The Dichotomy of Currency

January 28th, 2011
in Op Ed

money clip art Guest Author Derryl Hermanutz has contributed to GEI previously on topics related to theory of money and relationships between current events and economic history and philosophy.

Even in the pre-1913 era before the Fed, America never had a truly fixed supply money system. American money was often (supposedly) linked to a gold base, but bankers have been creating fractional reserve "bank deposit money", and issuing their own banknotes, since long before America's Continental government issued their own scrip.

Follow up:

In his 1920s and 1930s books and pamphlets, Irving Fisher describes the various monetary cycles the US has endured throughout its history. It is always monetary expansion that enables economic expansion, and monetary contraction that causes depressions.

After the bankster "gold boys" destroyed Lincoln's Greenbacks the US went into deep recession, leading to the whole "bimetalism" debate where William Jennings Bryan and others demanded the remonetization of silver, the poor man's money. Those people knew very well that constriction of the money supply meant constriction of their economy, and they knew the solution was to loosen up the money supply. If all US money had to be backed up by the bankers' gold there was not enough money to sustain the economic level and prosperous people became poor.

I agree that technology lowers costs and makes goods cheaper in the long term. This is one of the arguments Murray Rothbard uses to support his gold-money ideas. But you have to see that there are two sides to CPI deflation. Rothbard is only looking at the demand side. Anybody who is holding gold during an era of declining prices will see the value of his money rise.

In fact most people don't have any money, only "rich" people do. Most people depend on a prosperous economy to earn their daily living. Deflating prices are a boon to rich people and consumers and a bane to producers and workers.

How can you make any profit and sustain your productive business when the prices for your finished goods keep going down? You invested in your capital costs and your production costs at higher price levels, and when you're finally ready to start selling goods the price of the goods has declined to the point that you can never recover your capital investment and you're lucky if the lower prices will cover your operating costs.

Downward final demand prices will drive down labor wages, or it will bankrupt producers and labor will be unemployed and have no incomes at all. How can the productive sector "enjoy" low prices when they are bankrupt or unemployed and have no income to buy anything?

The issue is: Do we want to maximize the stability of the value of money? Or do we want to maximize the stability of the real productive economy? These are opposites.

Money cannot simultaneously serve as the medium of exchange in a growing capitalist profit-seeking economy, and serve as a store of value. Either money supply inflates (and the buying power of money decreases) to support ongoing money profits and wages in a prosperous economy; or money supply stays flat or declines in a deflationary depression economy (and the buying power of money is stable or rising).

Gold-money advocates want to maximize the value of money and are happy to accept periodic deflationary depressions to "squeeze out the malinvestments". But producing valuable goods and services that people want is not "malinvestment" in economic terms. It is only malinvestment in money terms, if the money supply stops growing to support ongoing profits and wages at ever higher prices.

People are employed and prosperous in an inflationary boom, and unemployed and bankrupt in a deflationary bust. As America is seeing, the existence of a "middle class" of income earners depends on a continually rising economy. These people have net debt, not net savings, so they cannot buy cheap during depressions because they have no money, or they only have enough to live on.

Very few people are rich in money, and very many people depend on a prosperous economy for ongoing employment income and small business profits and large business profits (stock dividends) to earn their daily bread. Stabilizing and increasing the value of money serves the few at the direct expense of the many. A democratic people should not stand for this monetarist assault on their ability to earn a living.


Related Articles

The New Feudalism by Derryl Hermanutz

This is Not a Credit Crisis by Dirk J. Bezemer

Did France Cause the Great Depression? by Douglas Irwin

The Deficit Commission and America’s Neo-feudal Economy by Michael Hudson (at Credit Writedowns)

The Government has a Printing Press to Produce U.S. Dollars at Essentially No Cost by Edward Harrison





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  1. Roger Erickson says :

    The points made here are synonymous to those made by Gerald McGrattan McGeer, Abba Lerner, Bill Vickrey, Bill Mitchell, Warren Mosler & Randy Wray ...

    why not coordinate with that monetary operations crowd?

    The only return worth chasing is the return on coordination. Everything else is secondary.

  2. Ned Williams says :


    Your article confuses accounting profit and losses with real profits and losses.

    For example: If a retail product cost is $1.00 and it is sold for $1.50, there is an accounting profit of $.50. However, if during the holding period there was 100% inflation, that $1.50 represents a "real" loss, since replacement inventory for that same retail product will cost $2.00, if purchased in the same time frame as the "profitable" sale.

    This "profitable" company will rapidly disappear, if it cannot generate gross margins that are greater than inflation.

    The converse is true during a deflationary period. A company "losing" money, might actually grow in real terms.

    The rational for stable currency is that both inflation and deflation mask what is "really" going on.

  3. Derryl Hermanutz, Correspondent (Member) Email says :

    You could add CH Douglas, Irving Fisher, JM Keynes, JK Galbraith, Ellen Brown and many others past and present to your list of people who see this same problematic arithmetic relationship between money and the economy. This knowledge has been published and promoted for over a century but those who don't want to believe it still refuse to believe the clear arithmetic truth. In his 1975 book, "Money", Galbraith says,

    "The process by which banks create money is so simple that the mind is repelled. Where something so important is involved, a deeper mystery seems only decent."

    People keep searching for "the deeper mystery" but, like Ellen Brown writes of the Wizard of Oz in her "Web of Debt" book, there's nothing behind the curtain but a little bankerman creating money out of nothing.

    In Milton Friedman's heyday, before we had the internet disseminating information at the speed of light, it was fatal to one's reputation to be a conspiracy theorist about money and monetary monopoly and manipulation. Last night I was reading Friedman's 1962, "Capitalism and Freedom", where he presents a synopsis of the Fed's acts of "omission and commission" from 1913 thru 1933.

    This history describes a ruthless banking cartel, acting thru its newly empowered frontman the Federal Reserve System, destroying economies and lives to consolidate the hold of its ownerbanks on the US dollar, which was to replace the pound sterling as global money in the 20th century. But everywhere Friedman attributes the Fed's moves to 'error' rather than deliberate policy. Even Irving Fisher states directly in one of his books that he will give the Fed the benefit of the doubt and attribute their 'mistakes' to ignorance rather than to evil intent.

    So Roger, what I try to do is to present the facts from every angle that occurs to me. Because their mind is "repelled" by the simple arithmetic truth of money and debt, people are predisposed to think that money "works" and that our money system is designed to do what its owners claim, promote monetary, economic and employment stability. If I see a mental opening I put a wedge in it with a flashing sign that says, More Proof!

    I support the work of Mosler et al but turning this great wheel of deluded monetary perception requires a whole bunch of different tacks, not coordinating our efforts under a single banner. If and when the money problem ever becomes acknowledged at the highest levels and it comes time to design a system that actually works to serve the financial needs of the economy, that will be the time to coordinate efforts.



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