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A Response to RealCurrencies

Among the many cries for monetary reform, there is a group of people who want the Federal Reserve to be assimilated into the Treasury Department and for the newly created money (which would be created at a much faster rate) to be lent out interest free.  All interest is usury that should be abolished, according to these people. Some of this I have dealt with in a previous post, but Anthony Migchels, writer of the blog RealCurrencies, is convinced that the Austrian case for a free market in currencies is actually a hoax.

Quote from Anthony Migchels: “In the old days of Austrian Economics things were simple: one just derided fiat currency. It is unfair to be raped by interest for paper money created out of nothing, even the Austrians will admit. So, they claim, stop fiat money and replace the paper with Gold. We’ll all feel a lot better when we can slave away for our usurious tributes to the Money Masters if we can pay in Gold coins.

If he seriously believes that in the old days of “Austrian Economics”, all you did was deride fiat currency, then Mr. Migchels hasn’t done that much research into Austrian Economics. For instance, he hasn’t read “Principles of Economics” by Carl Menger, the book which puts forth, in the clearest possible way, the principle of Subjective Marginal Utility; a principle which has completely revolutionized the science of economics.

Quote from Anthony Migchels: “But later things became a little more complicated. People started to wonder about the Gold Standards of the past. Weren’t these just banker operations? Don’t the bankers own all the gold? Haven’t they controlled Gold throughout modern history? And how about these Government controlled Gold Standards? Can’t Government just change the fixed price and mess up everything that way? And can we really trust them to indeed have the Gold they claim they have?

First of all, Mr. Migchel’s statement that gold standards have always been banker operations is factually inaccurate. Gold has been money for no less than 6,000 years, and this predates the earliest recorded bank in history by ~2,000 years

Secondly, Mr. Migchel doesn’t understand how ownership of currency works. Just as bankers didn’t own all of the gold, the bank does not own the money I now have in my pocket. I own that money, and no one else, and the only way the bank can have any sort of legitimate dealing with that money is by my permission. Period. It is here Mr. Migchels has demonstrated not only a severely impaired understanding of ownership, he has also demonstrated a complete lack of understanding as to what money is and where it comes from.

Money doesn’t have to be gold or silver, per se. In fact, historically, many things have been money, ranging from rocks, to gems, to salt, to iron and copper. Money is not some alien commodity that just fell from the sky, or was created by an elite to enslave people (as I’m assuming Mr. Migchel believes), money was created, and can only be created, by the market. It is a medium of exchange, selected by the people’s preferences (i.e., their buying and abstention from buying), by which goods and services are more easily exchanged. It allows for specialization of labor, and thereby increases the overall efficiency of the division of labor.

Money is, first and foremost, a commodity, and just like any commodity, there is a supply of, and a demand for it (which means it DOES exist in the realm of Supply and Demand… you know who you are….)

Mr. Migchel’s main gripe is with the practice of usury, i.e., loaning out money at interest. Here again, Mr. Migchel’s ignorance of the “Old Days” in Austrian Economics shows its ugly head. Had he simply bothered to type “Austrian Economics Interest” into Google, he would’ve found this blog post. Aside from being a fantastic exposition of the Austrian position on interest, the blog is basically a summary of Eugen von Bohm Bawerk’s “Capital and Interest”. Eugen von Bohm Bawerk was a student of the previously mentioned Carl Menger, and was the teacher of the man who would later become the face of the Austrian School, Ludwig von Mises.  For yet another response to Mr. Migchel’s position of usury, see the first link above in the first paragraph.

Quote from Anthony Migchel:  “Of course, Austrian Economics is well known for its trust in the magical ‘freedom’ of the market. First it has Government declare a ‘free market’, then it has Government enforce the contracts in this ‘free market’ and third it has Government look away if a few monopoly capitalists take this market overnight. Of course Government should not interfere if these capitalists show such wonderful ‘human action’ and gobble up the whole thing. Surely these capitalists would not win, were they not doing something right.

No, Austrian economists insist that monopolies on a free-market are impossible ( see here, here, and here).

Quote from Anthony Migchel:  “The minute Government creates this ‘free market’, it will be quickly conquered by the Money Power with its vast resources. It will have thousands of independent journalists and professors discuss the wonders of Gold as currency at its media outlets. It will pour in billions to open up thousands of ‘competing’ Gold banks, providing Gold based credit. The one at 4,9%, the next at 5,0%. Many of these outlets will actually believe they are really competing.

