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The Ideal Money

July 18, 2017July 20, 2017 Joseph Dewey

This entry is part 26 of 31 in the series 2011B

So what would be the basis of the ideal money system? Before we can answer that we should list the ingredients of such a system. If we do not know what we are looking for there is not much chance of finding it.

(1) Stability
This is perhaps the most desired feature of a currency, but as we study history we discover that no currency has been completely safe from extreme fluctuations, inflation, deflation, stagnation, manipulation, fraud, degradation, theft, etc.

We have illustrated that even gold and silver money has its own set of problems and gives no guarantee of stability. Yes, it is true that actual gold and silver coins will always have some commodity value, but that value is affected by an increase or decrease in the substance as well as speculation. Remember that one action by President Grant reduced the price of gold from $165.50 to $135 in one day. Then another action by FDR increased the price from $20.67 an ounce to $35 in another day of time.

Yes, yes, I know – that if we had some type of purist system in play and men of Jesus type integrity in office this may not happen but that has never been and not likely to be in the future.

Fiat money also has its own set of problems, Unlike gold and silver it has no intrinsic value but represents value. Its value can be manipulated by the amount of money added to or taken away from the currency system. Usually the problem is inflation caused by too much currency being added and if the presses go too wild there can be a collapse of the money bringing its value close to zero. This insecurity causes many to look to metallic currency in the hope of establishing a stable system.

(2) Flexibility
One often hears about the importance of a stable currency, but not so much about the advantages of a flexible one. It is interesting to consider the importance of flexibility in currency, for without this quality stability eventually goes out the window no matter what currency base is used.

Lack of flexibility is one of the major drawbacks of a gold or silver standard. Ironically, advocates tout this lack of flexibility as its major selling point even though this flaw inevitably leads to the undoing of the standard. Let me explain.

Advocates state that a gold system is desirable because it has little flexibility in that the State just cannot magically create additional gold supplies by fiat or out of thin air. New gold has to be mined or acquired from other nations. Since this is a slow process it normally insures against huge bursts of inflation which troubles many fiat systems.

That’s a good thing, right? On the surface it seems so. Advocates simply state that all we have to do is stay on the gold system causing the growth of money supply to be slow and stable thus preventing any major inflation.

That sounds good in theory but the historical results have been far from that reality. And why is this?

Because of the lack of flexibility.

And what are the two situations that demand the greatest flexibility?

The first is war or a situation that threatens the very survival of a nation. If a nation has a choice between survival or a period of inflation – which will they choose? The answer is really a no-brainer that seems to go over the heads of gold standard people in their thinking and calculations. The only response I have seen from them on this point is: “IF all nations stayed on the gold standard then they would not be able to raise large sums of money and would be discouraged from going to war.”

If? If??? When has this “if” ever taken place except in some fictionalized idealistic future?

The hard-core fact is this. If a nation’s survival is at stake, the leaders will seek to raise money by any means necessary, even if the end result is the destruction of the money system. Any people would rather have their currency destroyed than lose their country to a tyranny.

This was the situation in the Revolutionary War. The Colonists had the choice of throwing the gold standard out the window and creating a shaky fiat system that would probably fail or lose their country. There was only one choice for them. If the money system failed they could create another, but if they lost their country all was lost.

The Colonists thus created a flexible money system and won a country at the cost of a currency. BUT the currency problem was temporary and a new start was made. As a result the United States soon became the greatest economic vehicle in the history of the world.

Both the North and the South felt they had to have more flexible money during the Civil War and moved away from gold to fiat money.

In 1914 at the beginning of World War I the international gold standard ceased to function because of its lack of flexibility. During the war the wholesale prices in the U.S., France and the UK more than doubled causing much difficulty in going back on the standard after the war. Attempting to adjust for the deflation caused by returning to a gold standard caused so much economic grief that a full return became impossible and redemption of currency was abandoned a short time later.

