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Sunday, July 16, 2017

Gresham's law as a Tool of Regulation

Gresham's law, in a sovereign country, becomes a tool to manage money. So-called "Good money" becomes a commodity, measured by the governments accounts, paper and issue. Bad money is really money that is outside the control of society. In this post I explain why "good money" tends to be actually bad money, from the Point of View of Society as a Whole.

It is a faulty assumption that rare commodities like gold or silver are better money than, say the bronze tokens the Romans use. Good money is actually money that:

  • holds its value (is safe),
  • is readily used and accepted in markets
  • and that stays in Circulation long enough to support payrolls and investment in capital goods & services.

Therefore it is an illusion that gold and silver is "good money" unless your point of view is one of wealthy people who need portable assets that they can hoard. It is a faulty assumption.

Moreover, actual good money is based on the "full faith and credit" of the goods and services it buys and sells. That implies several additional things:

Money must be regulated through taxation.
Money holds its value when unearned and excessive quantities of it are removed from circulation by taxation.
When there is an alternative to private credit instruments.
When it is backed by goods and services.

Assumption that Commodity Money is "Good Money"

Gresham's law assumes that that more valuable commodities, when used as money, are the "better" money than less valuable commodities. When commodity money is used for trade the more valuable commodity will be driven out of the market. Thus when Gold and silver are both as money, Gold coins tend to disappear first, then silver coins, then copper and paper money. This law is based on the predicate that valuable commodity money is "good money" and that other forms of money are "bad." People have acted on this assumption, and the assumption that money is real wealth, for hundreds of years, and it has led to incredible mischief.

Good Money is really money in circulation backed by the general stock of goods and services it can buy. Gold and Silver are portable commodities that can be used as money. If the economy & rule of law tanks, Gold or silver aren't worth much to starving people, either. Gresham's law is true, but that doesn't imply Gold and silver are always "good money." The General principle is that people tend to hoard portable wealth.

People Hoard Portable Assets

The Reality is that "good money" tends to be hoarded. Like the ads for Gold say:

"Buy Gold! When the Stock Market Crashes, you're Gold will be more valuable."

And since hoarding is a cause of economic instability and one of the powers that aggravates and increases economic inequality --> hoarding is bad.

Individual Point of View

Gresham's law is money from the Point of View of folks with money wealth:

Gresham's Law: "In economics, Gresham's law is a monetary principle stating that "bad money drives out good". For example, if there are two forms of commodity money in circulation, which are accepted by law as having similar face value, the more valuable commodity will disappear from circulation."

Money as A commodity

Europe developed it's money theory out of chaos. The Roman Empire used fiat money in the from of bronze coins. The coins had standardized weight and measure, and were actually intended as a means to tax people in the realm without leaving them destitute. Government officials would pay soldiers or vendors with coin. And they would either pay taxes in coin or in goods. All that was disrupted when the Empire fell apart.

Barbarian, dark ages and medieval money developed because of anarchy. Few Governments could impose their sovereignty on their citizens. Thus money was simply a portable commodity that could be bartered. Money from realms that controlled their money supply were valuable for their ability to trade with those realms. But the notion of "Good Money came from the chaos of poor quality government.

Standardize Weights, Measures and Exchange Value

Initially less sovereign nations tried to regulate money by standardizing weight and trying to decree exchange rates. Thus:

10 Gold Coins each weighing the same as 10 Silver coins were far more valuable than the silver coins in the same weight. The Commodity silver is about 1/15 the value of the commodity Gold for a given weight of coin. Pirates and merchants would assay the purity of coin, weigh it, and that was how they transacted business. Thus countries lacking sovereign control over their money supply thus are forced to put a face value based on weight. The Pound represented a weight of Silver. Thus an equivalently weighed Silver Coin at about 1/15 that of the Gold one was worth approximately 15 (or 16) Gold Coins. An ounce of Gold was approximately the same as a Pound. English weight scheme is based on that sort of calculation. Silver coins were convenient to carry around but less convenient than gold coins if one was considering weight.

Mobil Commodities as a mitigation of Risk

For purposes of evading economic instability, portable goods like Gold, Silver, Jewels and pearls are invaluable. From the point of view of the insecure, gold and silver are good money, not because they are money, but because they can be used as money in an emergency and are portable enough to hide and carry.

When things get really bad it is time to sew them into one's coats and head for the border. Portable wealth is most valuable because it is portable. However in the desert a bottle of water is far more valuable than a bag of coins, until one finds civilization.

