When Kings are Counterfeiters
Published by sauvik August 6th, 2005 in EconomicsOr how the rich get richer while the poor get poorer
When a bad king debases his currency, by mixing some base metal with gold, he and the officials of his mint act as counterfeiters plain and simple. The immediate effect of the debasement is that the king now has ‘money’ with which to build his new palace or finance his wars. When, instead of minting 5 tonnes of pure gold coins, the bad king mints 6 tonnes of debased coins, he obtains the means to garner resources that would otherwise have been beyond his means. The extra tonne of coins are used to buy up the labour and the land, the wines and the cheeses, and the grain and the poultry of the people. In other words, the bad king is able, through counterfeiting, to take over ‘real’ properties by offering ‘false’ properties in exchange.
The same is done with currency notes by modern-day governments. A currency note is, in truth, a ‘property title’: the note is supposed to entitle the note-holder to obtain, from the issuer of the note, on demand, ‘real’ money in exchange for the note. However, each and every central bank in the modern world issues notes that are irredeemable. Even the ‘mighty’ US dollar, since the disastrous tenure of President Nixon, is not convertible into anything. Thus, as with the bad kings of yore who used to debase their coins, all the governments of the world today use ‘false’ money to take over the ‘real’ resources of the subject populace. In effect, then, all the ‘money’ used in the world is ‘false’, and all the governments in the world are guilty of acting in the manner of counterfeiters. All the currency notes issued in the world of today are ‘property titles without property’. They are all ‘false’ property titles.
Economists are now united in their opinion that what keeps poor people poor is the fact that they do not possess property titles to whatever land and shacks they own. The assets of the poor, bereft of property titles, become ‘dead capital’, in the words of the Peruvian economist Hernando de Soto. All over the Third World, as de Soto has estimated, poor people possess trillions of dollars of ‘dead capital’. This has led many Third World governments to focus on granting clear property titles to the poor, so that they can leverage their assets in the capital market by selling, leasing or mortgaging their properties. It is this process, powered by property rights, that will enable the poor to unlock what de Soto called ‘the mystery of capital’.
As the entire globe takes towards full-fledged capitalism, many voices are being raised about the iniquities of the process. These voices are unabashedly anti-capitalist, and cry out for ‘fair trade’, foreign aid, and ‘debt relief’ to Third World governments. However, none of these ideas hit the nail on the head. The crux of the present iniquities in the global market lies in the twin factors: firstly, that the poor do not possess property titles to what is their own; and second, the fact that the rich possess ‘property titles without property’. The rich nations use their ‘false’ or ‘counterfeit’ currencies to buy up the world’s resources, recruit millions of civil servants and soldiers, grant foreign aid and generous loans to ruling Third World despots, fund the United Nations and NASA and so on. As this ‘false’ money pervades the global market, the rich of the First World get richer while the poor of the Third World get poorer. Let us now examine how currency debasement works in the long run.
The immediate effect of currency debasement is that those who first get to use the money buy up resources at current prices. First users of the ‘new money’ are governments, bureaucrats, government contractors and those who get generous loans from banks. Thanks to the ability of the ‘fractional reserve system’ run by central banks the world over in order to create credit out of thin air (more ‘property titles without property’) those who obtain loans from banks also benefit by being able to garner resources at current prices. Those who lose are all the rest of the people, who get to use the notes at later time periods, when prices have risen thanks to the inflation that all this excess money causes. Poor people lose the value of their savings, and pay the ‘inflation tax’. Thus, currency debasement can also be called ‘inflationary finance’, and it is the surest way to ‘tax’ poor people in poor nations.
I watched Pink Floyd play “Money” during the Live-8 concert, under a banner proclaiming “Make Poverty History”. Noble thoughts indeed. The key to making poverty vanish lies in sound money and property rights: first, that the poor should get, as a part of good governance, clear property titles to what is their own; and second, that the rich should no longer be able to issue ‘property titles without property’. Both should be a standard feature of the ‘rule of law’. It requires judges to ‘find’ the property rights of the poor. It also requires judges “learned” in Economics to recognize counterfeiters and punish them, instead of allowing them to hide behind FERA. As the Pink Floyd song goes: “Money, it’s a hit. Don’t give me that do-goody-good bullshit.”
