Gary North

Sept. 24, 2009

A site member with no common sense and even less understanding of money attacked me on a forum yesterday. He called me a Friedmanite and a Keynesian on money (there is no such conceptual position). Me? A Friedmanite on money? This accusation violated a site rule: no profanity.

First, I am generally regarded as one of the academic expositors of the Austrian School's position on money. You can find my mini-book, Mises on Money, on Lew Rockwell's site. http://Lewrockwell.com/north/MOM.html

Second, it is a good idea to avoid confrontations with an expert. It is a better idea to avoid telling him that he has adopted the position of his opponent of over three decades. He has taken too many years of criticism from Fiedmanites for not adopting monetarism.

Third, one of the tricks that amateurs make is to misquote a "bad guy," attribute his position to the target/victim, and give the impression that the target/victim is a dolt. Do not try this with an expert on the topic who is a 45-year practitioner of confrontational rhetoric. You will get your head handed to you. Let me demonstrate.

Unfortunately, your reply makes it appear that you have joined Milton Friedman (banks create money) and the ranks of establishment economists in general with your statement that, "All money is credit." This is precisely the view that Keynes promoted with his publication of the General Theory in 1936. As he said in addressing his "fellow economists", per my September 22nd posted quote of his Green Cheese metaphor, we must persuade the public that central bank credit is practically the same thing as money. Then the central bank (green cheese factory) can create it (green cheese) as necessary to reduce unemployment among workers who won't accept lower nominal wages.

This man has never read Murray Rothbard's book, The Mystery of Banking. In it, Rothbard adopts the standard textbook approach to fractional reserve banking, showing that fractional reserve banks create money. He opposed the practice, but it was at the heart of his analysis. It is at the heart of every economist's analysis. This has nothing to do with "establishment economists." To tar and feather me with that pejorative phrase shows that the critic is both uninformed in his understanding of banking and a dolt in trying this stunt with me on my site.

By the way, I owned the publishing rights to this book. I turned this over to the Mises Institute. You can get it for free here: http://mises.org/Books/mysteryofbanking.pdf

In other words, Keynes sought to actualize what is probably the oldest bankers' plea in the infamous history of banking: "Forget what I promised; forget my debt! Or as banking economist, John Exter used to say, accept my "IOU nothing" and consider that you have been paid. Or, as Elgin Groseclose more elegantly put it in an early '80s confrontation with Fed Governor Henry Wallich, "You have defaulted on your fiduciary media." (No credit instrument confusion with money is possible there.)

This is merely a series of unrelated sentences strung together. There is nothing here that relates to the question at hand, namely, my original assertion that credit is money, and that if you cannot spend credit, it isn't money.

To combat the prevailing green cheese delusion, as well as to preserve our personal wealth, we need to stick with definitions that originated in the marketplace and which were formalized in early US statutes. Miners, through sweat labor, not bankers, produce money. As Jefferson, the father of the US dollar, put it, "You must dig a dollar out of the ground." (Those tired old silver dollars we've salted away, "just in case," are exactly what Jefferson had in mind.)

This is utter nonsense. Miners do not create money. Individuals trading with each other create money. Gold or silver became money after they were used for other purposes. This is the heart of Mises' famous regression theorem. It defines the Austrian theory of money. This poor guy is completely unaware of monetary theory in general and Mises' view in particular.

Murray Rothbard expanded on Jefferson's assertion simply and succinctly when he summarized the Austrian School position on money in his booklet: "What Has Government Done to Our Money?" (P.4): "A most important truth about money now emerges from our discussion: money is a commodity. Learning this simple lesson is one of the world's most important tasks. So often have people talked about money as something much more or much less than this. Money is not an abstract unit of account, divorceable from a concrete good; it is not a useless token only good for exchanging; it is not a 'claim on society'; it is not a guarantee of a fixed price level. It is simply a commodity. It differs from other commodities in being demanded mainly as a medium of exchange."

Mises in 1912 defined money as the most marketable commodity. Rothbard was following Mises on the origin of money. But this is irrelevant once there are receipts for the commodity, i.e., when there are IOU's, i.e., fiduciary media. This is what the Austrians focus on.

The author then rambles on and on about what money ought to be. It ignores the obvious: money is what you buy things with. This person used to subscribe using bank digits called money. To play verbal games as if this were not money is nothing short of imbecilic. It is a deliberate attempt to mislead people. I resent it.

The tyranny of vocabulary that was a purposeful outgrowth of Keynesianism, forces us to speak of Federal Reserve Notes as if they were money proper, and to argue over various sorts of "a return to the gold standard."

Federal Reserve Notes began in 1914. Keynes wrote in 1936. What kind of word games is this guy playing? Stupid ones.

What we should be demanding is a resumption of payments on Fed greenbacks, similar to that which followed the Resumption Act a few years after the Civil War suspension of specie payments. Of course unlike the 100 cents on the greenbacks promise of a dollar that followed the 1875 Resumption Act, there would need to be a huge market-related markdown on the value of Fed notes in terms of gold dollars. (The markets have already depreciated Fed notes by about 98 cents on the original gold dollar since they were first issued in 1914. That's a depreciation of banknotes comparable in magnitude to that of the "shinplasters" issued by wildcat banks in the backwoods of 19th Century America.)

While we're at it, why not just abolish the FED? I mean, if you are proposing pipe dreams, why not go all the way? Who needs Federal Reserve Notes?

Now I suspect, and fervently hope, that you wrote a somewhat hasty reply and inadvertently left out an important qualifier to your assertion that all money is credit. The qualifier is, that government has intervened in the marketplace and decreed via a legal tender law that we must accept Federal Reserve Notes (IOU's) as if they were really the sums of money that would constitute payment.

My hasty reply was based on 45 years of study and writing. Take a look at my first nationally published article, "Domestic Inflation Versus International Solvency." That was in 1967.

The man's comment is economically irrelevant. Legal tender currency is money. I do not need a qualifier.

Certainly that wouldn't imply that we must accept Keynes' green cheese delusion and believe that FRN's really are money, any more than we'd believe that if government were to decree that laundry receipts are really clothing, we'd happily run around dressed only in paper receipts, all the while hoping it didn't rain.

Gold is not money. You cannot walk into a store and buy anything with gold. There are no bar codes with gold coins in their software. You can buy with Federal Reserve Notes. They are money.

Money has this feature: liquidity. What is liquidity?

1. You can sell the asset immediately.
2. You can sell it without offering a discount.
3. You can sell it without advertising.

I have called for the re-monetization of gold. I began this call in 1964.

Question: If gold should be re-monetized, has it been de-monetized? This idea is beyond my critic's power of comprehension.

Gold was de-monetized by Roosevelt in 1933. He made it illegal for anyone inside the United States to own gold. Why did he do this? To de-monetize gold.

On gold as not being money today, see my article on Lew Rockwell's site.

No doubt my critic would accuse Rockwell and the Mises Institute of being Friedmanite Keynesians on money, whatever that might be.

I suggest that you do your bit to re-monetize gold. Buy some gold coins.

A reminder: Don't treat me or anyone else as an ignoramus on my forums. I police this site. I will boot off anyone who does this, just as I booted off this man. He will get back his $14.95.