The news you're not supposed to know...

Austrian Economics: Understand Economics, Understand the World
The Century of the Self: The Untold History of Controlling the Masses Through the Manipulation of Unconscious Desires
The Disappearing Male: From Virility to Sterility

The Obama Deception: The Mask Comes Off
Operation Gladio: The Hidden History of U.S. Sponsored False Flag Terrorism in EuropeThe New American Century: The Untold History of The Project for the New American Century
Article posted Oct 29 2012, 1:25 AM Category: Economy Source: James E. Miller Print

Ambrose Evans-Pritchard and the Greenbackers

by James E. Miller

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.

Latest Economy
- Good News: Law Schools In Decline, Bar Passage Rates Plummeting
- Singapore: The Power of Economic Freedom
- Schiff: The Shadow Rate Casts Gloom
- Neil Cavuto Embarrasses Student Who Wants Free College and Has No Idea How to Pay For It
- Pocketbook Pain: The Rapidly Rising Cost of Living Is Absolutely Killing The Middle Class in America
- The Three Industries That Love The TPP: Hollywood, Big Pharma & Wall St.
- Sexist Markets - 77 Cents On The Dollar?
- Former Reagan Administration Official Warns That Financial Disaster Is Dead Ahead

No Comments Posted Add Comment

Add Comment


Verification *
Please Enter the Verification Code Seen Below

Please see our About Page, our Disclaimer, and our Comments Policy.

This site contains copyrighted material the use of which in some cases has not been specifically authorized by the copyright owner. Such material is made available for the purposes of news reporting, education, research, comment, and criticism, which constitutes a 'fair use' of such copyrighted material in accordance with Title 17 U.S.C. Section 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond 'fair use', you must obtain permission from the copyright owner. It is our policy to respond to notices of alleged infringement that comply with the DMCA and other applicable intellectual property laws. It is our policy to remove material from public view that we believe in good faith to be copyrighted material that has been illegally copied and distributed by any of our members or users.

About Us - Disclaimer - Privacy Policy

Advanced Search


Remember Me
Forgot Password?

World's Most 'Adorable' Drug Kingpin Is Actually The Daughter of Texas DEA Head Honcho - 11/26Heroic Cops Protect Community by Raiding a Group of 90-Yo Women Playing Mahjong - 11/26Donald Sutherland Reveals The Real Meaning Of The Hunger Games - 11/27Good News: Law Schools In Decline, Bar Passage Rates Plummeting - 11/26Drone Pilots Have Bank Accounts and Credit Cards Frozen by Feds For Exposing US Murder - 11/27VIDEO: Language Barrier Leads to Seattle Cops Punching Man 17 Times - 11/26Let's Talk About...The Plague - 11/26City Settles After Police Chief Arrested Man For Calling Public Official A 'Liar' - 11/27

Man Follows Speeding Cop, Finds Out He Was Speeding To Buy PeanutsMission Creeps: Homeland Security Agents Confiscate Women's Panties For 'Copyright Infringement'Cop Shoots Couple's Dog, Threatens Jail For Trying To Save Dog's LifeSWAT Team Shoots Teen Girl & Her Dog During Pot Raid On Wrong HomeDurham, NC Cop Testifies Faking 911 Calls To Enter Homes Is "Official Policy"Indiana Sheriff Says US A "War Zone" To Justify New MRAP Military VehicleTampa Cops Surveil Pot Dealer, Catch Him Selling Pot, Raid His Home & Kill Him"You Just Shot An Unarmed Man!": Witness Says Police Shot His Friend With His Hands Up