The Nelson Nash Institute Monthly Newsletter

BankNotes -Nelson Nash Institute Monthly Newsletter -all expressed in money, to be used in our quest tosubdue others. The only way to stop this destructive process from running amuck is to establish asocial institution to keep these forces at bay, to leashthe beast. In other words, it requires a state strongenough to counterbalance the detrimental impact ofmarkets and also to suppress and control our basicdestructive desires.Or so the reasoning goes. But let’s unpack this alltoo-common view, because it doesn’t make muchsense even on its own terms.What Is Money?Those claiming the power of money hesitate todefine this mysterious institution. The resulting lackof clarity explains some of the confusion. A moneyis simply a medium of exchange, something thatis generally accepted—universally employed—intrade.Money helps facilitate exchange throughout theeconomy by releasing actors of the necessity of finding exchange partners who want exactly what theyare offering in trade and have exactly what they wantto acquire. In other words, where there is money wecan engage in indirect exchange: instead of beinglimited to situations of coincidence of wants fortrade, person A can sell what they produce to personB for money and then use that money to pay personC for what they sell.Simply put, money earned represents one’s valuecontribution to the economy and, since money is agenerally accepted medium, it has purchasing powerroughly representing that value. We produce in orderto consume, and our production facilitates our consumption by earning us purchasing power—which isgenerally usable through the institution of money.March 2020which they will not sell. Unless the potential buyeroffers a sufficiently high amount, the seller will notaccept and there will be no trade. And the sellerwill accept money in exchange for the good simplybecause it is money, and so can be used in terms ofits purchasing power. Similarly, the buyer would notpart with his money unless he considered the goodmore valuable to him than the purchasing power ofthe money given up.Consequently, the voluntariness of exchange remainsa fact. Both parties can veto the exchange, meaningthat it will take place only if both parties consider itworth it. Assuming no fraud and that what is offeredin exchange is legitimately theirs, we have no reasonto question the ethics of this situation.This holds true virtually regardless of the nature ofmoney, since it is traded (and traded for) given itsestimated purchasing power. It doesn’t matter if themoney exchanged is a gold coin, a fully backed billof exchange, or a fiat currency like the dollar. However, those believing money is power should recognize the fact that an economy that relies on a commodity money is practically still a barter economy,but with the difference that actors released from theburden of coincidence of wants. They should thus becomparatively in favor of an economy with, say, agold standard, since it leaves less room for the exercise of power than one with a fiat money regime.When and How Power EntersSo where do power and command enter this picture?They do not, because there is no requirement that apotential seller accept money in exchange for whatthey are selling. And there certainly is no magicpower in money to buy what is offered for sale regardless the amount of money offered.Where money is a commodity, regardless of whichparticular commodity, it is simply a good like anyother except that it is also used in indirect exchange.This does not in itself imply that this money providesthe holder with power. Nobody, or at least very few,would claim that bread in a bread commodity-moneyeconomy is a source of power over people that othertypes of food (or any other types of goods) are not.It is still just bread, the difference being only thatpeople would accept bread as payment even if theydo not actually want bread—because they expectthat they can use the bread as payment when tradingwith others.The seller typically has a reservation price belowThe bread itself is still useful. Even if we do not par-4 www.infinitebanking.orgdavid@infinitebanking.org

