Money Mistakes | Tom Woods

As I noted not long ago, I find myself in serious disagreement with a portion of the end-the-Fed movement. This is the segment of the movement whose complaints are that the Federal Reserve is “privately owned,” that the Fed does not inflate enough, that interest payments are unjust or inherently unpayable all at once, etc.

This is not nit-picking. I am not interested in replacing the Fed with something as bad or worse. The problem with the Fed is not that it isn’t socialistic enough. The problem with the Fed is that it is a creation of Congress and operates with special privileges granted by the government. If only the Fed were truly private, with no government-granted privileges. Then it could do no damage whatever.

As I also noted, I recently asked an antagonist on Facebook to write out his ten propositions on money, so we could try to get to the bottom of our differences. I posted them last week. Right now I’ll reply to this one:

“Monetary deflation benefits the private bankers who wish the People to default in order to seize collateral with, or without govt force.”

This is clearly incorrect. In addition to not wanting the hassle of trying to unload collateral in a potentially illiquid market, no bank would want to seize collateral during a deflationary period at all! When asset prices are falling, why would banks want to grab assets? Who would want an asset that’s in the middle of seeing its price fall?

Ah, but couldn’t the banks coordinate the deflation together, and then when it hits bottom, grab all the assets at that moment, when their prices have nowhere to go but up? Even assuming that bankers would adopt such a far-fetched strategy, there is no way for them to know at what point in the deflationary process the defaults are going to occur.

If there’s something we’re supposed to fear from banks, this sure ain’t it.

What’s also peculiar about this assertion is how tone-deaf it is to the financial world we live in. The remotest prospect of deflation is treated, without fail, as an unthinkable catastrophe by absolutely everyone in the financial world — the financial media, the financial elites, everyone. Once in a great while they may caution about inflation, but those cautionary words, when they are uttered at all, are always restrained and mild. But deflation? Scarcely a single voice can be heard, anywhere, in support of it.

Thus my critic, who claims I am really just a Rothschild shill (Rothschild evidently being in favor of a free market in money, and the absence of a central bank), is actually joining his voice with the entire financial establishment in raising warnings about deflation, of all things. Think back to the word “leverage” from the recent financial crisis and you will understand why the financial elites are desperate for inflation, and would see the whole world burn down before consenting to deflation.

We are constantly warned about deflationary spirals (if prices are falling, no one will buy, which will make prices fall even more, and then people will be even less willing to buy if they anticipate still further falls in price, etc.), about the alleged impossibility of business profits under deflation, etc. I answered these arguments in a recent lecture in New York.

For more on deflation, see the relevant section of my 2011 book Rollback (which could very well have been called Everything Should Be Abolished), as well as the deflation section of my LearnAustrianEconomics.com resource.

guest

You said, ” The first two versions were granted 20-year charters by the Federalists.
The government charter is WHY we say it wasn’t truly private.
If government is holding a gun to your belly, saying you MUST use so and so’s fiat money, it is NOT a private bank. It is a corporatist bank which has the government-granted privelege of socializing its losses – and those in government benefit, too, by being able to promise stuff to their constituents which will have to be paid for with higher taxes on the rest of us.
Without government interventions, banks would risk losing their business to bank runs – so they’d have an incentive to refuse give riskier loans; But since the government backs them up with a printing press if they’re deemed “too big to fail”, the government helps the banks to socialize their losses.
Besides that, “government issued, debt free currency” is an oxymoron, since non-commodity money is essentially an IOU. You’re giving somebody something that’s essentially worthless (paper), for something of value, and just declaring that it has purchasing power.
And IOUs are, BY DEFINITION, debt. Who owes the debt to whom, you ask, if government gives you purchasing power, directly? Its the later users of the new money who essentially owe YOU for taking the “debt free” money, and the debt is manifested in the form of higher prices. In other words, price inflation.
Good job, genius. By taking new “debt free” money, you’ve burdened the rest of society with higher prices. Who’s the corporatist, now?
So, whether a private greedy evil, corporatist, government-protected central bank is printing money; or the government comprised of elected officials; the SAME FRAUD takes place.
Except that in the case of the evil, corporatist, so-called “private” Federal Reserve, the decisions to print money aren’t ENTIRELY political; So, as Gary North has noted, a 100% government-run money supply would actually be WORSE than the Fed, as bad as the Fed is.
The German “Economic Miracle” was increased employment in war spending. That is NOT an economic miracle:
Ellen Brown: Hitler’s Cheerleader
http://www.garynorth.com/public/7070.cfm
“In short, the government created jobs in factories preparing for war. Then it
taxed workers so that they could not spend their income on consumer goods.”
And, yes, the autobahn is addressed in that article.
In a gold coin standard, not only can the banks not loan money they don’t have, but your money would GAIN VALUE instead of losing purchasing power to the hidden tax of monetary inflation.
guest

