking period. Oh Wait! The best banks were regulated. Never mind.

              Gravity makes one fall down and bump their head. I don’t like it, therefore I should get mad at gravity? It is a plain simple fact that money has law and force elements. Too BAD you don’t like gravity. OOOOH the evil government! Yes, it can be evil if we allow it to be constructed so. Yes, pride defectives can take over government. Yes, pride defectives can also use Gold and host private banks to their end.

              When it all boils down, it is who controls the money system, and how it is designed. Money flows in the system and take attributes from said system.

              Austrianism can rightly be attacked because the system they promote encourages private money power hosting of society. Clearly that power is not controlled, and hence to the detriment of the people. Austrians are apologists for predator oligarchies, and they hide behind shrill denunciations of government, and magically impute powers to gold or specie. There are no magic powers to metal. FRAUDSTERS!

              • marxbites permalink

                Where’s Stimpy??? ;>)

                Ren says:

                Austrianism can rightly be attacked because the system they promote encourages private money power hosting of society. Clearly that power is not controlled, and hence to the detriment of the people. Austrians are apologists for predator oligarchies, and they hide behind shrill denunciations of government, and magically impute powers to gold or specie. There are no magic powers to metal. FRAUDSTERS!

                I say:

                What a clown!!

                You may be ABLE to attack Austrians based in ignorance, but you may NOT attack them on the morality of their position, which is one’s right to 100% self ownership and of his property, and to not be molested by others. Nor the Austrian/libertarian concept of non-aggression against anyone unless proportional self defense..

                A market of freely chosen money, whether gold, rice or wampum, puts NO ONE in a superior position to anyone else.

                Giving the power to bureaucrats to print fiat that is then coerced upon all by threat of force is IMMORAL!!!!!

                Do some actual study of the Austrian School, they aren’t all for gold or anything else specific beyond a totally VOLUNTARY market of currency and goods/services.

                They are AGAINST a depreciating fiat that finances endless wars while impoverishing the globe.

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