Some of the earliest people to appreciate mobile wealth were Jews and Merchants. Such people often feared prejudice and persecution. They became famous for sewing peals into their coats so they could flee at a moment's notice when the local preachers started on them, usually around Easter. Good money was something that could be easily transported or hidden.

Thus while it may be that from the point of view of the individual possessor of money wealth; Good Money is money whose underlying commodity value retains its value when the money value vanishes.
Good money is thus the commodities a wealthy acquires when weathering bad economic times, or fleeing for the boarder.

Money as a Unit of Account.

Money is a measure of "relative value." For example 15 ounces of Silver are usually approximately equivalent to one ounce of gold, because silver is more common as a commodity than Gold, and because Gold has qualities that people value 15 times more than silver of the same weight. Measuring apples against Oranges is possible due to the relative value of apples and oranges, which is a function of the relative availability/scarcity of those goods, and their quality as food compared to other goods that people have a budget of trade goods to exchange them for. Money allows those values to have a common measure. Money is a creature of good government, of "standard weights and measures." And this is true whether one is talking about commodity money like Gold or Silver, or fiat money, money's value depends on its exchange value in markets.

History of Money as a Unit of Account

Money, however, has always been a unit of account. Whether it was tally sticks, cuneiform, or coins, governments would try to regulate exchange values. Since relative value is a function of relative scarcity or surplus that was never an easy task. When grain is scarce and wine is abundant, wine is cheaper than grain. When food is scarce, the price goes up. Folks talk of "inflation" but it is not usually that the coin that is too abundant but that the commodity being sought is too scarce. Deflation occurs when money is too scarce. Value is measured in money from a commercial perspective. That value represents the power of people entering markets both literal and figurative. A person who doesn't have enough money can't buy the commodities they need. Gold and Silver money, chaotic government, was good for those who could get gold or silver, but really sucked for everyone else.

Scarcity of Money

Gold & Silver also disappear out of circulation as people seek to use it as a store of value. One reason for the invention of token or paper money was that both gold and silver tend to disappear from Circulation when trade is going on. Cheap copper or paper money were only made available because the paper and copper is less valuable to hoarding. When a copper coin is worth more as a commodity than as coin it too tends to get melted and sold.

Debt Slavery

One trick of colonial powers was to make their victims, I mean colonials, buy goods with Gold or Silver, pay taxes in Gold, Silver or Goods, and force them to borrow money from Colonial Station masters or banks. This kept them constantly paying more for what they needed than the valuable goods they sold to pay back those debts. Before their was ever slavery for life, there was debt slavery, as this trick was used to enslave people and make them believe that it was their own fault for borrowing money before they earned it.

One reason for the revolt of the British Colonies (starting with our own) was the British "regulation" of paper money forbidding locals from using it!

Money For Rent

Central Banking grew out of colonialism as a means to exert control of subject populations using debt, interest and raw power. A society without control over it's money supply, constantly sees it's money leaving circulation. A society that only creates money through debt leaks all it's surplus as "r" (piketty) or compound interest. Colonies or colonized people never get out of debt, because they are always repaying loans to people renting them money.

Derivative Instruments

Gold Smiths and early bankers learned that they didn't always have to actually lend their money. They could hoard their money and lend derivative instruments. They could print Notes or letters of credit, backed by their loot. The earliest banks were simply merchant houses with stores of portable wealth [loot!] they could lend against. Lending at interest earned them even more money. Letters of Credit reduced the risk from piracy for sailors traveling long distances, so as long as a “great house” was good for their debts, this kind of paper money was popular.

Great Houses and Grifting

Great houses were often famed for their ability to "settle accounts", and pay letters of credit when due. Thus they could and did issue paper money, which was only as valuable as their willingness to redeem it in Gold or Silver. Private money was sometimes considered superior to public money due to the reputation of some private wealthy houses. Great Bankers such as the Rothschilds didn't amass their wealth through direct piracy. I call money backed by loot part of "privateering" because these private houses used their loot to take on that governing function. Their ability to lend money and do business depended on the integrity with which they did so, and their reputation. Often they'd get tired of doing things on the up and up, take the loot that backed their credit money, and leave town. This is the origin of the word:

“Graft” + “drifter” = “grifter.”

Why "Good Money" seems Good

Thus "Good Money" seems Good:

  • because the alternative is often rental money (debt money)
  • because the grifters who control it can rent it or flee town when the game is up.
  • because historically commodity money was the only reliable form of money available.
  • because Good Money is scarce, which means it can be loaned, either directly or as derivative instruments.

