The Flim-Flam Man

One of my all-time favorite movies is “The Flim-Flam Man.” It came out in the late 1960’s. It starred George C. Scott as Mordecai Jones, a small-time itinerant con man. Jones did not do big cons. His were penny-ante schemes. He rode freight trains, tramped the back roads of the South, and relieved the locals of their money.

Jones had a philosophy of life that he believed justified what he did to people. “You can’t cheat an honest man.” His schemes involved luring in suckers who were willing to cheat Jones or cheat someone else, using Jones as the intermediary. He carried a suitcase full of shoddy goods, including fake jewels. Jones told his young recruit, played by Michael Sarrazin, “You can sell a man anything if he thinks it’s stolen.”

But if you pay close attention to the plot of “The Flim-Flam Man,” you discover early that Jones doesn’t remain true to his philosophy. When he gets into a jam, he cheats honest people. In fact, the people he cheated most severely in the film was a family that loaned him their daughter’s new car after Jones dressed up in a clerical collar and pretended to be on an errand of mercy. Jones ruined the car by his wild driving. In his clerical garb, he looked like a solid citizen, but in fact, he was a destroyer.

The movie ends when the young man whom Jones had taken into his confidence and had enlisted in his schemes finally sees the error of his ways. He gets arrested and faces jail. He promises his girl friend that he will go straight when he gets out of prison. She believes him. We believe him. But, in one last act of misplaced mercy, he helps Jones escape from the local jail. Jones goes off to flim-flam other victims. So, even here, the biggest loser was the young man whom Jones had befriended and corrupted. The underlying message of the movie: if you are a good enough con man — which involves appearing not quite good enough and rather sympathetic — you will get away with it. You will go free to con the rubes again.

When I think about it, I really shouldn’t like the movie. It gets the viewer on the side of a bad guy. But I was always a Scott fan, ever since my mid-teens, when I saw him in “Anatomy of a Murder,” a movie with such a great cast that it achieved the improbable: it made Otto Preminger’s directing tolerable. I even liked Scott in “The List of Adrian Messenger,” a movie parodied years later on “Get Smart” as “The Mess of Adrian Lissinger.”

I got to thinking about “The Flim-Flam Man” as I walked 200 yards to my office in the morning dawn. (I usually get to work at 6 a.m.) I was thinking about another flim-flam man, equally beloved and far more successful. If Scott were not dead, he could play the role in a movie based on the man’s life: “Flim-Flam Man, II.” What is unique about this flim-flam man is that he has the cops on his side.


Mordecai is a counterfeiter by trade. He is a self-conscious counterfeiter. He knows his trade well, because he used to be in the phony bill-detection unit of a private organization that warned people about the dangers of counterfeit money. He was one of its most prominent spokesmen. Back in 1966, he wrote:

An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense — perhaps more clearly and subtly than many consistent defenders of laissez-faire — that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.

He fully understood in 1966 what he was up against: self-interested defenders of the nearly unlimited power to take money from one group and give it to another. But why do they hate the gold standard? He offered this answer:

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.

What Mordecai grasped intellectually is that modern banking is a gigantic counterfeiting operation. Bankers create money when they take in deposits that depositors can still spend, yet even though the bank uses these deposits to lend to borrowers, who will also spend it. This credit money is unbacked by gold or silver. So, there are only two significant limits on the issuing of such money, once deposited: (1) the bankers’ fear of bank runs when depositors figure out their money was loaned out to borrowers who have gone bust or are likely to; (2) reserve requirements that are set by the nation’s central bank.

To deal with threat #1, bankers have called in the cops. They got the government to make it illegal to organize bank runs based on a bank’s near-term insolvency. The central bank also helps out by making available emergency loans at a sub-market rate, called the discount rate.

To deal with threat #2, the bankers persuaded the central bank to lower the reserve requirement to about 2%.

There are only two ways to reduce or completely stop this counterfeiting scam: (1) remove all government protection against bank runs and open the industry to all who want to enter it, making it competitive (free banking); (2) require banks to keep 100% reserves (100% reserve banking). In the second case, when a bank takes in a deposit, the depositor is not allowed to write a check on his deposit or withdraw his money until the loan is repaid on schedule. That’s because a borrower has the exclusive right to write checks on the account. A dollar in, a dollar out: that’s honest money.