27 Responses to “When Kings are Counterfeiters”
- 1 Pingback on Aug 7th, 2005 at 6:24 pm
- 2 Pingback on Jun 29th, 2008 at 5:18 am
Hi Sauvik
Nice overview of fiat money as counterfeit. Central banks are the world’s biggest counterfeiters. All fiat money is counterfeit because it is wide open to arbitrary manipulation.
This also makes it unsuitable as a medium of exchange or long-term store of value, as it can’t be counted on to hold its value between two transactions, which is after all one of the main reasons we use money in the first place.
A small note: the US went off the gold standard in 1933, during F.D. Roosevelt’s presidency, not in the 70s under Nixon. The US banned private ownership of gold under the pretext of a national emergency, and illegally and unconstitutionally looted private citizens’ gold, handing them paper in exchange.
Am glad to see someone write about it finally! While I can’t prove it, it is my opinion that currency debasement has reached fairly huge proportions. Largely, due to the dollar having become the de-facto reserve currency of the world, and the flexibility that this has offered the Fed. I also believe that extensive capital market deregulation and securitization of every TDH asset class has exacerbated this problem.
Kudos Sauvik,
Finally someone says it in an indian context. Money supply growth is couterfeiting. Indians have suffered inflation for long because of their governments being so incontinent with money.
I just checked some stats on the RBI site and i was in for a shock. The example i saw was 2001-2002 to 2003-2004 money supply M1. A mind boggling 36% increase in two years. This is freaking crazy. and mind you, indian currency has been appreciating against the dollar for some time, which more or less means that the US has been wasting the dollar away even faster!
And then, these guys have problems with liberalising gold import. The indian gold craze is totally justified with such blatant legal counterfeiting going on.
I guess the only stop to this orgy of money creation all over the world is for the real commodity suppliers like OPEC or Australia to insist on getting gold as payment.
Move to 100% reserve banking
i read ashish’s post with interest. he has hit the nail on the head. the answer lies, firstly, in courts mandating conversion of any note on demand into a base asset. and secondly, courts should treat demand deposits in all banks as cases of “custody” or “safekeeping”, and judge any lending out of these as “misappropriation” in law. this will lead to 100 per cent reserve banking with laissez faire private banking. all money will be sound, and all bank depositors will be safe.
Sauvik, it is from your book that I understood the concept that banks don’t “create money”, they “monetize credit”. This happens due to fractional reserve banking. Have you changed your views on the question?
Great article.
I would love to read more about this, either from you, or from links you could point me to.
thanks
arZan
Here is another post on fractional reserve banking. It addresses and links to various arguments for and against fractional reserve banking. After more reading on this subject, my feeling is that the problem lies more in the fiat currency than with the fractional reserve banking as such. If notes issued by competing banks clearly state the reserve system (fractional or full reserve) that is used by the issuing banks then there is no fraud involved. Also, when there is no compulsion on anybody to accept notes issued by the state-sponsored central banks (that is there is fiat-money) then seller can decided if and how much premium to charge on the bank notes offered by the buyer.
re: ravikiran’s question: NO! I have not changed my views. it is not my “view” that the function of banks is not to create credit, but to monetise credit. This is simple economics. The crux of the matter lies in how we can have sound money and prudent banking. this is possible under simple “rule of law” by treating bank DEMAND deposits as “custody” or “safekeeping” and treating lending out of these deposits as misappropriation in law. but there will also be investment bankers and other kinds of bankers other than the retail variety. they will be monetising creditworthiness for a fee. and even retail bankers need not keep 100% reserves for anything other than “demand” deposits.