BankNotes -Nelson Nash Institute Monthly Newsletter -ticularly care for it, whether temporarily or at all, wecan see that it is a good with specific uses. The sameis true with any commodity money, even thoughprecious metals likely have fewer specific uses to uspersonally than bread does.Fiat money changes the situation somewhat, butnot regarding the actual use and nature of moneyin exchanges. Money is still used and accepted forits (expected) purchasing power. However, it is nota good that we can use for anything other than asmoney. So, in a sense, we’re stuck with it as moneyonly, whereas bread can be eaten, gold can be usedin jewelry, and bills of exchange are direct claims onsuch goods.For this reason, the bearer of noncommodity moneyis more vulnerable: if the money loses its purchasingpower, partially or completely, there is no alternatecourse of action. A 20 bill is a 20 bill whether ornot the purchasing power of the dollar plummets (orsurges), whereas it might make sense to eat one’sbread money if its purchasing power falls.The holder of cash in a fiat money regime is thussubject to the monetary policymakers. Should thelatter choose to double the money supply, whichwould severely undermine the currency unit’s purchasing power, it would affect the money in yourpocket, mattress, or bank account. You are made thevictim of another’s decision, which is certainly aform of power. But this is the very opposite of whatis claimed by those insisting that money is power.To them, to hold money is to have power. Yet in thisexample whoever holds money is powerless againstany changes in monetary policy.What about money as the power to command? As wesaw above, there is no such thing in a barter economy. But fiat money may be different, and in our dayand age typically is. This is due to legal tender laws.As is printed on every federal reserve note, “Thisnote is legal tender for all debts, public and private.”In other words, if someone is indebted to you, youare legally required to accept payment in dollars. Sowhoever has borrowed can, due to the powers of thestate, require that the lender accept dollars in repay-www.infinitebanking.orgMarch 2020ment.Although this does not mean that you can, as aholder of dollar bills, command anyone to sell toyou, other laws introduce such power. For instance,Michigan’s Scanner Law requires stores not only todisplay prices for all goods offered for sale, but toaccept the displayed price in dollars. This means thecustomer has the (legally granted) power to command the store to sell an item for the price displayedeven if it was a mistaken one.Consequently, we cannot fully dismiss the view that“money is power.” However, this power is not due tomoney being money, as is often and widely believed.Money is not mysteriously powerful. But there aresituations in which money constitutes power. This isthe case under fiat money regimes and legal tenderlaws, and other laws that may be in force to changethe power dynamics. Whereas money is involved inall of these examples, the common source of suchpowers is not the money itself. The source is thestate.Per Bylund is assistant professor of entrepreneurship& Records-Johnston Professor of Free Enterprise inthe School of Entrepreneurship at Oklahoma StateUniversity. Website: PerBylund.com.This article was originally published on mises.orgHow Fractional Reserve LendingMakes Money Disappearby Frank ShostakAccording to the popular way of thinking, it is heldthat banks are responsible for the expansion of lending also known as credit, and given that economicprosperity is associated with an increase in credit,they are seen as crucial to the economic well-being.But are banks the true source of credit?Real Credit Is Backed by Real SavingsFor instance, take farmer Joe, who produced twokilograms of potatoes. He requires one kilogram forhis own consumption. The rest he decides to lend forone year to farmer Bob. The unconsumed one kilo-david@infinitebanking.org 5

BankNotes -Nelson Nash Institute Monthly Newsletter -March 2020gram of potatoes that Joe agrees to lend is his realsavings.ers of credit, who hold money generated out of “thinair.”Remember, real savings are a necessary precondition of lending. Loans must be fully backed by realsavings.Obviously, this type of credit undermines the production of real wealth, and the weakening of theproduction of real wealth ultimately diminishes theborrower’s own ability to repay his debt.By lending one kilogram of potatoes to Bob, Joeagrees to give up ownership of these potatoes forone year. In return, Bob provides Joe with a writtenpromise to repay 1.1 kilograms of potatoes in oneyear. The additional 0.1 kilograms constitutes interest.What we have here is an exchange of one kilogramof present potatoes for 1.1 kilograms of potatoes inone year. Both Joe and Bob have entered this transaction voluntarily, because they both have reachedthe conclusion that it would serve their objectives.The introduction of money does not alter the essenceof what lending is all about. Let’s say that instead oflending his one kilogram of potatoes Joe first exchanges (sells) it for money, let us say for ten dollars.Joe may now decide to lend his money to anotherfarmer, John, for one year at the going interest rateof 10 percent. John the farmer in turn buys a piece ofequipment with the borrowed money, which increases his production.Observe that the introduction of money did notchange the fact that real savings precede the act oflending. When a saver lends money, what he in factlends to borrowers are final consumer goods that hedid not consume.Credit Unbacked by Real Savings Results In Economic ImpoverishmentWhen credit is not backed by real savings, no realsavings have been exchanged. The borrower holdsempty money, so to speak, which he exchanges forgoods and services.What emerges is an exchange of nothing for something, or consumption of goods

a deleterious form of hypnotism. Perhaps they had a point, but I personally think much of that criticism was akin to taxi drivers objecting to competition from Uber. When he dabbled in politics, Peale provoked even more controversy. In the 1950s, he spoke out against the idea of a Catholic president who might be