These problems caused by the inflexibility of the metallic standard are not peculiar to our age but similar problems have occurred hundreds of times throughout history. During the Roman Empire alone the government faced dozens of economic crises due to a lack of flexibility and this lead to either debasing the currency, plundering other nations or enslaving people to work in government mines.

It is interesting that gold standard fundamentalists place absolutely no blame for currency debasement or economic problems on the inflexibility of the metallic standard but maintain that it is all due to human corruption. If the leaders of nations could have just been pure in their metallic ideology then all would have been well.

While it is true that human frailties do create monetary problems this is far from providing the full explanation. The fact is that every generation or two a nation is presented with a life and death struggle for survival that demands flexibility in currency. If the money is not raised then their way of life will be gone.

It is not human greed or corruption that causes the people of a nation to seek to survive at all costs. It is common sense if their way of life is worth preserving.

The second situation that demands flexibility is a strong economic downturn.

For instance just as the various nations were struggling in an attempt to return to the gold standard we suffered the Great Depression and this pretty much ended the idea of paper money being redeemed for gold.

Powerful economic downturns demand a similar flexibility with currency as does war and if flexibility is not available then war can result. After World War I the winning nations demanded that Germany pay war reparations with gold standard money. This inflexible demand crushed their economy and led to the rise of Hitler.

Spain’s economic problems during the time of Columbus led to the plundering of millions of American Indians for the gold and silver.

This leads us to the irrefutable fact that during war or hard times the nations of the world will demand flexibility in their currency. If it is not there they will devise every possible scheme to create it. If they cannot create it then they will plunder their people or other nations and steal it.

Conclusion: A flexible currency is necessary for a nation to see itself through a major crises.

(3) A Debt Free Currency
A third quality a currency must possess is that its creation should not add to the public debt. If our Founding Fathers could see our national debt and the astronomical interest we pay every year they would roll over in their graves indeed. Had they seen our perilous state I’m sure they would have added a couple new paragraphs into the Constitution in an attempt to steer us on a better course.

We’ve already covered the fact that it is an insane idea for our government to pay private enterprise to create our money and loan it to us at interest when we the people can create debt free money for ourselves through our elected representatives and then owe nothing on it.

Wouldn’t it be great if our nation had a currency that fit in the guidelines of these three criteria: (1) stability, (2) flexibility and (3) debt free?

Is such a currency possible? I think it is.

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Fiat Money of the Past, Part 6

June 13, 2011July 20, 2017 Joseph Dewey

This entry is part 22 of 31 in the series 2011B

German Money

Of all the incidents of failed money in history the poster child of bad money is that of the Weimar Republic of Germany in 1923. Unfortunately, this is often used as an example of why fiat money must be avoided like the plague.

Those who put the blame on fiat money make the mistake of lumping all fiat money into one category but as was pointed out earlier there are two categories of fiat money. Here they are again:

(1) Money created by private banks or institutions and loaned out at interest. Most of our national debt is created this way. The Federal Reserve creates the money by fiat and loans it to the government at interest. There are many variations of this category, some fairly workable and others doomed to failure.

(2) Interest and debt free money created or approved by the government.

The Greenbacks that we just covered was in the second category. This has been proven historically to be much more stable than the private fiats that create debt and interest.

The fiat attackers make the mistake of lumping all forms of fiat money together as being equally bad and dangerous. Nowhere is this more apparent than their portraying the Weimar republic’s money as being no different than the Greenback.

Most writers talk about the German inflation problem as beginning in 1919 or 1921 but the problem really began at the beginning of World War I in 1914. By the time 1921 rolled around those who were on fixed incomes and depended on savings or government bonds for retirement or security were largely wiped out by the high inflation leading up to that date. From the beginning of the war in 1914 to its end in 1918 prices of consumer goods increased over 200%. By February 1920 shortly after the Treaty of Versailles internal prices jumped over 500% and prices of imported products skyrocketed to 1898% over the 1914 level.

Unfortunately, Germany could not pay off their draconian war reparations with inflated Marks but had to pay them with foreign currency values. This meant that when the Mark lost half of its value it took 200 of them to pay for what only took 100 earlier.