why i say this is essentially a “rule of law” problem and not an economics problem is that under anarcho-capitalism, that will be the only force of “moral authority”, standing up for the “ethics of liberty”. today, when currencies collapse - so what to speak of bank collapses - what we see are “economists” employed by the state (or the IMF) beavering about self-importantly trying to fix things. under anarcho-capitalism, it will be all the judges, who will decide on property titles, which is all that paper money will be treated as. i will look at the new link to fractional reserves later and get back to ashish.
adfas
i checked up the link ashish provided on fractional reserves. i feel that a really free society will not BAN anything, least of all financial instruments. the only question is how the judges will react if banks collapse, taking their currencies with them. it is this fear that keeps central bankers in power.
in ‘antidote’ i spoke of the “option clause” that will allow bankers to ‘opt’ for deferred payment, on payment of penalty interest to the note holder. this will prevent runs.
the other question is regarding inflation: if there are fractional reserves, then the system will create a lot of credit and this will be inflationary.
i will discuss these issues with a friend and get back to you.
Yes, you are right. Free society should not ban anything except fraud, deception and initiation of violence. In case, where competing banks are allowed to issue their private currencies (backed by fractional or full reserves) the inflation will only affect those holding that particular bank’s currencies who had chosen that particular option voluntarily. This is assuming the bank has made a very clear and unambiguous declaration of its reserve policy on the notes themselves or it is well-known by convention. As long as people dealing with that’s bank’s notes know the reserve ratio they can appropriately discount the notes if they want or if they have confidence in the bank’s ability to maintain the solvency they may accept it as its face value.
ashish is right. silly me - of course individual currencies will fall in value. however, people will have to be adept at switching currencies and the ‘opium’ of using single currencies as legal tender will stop being used. it will be a far more adept homo economicus that will arise in the new world we are talking about.
ashish is right. silly me - of course individual currencies will fall in value. the system as a whole will not see inflation; many currencies will be stable. however, people will have to be adept at switching currencies and the ‘opium’ of using single currencies as legal tender will stop being administered to the people by central bankers. it will be a far more adept homo economicus that will arise in the new world we are talking about.
i may add that the treatment of currency notes as property titles in principle will lead to a differentiation between liquid assets and real savings which go on to fuel investment. liquid assets will be demand deposits; savings will be term deposits. against demand deposits banks will keep very high reserves, because of the law. competing notes offering deferred conversion - the ‘option clause’ - will trade at a discount, if at all. remember, Hayek said “prudent private bankers are the overseers of the market economy”. he also said that booms and busts of the “political business cycles” will continue as long as the most important regulator of the market - money - is not produced by the market itself.
Nice article. What I am starting to wonder after reading your article is how does debasing of currency of one country work more effectively than that of others. And we know that it does. So the currency, while not backed by gold or other valuable commodities is probably backed by other intangibles.?
regarding the question by anon: we demand a currency based on our previous experience of its purchasing power. if this stays stable, we demand more of it. thus, central bankers who control note issue and take precautions to avoid hyperinflation find their notes “gaining currency”. notes by bankers which cannot control inflation are weeded out of exchange: no one wants them.
Sauvik - I agree that hardly any currency in this world is backed by anything real or is even partially converitlbe — it is just fiat.
I also think that this is a great risk for a weak country as a war can really wipe out the whole buying power…. scary
Regards,
@mit
From an economic iliterate : If we are talking of money as truthfully reflecting wealth (the poor’s capital that they have no control over), then how does a gold standard help ? As in, just as the First World debases money now, wouldn’t it hoard gold ? Secondly, in case the public perception of a country’s wealth does not match the increase in currency being printed, would’nt market forces automatically depreciate it’s value in relation to other currencies ? cf comment above how the Indian rupee has appreciated with respect to the US dollar. Finally, isn’t it also a fact that the poor lose whatever capital they have because of lack of opportunity to leverage it effectively ? For example, the suicides of farmers in AP. The farmers are unable to utilise the land they have to produce economically viable products. How does lack of clear title affect them ?
re: questions by ?!, the self-confessed ‘economic illiterate’. let’s help him out as best we can:
a gold standard means that all notes MUST be convertible ON DEMAND into the base asset: gold. this means the end of inflation, ushering an age of SOUND MONEY.