Individual versus Social Point of View

Therefore the concept of "good money" derives from the Point of View of the wealthy, the socially insecure and merchants. If the Government cannot be relied on to settle accounts and pay debts, then commodity money is the only good money.

Commodity Money as Very Bad Money

While from an individual point of view portable commodities are "good money", from the point of view of a society, of the commons, such money is not such a deal. Commodity money attracts highway robbers and pirates. Artificial shortages of money lead to usury, market failure and economic inequality. Trusting Bankers to issue money based on commodities leads to various forms of fraud (grifting) and the money disappears when it is needed the most, either to hoarding or when the Grifters flee town. Thus from the point of view of a stable country seeking stable trade relations, commodity money can be a very bad deal.

Leaking Commodity Money

For purposes of the systems financial health, therefore. Gold is very bad money. Because of Gresham's law, it gets hoarded or spent on imports rather than circulated.

Grifting And Accounting money

The wealthy usually have most of their money as accounting money regardless of the nominal type of money used. Money in an account is a measure of value. Each little mark of "money" == an account one can draw on, usually in a bank. That account in turn represents "deposits", which are liabilities of the Bank and usually also liabilities of some slubb who's been loaned to. Accounting money represents Assets on a balance sheet. Those assets by definition balance Assets = liabilities + Owner equity. The net value of those assets; Net Assets = assets - liabilities. This is accounting money. The wealthy often make their money by using cutouts to borrow money, converting that money to their own, then bankrupting the cutouts.

Debt money transfers resource ownership

The monied man will lend against his own assets. Taking a pledge, mortgage or surety as a guarantee that the money will be repaid. With privateering the borrower is not paid with Gold, but with accounting money either in the form of a note or a check. The same lender can lend the same gold multiple times because he never has to redeem the gold. The loan becomes an asset he can collect on one way or another. And the loan becomes a debt against himself. If he has to repay the loan he can always foreclose on the property used as a surety. Thus for almost no money, the average banker makes money by loaning money. Of course if things go wrong, the bank could be in trouble. But the banker is usually immune against serious repercussions, and the bank takes out economic instability on lenders, repossessing their things.

Taking Money out of Circulation

Through-out history, when the going got tough, the banker stops lending, forecloses on property. Or takes his reserve of portable commodities and flees. Thus the term grifter.

If the Grifter fled town, everyone else would find it impossible to settle their accounts. Bills went unpaid, folks also. And privation resulted in the wake of the pirates after they flee the town.

Freeing up Resources

Before the modern era, wealthy folks wealth was almost entirely in the form of real estate and similar holdings. That was never fungible. You can trade portable wealth like gold and diamonds. It is harder to trade land. Landlords and governments needed money to pay for things; weapons, military resources, luxury goods. Money was created to make trade possible. A place could specialize in growing coffee and then trade it for corn grown elsewhere. Money frees up resources. Banking also transferred immense resources to the bankers. They could take a cut of every deal. Interest on creating money, interest on retiring money & repossession when folks couldn't pay. Banking is win/win for the banker. Sometimes for the borrower. Never for the poor.

But the good thing about accounting money, whether bit-coin, paper or fiat value coin, is that circulation of money frees resources. The man selling coffee, once he settles his debts, can buy a loaf of bread. Adam Smith referred to this as comparative value. The principle is true. Banking distorts practice.

Actual Good Money is money in Circulation

Thus your actual good money is the money that stays in circulation, doesn't accumulate (inflation) or disappear (deflation), and hold's its value. Actual good money is money in circulation. When it goes "offline" and no longer circulates, it is a more figurative thing. It is either loot, speculative collecting or worthless paper. A man's, or a nations, net worth is Assets minus liabilities. Every time a person's money is spent, it enables someone else to spend. That person may buy from the merchant who spent previously. Thus the money circulates.

Common Unit of Account

The General purpose of money is to enable trade by creating a currency as a common unit of account that allows agreed on measures of value so that people can more easily exchange goods and services. Money is far more valuable as something to be traded, at least for most ordinary citizens who are always short of it.

So the money that is converted into commodities becomes a speculative thing and is pulled out of the market. When the Grifter flees, commmodity money flees with him. Thus commodity money is a very bad thing for system stability.

Money as a Measure of Wealth

As a unit of Account, money measures wealth but isn't actually that wealth. That unsettles some people, which is part of what drives Gresham's law.

Money As Virtual Wealth

Good money stays in circulation. "Good Money" from the pirates point of view is designed to be pulled out of circulation and carried away. This is another reason why "Good Money"/commodity money is really bad money for a functional and stable economy.