This situation accompanied by unlimited printing from private banks created an inflation slide of historical proportions.

By July 1922 it took 300 Marks to equal one U.S. dollar. By November it took 9000 and by January of 1923 it was a whopping 49,000. That was just the beginning of the sinkhole. By July 1923 the figure was 1,100,000 and by Mid November it reached the legendary 2.5 trillion marks to equal one U.S. dollar. Billion mark notes were traded as almost worthless paper.

It is a blatantly false and disingenuous comparison to compare the Weimar money as being equivalent to the Greenbacks. Let us examine the differences so the reader can judge correctly.

(1) The Greenback was issued by the government
The Weimar money was issued by private banks – led by the Reichsbank. This was similar to the Federal Reserve, which, contrary to the sound of its name, was privately owned and publicly controlled. May 26 1922 private business was given complete control over the Reichsbank and the issuing of currency.

Most hyperinflation commentators blame the government as having sole responsibility for issuing so much money but it was done through the privately owned Reichsbank and other private issuers of the Mark. The Greenback was not issued by a private or semi private bank but by the U.S. government.

(2) The Weimar Mark was created by loans at interest whereas the Greenback was created without interest involved.

(3) The Weimar Mark had no limitations on its issue. The Greenback’s issue was limited to $450 million.

A heroic German, named Hjalmar Schacht, who became the Commissioner of Currency, finally brought the inflation under control. He prohibited the private banks from creating Marks and established a new Mark – the Rentenmark. The new Mark had a value equal to an astounding $4.2 trillion of the old Marks. He then established guidelines for limited issue and created regulations that dramatically slowed the currency speculation that had been adding to inflation.

Within a year the currency reached an amazing degree of stabilization despite the fact they still had reparations to deal with.

After 1929 a great depression was forced upon most of the world. By 1932 Germany had suffered economic effects similar to that of the United States including a 30% unemployment rate and a 41% dip in industrial production. One could say they were lucky it was not worse considering they had war reparations to pay off.

This was the situation when Adolf Hitler came to power.

Now before I write more about Hitler let me make something crystal clear because many others who have written about Hitler’s economic recovery have been maliciously accused of being a Hitler lover or sympathizer. This is not the case with me nor is it the vast majority of writers on this subject.

BUT… there is one thing that is agreed on by those who despise Hitler’s philosophy and that is – he was an evil genius.

It’s fine with people if you talk about the evil part but as soon as you talk about the genius part there is danger of being lumped with Neo Nazis or worse.

This is unfortunate as we need examine Hitler without blinders on if we wish to neutralize such tyrants in the future.

When Hitler took over Germany on January 30, 1933 Germany was in the middle of a great depression and the little gold they had was storming out of the country. By 1934 they only had 83 million Marks worth of gold, a loss of about 97% of their supplies since 1929.

Basing an economic recovery on gold would have been pure fantasy.

Instead of descending the country further into economic chaos, as many expected, Hitler surprised the world by creating a teeming economic system in a few short years. Between 1933-1938 the Nazi economy grew by 9.5% per year. They built many public works projects such as dams and about 1900 miles of the current autobahn. Housing construction doubled. By 1936 unemployment was over 80% gone and by 1938 it was virtually non-existent for they had more jobs available than there were laborers to fill them.

By contrast FDR and his New Deal was not working so well. In 1938 the United States was in a depression within the depression with unemployment at 19% and many were committing suicide rather than endure a continued struggle.

Some say that Hitler achieved full employment because he borrowed money and put people to work on government projects. That explanation does not cut it because FDR did the same thing yet his economy was in shambles.

What was the difference then?

There were several. Even though Hitler only had a elementary understanding of economics he recognized talent when he saw it. Hjalmar Schacht, who once restored Germany’s economy but quit in frustration in 1930, was appointed by Hitler to be the Reichsbank President in 1933. He enthusiastically supported Hitler until the war and later supported Stauffenberg and the resistance to Hitler. He assisted Hitler in creating Bills of Exchange, similar to what the early American colonists did when they had no gold.