The only academic economist in our era who promoted this concept of completely non-fractional-reserve banking was Murray Rothbard, who was regarded by academic economists as an eccentric because of this argument, among others. Rothbard wrote a money and banking textbook on how the fractional reserve flim-flam works, but because he openly identified the practice as fraudulent, no textbook publisher would publish the book. It went out of print within a few months after a small hard-money newsletter organization published it. Today, I am glad to say, it’s free on the Web. It’s called The Mystery of Banking. I wrote the Foreword. (Because it’s a PDF file, it downloads slowly.)

Back to Mordecai. He later went into the economic forecasting business. He figured out ways to trace the effects of legalized counterfeiting on the economy. His company sold businessmen the results of his findings. They presumably could make even more money by investing according to his findings.

I don’t know if he really could forecast markets based on his knowledge of the way the money system works, but he surely persuaded businessmen to pay his firm money. He was a great salesman. But his official sales pitch had an unofficial but unstated assumption: when the banking system’s newly created counterfeit money is passed from person to person, not everyone wins equally. Some people may even lose. He sold his information on the basis that if you paid his firm money, you could make more money than the person who didn’t pay his firm.

He gained such a reputation at being able to follow the money, i.e., the effects of the newly created money, that in 1987, the President of the United States, Ronald (6) Wilson (6) Reagan (6), appointed him Chairman of the Board of Governors of the Federal Reserve System, which oversees the national cartel of state-licensed counterfeiters.

Reagan retired in January, 1989. He moved into a home in Bel Air, California, at 666 St. Cloud, which his wife had the postal authorities change to 668.

(These odd numerical facts about Reagan may bother followers of Hal Lindsey, author of The Late, Great Planet Earth, whose publisher, Bantam Books, is located at 666 Fifth Avenue, New York City. As the publisher of three books that identify the true identity of 666, including one titled, The Beast of Revelation, I can say that 666 does not refer to Ronald Reagan, or even Henry Kissinger. You can download this book for free at my Web site:

Mordecai’s first great triumph took place two months after his appointment when, on October 19, 1987, the Dow Jones industrial Average fell 508 points: 23%. Similar percentage declines were experienced by stock markets around the world. The FED calmed investors and bankers with the immediate promise of injections of new counterfeit money, called “liquidity” by bankers. This promise was confirmed the next day at a meeting of the FED’s Federal Open Market Committee (FOMC), which decides how much government debt to buy, and hence the size of the monetary base. Notes of that historic meeting are on-line:

There is no doubt that Mordecai knew exactly what he and his colleagues were doing. Twenty-one years earlier, he had written about the official reaction to the Great Depression.

With a logic reminiscent of a generation earlier, statists argued that the gold standard was largely to blame for the credit debacle which led to the Great Depression. If the gold standard had not existed, they argued, Britain’s abandonment of gold payments in 1931 would not have caused the failure of banks all over the world. (The irony was that since 1913, we had been, not on a gold standard, but on what may be termed “a mixed gold standard”; yet it is gold that took the blame.) But the opposition to the gold standard in any form — from a growing number of welfare-state advocates — was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.

He decided that a similar reaction would not take place during his official watch. So, the FED pumped in money. It has done so every time a recession has arrived since 1932.

His new position on the benefits of counterfeit money should not have been surprising to anyone in 1987. He had already moved into the camp of the welfare statists as a defender of the largest government wealth-redistribution program of all. Reagan had appointed him in 1981 to serve as the chairman of the National Commission for Social Security Reform. He was still chairman in 1983, the year that Social Security technically went bankrupt, when Reagan and Congress hiked Social Security taxes, thereby offsetting Reagan’s reduction in top income tax rates.

Note: Reagan was not a tax cutter. He was a top-bracket income tax cutter. That was what enraged his liberal critics. They fully approved of the Social Security tax hikes. They disapproved of the top-bracket cuts.


