There are many
ways in which human beings have created means of exchange (currency, means of
payment, money) that have worked successfully over long periods of time.
There is the way that Menger explained, through
discovery of a highly marketable commodity. This is the way in which precious
metals gained ascendancy. Another way is through banks that have intermediated short-term (90-day) bills of exchange
and provided bank notes. This was common for many centuries. Another way is
through the deposits of goldsmiths at a bank in exchange for certificates
that circulate. Fourth, governments have created tax certificates good for
paying taxes, and these have functioned as means of exchange. We should not
forget also that there have been many commodities that have been used as
means of exchange.
not an exhaustive list. It is enough to suggest that the private economy is
perfectly capable of generating a variety of means of exchange that solve the
economic challenge of low-cost exchange without barter. It is also enough to
suggest that even a government can devise a legitimate means of
exchange without imposing an illegitimate forced currency, that
is, legal tender.
these listed methods can cause an economy to malfunction, properly
used. None can cause unemployment, properly used. None of them ever
has, not unless banks or governments broke certain rules that
fundamentally changed the means of exchange into something illegitimate
or improper or not fitted to the purpose and to the economizing behavior of
particularly in mind such improper acts as the following:
- Governments taxing
freely-developed means of exchange so as to disadvantage them.
- Governments forcing citizens
to use a currency by legal tender restrictions.
- Banks issuing notes against
assets that were not short-term or were not liquid, assets such as term
loans, real estate, stocks and mortgages.
- Banks using financial
leverage, usually excessive, to borrow money to buy illiquid and/or
long-term assets and mixing this activity with the issuance of notes
against short-term self-liquidating bills.
- Banks rolling over short-term
bills and improperly converting them into longer-term obligations.
- Governments making their own
bonds the basis of issuing bank notes.
- Governments insuring bank
deposits when the banks were using the funds to buy long-term and/or
- Governments setting up
central banks with special privileges such as making their notes legal
- Central banks with the power
to bail out illiquid banks and other financial institutions that have
purchased illiquid assets and become insolvent.
- Governments and central banks
that favor large banks.
- Central banks with the power
to purchase government bonds with its government-forced means of
- Governments that seize gold,
outlaw gold contracts and issue irredeemable money.
- Governments that issue
certificates or bills of credit far in excess of what they can collect
- Governments that prevent or
restrict their citizens from buying foreign currencies or foreign
- Central banks with a monopoly
on note issue and the concurrent phasing out of notes issued by
is not an exhaustive list.
have the opposite situation. Every one of these improper and illegitimate
activities has historically been used. Not only can they cause large
economic problems, they have caused such problems.
to the Great Depression, thousands of banks failed in America. This was not
because they were unit banks or undiversified, it was because they had
invested in long-term illiquid assets, such as farm land and mortgages tied
to farm land, whose prices declined. They declined because they had been
driven up by World War I and the accompanying excessive creation of means of
payment by the central bank (the FED). During the 1920s, the FED created
funds that flowed into stocks financed by loans issued, improperly, by banks,
since stocks are long-term assets. History shows again and again that banks
cannot safely issue redeemable bank notes against long-term assets. Indeed,
the stock market crash in 1929 triggered bank failures in America and
large-scale bank failures in the 1930s caused a currency famine, much as in
1893, but the banks in this case did not create a currency of clearinghouse
certificates as they had in 1893. The FED now controlled base money. The
result was a large-scale deflation and depression.
private creation of currency by proper means and a proper system of governing
law, this could not have happened.
employ improper practices and when governments make improper laws that shape
the banking industry and the entire monetary system, what are the results? We
get inflation, deflation, stagflation, booms and crashes, unemployment and,
very often, needless wars. We get frictions with other nations, trade
interruptions, and excessive volatility of asset and commodity prices. We get
resources diverted into efforts to protect against this system. We get
failures in accounting. We get excessive frauds and rampant speculation. We
get malinvestment. We get extremely unhealthy
alliances between financial institutions and governments.
ordinary people get a great deal of needless suffering.
