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Economic Error #9: Murray Rothbard's Theory of Money Is Wrong (Especially When You Alter What He Wrote).

Gary North
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Ellen Brown has no understanding of monetary theory. She claims to know what Austrian economics teaches about money, yet her footnotes do not directly cite a single book or article on Austrian monetary theory. She is faking it.

Consider her treatment of Murray Rothbard's little book What Has Government Done to Our Money? (1964). I regard it as the clearest presentation of monetary theory ever written. It is surely the best introduction to Austrian School monetary theory.

Rothbard made an important point: it does not matter what the money supply is. Prices will adjust to the existing money supply on a free market. He specifically used the example of a gold standard.

He opposed a planned increase in the supply of money. This does not create wealth. Ellen Brown's book is a denial of this position. No one has stated this position any more clearly than Rothbard did in his book. In an updated version of the book published in 1990, he explained this. But the basics had been present in the 1964 edition.

What is the effect of a change in the money supply? Following the example of David Hume, one of the first economists, we may ask ourselves what would happen if, overnight, some good fairy slipped into pockets, purses, and bank vaults, and doubled our supply of money. In our example, she magically doubled our supply of gold. Would we be twice as rich? Obviously not. What makes us rich is an abundance of goods, and what limits that abundance is a scarcity of resources: namely land, labor, and capital. Multiplying coin will not whisk these resources into being. We may feel twice as rich for the moment, but clearly all we are doing is diluting the money supply. As the public rushes out to spend its new-found wealth, prices will, very roughly, double--or at least rise until the demand is satisfied, and money no longer bids against itself for the existing goods.

Thus, we see that while an increase in the money supply, like an increase in the supply of any good, lowers its price, the change does not--unlike other goods--confer a social benefit. The public at large is not made richer. Whereas new consumer or capital goods add to standards of living, new money only raises prices--i.e., dilutes its own purchasing power. The reason for this puzzle is that money is only useful for its exchange value. Other goods have various "real" utilities, so that an increase in their supply satisfies more consumer wants. Money has only utility for prospective exchange; its utility lies in its exchange value, or "purchasing power." Our law--that an increase in money does not confer a social benefit--stems from its unique use as a medium of exchange.

You can download it for free here.

Brown did not respond to this or the earlier version, because she never read the book. She read only the following section, which another author quoted. Then she changed it. She decided that what Rothbard wrote was not what she wanted to respond to. So, she tampered with the quotation. She inserted a something else: [monetary]. This is considered legitimate in academia when you are clarifying another person's concept. But she was not clarifying a concept. She deliberately dropped a word: gold-. Rothbard wrote "gold-unit." She substituted "[monetary] unit" for "gold-unit."

This is called "putting the shuck on the rubes." Her readers are the rubes. Here is the altered passage.

We come now to the startling truth that it doesn't matter what the supply of money is. Any supply will do as well as any other supply. The free market will simply adjust by changing the purchasing power, or effectiveness, of its [monetary] unit. There is no need whatever for any planned increase in the money supply, for the supply to rise to offset any condition, or to follow any artificial criteria. More money does not supply more capital, is not more productive, does not permit "economic growth." [Web of Debt, p. 153]

This appears in the 1964 first edition of the book, on page 13.

When I first read this book 45 years ago, I marked this passage, and only this passage. I put an exclamation point here: "it doesn't matter what the supply of money is." He put these words in bold face in the original edition. I recognized at the time that this was the central sentence in the whole book. I had read Rothbard's monetary theory two years before: Chapter 11 of Man, Economy, and State. That was why I instantly recognized this as his central insight.

If Ellen Brown wanted to refute Rothbard's theory of money, this was the correct passage to select. She tried -- but not very hard.

First, she did not read his book before she wrote her book. She got this brief extract, as her footnote indicates, from G. Edward Griffin's book, The Creature from Jekyll Island. There is nothing with this practice, just so long as you do not subsequently refute the author's entire thesis (62 pages) based on one section in one paragraph, and also substitute your preferred word for his.

Second, here is her response:

That was the theory, but in the Great Depression it clearly wasn't working (p. 153).

That's all? That's all.

Nowhere in her book does she again respond to Rothbard's monetary theory or Austrian School monetary theory in general.

Her 519-page book is one long attempt to justify government issuing of fiat paper money -- the need to increase the money supply for economic growth -- yet she does not attempt to explain why Rothbard was wrong. This is not scholarship. This is an untrained non-economist's attempt to put the shuck on the rubes.

Third, Rothbard wrote a book in 1963, America's Great Depression, in which he argued in great detail that it was the Hoover Administration's interference with prices -- preventing price decreases -- that caused the Great Depression. The government did not allow businesses to lower prices in order to clear the market of unsold goods and services. Ellen Brown never refers to this book. You can download it for free here

So, for her to say that the depression disproved Rothbard is preposterous. A year before his book on money was published, he had explained in detail why the Great Depression did not end. The free market was not allowed to respond to a contracting money supply by lowering prices.

Fourth, she never once offers a theoretical argument to refute his theoretical argument. Yet her entire book is premised on the assumption that his argument is wrong. She never tries to explain why Rothbard's theory is wrong.

This is pretending that you don't see the elephant in the bedroom. You desperately hope that the guests in the living room don't wander into the bedroom.

For a detailed critique of Ellen Brown's economics, go here:

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