A Rebuttal To Greenbackers vs. Goldbugs

Eric Blair of the Activist Post recent published an article entitled The After-the-Fed Solutions Debate Begins: Greenbackers vs. Goldbugs as a response to Gary North’s article that slammed the “Greenbacker” movement.

In brief, what the Greenbackers want is an entirely fiat interest free money printed by the US Treasury, where the Congress gets to print as much interest free money as they want to pay for whatever spending programs they want.

The people who back the gold standard want a fixed currency that simply represents a unit of gold and can be redeemed for gold at any given moment.

Both parties want the central bank abolished.

To understand why the Greenback movement is nothing but “progressivism” in disguise, one must understand the fundamental nature of money and how it arises in a free society.  One must also understand the nature of interest, how it arises, and how it affects the over-all economy.  Blair seems to think that interest, in and of itself, is some kind of evil mechanism without presenting any real reasoning as to why this is so.

So let us look at the nature of money and how it arises in an economy.  If we were to remove all money from an economy, people would be reduced to bartering for goods and services. This means that if I am chicken owner and I want a pickle, I have to find a chicken wanting pickle owner with whom I can trade.

What people realized is that if they traded the chicken for something that everyone wants, they could then use that new commodity to barter for the other goods more easily.  So the pickle wanting chicken owner would trade his chicken for gold and then trade the gold for the pickle.

As this intermediary of trade becomes the market chosen standard against which all other goods are bartered, it takes on the form and property of money.  Shop owners begin to price their goods in terms of the market money, which history shows us is almost always gold or silver.

This is how money and prices arise in a free market.  First the market chooses the money, and then the market sets the prices of all goods based on the supply and demand of that market “money”.  No violent or coercive force is necessary for this to take place.  It takes place all on its own without the use of weapons, police, brutality, or courts.  People freely chose to engage in trade with this money because it is in their best interest to do so.

This gold-as-money system arose, and can arise, without any government at all.  In a completely anarchic system, this is how money would come into existence – no violence or force is necessary.

None of what I have written is true of fiat currency.  Fiat currency cannot be introduced into a market without gold first being used as a currency, and when it is introduced, it requires violent enforcement of legal tender laws to make it work.  For example, if there were no money in a society and everyone simply engaged in barter, I could not print up a bunch of 100 dollar bills and start buying things with them.  No one would have any idea what prices should be or how much the 100 dollar bill was worth.  First, the paper money must be used to represent gold; otherwise it would be impossible for anyone to set prices.

Only after paper money is used to represent gold can a criminal counterfeiter step in and replace the gold backed money with unbacked fiat paper money.  This is why government loves fiat money and why almost all governments use fiat paper money today.  Fiat paper money can be easily counterfeited.

In reality, inflation is nothing more than the government stealing gold out of your pockets through the mechanism of counterfeiting.  When the government expands the money supply by creating more debt (issuing more treasury bills), it steals from the value of all the money already existing.  In a Greenback system, this inflationary expansion is simply accomplished by running a printing press rather than issuing more bonds at interest, but the net effect is the same.  By adding more money into an economy, the government artificially suppresses interest rates and steals from the value of all the existing currency.

To understand how this inflation distorts the market, we must turn to the Austrian School of economics.  The Austrian’s use a method known as praxeology to determine the effects of rational actors in a market.  Praxeology starts with logical truisms about individual actors and then works its way up to describe the entire economy.  It is a unified theory of economics, unlike the current Keynesian nonsense that separates macro and micro economics and has no way to relate the two.  This is the same school of economic thought that Ron Paul and Peter Schiff subscribe to, and it is the only school to have consistently predicted the market chaos that is now unfolding.

In our former gold backed system, inflation was caused by banks lending out more money than they had in gold reserves or by an increase in the gold supply.  Lending out more money than the banks have in reserves is called fractional reserve banking.  Fractional reserve banking means that if a bank had 100 dollars in physical gold reserves, they could lend out 1000 dollars of loans.  The Austrian school opposes this kind of fraudulent activity.  It is important to understand this crucial difference between the gold standard advocated by the Austrians and the gold standard that is advocated by bankers.  The Austrians want a 100% reserve gold backed system of private currencies.