Money and Rent

Medieval landlords (Crown or noble) found owning land useful. During the dark ages, when there were few freed up resources available, landlords could take a trade in chickens and goods. But to amass real fortunes, trade and commerce have to happen. For that to happen they'd force rents to be paid in the coin of the land. This had the further benefit of letting some people loan peasants when their crops failed or they needed tools and seeds. People would sell themselves into slavery so they could eat. Money rents became a very good way to get and stay wealthy. Those who are resource poor can be easily kept that way by loaning them more money than they can easily pay back. Rents on money or Ground became a ticket into the "gentry" class, or even higher.

You can only eat so many sheep a year. But the wool from sheep can provide a steady income. And renting to the herdsman, money for fodder, the land and sheep for his herds, often gave the rentier a source of permanent income. Money economies lead to a lot of wealth. Much of that wealth tends to get funneled up a narrow hierarchy of power and wealth.

Measuring Relative Value

What makes money valuable is that it can be used to measure value. A House's value is measured in what the pirate can sell if for. A slaving vessel was measured in the net value of its prospective cargo. What couldn't be sold was worthless. Hence slavers would heave the old or sick victims of their slaving over the side of their ships before even setting sale. Hunters for whale or Walrus bone would heave entire animal carcuses into the sea once they had gotten the valuable parts of the animal and stored them. On the other hand, when someone butchered an animal on a farm, nearly every part of that animal would be used for something. Social or moral measures of value get slugged aside when pirate measures are adopted, and this happens because of the exigencies of relative value.

Commodity Money is still a unit of account

When a person is said to be worth their weight in Gold, that is still using money as a measure of account. At the current value of gold; 42K$ per kilo, a 100 Kilo man is worth 4,200,000$ in Gold. Money as a unit of account is not merely a measure of the value of the Gold, but of the aggregate and relative value of all the commodities a person needs to eat, feel comfortable, and live by. It also pays for services. Even though slavery is now outlawed, essentially one can buy servants with enough money. People still buy gold because it still serves as a unit of account. That it is not a perfect unit of account is immaterial. The value of Gold is really a social value. But because almost everyone on earth can measure that value in the same way, more or less, it is a shared value.

Portable Money, Piracy and Hoarding

It is no accident that pirates:

hoard portable commodities.
travel long distances and risk their lives to acquire them.

It is also no accident that legal piracy is known as "privateering" and that raiding or conquering neighbors has been a practice of communities for thousands of years.

Therefore it's no accident that pirates and piratical governments hoard money.

Money as Pirate Loot

Gold wasn't anywhere near as valuable among the indigenous in the Americas as it was back in Eurasia, because in the Americas it had to be bartered as something pretty and useful, while in Europe a person could live like a King if one had enough of it. Wars were fought over precious metals. Sea dogs set sail on the seas and highwaymen on the roads, looking to fill their pockets with loot. The most important loot sought was commodity money, but any valuable, portable commodity could also be a source of riches:

Gold, Silver, Copper, Tin,
Swords, Knives, arrow heads, guns, ammunition, explosives,
Sea Shells, Ivory,
Spices, Tea, Coffee, Chocolate,
Alcohol, wine, beer, whisky,

The Value of Money is a Social Value

The value of money is a shared myth. It lets us say "this house is worth 400,000$ and make calculations of what that means to us in the marketplace should we sell it. If something changes that house may suddenly become worthless. Money is also a pseudo-wealth thing, even when we are talking about commodity money. The Indians used to melt gold and pour it down the mouths of particularly ruthless and cruel conquistadors to remind them of that. A stack of 100$ bills can suddenly become a stack of worthless paper. One can scratch a stack of Gold ingots and find that what is underneath is lead. Pirates long ago learned they could exchange gold painted ingots for real gold. There are many ways to be a pirate.

Gresham's law as a corollary of the law of comparative advantage

Thus Gresham's law only acts in its original case when talking about money as a commodity. However, one can think of Gresham's law as a corollary of the law of comparative advantage. When the values between commodities are not stable people seek to conserve or hoard the more valuable, durable and stable goods so they can exchange them later if needed. Or if the values are different between different locations they'll seek to find a way to transport those commodities elsewhere. European Kings sought to transport Gold from the America's, where it did them little good as a commodity, to Europe, where it could buy them arms to fight the Turks and allow them to live in nice palaces. Later they found substitutes for digging for Gold in slaves, silver, sugar, coffee, etc.... Commodity money is only a specific case of the law of comparative advantage. If Silk is common in China and expensive in Europe, sailors will sail to China if the cost of sailing their is less than the comparative advantage of selling silk on the return voyage.