the idea of hoarding gold as a means to raising the wealth of a nation was disproved by both hume as well as adam smith. hume gave us the ’specie flow argument’ according to which, when domestic bank vaults are full of gold, there will be domestic inflation, causing a fall in exports and a rise in imports - and a consequent outflow of gold.
adam smith said that the wealth of a nation is in the cheapness of all commodities and goods, so that every citizen is possessed of wealth: his possessions are of the best quality, obtained at the lowest prices - because of free trade.
if farmers in ap had clear titles to their land, they could get loans against their properties and try their hands maybe at some urban enterprise.
i suggest you read a little more. maybe yazad can help you with a reading list.
The US Fed is privately held - which is amazing to anyone who hears this first time.
In India, it is held by the govt - the Reserve Bank of India which is a government body
In most other countries too - it must be the government.
The US should move towards a reform to change the Fed from private to govt.
That would an early step in their evolution towards being a democratic country
But this moron is part of that private cabal, as his dad had been also
The US President who tried to do this first time was assasinated soon after and that assasination is a big mystery.
We wouldnt have cared if this didnt matter to us, but by twist of fate and our collective behaviour, that currency is very hegemonistic today.
If that currency is removed from the global oil trade, it will devalue overnight to third world levels.
Saddam wanted to shift to Euro and show the way to the OPEC to do this. Hence he was invaded.
Let us dump all the $ we have and trade in Euros or gold. And watch the fun - or the next big war!
the comment by immaterial regarding the assertion that the us fed is privately held and should be reverted to government ownership is IMMATERIAL.
this is because NOTHING IS PUBLIC PROPERTY.
anything that is called public property is in fact under the control of some people who CLAIM TO REPRESENT THE PUBLIC.
test out this from palatial bungalows to ONGC, and you’ll know this to be a fact.
thus, the rest of his post is immaterial too.
What about the numerous ‘Bank Runs’ that a gold standard would cause.
http://en.wikipedia.org/wiki/Gold_standard
In the international gold standard imbalances in international trade were rectified by requiring nations to pay accounts in gold. A country in deficit would have to pay its debts in gold thus depleting gold reserves and would therefore have to reduce its money supply. This would cause prices to deflate, reducing economic activity and, consequently, demand would fall. The resulting fall in demand would reduce imports; thus theoretically the deficit would be rectified when the nation was again importing less than it exported. This led to a constant pressure to close economies in the face of currency drains in what critics called “beggar thy neighbor” policies. Such zero-sum gold standard systems showed periodic imbalances which had to be corrected by rapid falls in output.
In practice however this could seriously destabilize the economy of countries which ran a trade deficit, because people tended to make a run on the bank to retrieve their money before gold reserves were exported, thus causing banks to collapse and wiping out savings. Bank runs and failures were a common feature of life during the period when the gold standard was the established economic system.
imagine the grand mughal ensconed in delhi’s lal quila, while the caravans (and the gold) from all over the world came and left the grand marketplace just outside the fort - chandni chowk.
redeemable currencies issued by private banks and upheld as “property titles” by the common courts will lead to precisely the same situation as with the grand mughals: gold will come and go, as will goods and services, and the state will not even be able to collect balance of trade statistics. goodbye growth rate!
as for runs, if demand notes are not redeemed, the banker will go to jail and so for these kinds of notes there will be 100 per cent reserve banking - or very close. same with demand deposits. there can be notes with “option clauses” to redeem with penalty interest, after a said period of time. if these are acceptable to the public - at a discount - that will be another way to prevent bank runs. banks face illiquidity crises and not insolvency crises. the ‘option clause’ would give them time to call back loans and pay off their notes.
Deficit financing is the norm I suppose because first of all it is difficult to calculate exactly the quantum of goods and services produced and secondly so plain convenient for the govt when it runs out of money. The govt unlike the people does not really have to work- it can always publish more notes when it is short. Apart from inflation, it is a dangerous form of corruption if it gets out of hand.