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Inflation and The Coming Keynesian Catastrophe: The Story of the Exeter Experiment With Constants


Schumacher Center for a New Economics,
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School of Living, 215 Julian Woods Lane, Julian, PA 16844
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The Papers of Ralph Borsodi

Articles, research files, and previously unpublished manuscripts of Ralph Borsodi can be viewed at the Schumacher Center for a New Economics Library. The materials in this special collection were acquired from the files of Borsodi’s former editor Lydia Ratcliff. Ralph Borsodi (1886-1977) was an economist as well as an author and founder of the School of Living in 1934. In the early 1970’s, Schumacher Center founder Robert Swann worked with Ralph Borsodi to issue Constants, a commodity-backed currency, on an experimental basis in Exeter, New Hampshire. The Exeter experiment began in April 1973 and ran for over a year, circulating almost 100,000 Constants in Exeter, Borsodi’s hometown. Borsodi and Swann were two of the most influential intellectual leaders of the community land trust movement in the United States. Together, they established the International Independence Institute in 1967 to provide training and technical assistance for people who were interested in promoting rural development.

The Milne Special Collections and Archives at the University of New Hampshire Library in Durham, NH houses Ralph Borsodi’s papers from 1938-1977. This collection consists of correspondence, much of which concerns the imminent visit to the United States of Jayaprakash Narayan in 1966; manuscripts for several of Borsodi’s works, both published and unpublished; and a small amount of papers from the School of Living, the University of Melbourne, and the corporations that Borsodi set up to implement his ideas.

Borsodi Cover

Table of Contents

Introduction by Robert Swann
Chapter 1: The Blind Leaders of Our Blinded World
Chapter 2: Keynesianism
Chapter 3: The Story of the Escondido Memorandum
Chapter 4: The Exeter Experiments
Chapter 5: On the Nature of Inflation
Chapter 6: On the Nature of Money
Chapter 7: On the Issuance of Money
Chapter 8: On the Redemption of Money
Chapter 9: On the Nature of Measures of Value
Chapter 10: On the Nature of Bank-Money
Chapter 11: On the Nature of Paper-Money
Chapter 12: On the Nature of Metal Money
Chapter 13: On the Nature of Arbitrage and of Speculation
Chapter 14: On Currency Arbitrage
Chapter 15: On Commodity Acquisition, Arbitrage, and Lending
Chapter 16: On the Nature of Lending and Investing, and of Speculating and Exploiting
Chapter 17: On the Acid Test: Deflation
Chapter 18: On the Nature of Banking
Appendix A: Statistical Problems
Appendix B: On the Wording of Paper-Money
Appendix C: The Escondido Memorandum
Appendix D: Bibliography


Introduction by Robert Swann

Ralph Borsodi once said that without money reform, no social reform would be possible, and he added money reform, or an honest money system, will be the most difficult reform to bring about because so few people understand the problem. Because Borsodi was and is a widely recognized leader of the decentralist movement in the United States, and because his books, from The Distribution Age to Seventeen Problems of Man and Society represent such a comprehensive analysis of our present society, such a statement has to be taken seriously.

At the same time he was reluctant to write a book about it. It was only after he had almost single-handedly launched the “Exeter Experiment,” as he called it, that some of us who were working with him persuaded him to set down in a brief outline his ideas for an “honest money system” which are contained in the pages which follow. He had, in fact, in 1977 at the age of 87, set out to write a book on what a “decent” money system would look like. At the same time he was on a trip in California and he had gone to the library to do some research for the book. But when he noted the headline in a local paper which announced that inflation had increased another percentage point in the last month, he decided that another book would be useless. There were too many books already. No one would pay any attention to another book. He sat down and jotted what he later called the “Escondido Memorandum.” It was an outline for action on how to establish an experiment which would actually launch an “honest money system.”