Portable Goods

What made these items useful to the pirates and smugglers was that they could be carried elsewhere and exchanged. Bananas would become a valuable commodity in the 20th century, only when fast vehicles (boats, trains, planes) were developed. Commodity Money, being the most portable of them all. became the unit of account for these items. It was far easier to exchange ones slaves, alcohol, guns or ammunition for money than to risk getting caught smuggling or lose one's cargo. When one had more valuable commodities than one needed, it was easier to bury the loot, than risk that someone else would steal it from one; or worse the government would tax it.

Exchange or Steal

Recent archeology finds show that Greenland communities were sailing across the Arctic hunting ivory to sell back in Europe. Vikings and later pirates journeyed around the world seeking valuable commodities to exchange for other valuable commodities. Something that is common and readily available in one place, but rare elsewhere, becomes a good to exchange where it is rare.

Pirates And Colonies

Pirates on the Seas, and land pirates, would travel long distances looking for exchange goods to take home and exchange for other goods. Their goal was the accumulation of portable wealth like Gold and Silver, and real wealth like expensive homes or estates. They would establish trade depots, because one jackpot is not as good as a steady flow of income.

Depots and Grifting

Wealth was built on those exchanges. Merchant Warriors could become Kings and live in palaces. And some goods allowed people to simply take what they want. No pirate story is not complete without tales of theft, looting, enslavement and conquest. The pirates of the Old-World tried to conquer the world. One can think of explorers like Christopher Columbus as pirates. What they did was legal from the Point of View of their Sovereign [privateering]. But it was still piracy.

Freedom for Some, slavery for the rest

Looting, trade, smuggling, enslaving, all are alternative forms of exchange. Free markets aren't free to the enslaved or murdered. Free markets have their origins in markets for enhancing local trade. But they got their reputation from being places that sold people as well as goods and services. Free-booters were private army. These armies insisted that their freedom depended on defeating and usually enslaving their enemies.

Stable Exchange rates

If a country cannot control its currency, then merchants won't accept such goods without gold or silver. The pirate legacy lives on in this insecurity. Private money had a disturbing tendency to be printed in quantities exceeding the assets that purportedly backed it. Thus banks regularly suffered "runs on themselves." Fiat printed money would sometimes lose value with changes in government, or as happened with the Confederate States of America, the government's collapse. The USA had had a problem with it's "continental" currency due to counterfeiting, which led to extreme inflation. Even so, during the time when paper money seems secure, it becomes very popular.

Regulating Hoarding

Land Pirates

In 1871:

Q. What is the Chief End of Man?
A. To Get Rich.
Q. In what way?
A. Dishonesty if we can; honestly if we must.
Q. Who is God, the one only and true?
A. Money is God. Gold and greenbacks and stocks.
-- Mark Twain, "Revised Catechism," 1877

Commoners were not afraid of greenbacks. Issued by the Government, backed by the Treasury, they represented real wealth. Unlike bank notes from private notes, folks didn't have to worry about Grifter Bankers taking their deposits and fleeing to Argentina.

Chaos and Greenbacks

Commodity Money works for chaotic, piratical governments, because gold or silver can be hoarded and keep their value. However, what drives capitalist society is debt money. Indeed, Gresham's law implies that the "bad money" of debt, will push the "good money" of gold or silver out of circulation. So in any society where debt money is allowed to take the place of sovereign or commodity money, the debt takes its place.

When Salmon chase issued Greenbacks, it was salutory for the economy.

Private Money is Debt Money

To reiterate, private money is the circulation of debt. Fiat Money is the Treasury issuing paper money or "accounting money" in lieu of a commodity like Gold or Silver. This is a sort of debt too, but there is no interest with it and it becomes more analogous to a financial asset such as stocks.

Sound Money Versus Greenbacks

Indeed, a biography of Grant tells us that in 1869 when Ulysses S Grant took office:

"the national debt, which stood at $64 million in 1860, had grown to a staggering $2.8 billion."

To the emerging "liberal Republicans", and some of the "Radical Republicans" of the late 1860s, this was a more important issue than slavery. Paper Money, as issued by private banks had time and time again proven worthless. Even compassionate persons like Ulysses S. Grant felt that "sound money" was gold or silver coin and that paper money, especially "greenbacks" issued by treasury.

"The problem was compounded as hundreds of millions of dollars in unredeemable paper money -- "greenbacks" -- had pushed gold coins out of circulation."