The Money Power will bribe politicians to only accept Gold coins in taxes.

Meanwhile, nobody will be investing one cent in Mutual Credit based facilities. Because there is nobody with the necessary resources.”

This is nothing short of a conspiratorial doomsday scenario that is based on truly shoddy historical research (as I pointed out earlier).

Mr. Migchel then proceeds to demonstrate that he is an economic illiterate, addressing the issue of if we did have free competition in currencies. In the process, he sharply contradicts himself.

Quote from Anthony Migchel:  Of course, would there be real competition, Gold would be absolutely irrelevant in a free market.

As we explained earlier (here and here), if Ron Paul’s “”Free Competition in Currency Act” (HR 1098)” (which would end legal tender laws and end taxing metals) would ever be enacted, nothing would happen.

Everybody would continue to hoard Gold and pay with Federal Reserve notes.

It’s called Gresham’s law: bad money drives out good money. It’s no use discussing this: just check it out for yourself: would you pay with your Gold coins or with your notes?”

Do you see the contradiction? Saying that nothing would happen if Ron Paul’s policy was enacted, and then to say that we’d be witnessing Gresham’s Law, is a contradiction that can only be made if you have little-to-no understanding as to what Gresham’s Law is.

Gresham’s Law, named after Sir Thomas Gresham, doesn’t come into play without legal tender laws. Period. In one of the links he posted, he addressed this very criticism by saying, “In response to a comment by Memehunter, quoting my article on Gary North, they elaborate on why they think I might be wrong.

They suggest that Gresham’s Law does not apply: “As we pointed out before, this is a misconstruing of Gresham’s Law. Gresham’s Law only applies to tender manipulated via government compulsion: ” ‘When a government compulsorily overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation.’ It is commonly stated as: “Bad money drives out good”, but is more accurately stated: “Bad money drives out good if their exchange rate is set by law.”

However, the source for this info is Wikipedia, and I don’t believe the Daily Bell will blame me for not accepting that as Canon Law.
It may be true that this was the situation at Gresham’s time, but it is clear that his observation is true always when different units circulate side by side and one of them is overvalued. Or losing value.

Now we can begin to understand; it’s not that Mr. Migchel just doesn’t understand Gresham’s Law, it’s that he refuses to understand Gresham’s Law. Not only has Mr. Migchel refused to do any sort of sound research on Austrian Economics, he’s constantly spewing forth these nonsensical conspiracy theories about an elite creating these banks and using interest lending to enslave and exploit, but just a little bit of logic shows us exactly why interest lending isn’t exploitative in the least.

Suppose you have a borrower who his desperate to pay his mortgage; he’s $1,200 short this month. So he goes to his local lender to apply for a loan. After considering the pros and cons of the loan, the lender decided to charge an interest rate of 25%. For those who want to know the numbers,  that means the borrower will have to pay back the principle of $1,200, plus $300 in interest, for a total of $1,500.  Is this exploitation?

Not at all. Why? Because the borrower preferred the $1,200 he borrowed today to the $1,500 he will have to pay back in the future. If he made a mistake in his valuation, then the mistake is on the borrower, not the lender or the interest lending system.

Quote from Anthony Migchel:  “The second issue is, that would there be Mutual Credit Facilities competing with Gold banks, they would be offering credit at 0%, while the Gold banks would want 5% for their mortgages.

Where would you go for your loan?

Is it really any use discussing this further?

Click here for Mr. Migchel’s explanation of Mutual Credit Facilities, and it is one of the most absurd proposals I’ve ever heard. It will receive its own response in due time.

Quote from Anthony Migchel: “The ‘free market for currencies’ is just a ruse, made possible by Austrian Economics’s standard way of ignoring market power. They only look at Government intervention, but they always ignore the elephants monopolizing the helpless ‘free market’.

Should there be a ‘free market’ for currencies, especially if the Federal Reserve Notes would be phased out, the massively funded and promoted Gold dealers would quickly gobble it up and tightly controlled specie, easily inflated and deflated and taxed with interest, would provide the Money Power with the de facto Gold Standard it wants.