On returning to his home in Exeter, New Hampshire, he sought out the president of the local bank, a good friend of his, and asked for his cooperation. His plan was to announce in the local newspaper (the publisher was also a friend) that he, Ralph Borsodi, would indeed issue a currency based on 30 commodities, and this currency could be purchased with U.S. dollars at the local bank, and would be accepted as payment for goods at local stores. He noted that the currency would not devalue like U.S. dollars because it could always be redeemed for the same amount of commodities, or it could be redeemed at the local bank for U.S. dollars at an exchange rate based on the current price for the index of commodities. Since the “commodity basket” as he called the currency, would continue to have the same value, even as the dollar went down in value. Hence, it would take an increasing number of dollars to exchange for the same number of constants. To ensure there would be enough dollars in the bank, he placed some of his own money with his friend at the bank to cover any demand.

During this period he talked with local store owners to get their support and set up regular meetings for local people, especially business people, to explain how his system worked or the concept in back of it. All of this work and education paid off, and to his own surprise many people began buying “constants” and using them at local stores. Even the Town of Exeter accepted them as payment for parking traffic fines. Very few people ever redeemed them for dollars at the bank.

In order to continue such a scheme, of course, it would have been necessary to purchase significant quantities of the 30 commodities which were included in the basket. An initial start was made by purchasing a quantity of silver, but this was later sold to cover the cost of returning dollars for Constants, when Borsodi had to give up the experiment partly due to his age and health. Many people never did turn in their Constants, probably keeping them as souvenirs of the “Experiment.”

What was the result of the experiment? Borsodi had proved what he had set out to accomplish: that people were interested in a currency which did not devalue. The media was quick to realize how interested people were. Two national magazines, Forbes and Newsweek, carried stories about it and several newspapers in the region wrote about it.

But what would be necessary to bring about a wide scale monetary reform? What would an entire money and banking system which would change, in fact revitalize, an entire economic and social system, look like? These were the questions we asked Borsodi, and we finally got him to sit down and draft in his terse, curmudgeon style the following essays on money and banking.


Chapter 1: The Blind Leaders of Our Blinded World

Very appropriately on April Fool’s Day, on April 1, 1974, the New York Times published on its first page one of the most extraordinary stories which has ever appeared in a modem newspaper. Since the New York Times is the most widely read newspaper in America and perhaps the most influential published in the whole world, this must be an extraordinary story to justify making such an extraordinary statement about it.

The story was written by Soma Golden of the Financial Department of the Times. It is devoted to the fact “Inflation Grips the United States”, as one of its headlines states, and the fact that the leading economists of the nation do not know what to do about it. As Paul C. McCracken, who was Chairman of the Council of Economic Advisers early in the Nixon Administration puts it, “high probability” must be given to the notion that “modern societies do not have the knowledge and the will to keep the price level reasonably stable”—that neither the economists, who provide societies with their knowledge about money, nor the bureaucrats and bankers, who put that knowledge to work, know what to do or are willing to do anything which will “curb inflation.”

Golden quotes the nation’s leading economists and monetary authorities—including Secretary of the Treasury George P. Schultz; Walter W. Heller, who was Chairman of the President’s Council of Economic Advisers in the Kennedy and Johnson administrations; Henry Kaufman, a leading Wall Street economist; Milton L. Friedman, of the University of Chicago; James Tobin, of Yale University, a member of Kennedy’s Council of Economic Advisers; and Arthur Okun, another former Chairman of the Council of Economic Advisers. He sums up what they have to say as follows:

After years of slowly rising prices and seeming immunity from the virulent inflation elsewhere, the giant and troubled American economy stands poised in the middle of an inflationary spiral.

Economists are stunned by it.

They do not agree entirely on what to do about it, according to Golden. Many of them admitted that they did not know what to do about it at all.

Even Milton Friedman, who is one of the few distinguished economists in the United States who is not a Keynesian and who expects that United States inflation will begin soaring steadily at a rate of 10 to 12 percent, came up only with an expedient which accepts inflation; none of them proposed anything to stop it, and none offered anything except the hope that it might be reduced.

Let’s face the facts: the men who are actually leading us, who are responsible for what is going on, who are making the decisions about what is to happen, are confessing their blindness. The economies of the West, headed by that of our own, are heading for catastrophe led by blind leaders of a blinded world.