However, greenbacks, as long as they were legal tender, fiat money, valid for "all debts public and private", don't need to be redeemed for gold or silver. They merely need to be rolled over into new issues of greenbacks. And as long as there are no (or minimal) interest charges on them, this can happen indefinitely.

Sound Money Versus Greenbacks

However, the "monied men" of the time didn't see it that way. The Author claims that "all of this [greenbacks] left the nation's credit in precarious shape." But people using those greenbacks didn't see it that way.

Private banks were the source of precarious circumstances. Grant was being Bamboozled. That has been going on ever since. A well regulated national currency is safer and stabler than privateering ones.

Legalized Piracy versus Sovereign Money

The power to lend is the power, potentially, to steal legally. Granting and regulating access to resources by through delegating the privilege of paying debts or buying goods to those issuing debt currency puts all the cost and risk on the depositors and society as a whole. This is not only unfair it is an inherent source of risk. There is no natural incentive to fiduciary duty. The lender makes money no matter what happens and is rarely punished when he commits fraud. Banking under the current schema is legalized piracy.

In most countries with a privateering central bank and private banking, banks hold to a fiction that their lending is controlled by "fractional reserve banking". The fractional reserve system also generates the real money supply of accounting money, paper money "as good as gold" and money treated as private debt.

Regulating the Money Supply

Thus to improve the commerce and access to credit and markets for people living within the lands where such money is available, local control over economies must be provided to local government. That can only happen if some means of regulating money is extended to the community. This requires that the government of the banking system be sovereign over money and it's governors have the power to ensure that only legitimate transactions are originated and cleared. Instead of treating local governments as second class citizens, central banks should front them money at zero interest for their municipal spending and then retire excess money when taxes are collected.

To do that hoarding has to be taxed. Rents have to be taxed. Actual capital in the form of capital goods and gains from those goods and services are an investment whose taxation should be deferred until they are actually no longer working to the public good. Likewise labor should be compensated justly and compensation not taxed to death. People like Henry George insisted that labor should not be taxed at all for moral, ethical and practical reasons. Since some taxes are fees for service taxing labor may be expedient, but it is better if taxes fall on net unearned income "profit."

Moreover, credit money should be taxed to regulate money, prevent inflation and gather resources necessary for Government operation. Our current system borrows its own credit from wealthy people, creates wealthy people and then pays unearned income to the very people it gave the money privilege to. Inheritances, privilege, excess, are what should be taxed.

Privateered Money is not Sustainable

Many of us know know that credit money is not sustainable, that many of the assumptions of the current system are not only faulty, but are downright fraudent. Yet nothing is done about it? Why is that? Galbraith called such systems of fraud "innocent frauds", but they aren't so innocent. Irving Fisher pointed out why they are frauds over 80 years ago. John Kenneth Galbraith labeled the "Phillips Curve" such a fraud way back in 2004, yet Reserve Chairman Janet Yellin referred to the Phillips Curve in her threat of raising interest rates to "fight inflation" in 2015! The reason we have this problem is the power of those with wealth to buy propaganda and people to speak for them. The answer to the problem is for the rest of us to understand the reality.

Irving Fisher, Credit Money and Dysfunction

Much of what is called "Keynesian Economics" in the United States actually owes to Irving Fisher and other New Deal Economists. Much of modern economics owes to them. They in turn owed a debt to previous generations. Henry George was born in 1839 and died in 1892, Irving Fisher was born in 1867 and died in 1947. Irving Fisher was probably influenced by Henry George but as a mathematical economist, he like the contemporary Thomas Piketty rejected the legalistic and accounting definitions used by Henry George in favor of a broader definition of Capital. That difference in argument, tended to disguise the fundamental symmetry and confluence of their analysis and prescriptions. Irving Fisher described an animal that had changed over the course of his lifetime. By the time he died the world was a very different place from that of Henry George. But both had similar policy recommendations when it came to money. Because they both were talking about the same facts.

We call current economics "Post Keynesianism" because all these theorists have theories that have weaknesses and strengths and that are gradually developing consensus.

The Insanity of Credit Money

Over 100 years ago Irving fisher pointed out the insanity of that system. An article on Fisher in "The Economist" notes about how money as debt, and excessive borrowing can destabilize an economy:

"As the underlying collateral declines in value and incomes shrink, the real burden of debt rises. Debts go bad, weakening banks, forcing asset sales and driving prices down further. Fisher showed how such a spiral could turn mere busts into depressions." [Economist]

And he quotes Fisher:

"Over investment and over speculation are often important; but they would have far less serious results were they not conducted with borrowed money. The very effort of individuals to lessen their burden of debts increases it, because of the mass effect of the stampede to liquidate…the more debtors pay, the more they owe. The more the economic boat tips, the more it tends to tip." [Economist]

Irving Fisher suggested notions like postal banking and "Stamp money" as a solution. He must have read his Benjamin Franklin, as Benjamin Franklin had suggested something similar way back before the American Revolution.