practices and laws are the rule, not the exception. It is absurd to
blame the 2008 crash and the subsequent deep recession and continuing
economic difficulties on the free market or on capitalism. When it comes to
the monetary system, these are nowhere in sight.
current financial system issues that surfaced with a vengeance in 2007-2008
and have not yet been resolved are no different from any others in the past
in the sense that the causes of them are the same as always: improper banking
practices and improper government laws shaping financial institutions and the
banks and investment banks borrowed short and lent long. They bought
long-term assets with short-term deposits that, under the central banking
system, are treated as money or close to it. They broke the economic rule
that banks should only properly invest such deposits in self-liquidating
loans of 90 days or less while also keeping liquid reserves. They broke the
other rules as well. The long-term assets were and are related to the housing
industry, in which prices were inflated both by the FED’s easy money
and government encouragement in various ways. When those assets fell in
price, the dominoes began to fall. By providing loans and creating huge
amounts of base money, the FED prevented widespread failures of these
fundamentally flawed and mismanaged institutions that are working within a
fundamentally flawed government-created system of laws and regulations.
postponed fixing the system, but this simply continues and worsens the
suffering. The basic problems and issues have not been resolved in the intervening
4 years. They have literally been papered over or, more accurately, digitized
over. The system is now operating in "pretend" mode. In some
countries in Europe, pretending is no longer possible.
those who think – and those who are being instructed to think –
that the direct printing of forced currency (politely called legal
tender and colloquially called greenbacks) by the U.S. Treasury is better
than the printing of forced currency by the FED and will solve the
nation’s problems. Move the printing press a few blocks down the
street, we are told by Ellen Brown, and all will be well. Why? Because those
nasty banks that charge interest will be deleted from the picture.
are those who think that replacing the central bank’s (forced) currency
monopoly by the Treasury’s (forced) currency monopoly will ameliorate
the nation’s economic difficulties. These people are so confused that
they do not realize that a money monopoly by any other name is still a money
monopoly. The currency forced upon the nation that is called the Federal
Reserve Note will not be improved by relabeling it a U.S. Note and forcing it
upon the nation. In both cases, we the people are not in a position to
produce our own currencies because a central institution has forced its own
currency upon us as legal tender and monopolistically disallowed other
currencies or created insurmountable barriers to their use. It is a farce to
think that a government’s forced currency is the people’s free
Greenbackism in the
form of the printing of forced currency by the U.S. government is totally
futile as a method of monetary reform.
futile is another movement spurred on by the evidently energetic Ms. Brown.
This is for individual states to start up their own state banks. These banks
will, in certain important respects, be much like all other banks. They will
adopt the same flawed practices now in evidence everywhere of making
long-term loans against deposits, and they will be under the same flawed
government laws that exist now that prevent monetary
freedom. Their currency will be the same. The states will guarantee deposits.
movement is much ado about nothing, because it changes nothing fundamental.
The hopes and promises articulated by the true believers in this solution are
bound to be disappointed. We need not even stop to analyze the many paths by
which such government-run banks will fail to operate efficiently, distort
economies, and/or cause a decline in the banking within their states. The
main point is that the proposed institutions do absolutely nothing to bring
about monetary freedom, proper banking practices and proper government laws
that must underpin a decent monetary system. State banks that use the
national currency and work within the central banking system and the national
laws do nothing to rid us of inflation, deflation, stagflation, booms and
crashes, unemployment, needless wars and all the other ill effects mentioned
important message that I can deliver as the bottom line is that a great deal
of economic hardship and suffering today is directly related to and caused by
improper banking practices and a flawed monetary system created by bad
government laws. To reduce this suffering, these must be changed.
requires far more radical changes in thinking and action in this
nation’s and the world’s monetary system than are commonly
mentioned in the main stream media. The radical changes have to be the right
changes and effective changes. They can’t be dithering around
with greenback ideas that are non-starters.
make government make these foundational changes, the current system is going
to deliver continued needless suffering.
Michael S. Rozeff