Money Cranks vs. Ron Paul

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Americans are living in a world of central bank profligacy. This has been true ever since 1914, when the Federal Reserve System opened for business. But the most recent bank-created economic crisis, which began in December 2007, has received more attention than ever before. This is mainly the result of Ron Paul’s 2007 candidacy for the Republican nomination for President. He warned that this crisis would happen. He also spelled out the reasons: Federal Reserve policy. Then the crisis hit.

The Federal Reserve lost its immunity from criticism in 2008-9. It will never get it back. It also lost its invisibility. The general public now has some limited awareness of the FED. The FED gets a lot of negative publicity. This to a positive development.

This has also created a problem. Some of the critics of the Federal Reserve System propose a solution worse than the FED itself: the creation of a fiat-money based central bank that creates money out of nothing to pay for government-funded projects. These critics argue that this government-run bank will be able to offer interest-free loans to the public, which will keep the economy running at full capacity.

This is what John Maynard Keynes taught in “The General Theory of Employment, Interest, and Money” (1936). Keynes praised several economically unsophisticated predecessors who proposed schemes for government-created zero-interest money, including the founder of Social Credit, Major C. H. Douglas, and the farmer and former economist for the week-long Bavarian Soviet Republic of 1919, Silvio Gesell. He referred to them as part of the economic underground, as indeed they were. I have given a lecture on this. You can hear it here.


In the United States, the largest and oldest component of the economic underground promoting government-issued fiat money has been the Greenback movement, named in honor of the Union’s Civil War currency, unbacked by gold and printed with green ink. The Greenbackers have been a separate ideological movement ever since the 1870s. They are influential on the extreme fringes of both Left-wing and Right-wing circles – a unique achievement.

I have been writing about these people for over 45 years. I am the only person in the Austrian School who has published critiques of their position. The first one I wrote in 1965 as a privately circulated essay. I published it in my book, “An Introduction to Christian Economics” (1973). I revised it to bring it up to date as a mini-book published by the Mises Institute: Gertrude Coogan’s Bluff. You can download a PDF for free here.

Miss Coogan was the main theoretician of the Greenback movement in the 1930s. Her books are still in print. More recently, she has been replaced by a lawyer, Ellen Brown. I have dissected her book, The Web of Debt (2007) here.

The Greenbackers hate the idea of the gold standard, just as Keynes did. They claim that fiat money will keep depressions from happening, just as Keynes did. They claim that capital – the tools of production – can be obtained free of charge at a rate of zero percent per annum, just as Keynes did.

The odd thing is this: most of the adherents of the Greenback position think of themselves as conservatives. They think of themselves as defenders of the free market. Yet they see all privately owned banking as an economic evil. They trust Congress to set up a government-owned bank with the legal right to print however much fiat money that the government-protected, monopolistic bankers decide.


They do not understand the reason why there are interest rates in every society. They see interest payments as an undeserved payment to bankers. The bankers, because they control lending, are exploiting the public. They are able to get something (interest) for nothing (fiat money).

Let’s get to the heart of the matter. I ask this question – the question that every free market economist asks whenever he finds someone arguing that anyone can get something for nothing.

If a seller is charging something for nothing, why doesn’t a competing seller charge slightly less?

If bank A is charging 6%, why doesn’t bank B charge 5%? If bank B can make a profit charging 5%, why can’t bank C charge 4%. And so we go, right down to such a low rate that nobody would complain – not even Greenbackers. You get the idea. Let me put it a different way:

If something is really worth nothing, how is it that anyone can charge anything for it?

Simple question, isn’t it? Yet I have never seen any Greenbacker admit in print the existence of this conceptual threat to his/her theory of banking. They either do not understand this most elementary principle of economic theory, or else they do not connect general economic theory to banking.

If you ever come across a defender of Greenbackism, ask the person to explain this. Why does it take a government-created monopolistic bank to offer zero-interest loans? Why doesn’t the free market provide this?

Theoretically, there is no answer that is coherent with the theory of supply and demand. When the person starts to mumble, you will know he is stymied. You therefore do not need to pay any attention to him or her.

If you get the response, “Well, you have to answer my question first,” just reply: “You brought this up. It’s therefore your responsibility to explain how something that is worth nothing can command a price in a free market. Why doesn’t competition among sellers lower the price?”

If he/she says: “Because there are government restrictions on entry into the field,” the person is close to the truth. The correct response is this: “Then we citizens should demand that Congress get the federal government out of the field of money and banking. You should stop calling for a government bank.”

See what the person replies. Does the mumbling become sputtering?


The free market economist usually begins with the fact of scarcity. That was where Adam Smith began in 1776. He observes that some things command a price. The fresh air we breathe is free, but almost everything else has a price tag. Why? Because, in the words of free market economics: at zero price, there is greater demand than supply. In the giant auction that every market is, there are more bids to buy at zero price than offers to sell.

Simple, isn’t it? But is this a universal law? The economist says that it is. This is why Keynes was not an economist. He said that capital can ultimately be free. He wrote this: “But whildst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital.” (General Theory, p. 376.) I regard this as the most preposterous sentence in the history of economic theory. I don’t think anything else comes close.

