In the 1964 film The Pawnbroker, Rod Steiger plays Sol Nazerman, a Holocaust survivor who operates a pawnshop in Harlem. In one memorable scene, his young assistant asks him what he believes in. “Money,” he answers. Money has extraordinary powers. It can buy comfort, luxury, relief from pain, sometimes even life itself. Then he adds, his anger driving him:
Now you listen to me and listen very carefully. Next to the speed of light which Einstein says is the only absolute in the universe, second only to that I rank money.
Believe me, that’s all you need to know.
“Is it everything?” “Money is the whole thing,” Nazerman tells him.
Nazerman had suffered horrors that have left him emotionally damaged. Money became the center of his life, something he could cling to in a world overtaken by wanton malevolence.
Of course, Nazerman was wrong, there’s more to life than money. We tell ourselves that while knowing everything has a price tag, even death. To what extent does the pursuit of money drive us?
What Is Money?
Economists define money as a generally-accepted medium of exchange. It is one of mankind’s greatest discoveries.
Money solves the problem of the double coincidence of wants. A farmer sells his wheat for something widely accepted in exchange, then uses it to buy shoes. The shoemaker doesn’t want wheat but accepts the money because he knows others will accept it from him.
People pursuing their individual interests discover that certain goods are more readily accepted than others. Carl Menger explained how money could emerge spontaneously from this process.
Gold and silver eventually became important monetary commodities because they possessed characteristics useful in exchange: durability, divisibility, portability, recognizability, and relative scarcity. . . .
The commodity chosen as a medium must be a luxury. Human desires for luxuries are unlimited and, therefore, luxury goods are always in demand and will always be acceptable. Wheat is a luxury in underfed civilizations, but not in a prosperous society. Cigarettes ordinarily would not serve as money, but they did in post-World War II Europe where they were considered a luxury. The term “luxury good” implies scarcity and high unit value. Having a high unit value, such a good is easily portable; for instance, an ounce of gold is worth a half-ton of pig iron.
Money was originally a means by which strangers could cooperate without knowing or trusting one another personally. And therein lies its genius.
Money can be exchanged for almost anything offered for sale. But it is not the same as wealth.
A society’s wealth consists of its houses, food, machinery, medicines, knowledge, productive capacities, and countless other goods and services that improve human life. And though not usually considered wealth, I consider having a loving and supportive family a form of wealth, especially as one ages.
Gold and silver are scarce and require much work to get them from the ground to a form useful in exchange. If people acting in their own interest preferred precious metals as money, how did we get paper and digital money?
As money-substitutes, paper, and digits are convenient. They were exchanged for goods and services on the belief that the commodity money was readily available for exchange at the bank issuing the substitutes. Paper and digits are not money backed by commodities. Only the commodities—gold and silver—were money. Or they were until government intervened.
Willie Sutton reportedly said he robbed banks because that’s where the money was. Willie would’ve made a good politician. Governments became friends with banks for the same reason Willie robbed them. If a sufficiently important bank issued more receipts for money than it had locked up in its vaults, people would get suspicious and start to pull their money out. The monetary contagion could spread to other banks, and government, which kept its loot in banks, would be in trouble. Using its status as an agency of coercion, government intervened to stop the redemption while keeping the banks in business.
The banks were guilty of embezzlement but the (government) courts didn’t see it that way. According to Foley v. Hill (1848), “The money placed in the custody of a banker is, to all intents and purposes, the money of the banker, to do with it as he pleases” though of course the banker is still responsible “to repay to the principal, when demanded, a sum equivalent to that paid into his hands.” And if the banker can’t repay when demanded, governments often let the banker off the hook until he could.
In the US the racket came to a climax in 1933 when the US government went off the gold standard domestically, declaring in effect that the money-substitutes were now money and would be created by its partner in crime, the Federal Reserve.
The market—meaning people engaged in production and trade—had chosen luxury metals as money. People once saved by keeping gold coins in their mattress because their purchasing power tended to increase. Government chose paper as money so it could print what it wanted by selling its debt, with the increase in supply lowering what each dollar could buy and eroding savings. Once again, Alan Greenspan had something to say (2002), this time as Fed chairman:
In the two decades following the abandonment of the gold standard in 1933, the consumer price index in the United States nearly doubled. And, in the four decades after that, prices quintupled. Monetary policy, unleashed from the constraint of domestic gold convertibility, had allowed a persistent overissuance of money. As recently as a decade ago, central bankers, having witnessed more than a half-century of chronic inflation, appeared to confirm that a fiat currency was inherently subject to excess.
Printing additional money does not create another house, harvest another crop, or cure another disease. But it can fund the creation, harvest, or cure and that’s the attraction it offers. The cost arrives later in the form of higher prices, business failures, and unemployment, while the dollar itself loses purchasing power, moving further in the direction of worthlessness.
The new money is not sprinkled uniformly over society like rain. Its creation changes spending patterns, relative prices, and the distribution of purchasing power. The winners are those receiving the new money early before prices rise. The losers are everyone else, especially retirees on fixed incomes.
Conclusion
If producing money does not produce wealth, what is the point of the Federal Reserve? An institution such as the Fed that has the exclusive privilege to produce money goes by the name of counterfeiter. As Robert P. Murphy discovered, the Fed is not like a counterfeiter, it is one.
The Fed is one of a long line of government counterfeiters extending back to the beginning of civilization. It’s a trail of war and inflation, social collapse and chaos.
Young people especially should understand who controls the monetary unit and why. Its integrity is too important to be taken for granted. The money we earn should serve our lives, not the war machine roaming the planet.
At the very heart of the modern economy is fraud -- fraud on a gigantic scale.
What is the nature of this fraud? Counterfeiting. Banks are government-licensed institutions that issue bogus IOUs. Because these IOUs function as money, they are counterfeit money. This is the heart, mind, and soul of all modern banking.
There is only one textbook in money and banking that states explicitly that all fractional reserve banking rests on fraud: Murray Rothbard’s The Mystery of Banking. It is not used in any university. It never has been. It was published in 1983. It went out of print almost immediately. It is online here.