I found this relevant list of links from one of Gary North’s articles:
Ellen Brown: Hitler’s Cheerleader
http://www.garynorth.com/public/7070.cfm
GREENBACK ECONOMICS

To get some sense of what Greenback economics is all about, let me survey a
few of her economic errors. I list them in the order in which they appear in
Web of Debt. I do not refute them here. I have devoted one article per
error. Click any link to see the direct quotation from Web of Debt and my
refutation.

1. Governments
should get out of debt by printing paper money.
2. There is not enough
gold to facilitate trade.
3. Economic scarcity is
the result of greedy bankers.
4. Mercantilism’s
state-run economy is harmonious; the free market isn’t.
5. Keynes was correct
about money.
6. The New Deal made
Americans richer through public works.
7. The New Deal’s price
controls on food were good for America.
8. Keynes was a great
economist because he promoted budget deficits.
9. Rothbard’s monetary
theory is wrong (when you misquote it).
10. The New Deal allocated
capital better than the free market did.
11. A monetary system is a
national contractual agreement.
12. Falling prices and
increasing productivity cause recessions under a gold standard.
13. The government can pay
off its debt with paper money with no price inflation.
14. The government can pay
off Social Security with paper money with no price inflation.
15. Americans should trust
Congress to regulate the monetary system.
16. The government should
build a larger welfare state with fiat money.
17. The banking system
should be run like the Post Office.
18. Banking should be run
on a non-profit basis.
19. If Congress prints
money, there will be no need for an income tax.
20. Gold’s price
fluctuates too wildly for it to serve as money.
21. It is possible to have
civil government without taxes, debt, and inflation.
guest

A gold standard would prevent #4 (assuming an already existent government granted money creation priveledge), which would severely limit the ability of banks (or government) to engage in #2 and #3.
But if we don’t already have a government that’s restricting the use of other currencies, or if we don’t already have a “private” business with a government-granted monopoly, then a gold standard would prevent #1.
guest

Here is a really good intro video that explains the Austrian view on money.
Smashing Myths and Restoring Sound Money | Thomas E. Woods, Jr.
http://www.youtube.com/watch?v=HAzExlEsIKk
Once you understand that real money has to have first had a value AS A COMMODITY, and then have BECOME the money through barter, then it’s easier to see why Joshuatwill’s scenario doesn’t involve the destruction of money.
Briefly, money created out of thin air is artificial credit expansion. It’s fraud. The central bank is tricking you into believing that money is JUST a unit of account so that they can hand you worthless pieces of paper for real wealth.
In a gold coin standard, loans are limited by the supply of real wealth (because real money is itself a commodity), and the banks would have to lend actual physical wealth, such that the Joshuatwill’s scenario cannot occur.
In the above scenario, the borrower was tricked into believing he was getting real wealth because he thought that paper notes correctly represent real wealth (which can only be true in a 100% reserve scenario, in which case there’s no point in using paper – just use the commodity money). This is why the Greenbackers are wrong.
The ILLUSION of wealth was destroyed, not real wealth.
Anonymous

In regards to the second to last paragraph, it’s important to note that most consumer items are built with planned obsolescence. So if the cost of food, cars, TVs. weed, iPads of things of this nature fell, I’d be buying the crap out of them, not worried that their prices would drop further. Who buys a hamburger with the intent of reselling it. Do you?

Apparently Wood’s antagonist assumes that most people would rather starve than lose resale value on an iPhone that is going to be obsolete in 6 months anyway. And that this thinking represents moral and righteous monetary policy (I’d encourage him to ask around). This is just one snapshot into the flawed mindset of those who demean deflation. The reality is deflation will be our only salvation. Oppose it at your own peril…
guest

He has the cart before the horse.
In the following time stamped link, Peter Schiff explains that the Fed tricked the rest of the world into selling its gold for Federal Reserve Notes at a time when everyone else was worse off than us. We told them that the FRN was as good as gold.
Peter Schiff – The Fed Unspun: The Other Side of the Story
http://www.youtube.com/watch?v=zdB9I79BQRI#t=1h14m19s
By the way – and this issue comes up in the video – gold DOES IN FACT earn interest, but in the form of increased purchasing power over time. Gary North explains this in the following article:
Interest Rates in a Gold Coin Standard
http://lewrockwell.com/north/north1075.html
guest