What is wrong with his statement? This. Capital is the product of land plus labor over time. If land has an intrinsic reason for being scarce, then capital must, too. But Keynes in The General Theory did not think straight, which is another way of saying that he either lost his mind when he wrote it or else he was – in the delightful phrase of the South – putting the shuck on the rubes. Most of the economics profession is an assembly of rubes on whom the shuck has been put.

In this sense, I have respect for Greenbackers. They are no more misled than Keynesians in their theory of capital, but they did not pay a dime to go to college to be taught this obviously nutty idea.

First, productive land must be paid for. There are competing bids to own it. When we buy land, we buy a hoped-for stream of future services. Or we can rent land. We call the payment “rent.” We can buy these future services by purchasing land or raw materials.

Second, labor must be paid for. There are competing bids to own it. In today’s world, we rent labor services. Back when slavery was legal in the West, men could buy these lifetime services at a slave auction.

But what about time? Is it free?

Of all resources that are not free, time is at the top of the list. Time is the only irreplaceable resource. This has been understood in every culture in every era. I think Ralph Stanley at age 73 said it best for my generation. (At age 84, he is still on the road saying it.)

In any economy, raw materials command a price. We call these prices “prices.” In every economy, labor services command a price. We call these services “wages.”

Then what of capital? It is produced by combining land and labor over time. It therefore commands a price. But here, there is a widespread and fundamental conceptual error. People call the price of capital “interest.” Why is this incorrect? Because the price of capital is the result of land (prices), labor (wages) and time (interest). The word “interest” should be applied only to what we pay for time. It should not be used to identify what we pay for capital.

The clearest discussion of this that I have seen appears in Murray Rothbard’s book, Man, Economy, and State (1962), Chapter 7, Section 4. He discusses what we must pay for factors of production. He begins with a discussion of a theoretical construct that does not exist in history: a perfectly competitive economy in which there are no profits or losses, because everyone knows the future. In such a world, “there is no net income to the owners of capital goods, since their prices contain the prices of the various factors that co-operate in their production. Essentially, then, net income accrues only to owners of land and labor factors and to capitalists for their ‘time’ services.”

Basic to Austrian economics is the idea that there can be no perfectly competitive economy., Nevertheless, as economists, we must initially factor out profit and loss (uncertainty) in order to get to the core economic concepts associated with pricing the factors of production. When we buy a capital good or a piece of land, we buy a stream of future services (we hope). We always discount the expected future value of these services. Let me offer an example. If I promise to pay you an ounce of gold each year for 30 years, you will not offer me 30 ounces in exchange for this written promise. Think about this. Why would you give up 30 ounces of gold today in order to receive 30 ounces over 30 years? Those future ounces are not worth as much to you as your present ounces. So, you offer to buy my promise for much less than 30 ounces up front. This discount is the rate of interest. It affects every promise to pay. Its effects are not confined to money.

By the way, if you do not believe me here, I will make you this deal. I or my estate will pay you one ounce of gold at the end of each year for the next 30 years at the bargain price of 29 ounces of gold up-front. What a deal!

What’s that? You say don’t think it’s a good deal for you? Why not? Because you have accepted the Austrian School’s theory of interest. Again here is the theory. The rate of interest is the discount that is applied by all rational economic actors to every expected future income stream.

Then what is rent? Rent is the stream of income. This stream of income can sometimes be purchased by offering cash up front. A buyer pays for these future rents, but always discounted. Again the discount is the rate of interest.

So, there are no free lunches in life. There is also no free land. There is no free labor. Above all, there is no free time. Time is running out.


I have said that Greenbackers have no answer to this question: “If interest is a payment of something for nothing, why doesn’t competition drive the interest rate to zero?” My discussion of interest as a discount for the use of scarce resources over time shows why interest is not a payment of something for nothing.

The Greenbackers have a favorite pair of questions to ask those who say that bankers get paid for valuable services rendered. It goes like this.

How do bankers get paid back more than they have lent? Where does the extra money come from?

Their point is that bankers are paid something for nothing. But this question applies more fundamentally than mere exploitation. How can economic theory explain this extra payment?

This question was at the heart of Karl Marx’s theory of capitalism. He argued that the extra payment to capitalists from the exploitation of labor was surplus value. It is value received from workers above value paid in wages. The Austrian economist Eugen Bohm-Bawek answered this 130 years ago. He said that the payment to capitalists is for scarce services rendered. All capitalists are forced by the auction for labor services to bid up the price of labor (wages) to the point at which labor services receive full payment.

It is not possible to retain an extra payment – not by workers, land owners, employers, or bankers. Why not? Because of the unbreakable rule of the free market’s auction: “high bid wins.” (If a would-be seller refuses to sell, he offers the highest bid.) I will now answer the Greenbacker’s favorite question.

Let us start simply. Let us say we live in a gold coin standard. There are no fractional reserves. Every bank-issued warehouse receipt for an ounce of gold has an ounce of gold in the vault.