A 100% reserve system means the banks essentially act like warehouses.  They hold the people’s money and charge a nominal fee for this service.  They don’t actually create money through lending like they do now.  Inflation in a 100% reserve gold system can only occur if the supply of gold is increased, which requires a large amount of time and effort on the part of gold miners.   The mining operations also must be profitable, which means the miners will only undertake new mines if they feel the value of gold has increased to a point where opening a new mine would yield profitable results.  The scarcity of gold and the profitability requirements of mining operations naturally limit the expansion of the gold supply.

In a greenback system, inflation is caused by government simply running a printing press and then spending that newly printed money into the economy.  Inflation under the proposed greenback system would be constant and rapid.  Since government would continue to hold the reins of power over the printing press, it would ceaselessly print, rather than ceaselessly borrow, in its ever expanding quest for more power.  If government can’t control its borrowing now, it is ridiculous to think it will be able to control its printing under a greenback system.

Business cycles are directly related to this fraudulent activity of excessive lending (or printing in the case of greenbacks) since the act of lending more paper money than the banks actually have in gold reserves artificially reduces interest rates, which leads to “booms” in the business cycle.   An increase in the money supply increases the reserves of banks, which then allows them to further pyramid loans in a fractional reserve system. The current rate of this expansion is tightly controlled by the Fed through its monetary policy.

When money is made “cheap” (low interest rates), either by printing in a greenback system or by pyramiding in a fractional reserve system, it causes wild distortions in the structure of production.  Interest rates are nothing more than the price of borrowing.  They are a price, and like all prices, any government interference in the price causes massive economic problems.

For example, no rational person would advocate government price controls on commodities.  When government places price controls on a good and artificially drives down its price, it causes all manner of distortions in the production of that good.  Producers have less incentive to produce, the consumers have incentive to horde, and it generally causes massive shortages of the good in question.

The same general distortions apply to the price of borrowing.  When government drives down the price of borrowing by printing money in a greenback system or by expanding bank reserves and pyramiding in a fractional reserve system, it causes “booms” in the business cycle.

These “booms” are when the malinvestment takes place due to excessively “cheap” money (credit) being available.  Since money is cheap, investors are willing to take more risk than they otherwise would.  The cheap cost of borrowing also sends a signal to investors that there is more capital goods available for future production than actually exists.  Producers see the cheap rates and assume people have lots of savings available to spend on future consumption so industry reorganizes itself into the production of long term goods.  Only later is it revealed that consumers are broke and the existing capital stock of goods that producers were relying on to finish their projects does not actually exist.  For a great layman’s overview that proves why this is so, watch this presentation by Professor Roger W. Garrison.

From this we can see that interest rates are a necessary coordinating factor that harmonizes the production of high order and lower order goods.  The reason why we have such a screwed up economy today is mostly due to the Fed artificially suppressing interest rates which drove the housing boom by screwing up this crucial investment signal.

Further, suppressing rates through inflation also causes people to SPEND their money rather than SAVE their money.  If people cannot get a reasonable return above the rate of inflation on their savings, they MUST necessarily spend their money or they will lose it.  If they don’t spend it, the government will essentially steal it through the mechanism of inflation.  Obviously this destroys any real investment capital that an economy might have.  This is also a primary cause of our current economic crisis.

We also must not neglect the fact that when government spends money it takes resources away from the productive private sector of the economy that would otherwise be available.  For example, if the government decides it wants to create a large number of propaganda websites, it must necessarily hire a large number of web developers.  This obviously causes the price of web developers to increase since web developers would be scarcer.  So now a private company that wishes to expand its online presence must spend more than it otherwise would have had the government not involved itself through spending in the web development market.

After looking at the above evidence, it is easy to see why a Greenback system would not bring prosperity to the American public, which is really what this is all about to begin with.

Money is far too important to be left in the hands of government – it must be left in the hands of the people.