We are being victimized by so-called authorities who are what Pitirim Sorokin called “amnesiacs.” They are men so absorbed in what is happening and what is being said today—whose noses are so close to the grindstone—that they have lost all knowledge of what was written and what happened in the past. They are men who have never heard, apparently, of Samuel Jevons or Irving Fisher, or of F. A. Hayek or Frank D. Graham, of Jan Goudrian or Benjamin Graham, of Henry George, of Horace White, of Louis D. Brandeis, of Thomas Jefferson and Alexander Hamilton.

They are men who have apparently never heard or never read, or forgotten what they have read, about the ideas of these men. They are men who know all about the minutest details of what is considered economics today but not that in economics as in everything else, ends dictate means, and that if ends are wrong, the better the means used to realize them, the worse the result.

They have forgotten their histories. They do not know that in the conflict of ideas about the American dream, it was Jefferson who lost and Hamilton who won. They do not know that Jefferson’s goal was democratic, Hamilton’s plutocratic. They do not know that Jefferson believed that the freedom, the justice, and the integrity he wanted could only be realized in an agrarian and decentralized society. They do not know that Hamilton believed that the rich and powerful America he wanted, called for the creation of an industrialized and urbanized nation. Above all they do not know that Hamilton succeeded and Jefferson lost because Hamilton laid the foundation for the monetary and banking confusion which bedevils us to this day. Finally they do not know that in the conflict between the original American dream of a free economy, a free polity, and a free society on one hand, and the Socialist and Communist dream of planned and regimented prosperity on the other, it is the Socialist dream which is certain to prevail unless by some miracle the moral equation is injected into the resolution of the crisis we face today.

They write their text books, they teach their classes, and they advise the government about what it should do as if all the basic problems of how to avoid inflation had not been solved long ago when Jevons and Fisher called attention to the significance of index numbers, and as if some of the best economists of all time had not advocated the issuance of commodity-backed currencies so as to provide a constant value for the unstable and variable so-called “standards” of value of the past.

They certainly never heard, or if they have, have forgotten what Henry George made clear in Progress and Poverty, that unemployment is a pseudo-problem; that it has troubled and is troubling mankind for only one reason, because self-employment and in effect full-employment is made impossible by the expropriation of land and the prevention of access to it without prior payment of tribute to the land-speculators who own it.

All of the economists and authorities Golden quotes in his story are “amnesiacs.” What all the Keynesian economists are teaching us, out of the Keynesian economic textbooks which they use, consists of pseudo-economics. None of them are willing even to consider repudiating those who have and are misleading and bamboozling the world, and of turning to an alternative which would make it possible to escape from the catastrophe toward which they are leading us.

There are four things which all these economists and all the officials and bankers who are responsible for our monetary policies ignore:

  1. The first is that inflation is dishonest. It is a form of embezzlement. What is worse, it is a form of legalized embezzlement. Those who ignore this fact in effect condone it. And there is no excuse whatever for condoning any form of stealing.
  2. The second fact is that the inflation is deliberate. It was planned. It is in actuality a sort of conspiracy entered into by nations and those who represented and participated in the International Monetary Conference held in Bretton Woods, New Hampshire in 1944. It is an ongoing conspiracy still being carried out by all the nations which are members of the International Monetary Fund. The dishonesty involved is therefore deliberate.
  3. The third is that it is unnecessary. None of the so-called reasons, none of the excuses and rationalizations of those who are responsible for the inflation or who condone and justify it, have any real validity.
  4. The fourth and final fact is that almost without exception those leaders of the world who say that they are against inflation and who claim to be fighting against it, are lying. It is a lie to say that you are against something which you are in truth advocating. It is a lie to say that you are against something which you are in fact deliberately doing. It is a lie to advocate doing a little of what in fact should not be done at all. It is a lie to say you are against stealing, when you are in fact saying that a little stealing is all right. It is a lie to say that a little inflation, say two or three per cent, is not stealing but that a lot of inflation, say ten or twenty or thirty percent, is all wrong.