The Christmas season will begin shortly. The fate of the retail economy for 2002 is now in the hands of Christmas shoppers, who have stopped buying new cars, even at 0% interest. Retailers and investors have sent Santa their annual Christmas wish list: great malls of fire. But they know that Santa won’t make the rounds if Mordecai doesn’t supply the funds. He is supplying the funds as best he can.

When he last testified before the Joint Economic Committee of Congress. Senators and Congressmen were treated to soothing language about the recovering American economy, an economy that requires the federal funds rate at 1.25% just to keep moving forward even slowly.

Things are going pretty well, he said, because home owners are borrowing money on their homes’ equity, and then spending it.

Besides sustaining the demand for new construction, mortgage markets have also been a powerful stabilizing force over the past two years of economic distress by facilitating the extraction of some of the equity that homeowners had built up over the years. . . .

According to survey data, roughly half of equity extractions are allocated to the combination of personal consumption expenditures and outlays on home modernization. These data and some preliminary econometric results suggest that a dollar of equity extracted from housing has a more powerful effect on consumer spending than does a dollar change in the value of common stocks.

So, things will continue to go well for as long as consumers load up on more debt. Of course, the question arises: How much longer will the incomes of home buyers support the equity-generating rise in home prices? For it is home buyers who are supplying most of the new equity money, which is taken by home sellers.

Sales of existing homes have been the major source of extraction of equity. Because the buyer of an existing home almost invariably takes out a mortgage that exceeds the loan canceled by the seller, the net debt on that home rises by the amount of the difference.

As for business spending on new capital, things are not so hot.

Although economic growth was relatively well maintained over the past year, several forces have continued to weigh on the economy: the lengthy adjustment of capital spending, the fallout from the revelations of corporate malfeasance, the further decline in equity values, and heightened geopolitical risks. Over the last few months, these forces have taken their toll on activity, and evidence has accumulated that the economy has hit a soft patch. Households have become more cautious in their purchases, while business spending has yet to show any substantial vigor. . . .

In the business sector, there have been few signs of any appreciable vigor. Uncertainty about the economic outlook and heightened geopolitical risks have made companies reluctant to expand their operations, hire workers, or buy new equipment. Executives consistently report that in today’s intensely competitive global marketplace it is no longer feasible to raise prices in order to improve profitability.

So, prosperity is based on the demand-side: consumer spending. This is the familiar Keynesian line: demand-side economics. The problem comes when long-term declines in investments in capital keep wage-earners from increasing their output and thereby increasing their income. Then the crisis arrives. Demand-side economics then faces economic reality: “If you ain’t got it, you can’t buy it.”

So, the question of questions is this: Will productivity continue to increase? Mordecai can handle this one with ease, for he is to official testimony what Professor Irwin Corey was to academia.

However, history does raise some warning flags concerning the length of time that productivity growth remains elevated. Gains in productivity remained quite rapid for years after the innovations that followed the surge in inventions a century ago. But in other episodes, the period of elevated growth of productivity was shorter. Regrettably, examples are too few to generalize. Hence, policymakers have no substitute for continued close surveillance of the evolution of productivity during this current period of significant innovation.

So, in the meantime, while we wait to see whether productivity can continue to rise despite the fact that business investment continues to fall, there is plenty of money to spend. The FED has seen to it.

In these circumstances, the [Federal Open Market] Committee believed that the actions taken last week to ease monetary policy should prove helpful as the economy works its way through this current soft spot.

Everyone in the investment world knows the new money is counterfeit. Everyone knows it’s stolen from savers, who are today facing the lowest return on their money in decades. That’s why everyone is happy to take the money. Mordecai Jones said it best: “You can sell a man anything if he thinks it’s stolen.”


As surely as there is no Santa Claus, so is there no economic growth without investment. But children like to believe in the first fairy tale, and investors, voters, and economists like to believe in the second. They believe that counterfeit money is necessary for national productivity, especially during “soft spots.” They believe an updated version of the mythical words of Marie Antoinette: “Let them eat digits.”

November 18, 2002

Gary North is the author of Mises on Money. Visit For a free subscription to Gary North’s twice-weekly economics newsletter, click here.

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