The same thing would occur under a government controlled money supply, except you’d always owe the government rather than a corporatist central bank.
guest

Give him the following two videos. They will explain how to eliminate state control, in practice (especially the Ron Paul video):
Smashing Myths and Restoring Sound Money | Thomas E. Woods, Jr.
http://www.youtube.com/watch?v=HAzExlEsIKk
Gold versus Discretion: Ron Paul Debates Charles Partee
http://www.youtube.com/watch?v=kcm8VvBcUdE
Anonymous

Not true at all. WE are the government. WE wouldn’t charge ourselves interest to monetize our assets. WE wouldn’t print money to launder in Indonesia to aid our central banking interests in London. WE wouldn’t cheapen goods we just produced by printing more money than their collective value could back. WE would have greater oversight and influence over our own presses. Last I checked both Congress and the FED regularly assert that the government has no power to dictate FED policy. The exact opposite would be true if the government issued its own money, and many of the worst consequences of FED practices would not even be within the realm of possibility. Therefore, despite my belief that there would still be opportunities for corruption, a government controlled money supply would be immune to many of the trappings of the FED.
guest

Deflation and Liberty
http://mises.org/daily/3231
guest

Deflation and Liberty
http://mises.org/daily/3231
guest

Here’s a relevant excerp from Jörg Guido Hülsmann’s “Deflation and Liberty”.
Deflation and Liberty
http://mises.org/daily/3231
“Some present-day libertarians harbor a romantic picture of these days of the classical gold standard. And it is true that it was the golden age of monetary institutions in the West, especially when we compare them with our own time, in which the monetary equivalent of alchemy has risen to the status of orthodoxy. But it is also true that western monetary institutions in the era of the classical gold standard were far from being perfect. Governments still enjoyed monopoly power in the field of coinage, a remnant of the medieval regalia privileges that prevented the discovery of better coins and coin systems through entrepreneurial competition. Governments frequently intervened in the production of money through price-control schemes, which they camouflaged with the pompous name of bimetallism. They actively promoted fractional-reserve banking, which promised ever-new funds for the public treasury. And they promoted the emergence of central banking through special monopoly charters for a few privileged banks. The overall result of these laws was to facilitate the introduction of inflationary paper currencies and to drive specie out of circulation. At the beginning of the 19th century, most of Europe, insofar as it knew monetary exchange at all, used paper currencies.[11] And during the remainder of that century, things did not change much. England alone among the major nations was on the gold standard during the greater part of the 19th century, and banknotes of the Bank of England played a much greater role in monetary exchanges than specie—in fact, the reserve ratio of the Bank seems to have been around 3 percent for most of the time, and occasionally it was even lower.[12]“
guest

We aren’t the government, we choose to HAVE and fund a government for our own individual purposes. Government is a creation by people who ALREADY HAVE wealth. Government doesn’t create free trade or society – it’s the other way around.
And no, money isn’t a public good, but rather is supposed to be a commodity that serves as the money – no central planning of the money supply required.
Your problem is with interest per se, but interest comes from people’s varying time preferences, which is normal. Production requires time, and if there were no money we’d still have interest in terms of some other good:
Basic Economics Lesson 4 – Time Preference, Interest Rates, and Production
http://www.youtube.com/watch?v=g2OK5D_3TzM
Besides, your girl, Ellen Brown, has basically admitted that she took you for a ride. She supports the Federal Reserve System’s inflationary policy, now:
Ellen Brown’s Web of Debt Is an Anti-Gold Currency, Pro-Fiat Money,
Greenback, Keynesian Tract. Here, I Take It Apart, Error by Error.
http://www.garynorth.com/public/department141.cfm
guest

Monetary deflation (reduction in the money supply) makes only those existing debts that were in some way dependent on artificial credit expansion to be more burdensome.
But such debts were the result of cronyism, to begin with. So they SHOULD be more burdensome, because they are socializing their costs (as you noted).
If you can still make the same (or sufficient) profits, though, then you’re all set.
Gamble

No, I do not think demand for loans is infinite.

I think if all loans were repaid, there would be no money in
circulation however it is impossible to repay all loans because interest was never
printed.