They do not therefore know that Keynes was wrong when he persuaded the whole West to accept his doctrine that the only way to ensure economic growth and to abolish unemployment was to use inflation. They certainly do not know that it is wrong from every standpoint except that of immediate political expediency. It never therefore occurs to them that the real problem is not how to “curb” inflation— how to reduce it or how to prevent it from running away— but how to stop it altogether. Even less does it occur to them that inflation will be neither curbed nor stopped until some alternative is offered to the existing inflation-prone currencies of the nations in the IMF, and that it is made possible for people to turn to a currency which is inflation proof—a currency based upon some such solution of the problem which in the Exeter experiment I called a constant. When that becomes possible we will have Gresham’s law operating in the reverse—good money will be driving bad money out of circulation.


Chapter 2: Keynesianism

The architect of the inflation with which the world is faced was John Maynard Keynes. Those initially and currently responsible for it are the organizers of the International Monetary Fund and their successors.

Ultimate responsibility, however, belongs to the leaders and teachers of the free world who, if they did not, should have known the truth about it, and if they did, utterly failed to make it known. A short excursion into history will make this clear.

The Coinage Act of April 2, 1793 made the dollar the legal unit of currency and legal tender in payment for all debts in the United States.

The Act provided that dollars issued by the United States should be redeemable by the Treasury Department in 24.75 troy grains of fine gold or 371.25 of fine silver.

As the accompanying chart makes clear, the dollar’s purchasing power at that time was equal to 100% of what this quantity of gold or silver would buy. It fluctuated between 75% and 85% of its original purchasing power until the War of 1812. During that disastrous war it dropped as low as 56%. It not only recovered but during the 1820’s it rose way above its original purchasing power.

The history of its purchasing power for the first one hundred fifty years of its existence can be described as one of ups-and-downs fluctuating around its original purchasing power. But then in the 1940’s something happened which completely changed its history.

What happened?

Two things happened: (1) The International Monetary Fund was organized in July 1944 at the famous Bretton Woods Conference, and (2) Keynesianism became the dominant monetary policy of all of the nations which became members of the IMF. There was no explicit endorsement of Keynesianism by the Conference or by the IMF, but for all practical purposes the conference set the machinery to Keynesianize the West in motion.

Since then, the chart not only records what has happened to the dollar, it points to what is going to happen to the dollar since nothing has been done to change the direction in which the dollar is going. In the first place, in the more than thirty years since this double “happening” the dollar has fluctuated but always fluctuated downward in purchasing power. Today, as I write, it has less than a third of its original purchasing power. In the second place, as I have already pointed out, there is nothing in sight but more and more inflation and less and less purchasing power.

Neither of these two happenings contributed a particle to making the dollar a more stable currency unit. Had the Coinage Act of 1793 provided for a stable currency, or had any subsequent act dealing with the currency provided such a currency, the purchasing power of the dollar would have begun to fluctuate in all probability not more than one or two percent around a level—neither a rising nor falling—secular trend. It would have been neither inflated nor deflated and it would not have developed the downward secular trend which began early in the 1940’s. The chart makes vividly clear the long-time trend of increased inflation and de creased purchasing power of the dollar. It makes it clear that since this double “happening” the money managers of the country have, for all practical purposes, been engaged in murdering the dollar.


When the history of the mis-education of mankind is finally written, few of the outstanding mis-educators will outshine John Maynard Keynes. Ironically, Keynes was knighted for both his disservice as a mis-educator and his disservice as an economic activist.

It is a tragedy that the rationalizers of economic half-truths and economic expedients (which are rarely truly expedient) should be accepted not only by the general public but also by professional economists who should have spotted their phoniness immediately. Competent economists should all have denounced Keynesianism as charlatanism— a charlatanism made worse by the moral naiveté of Keynes and his devotees who were and are still unconscious of its nature. The Keynesians, however, are sophists who have no difficulty in the present climate of economic opinion in “making the worse appear the better written.” The eminence of so many of them and the influence they exercise both in Washington and in Wall Street only proves the credulity of those who should have highly developed talents for skepticism.

Will the price we will have to pay to disillusion the West about Keynesianism be as great as the price paid by those whose faith in the New Era of the 1920’s was destroyed during the worldwide economic collapse of 1929?

Will the price we will have to pay be greater; will it be not only the collapse of the dollar and with it the collapse of the whole IMF, but also some form of fascism, or —

Will it mean that the price we will have to pay will also include some such revolutionary hell as Lenin and his cohorts visited upon Russia and which the other “dictatorships of the proletariat” are now inflicting upon the rest of the totalitarian Communist world?