This was powerful fiat money, but still had a disadvantage over the Greenback in that they paid around 4% interest and added to the national debt whereas the greenback was interest free.

Even with this disadvantage they were able to put enough money into circulation to revive the economy whereas money was nowhere to be found or borrowed by the common people in the United States at that time.

By contrast it was said that the German “certificates (were) paid out to employers who undertook projects of replacement or maintenance projects. Anyone who equipped a factory with new machines or who had his house repainted could finance his operations with these work drafts…”
Konrad Heiden, The Fuerher, (Boston: Houghton Mifllin, 1944, page 662.

Hitler’s economy not only did a much better job in making consumers happy and employed but in addition to doing this he built up a military from virtually nothing that challenged everything the banking systems of the whole world could throw at him. This is even more amazing when you consider that France, England and the United States put very little investment in defense until the War because they had just fought the war to end all wars – World War I.

Hitler often bragged about his economic accomplishments in his speeches. Here’s just one example:

When I took over the government, I had only one hope on which to build, namely, the efficiency and ability of the German nation and the German workingman; the intelligence of our inventors, engineers, technicians, chemists, and so forth. I built on the strength which animates our economic system. One simple question faced me: Are we to perish because we have no gold; am I to believe in a phantom which spells our destruction? I championed the opposite opinion: Even though we have no gold, we have capacity for work.

The German capacity for work is our gold and our capital, and with this gold I can compete successfully with any power in the world.
DECEMBER 10, 1940 in Berlin

He not only bragged about besting his enemies when he had no gold but he also drew comparisons between Germany and the Allies. Germany only had 85 million people, and a land with limited resources occupying only 232,000 square miles. He compared that to the British Empire that controlled 16 million square miles of land. In addition, there was the Continental United States possessing over 3 million square miles containing vast resources.

We are extremely fortunate that two things were in our favor.

First, we can thank our lucky stars that Hitler did not wait an additional five years to start the war. Five more years of economic growth and perfecting her military would have made Germany unbeatable.

Secondly, we are lucky that the bankers supported the Allies during the war and that we did have superior resources for we did not have a superior economic system or currency.

It is interesting to note that two of the most significant men in history – Abraham Lincoln (one of the best), and Adolf Hitler (one of the worst) – both used creative forms of fiat money to advance their cause. This merely illustrates that money, like electricity is a neutral power. Those bent on destruction can use it to do harm whereas those with good intent can use it constructively or for good.

Today, most of the common people use what power they have for good. They feed their families, heat their homes, travel to see friends and family etc. The misuse of power usually comes from those who amass great quantities of it for the sake of control over others. It thus behooves us to do all in our power to make all useful power or energy available to the masses who, on the whole, use it well. This principle certainly applies to money. If there is abundance of it available to all then the chances are that it will be used constructively for the good of all.

Let it so be.

Sources:
Web of Debt by Ellen H. Brown, 2008

The Lost Science of Money By Stephen Zarlenga, 2002

Konrad Heiden, The Fuerher, (Boston: Houghton Mifllin, 1944

John Weitz, Hitler’s Banker (Great
Britain: Warner Books, 1999).

Henry C. K. Liu, “Nazism and the
German Economic Miracle,” Asia
Times (May 24, 2005).

HITLER’S MONEY
The Bills of Exchange of Schacht and Rearmament in the Third Reich
Guido Giacomo Preparata University of Washington, Tacoma

Hjalmar Schacht, Stabilization of the Mark, (London: George Allen & Unwin, 1927)

Hjalmar Schacht, The Magic of Money, (London: Oldboume, Trans. P. Erskine, 1967)

Norbert Muhlen, Schacht – Hitler’s Magician, (New York: Alliance, Longmans Green, trans. Dickes

C. C. Veith, Citadels of Chaos (Meador, 1949