I think if all loans were repaid, there would be no money in
circulation however it is impossible to repay all loans because interest was never
printed.
http://www.TomWoods.com Tom Woods

But you said the banks would wind up with all the money. That would be true only if people kept on borrowing and borrowing. Best Buy would wind up with all our money if we kept buying and buying consumer electronics, too.
Anonymous

Totally agree, and I think I made that clear when I said it exposes the rampant inflation for what it was. Keynesians simply denounce deflation outright because they disingenuously neglect to mention that high inflation fuels credit expansion, easy loans and debt, which makes those obligations worse during deflation.
Anonymous

thanks, read later
Gamble

But you have never answered the original question I asked. In
our current FedFracFiat system, where do the interest repayment notes come
from?
guest

By the way this particular issue is currently being debated on Bob Murphy’s blog:
A Challenge on the Great Debt Debate
http://consultingbyrpm.com/blog/2012/10/a-challenge-on-the-great-debt-debate.html
“Here’s a challenge I gave to Daniel Kuehn in his comments:
==> Do you agree that Krugman said there is a sense in which debt makes a household or a family poorer? But that he denied this truth for the individual family could be aggregated to the USA as a whole? …” … As is his wont, Daniel denied that Krugman said debt could make a family poorer in the future. To bolster my understanding that Krugman thinks debt *does* make an individual family poorer in the future, here are two quotes from him:”
Gamble

I am no leftist and I landed here at Tom Woods because I
followed a link from LRC, which I have read daily for years. I think the Fed is a product of our government
or one in the same. So making the Fed
government owned would not change anything. I think gold or multiple competing currencies
is a good idea, although I think Gold would win out. Whatever the free market decides is okay by
me. Interest is okay by me. I meant no disrespect
to Tom Woods in my earlier post. He is awesome and I read all of his stuff. With
all that being said, I guess there are a few things about money creation I do
not understand and I am hoping all of you smart people can help me get to the
bottom of it. Assuming all money is
printed by central banks only when a debt pledge is signed, then the amount of
money is fixed. However when a debt pledge is signed, there is also mandatory
interest. However when the debt money is printed, the interest is not printed.
Where does the interest come from? I am
not talking about how things should be or would be under gold, I am talking about
how things are today. Is not all money actually debt? IF all debt were immediately repaid, there
would be no money in circulation however the interest would still be outstanding
because it was never printed.

Please read what I write and correct me. I am just an
average Joe trying to make since of all this. I have a 2 year technical degree
in electronics, nothing more. Well, I have read a lot at Mises.com and a few
Rothbard books and the Bible. Maybe somebody can answer my interest question or
explain why it is an invalid question.
Gamble

While you are at it, explain to me how to format my post,lol. Sorry.
guest

If the Fed stops printing money, then the interest repayment notes come from lower prices leaving you more money.
Spending (or loaning) new paper money into the economy causes price inflation, making people worse off; and it causes the boom/bust cycle.
In a gold coin standard, your money would tend to gain value over time, and there would be no boom/bust cycle:
Interest Rates in a Gold Coin Standard
http://lewrockwell.com/north/north1075.html
guest

See above (or below, I don’t know; it seems you responded as I was typing) for my response to the interest question.
Also, this video will help a lot. Once you realize that paper isn’t money, then you’ll understand why the fraud of what you speak isn’t possible under a sound money system (though bimetalism is also a form of artificial credit expansion):
Smashing Myths and Restoring Sound Money | Thomas E. Woods, Jr.
http://www.youtube.com/watch?v=HAzExlEsIKk
And here’s an article that talks about bimetalism:
What Has Government Done to Our Money? III. Government Meddling With Money 5. Gresham’s Law and Coinage
http://mises.org/money/3s5.asp
As for formatting, it looks like you might be pasting from another program. Make sure to turn off any wrapping feature, if possible, before you copy. And for the spacing between paragraphs, I’ve been getting away with using the angle brackets on either side of the text “br” to mark the end of the paragraph.
Citizen

Allowing Government to Print Fiat Currency rather than Mint (precious metal) Coin is the equavolent to hiring a Fox to guard your Henhouse.
Historically Money… was created by Free Trade, NOT Governments.
The SOLE purpose of Governments forcing Legal Tender Laws is simply to enable Public Theft of Private Property without obvious detection.
Government prefers Inflationary Theft as compared to Tax Confiscation.
Because the later pisses people off, so it’s politically more expedient for Government to print money it wants and thus avoid the messy Tax and Confiscation stuff.
The MPE people at this site are selling Michael Montgage’s notion that Governments can simply print debt free money without consequence.
The MPE people often mention that Adolf Hilter built up his 3rd Reich WarFare Economy with printed “debt free” money. But it only works for a short period of time and then you have to go Kill People and take their stuff to cover the deceptions.
Government sponsored central banks, including the FED and ECB, are the only means whereby our US government is able to perpetuate its WarFare State AND WelFare State.
AND because of this, our Government has hit the Fiscal Wall….