“Were Fisher alive today, he would tell us we have to avoid deflation, and to worry about all that inside debt,” says Robert Dimand, an economist at Brock University in Canada, who has studied Fisher in depth. “The ideal thing is to avoid these situations. Unfortunately, we are in one.” [Economist]

Quantity Theory of Money & Velocity

Fisher understood money better than he gets credit for:

In 1911, in “The Purchasing Power of Money”, Fisher formalised the quantity theory of money, which holds that the supply of money times its velocity—the rate at which a dollar circulates through the market—is equal to output multiplied by the price level. Perhaps more important, he explained how changing velocity and prices could cause real interest rates to deviate from nominal ones. In this way, monetary forces could produce booms and busts, although they had no long-run effect on output. Furthermore, Fisher held that the dollar's value should be maintained relative not to gold but to a basket of commodities, making him the spiritual father of all modern central banks that target price stability. [Economist]

Milton Friedman would popularize the "velocity" argument for money's circulation over Keyne's "Money Multiplier". Though Fisher was closer to Keynes on most subjects.

Sovereign Money enables Fiscal Policy

The Economist Article claims:

More important, Keynes's advocacy of aggressive fiscal policy overcame the limitations of Fisher's purely monetary remedies for the Depression.[Economist]

Fisher's suggested use of Stamp scripts would have been a fiscal measure if it had been supported and caught on, but it was aimed at supporting local government. It simply would have shifted the locus of fiscal spending to where it really should be -- local communities.

Irving Fisher and Stamp Scripts

I've talked about how Irving Fisher used Stamp Scripts to relieve the issue of shortages of money in the 30's and other acts of common sense and heroic economics (See ). And I first learned about the subject from an article referring to the Greek Tragedy back in February 2015 (see: Stamp Script 1). But he actually laid out the outlines for Money reform, along lines not much different from Alexander Hamilton's or Benjamin Franklin's before him!

Fisher's Plan

Indeed Irving Fisher, writing way back in the 30's laid out part of the the problem and some outlines for a solution, in his book, "One Hundred Percent Money"[100percent_money.pdf]. almost a 100 years ago he outlined the negative effects of privateering money and created the theory of money nowadays talked about by the various Sovereign money Groups.

Henry George and Irving Fisher

There is an effort to depict Economic thinkers like Henry George and Irving Fisher in a way that distorts what they had to say. I would prefer to send folks to other people's websites on this subject but I was reading an economic site today that completely misrepresented both of their views. That reminded me that people need to critically read what they themselves said. There is no substitute. They have to be read in the context of their time and place.

Cause of Business Cycle in the Privateering behavior of private banks

Irving Fisher was incredibly prolific. Irving Fisher has been neglected, purposefully in my view, precisely because his ideas were "on the money" about the causes of economic cycles and inequality. An article in the Economist notes:

"Fisher laid the foundation for much of modern monetary economics; Keynes called Fisher the “great-grandparent” of his own theories on how monetary forces influenced the real economy. (They first met in London in 1912 and reportedly got along well.)" [Economist]
"Fisher translated his theory into a policy prescription of "100 percent money" (all bank deposits should be backed by 100 percent reserves rather than fractional reserves, used then and now by virtually all banking systems) on the grounds that such a policy would control large business cycles."

According to the debt deflation theory, a sequence of effects of the debt bubble bursting occurs:

  1. Debt liquidation and distress selling.
  2. Contraction of the money supply as bank loans are paid off.
  3. A fall in the level of asset prices.
  4. A still greater fall in the net worth of businesses, precipitating bankruptcies.
  5. A fall in profits.
  6. A reduction in output, In trade and In employment.
  7. Pessimism and loss of confidence.
  8. Hoarding of money. "
  9. source:

Thus Irving Fisher was a pioneer in modern money theorizing. He seems to have been the first to thoroughly do the math. Hamilton saw "bank paper" (paper money) as a necessary adjunct to coins and said:

" may be observed, that the inconvenience of transporting ... is sufficiently great to induce a preference of bank paper..." [Hamilton/Money]

Benjamin Franklin wrote about the value of paper money in the 1740s and defended paper money in Parliament against a Hostile Parliament.