I can’t tell if it’s typographical errors or what, but Mr. Migchel’s proposal is really hard to understand here. Is he seriously proposing that Gold dealers would control all of the gold, inflating and deflating at will? Does he fault the Electronic dealers for controlling all of the electronics, inflating and deflating at will? The logic is the same in both cases, and it’s completely silly.

In conclusion, I’m afraid Mr. Migchel has a lot to learn about economics.




Money = Debt, Debt = Money? Nonsense!

Modern day Keynesians (and Zeitgeist advocates) operate under this very absurd assumption; some proclaim it outright, but others say it indirectly. An direct statement of the above proposition that Money = Debt, and vice versa, goes like this.

Quote from Mr. Keynesian: “Money by its very nature is a claim on society; it is a token of a debt that someone in society owes. Even according to such crazies as Mises and Rothbard, money is proof that you have served your fellow man. If you performed Service A or sold him Commodity B, he pays you in money. Money isn’t good for anything else other than facilitating trade, and since it isn’t good for anything else, it is by its very nature a token of debt; an I.O.U., as it were. As one such insane bastard, Walter Williams, put it; when a man goes to a store to buy an item (let’s say a pound of beef for the sake of argument), the employee of the store asks the costumer, “Have you served your fellow man to the tune of $5” The customer replies back, “Yes, I have served my fellow man to the tune of $5, and here is the proof”, and thus the customer hands the cashier $5 and he receives the commodity. This entire exchange is, ultimately, nothing more than buying/selling debt in exchange for some tangible commodity; the store bought $5 worth of debt in exchange for a pound of beef, and the customer sold $5 worth of debt in exchange for a pound of beef. This is the fundamental reason why debts don’t really matter; money is, by its very nature, debt. Crack-pot Austrians love to talk about ‘real debt’ this, ‘real GDP’ that, but in reality the ‘real debt’ is completely incalculable. If we seriously liquidated all of the ‘toxic debt’ (an oxymoron, since the very foundation of exchange and thus society is debt), we would end up going back to primitive barter!

This is a direct statement (and exposition) of the proposition that Money = Debt, and vice versa, and while this is an extreme example to be sure, you will find that the same underlying assumptions Mr. Keynesian makes in his above argument are built into virtually every Keynesian exposition of monetary theory.

The first big mistake that he makes is that he totally neglects to talk about how money came to be used. Money is a commodity, just like any other commodity; the only difference is that it is so widely demanded, it is the medium of exchange. There is nothing arcane or mystic about money; it is just that simple. Because money is nothing more than a widely demanded commodity, it can hardly be said to be a “claim on society.” If it were true that money is a claim on society, what does that say for the goods and services that exchange for money? It would be far better (though still very incorrect) to say that the goods and services that exchange for money are themselves claims on society, but a claim on society is by necessity an entitlement. If you are entitled to something, it is yours by law, but no one is entitled to any sort of good or service on the mere basis that he has money. A person with money must first find and convince various individuals to part with their goods and services in exchange for a given amount of money. If they indeed part with these goods and services in exchange for the money, then assuming no sort of coercion took place, they did so because they valued the money they received more than the goods and services they parted with, and not because the person with money was somehow entitled to those goods and services.

The second big mistake that Mr. Keynesian makes is that he makes the assumption that money isn’t good for anything other than facilitating exchange. This mistake rests on a problem that we mentioned earlier; namely, the fact that Mr. Keynesian does not talk about how money came to be used in society to begin with. As I have pointed out before, money is nothing more than a widely demanded commodity, but why is it widely demanded? It is widely demanded because of its prior reputation. Money starts out as merely another commodity in a barter economy, but over time, individuals begin to favor certain goods over others. Why? Because the demand for those goods is higher than other goods, and thus it is easier to trade them off for the various goods and services that an individual in society may want. For example, it is easier to trade gold for lessons in economics than it is to trade dental services for musical lessons.

But, why is money so demanded? How did money (gold for instance) start from being just another commodity in a barter economy and then become a massive medium of exchange? Individual preference; people, for whatever reason, preferred gold to the other commodities available, thus the demand was higher, thus gold became a medium of exchange. You can come up with your own ideas as to the source of the original demand for gold. Like I said; money is not overly complex. It is not some arcane device that’s so intricate that the world’s smartest Ph.Ds and Nobel Laureates have a hard time understanding it.

So why do the world’s smartest Ph.Ds and Nobel Laureates have such a hard time understanding it? Because they make the above mistakes, and they make them in spades.