Ambrose Evans-Pritchard and the Greenbackers

by James E. Miller
Oct. 29, 2012

In a recent article for The Telegraph, Ambrose Evans-Pritchard considers a recent IMF paper that, in his words, has "begun to acquire a cult following around the world."  This working paper, written by Jaromir Benes and Michael Kumhof, applies an almost century-old solution to what many consider a broken banking system today.  According to Evans-Pritchard, this proposal would be the equivalent of an economic miracle drug.  In one fell swoop, it would
...slash private debt by 100pc of GDP, boost growth, stabilize prices, and dethrone bankers all at the same time. It could be done cleanly and painlessly, by legislative command, far more quickly than anybody imagined.
What is this miraculous resolution?  A contemporary Chicago Plan as first laid out by Henry Simmons and Irving Fisher in 1936.  What is proposes is that various states eliminate fractional reserve banking and flood the market with fiat currency to make up for the elimination of private money.  The state would then take full control over the money supply and take the privilege of creating credit out of thin air away from private banks.  As Evans-Pritchard puts it
The conjuring trick is to replace our system of private bank-created money — roughly 97pc of the money supply — with state-created money.

The nation regains sovereign control over the money supply. There are no more banks runs, and fewer boom-bust credit cycles.
In other words, the proposal is the enforcement of what is known as greenbackerism where the state remains the only entity legally able to create money.

It should be pointed out immediately that this idea was co-developed by a man who famously claimed shortly before the stock market crash which ushered in the Great Depression that the market had reached a "permanently high plateau."  Irving Fisher, whom Milton Friedman once called "the greatest economist the United States has ever produced," was an advocate of supreme government regulation including mandated eugenics to preserve the Nordic race so it would not "vanish or lose its dominance."

Fisher developed the Chicago Plan during the Depression because of the wide wealth disparity he witnessed.  Too many creditors were becoming wealthy on the backs of debtors, or so he alleged.  Putting money creation fully into the state's hands was seen as a counterbalancing maneuver.

Rather than the creditor class being the beneficiaries, the debtor class receives special treatment. The Chicago Plan was a pure populist ploy based on appeasing those who took on too much debt.  It is reasoned that a greenbacker monetary system would ease social tension.  In actuality, it would instill a kind of recklessness by taking from one class and bailing out another.  One side (the debtors) wins in the short run while the other (the creditors) loses.  But in the end, both lose and the state is the winner since it holds a monopoly on the supply of money that is ultimately maintained through the threat of violence.

Under the Chicago Plan, Evans-Pritchard refers to money becoming an "equity of the commonwealth" but this is simply linguistic nonsense commonly employed for justifying state usurpations of power.  What would back this equity is the ever-present threat of looting by state authorities; no tangible wealth creation.  It amounts to voluntary consent overthrown by the trigger of guns and the prospect of prison bars.

Evans-Pritchard, who is no fan of gold, also takes the chance to point out that contrary to popular belief, money did not first develop "as a commodity-based or gold-linked means of exchange" and that "social fiat currencies began with the dawn of time."  He is likely referencing recent work done by anthropologist and anarchist David Graeber which shows that ancient cultures used elaborate systems of credit before the development of money.  Graeber's position is based off of a lack of empirical evidence of the use of money and the documentation of credit systems which used monetary accounting.  In other words, money predated barter; not the other way around.

But as Rothbardian economist Robert Murphy points out, Graeber's claim doesn't hold up logically since the prices used to formulate a system of credit must have been based off of preceding barter.  For example, Joe couldn't have owed Smith one chicken if chickens weren't seen as marketable commodities enough where Joe agreed to the transaction.  In order to sustain a system of credit with monetary prices, those prices had to be first established by some means.  Graeber's, along with Evans-Pritchard's, position appears to be that the authorities established these prices without ever witnessing barter taking place.  While that could certainly be true, it makes much more sense to deduct that barter took place first so as to give the central planners an idea of what unit should be used for monetary accounting.

What isn't said but is definitely implied is that the state is the most trustworthy and capable of institution of having complete authority over the money supply in a given society.  This is an incredibly dangerous recommendation however.

Money is the lifeblood of any economy.  Giving full control over to the state is the equivalent of handing over firecrackers to teenage boys.  The number one job of a politician is to be reelected.  The number one job of a bureaucrat is to maintain their position while accumulating more jurisdiction and therefore prestige.  It is in both their interest to use a fiat currency system totally under their control to enrich those who keep them in office.  In all likelihood, such an arrangement would lead to high inflation or even hyperinflation.  The very least it would do is cause massive distortions in the capital structure of the economy as resources are dedicated to political endeavors instead of investments to meet consumer demand.

Whenever the state has its hands all over something, the results are the same: inefficiency, waste of resources, and cronyism.  Most importantly, the state monopoly over currency means that individuals not within the government are violently restrained from creating their own money.  It is an assault on basic liberty and the right of self-ownership.

None of this is to say that the current fractional reserve banking system is legitimate either.  Efforts to impose a 100% reserve system are laudable as they would ensure that the right of contract is upheld.  Under any understanding of proper law, fractional reserve banking constitutes fraud.  When bank deposits are created ex nihilo without any backing, duplicate claims are created on those reserves which a bank actually collects from depositors.  In other words, two or more people have a claim on the deposit of someone else.  The bank can't fulfill all of its contracts to everyone who has a claim on the money it supposedly holds; hence where fraud comes in.

Just as murder, rape, and theft are still considered crimes under capitalism, the unfettered marketplace does not give way for fraud to be committed.  As economist Jörg Guido Hülsmann writes
There is no tenable economic, legal, moral, or spiritual rationale that could be adduced in justification of paper money and fractional-reserve banking. The prevailing ways of money production, relying as they do on a panoply of legal privileges, are alien elements in the capitalist [i.e., true free market] economy. They provide illicit incomes, encourage irresponsibility and dependence, stimulate the artificial centralization of political and economic decision-making, and constantly create fundamental disequilibria that threaten the life and welfare of millions of people. In short, paper money and fractional-reserve banking go a long way toward accounting for the excesses for which the capitalist economy is widely chided.
The fractional reserve banking system by definition is unstable and insolvent because of the pyramiding of credit which takes place.  Forcing banks to hold 100% reserves would be a good step toward having a legitimate banking sector which doesn't pose a risk to the greater economy.  But the greenbacker scheme is a terrible channel to do so as the state would proceed to devalue the currency at an extraordinary rate.  The only economical and moral solution is for the enforcement of 100% reserve banking while leaving money to the marketplace.  Evans-Pritchard should consider that possibility before giving credence to a ploy that is a backdoor to socialism.
James E. Miller holds a BS in public administration with a minor in business from Shippensburg University, PA. He is the Editor in Chief at the Ludwig von Mises Institute of Canada and a current contributor to his hometown newspaper, the Middletown Press and Journal. He currently works in Washington D.C. as a copywriter.

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