Money Men Versus Sovereign Money

Hamilton didn't even see value to reserve banking. For him bank paper was a convenience. In his time banking was the province of money men and the idea of the USA, or any country, having complete sovereignty over money was foreign. So we really can thank more recent thinkers for the idea.

Benjamin Franklin and Paper Money

Benjamin Franklin vigorously defended the right of the colonies to issue their own script. He may never told Parliament

"In the Colonies, we issue our own paper money. It is called Colonial Scrip. We issue it to pay the government's approved expenses and charities"

as Gary North Alleges. But he actually, literally, wrote a book on the subject that explained exactly that. Setup paper money systems for an number of colonies and printed paper money. So what he did say was that the reasons for rebellion owed:

"To a concurrence of causes: the restraints lately laid on their trade, by which the bringing of foreign gold and silver into the Colonies was prevented; the prohibition of making paper money among themselves, and then demanding a new and heavy tax by stamps; taking away, at the same time, trials by juries, and refusing to receive and hear their humble petitions." [bartleby]
More on Franklin:
Franklin As Modern Money Advocate

In other words, the colonies were in rebellion because Parliament at the behest of the Bank of England and other Tory forces were seeking to starve the colonies of money. And Franklin says as much:

"The Stamp Act says we shall have no commerce, make no exchange of property with each other, neither purchase nor grant, nor recover debts; we shall neither marry nor make our wills, unless we pay such and such sums; and thus it is intended to extort our money from us or ruin us by the consequence of refusing to pay it." [bartleby]

Bad Banking can turn a loyal country into a disloyal one. This Gary North alleges that Franklin would never have defied Parliament's prohibition on printing money. But Franklin did exactly that:

"Q. Do you think the assemblies have a right to levy money on the subject there to grant to the Crown?"
"A. I certainly think so; they have always done it."
"Q. Are they acquainted with the Declaration of Rights? And do they know that, by that Statute, money is not to be raised on the subject but by consent of Parliament?"
"A. They are very well acquainted with it."
"Q. How, then, can they think they have a right to levy money for the Crown or for any other than local purposes?"
"A. They understand that clause to relate to subjects only within the realm; that no money can be levied on them for the Crown but by consent of Parliament. The Colonies are not supposed to be within the realm; they have assemblies of their own, which are their parliaments, and they are, in that respect, in the same situation with Ireland. When money is to be raised for the Crown upon the subject in Ireland, or in the Colonies, the consent is given in the Parliament of Ireland or in the assemblies of the Colonies. They think the Parliament of Great Britain can not properly give that consent till it has representatives from America, for the Petition of Right expressly says it is to be by common consent in Parliament, and the people of America have no representatives in Parliament to make a part of that common consent."

How to Control our Money Supply!

Both Benjamin Franklin, Irving Fisher and maybe Salmon Chase, would have been fine with Post Offices taking accounts. With the use of Stamp Scripts to provide local money and treasury Branch banks to issue money to pay for State and local utility expenditures. If a ready supply of currency is available, and money is constantly invested in the kind of infrastructure and utilities needed to sustain a thriving economy, then the money supply can be regulated through taxation.

Gresham's law used to regulate Money

Thus Gresham's law can regulate money. Gold and Silver can safely be traded as commodities. People can do with them as they please, or they can be used to settle foreign trade accounts. Both will be driven out of the banking system. The real bad money of bank notes and fake money will be driven out of the system. People hoarding accounting money will have to pay a tax on those accounting hoards.

Aristotle on Usury

Aristotle explained it:

“The most hated sort, and with the greatest reason, is usury, which makes a gain out of money itself, and not from the natural object of it. For money was intended to be used in exchange, but not to increase at interest. And this term interest, which means the birth of money from money, is applied to the breeding of money because the offspring resembles the parent. Wherefore of any modes of getting wealth this is the most unnatural.” [Quantum of Power]

Sources and Further Readings

"commonwealth" and the common Good and what the virtues of a commonwealth are
traced the Concept to John Locke
Tory tyranny of the Stuarts.
Pirates and Privateers of the Americas
Bernie Sanders did introduce Sovereign Money:
"Can America Afford Bernie Sanders' Agenda?"
“This is so because, unlike in Greece, every single penny of it is denominated in our currency. We don’t need to raise dollars from taxation, exports, or bake sales–we make them.” Harvey

This post was already long when I started working on it the other day. I have a lot to say on the subject. But some of what I say here overlaps other posts, and to keep it somewhat coherent I've moved long sections to another draft and am deleting them. It still rambles a little. Sorry. But the subject is important.

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