Let us say that the banking system has a total of 100 million ounces of gold on deposit. Let us also say that depositors have lent the money to bankers for one year at 2%. So, the bankers go looking for borrowers who are willing to pay about 5%. (I choose these numbers for the sake of easier computation.) Let’s say that they find them.

The bankers look at the financial accounts of the borrowers. Will these borrowers have sufficient income over the year to repay the loans? Will the borrowers receive enough gold in the future in order to pay off the loans? The may be able to sell their labor. They may be able to sell some land. Maybe an inheritance check will arrive. But the bankers will not make the loans if they do not think they will be repaid with interest.

Next, the depositors cannot legally get their money back until the end of the deposit term. There are no fractional reserves. If they want a positive rate of return, they must let the banker lend their deposit money during the time specified in the deposit agreement. Otherwise, they would have to pay money to the bank for safe storage: warehouse services.

The bankers buy a future 105 million ounces of gold over the year by lending 100 million ounces today. They buy those future 105 million ounces at a discount.

Case by case, loan by loan, the borrowers collectively offer to pay back 105 million ounces of gold over the next 12 months. The bankers require monthly payments. The borrowers agree.

So, the bankers lend the money. They money goes into the borrowers’ bank accounts. Then the borrowers spend this money on whatever they want to buy. The money goes out either in the form of coins or checks or credit card payments.

The ownership of this money moves from high bidder to high bidder. Borrowers earn money – streams of income – from these other spending customers. The borrowers then begin to repay the banks.

In a free market economy where there are no laws favoring fractional reserve banking, and where bank runs are allowed by law, there is money in circulation outside of banks. There surely is today: “currency held outside of banks.” This is part of the money supply today.

How can everyone pay off these loans? Where do they get the extra 5%? By selling more goods and services to other people who use gold coins to buy items. Some of these gold coins may be held outside the banking system.

But what happens if the borrowers find that they can no longer afford to do this? They cannot earn the extra money from outside the bank-money system. They will not borrow at 5%. They will agree only to less.

The bankers will find fewer takers for the loans at 5%. They will have to lend at lower rates. They will have to pay less to depositors.

Depositors may pull money out of the banks. The money held outside of banks then increases. The money in banks decreases. The recipients of the depositors’ withdrawn money then spend this money. This makes it possible for borrowers to pay extra money to bankers.

On the other hand, some depositors may agree to be paid less interest. They may agree all the way to zero or very close to it.

Why would they hand over their gold coins to the banks at zero percent? Because, in a free market economy, the production of goods and services constantly increases. This has been the normal situation ever since 1800. The greatest unanswered question of modern history is how this compound economic growth started when it did and where it did: Great Britain and the United States. But it did, and the world changed. Sellers’ competition drives down money prices. The real price of goods falls even when the money price of goods stays the same. People get richer even though the have no extra money.

So, in a free market economy, the money (gold coins) paid by borrowers to lenders may not be more than the money borrowed – zero percent – but the real income of the lenders rises. Interest is still being paid to lenders, but it is concealed. The interest rate is the same as the decline in gold-denominated prices.

Side benefit: no one pays income taxes on this increased wealth. Why not? Because the income in gold coins is the same as the outflow.

Isn’t price deflation grand?

Say that a gold coins owner goes to a banker. “I will pay you to store my coins.” The banker says, “Fine. That will cost you 2% a year.” The coin owner says: “That’s way too high.” The banker says: “I’ll tell you what. Let me lend out your coins, and I’ll put coins of the same weight and fineness back in the vault in a year. It will cost you nothing.” The coin man says: “But I won’t make any money.” The banker says: “True, but you also won’t pay any income tax. The gold in a year will probably be worth 3% more in purchasing power. And you will worry less about burglars.”

Deal? Deal!

Modern men are deceived by the above-zero money rate of interest received by fractionally reserved banks in a price inflationary economy. This distracts their attention from the fundamental aspect of the free market economy, namely, the constantly declining real price of goods and services.


The Greenbacker sees the price inflation that is caused by fractional reserve banking: monetary inflation. What are fractional reserves? More warehouse receipts for gold than there is gold in the vault. He wisely opposes fractional reserves. But he does not make the crucial conceptual leap: imagining what a price system would look like, including interest rates, in a full gold coin standard economy without fractional reserves.

In a capitalist world in which there is no increase in the money supply, there would be low rates of interest in an expanding economy. Banks might offer – probably would offer – loans at zero percent or slightly above to borrowers, and also offer negative rates of interest – charges for depositing gold – to depositors. They would sell gold storage and check-writing services.

Inconceivable? Really? Have you looked at what your bank is paying you to get you to deposit your money? Look at what the U.S. Treasury is paying: one one-hundredth of one percent per annum on 90-day T-bills. If this can happen in this economy, it can surely happen in a full gold coin standard economy with falling prices.

The question is not how the banks lend out money at interest and get repaid more money. “Where did the extra money come from?” The question rather is what the future purchasing power of money will be when it gets paid back. If prices are falling, banks will be repaid in money terms exactly what they lent – and prosper.

Greenbackers do not understand this. I hope you do.

Gary North [send him mail] is the author of Mises on Money. Visit He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

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