Economic Error #11: A Monetary System Is a Contractual Agreement of an Entire Nation.

Gary North

Ellen Brown is a Greenbacker. The theory of money that is offered by all Greenbackers never changes. They argue that fiat money is a contract among all members of a society. The civil government is in charge of the issuing of fiat money. The civil government is therefore part of the contract that everyone has made regarding the value of money. Here is what she says.

Money is a token representing the value. A monetary system is a contractual agreement among a group of people to accept those tokens at an agreed-upon value in trade. [Web of Debt, p. 347.]

You do not know what this means. Neither do I. Neither does she.

How does a token represent value? What is a token? There can be a ticket, and this ticket may entitle you to claim something. It could be a warehouse receipt. It could be a hat check. (Remember hats?) But this legal claim to an item does not determine the value of whatever is stored.

In a changing society, the economic value of everything is constantly changing. People regard the value of something in relation to their goals, their opportunities, and their plans for the future. When circumstances change, this affects their goals, their opportunities, and their plans. Prices change because conditions change.

If money is a token representing value, how is that token initially established? Who determines what the value of a token is? Is it the government? Does this mean that the Federal government at some point had to establish the value of every item offered in exchange? This would be preposterous. It could not be done. Who would want it to be done? Who would want to entrust government bureaucrats with that degree of authority?

The reason why the Greenbackers adopted this definition is because they believe that the government has the authority to regulate the value of money. They believe that the government can lawfully and rationally set prices as denominated in the government currency unit.

The trouble is, prices keep changing. People's assessment of what something is worth is constantly changing. There is no way for the government to assess prices and value, because there is no way that the government is God. Ellen Brown and the Greenbackers argue that the government has the authority to establish value, yet the only way that a central planning agency could do this is if it were God. It would have to be omniscient. The state is not omniscient. Government bureaucrats are not omniscient. But the Greenbackers have to assume that, in theory and practice, government bureaucrats are omniscient.

No group of people ever accepted these tokens at an agreed-upon price in trade. You did not agree to it, and I did not agree to it. Even if we had agreed to it, there is no way that we can stick with the agreement, because our assessments of the value of items is constantly changing. There are new inventions, new developments, new conditions. How would it be possible for any group of people to determine what the value of anything is, let alone what the value of everything is?

The only way that the Greenbackers can logically say that the government is a reliable agency for the preserving the value of the currency is to say that the government has the ability to regulate the supply of money so that all prices will remain the same, because all value must remain the same. It is obvious that no government agency has this ability. Government bureaucrats do not know what all prices are. They do not know what the value of all the items are. There is no way that money can be a token representing value.

If I give my hat to a hat check lady, assuming that I owned a hat, which hardly anybody does anymore, the hat check lady puts the hat in a location that is supposedly safe. Later in the evening, I return to the hat check lady and hand her the check. She goes into the room where the hat is, and she grabs my hat. There is some sort of temporary tag on my hat that is consistent with the number on the check. She gives me back my hat. I, if I am a gentleman, will give her a tip. I suppose my tip would be not to buy Ellen Brown's Web of Debt.

The point is, the value of the hat may have changed since the time that I handed it to her. Maybe I find out that the party that hats are no longer in style. I had not known that. Now I really do not want the hat anymore. I cannot sell my hat, because hats are no longer in style. So, the hat check entitles me to get my hat back, but there is no way that the check can establish the value of that hat.

You may think that this is a joke. It really is not. My father was an FBI agent for 20 years. J. Edgar Hoover required all of the agents to wear hats in public. The problem was, by the late 1960s, the only people wearing hats in public were FBI agents. So, if an FBI agent were tailing someone, the person would know he was being tailed. The agents did not know what to do with their hats. They would sometimes leave them in the car, or they would hold them in their hands. But, ultimately, they could not conceal the fact they were FBI agents. Finally, Hoover rescinded the requirement.

The value of hats in the United States plummeted in the 1960s. Men's hats have never become popular again. Very few women wear hats in public. So, how can a receipt for a hat maintain the value of the hat? The idea is absurd. Yet this idea is the foundation of Ellen Brown's entire economic theory.

Ludwig von Mises was correct: money is the most marketable commodity. There is no agreement among individuals about the value of money. The value of money is constantly changing.

People make voluntary exchanges, one exchange at a time, in terms of the prevailing value of the currency unit. There is no social contract among all participants regarding value. The only contract that exists is this : if someone issues a receipt, there is supposed to be in reserve whatever the receipt promises. This is not a token to value; it is a token to a specific physical item.

Because paper money units (IOUs) are severed from gold or silver coins on demand, there is far less predictability of the value of the currency unit than there was when the currency unit was a specific quantity of gold or silver. It is easier to print digits than it is to mine gold and silver.

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

http://www.garynorth.com/public/department141.cfm