Mises Wire

Honest Money in Dishonest Hands

For those who would find relief knowing the Bible sanctions a market-derived medium of exchange, Gary North’s Honest Money will come as a godsend (no pun intended). Even for those reprobates who forswear a religious worldview, his book will provide a solid grounding in monetary theory and history.

North’s vast understanding of money and banking coupled with his lean, no-jargon writing style takes the labor out of reading. His narrative carries us on a journey from the development of money in its innocent youth, where it was used solely as a means of facilitating trade, to money in its corrupt maturity, where today it also serves to facilitate power and profit for a ruling elite.

Very importantly Honest Money also includes numerous bullet points at the end of each chapter covering the main ideas. More good news: the book can be read comfortably in one evening.

Crusoe’s Choices

North begins with the familiar star of economic analysis, Robinson Crusoe. But rather than the usual pedestrian account of how Crusoe will budget his time, North dramatizes the situation somewhat, as would be appropriate for someone recently shipwrecked on an unknown island.

While on board a ship slowly sinking, Crusoe makes decisions about what goods to take to shore on his crudely assembled raft. The various goods and conditions on the island are objective, but his evaluation of the value of each good is purely subjective. Any gold on board has no value to a man marooned indefinitely on a desert island.

Gold isn’t wealth. It’s heavy. It displaces tools. It sinks rafts. It’s not only useless; it’s a liability.

This is how North introduces the reader to the distinctions between objective reality and subjective preferences, and to the fact that money arises only in a social context. With no one to trade with, poor Crusoe had no need of it.

What Is Money and Where Did It Come From?

In subsequent chapters he builds on these ideas. Money is a universally accepted medium of exchange. Originally, it was not imposed from above but evolved from competition with all other goods on the market, as the good most acceptable in trade. Over the centuries, gold and silver became the most used monies.

What about the supply of money? Who determines that?

If we have honest money, the market controls its supply. In today’s world it’s a committee. Just as we wouldn’t want a committee to set prices for us, North says, “why should [a committee] be allowed to control the supply of money in which all prices are quoted?”

A Complacent Public

But what about the hapless public under this monetary regime? Will they ever revolt?

Not very often. The public decides that paper money is money, not pieces of shiny metal. If paper is acceptable by the store down the street, then who cares? Who cares if prices go up, year after year? What’s “a little” price inflation? We’re all doing better, aren’t we? …

“Inflation can’t hurt anyone too badly” is a delusion of fully employed younger workers. It can hurt everyone who isn’t staying ahead of it with pay increases, and I mean after-tax pay increases.

Inflation acts as a turbocharger for the progressive income tax. The latter was passed in 1913 with rates so low and applied to incomes so high that almost no one worried, just as no one worries about a little inflation. The average family made $1,000 a year, but the tax didn’t kick in until the $20,000 level, and even there it was only 1 percent. Those few who made $500,000 or more were “soaked” at only 7 percent.

But once the law was in place the politicians changed the rules. Imagine that. In 1916, while Woodrow Wilson was bragging to voters about keeping us out of war, the top rate was bumped to 15 percent. The following year, while Wilson was shipping American men “over there,” the bottom bracket plunged from $20,000 to $2,000 while the top rate reached 67 percent, then 77 percent a year later.

Murray Rothbard has noted:

As luck would have it, the new Federal Reserve System coincided with the outbreak of World War I in Europe, and it is generally agreed that it was only the new system that permitted the U.S. to enter the war and to finance both its own war effort, and massive loans to the allies; roughly, the Fed doubled the money supply of the U.S. during the war and prices doubled in consequence.

Inflation is another name for counterfeiting. Counterfeiters create money from nothing then spend it. The private counterfeiter and the government counterfeiter have the same goal: to get something for nothing.

The public doesn’t trust private counterfeit money. The public does trust government counterfeit money, at least for a long time, until people’s trust is totally betrayed (mass inflation).

What is the difference in principle between private counterfeiting and government counterfeiting? None.

A Tale of Three Counterfeiters

One of the most memorable parts of Honest Money is North’s tale of the counterfeiters. Although counterfeiting is a swindle it acquires a high moral luster if it’s practiced in plain sight by the right people.

In North’s tale three men counterfeit and are discovered.

The first one is a businessman with an offset printing press who prints five hundred twenty-dollar bills and spends them into circulation.

The second man is an employee of the Bureau of Engraving and Printing who prints a million twenty-dollar bills, and the government spends them into circulation.

The third is the chairman of a major New York bank that has loaned a billion dollars of fractional reserve money to Pemex, the oil company owned by the Mexican government. Pemex cannot meet interest payments on the loan because the price of oil has collapsed.

What happens to these three men?

The businessman is convicted of counterfeiting and sent to prison.

The government employee continues to print money until he reaches age 65, when he retires and collects a pension.

The bank chairman calls the Fed, who in turn calls the Mexican government to get them to issue a bond for $25 million. The Fed subsequently creates $25 million to buy the bond. The Mexican government sends the money to Pemex, which then sends it to the New York bank to meet its quarterly interest payment. “The chairman of the New York bank gets a round of applause from the bank’s board of directors, and perhaps even a $100,000 bonus for his brilliant delaying of the bank’s crisis for another three months.”

The $25 million then multiplies through the US fractional reserve banking system, creating millions of new commercial dollars in a mini wave of inflation.

The World’s Most Powerful Insurance Company

Counterfeiters need protection if they are to succeed. The biggest counterfeiters, the major banks, sought and established the protection they wanted in 1913, with the Federal Reserve System.

The Fed’s public purpose was to prevent banking panics, as recessions were once called. It was to create an elastic currency to meet the needs of business, through dispassionate and skillful management of the money supply.

Under its watch, the economy has experienced at least eleven recessions over the last century, including the longest one on record, 1929–45.

One of the greatest services the Fed does for government is monetize its debt. When the federal government can’t raise taxes without facing a tax revolt and borrowing from private sources would entail high interest rates, it calls on the Fed to buy its debt on the cheap.


Honest money is not necessarily a gold—silver standard, North says. “The only standard that matters is the no fractional reserves standard, coupled with the no false balances standard.”

As long as the Fed is around, we will never have honest money. The purpose of the Fed is to inflate for the benefit of its friends: the big banks and government. In light of this situation, we should never question the success of government schooling.

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