What the International Encyclopedia of the Social Sciences says about the Keynesian revolution is very true: “It is generally agreed that the impact of John Maynard Keynes on the development of economic theory was greater than that of any other economist in the first half of the twentieth century”.

Yet everything he wrote and everything that he succeeded in doing has to be considered in the light of the fact that he was so obsessed by his fears about the problem of unemployment that he did not hesitate to rationalize and encourage unleashing the scourge of planned inflation.

For Keynes, providing prosperity and full employment justified deficit spending and payment for it with inflation. The tactics he recommended can be likened to that of a doctor who is confronted with a man shivering in bitter wintry weather and infects him with typhoid so as to make certain that he has a high fever. The fever will certainly make him feel warm, but consider the price his patient will have to pay for that short period of warmth!

Keynes was too intelligent a man not to realize that he was monkeying with fire. He himself once said:

Lenin…declared that the best way to destroy the Capitalist system was to debauch the currency…Lenin was certainly right. There is no subtler, no surer way of overturning the existing basis of society.

Yet I can think of no man who, with the best intentions in the world, has done more to “debauch the currency.”

Like most economists, Keynes labored under the delusive notion that ethics and economics have nothing to do with one another. He was perfectly willing, therefore, to prescribe legalized robbery by the government of every person who had a savings account, who held a life insurance policy, who had savings invested in bonds, or who lived on a pension. Debasing the value of money and reducing the purchasing power of people’s salaries and savings is a very subtle way in which the government quite legally either appropriates what the people lose or transfers it into the pockets of those the government wishes to favor. True, Keynes wanted this done with restraint, and only when needed to stimulate employment, but he ought to have known that no government in any way beholden to the masses of people would exercise such self-control.

Keynes, like most economists, had not the remotest notion of what was the correct solution of the problem of unemployment. He took it for granted that anyone who was unemployed had the right to demand of the government, “You furnish me a job!” If he ever read Henry George, the fact made no impression upon his thinking. He did not realize that involuntary unemployment was impossible in a society in which the system of land tenure gave everybody equal access to land. Even Marx admitted that there could be-no surplus of labor until land had been first preempted by private owners.

Men are not born with any natural right to employment by others. The only natural right they are born with is the right to extract a living from the cultivation of the earth. Resorting to an expedient like inflation to provide employment is no substitute for justice—and justice is denied to everybody under a system of land-tenure which makes it possible for a few to preempt land and resources which should be accessible to everybody who is willing to pay ground rental for it.

Keynes cannot be said to have belonged to a school of economic charlatanism such as that represented by W. H. (Coin) Harvey, whose book, “Coin’s Financial School” was sold by the hundreds of thousands during the panic of 1893. Nor to a school such as that represented by “General” Jacob S. Coxey who organized a march on Washington to demand the printing of an unlimited quantity of greenbacks so as to put the country “back on the tracks” to prosperity. The constantly increasing numbers of marchers in Coxey’s army when they finally reached Washington scared the living daylights out of Congress and the Administration.

It is more correct to say the Keynes created a school of economics such as that created by Major C. H. Douglas with his scheme for Social Credit. But he was much more clever and therefore more dangerous.


This is not a history. No historical account of the Bretton Woods Conference is needed for this study. But there are a number of things for which the Conference was responsible and a number of facts about the Conference which are germane.

The first is that it was important. It dealt with a problem of first-rate importance. Secondly, it set up an organization, the International Monetary Fund (IMF), which used the dollar as a reserve currency. With splendid unrealism it assumed that the United States would always redeem its dollars in gold at $35 an ounce. Thirdly, it made an agreement, presumably to be a permanent agreement, about the rate at which the various currencies belonging to the Fund would be exchanged. No matter how many times since then this agreement has broken down because of the revaluation of the pound, or the franc, or the mark, or the yen, it kept on making the same kind of “permanent” agreements. After all these years, it has still not learned that agreements for fixed exchange rates will not last. Fourthly, it implicitly, if not explicitly, accepted Keynesianism—the issue of money by its members to ensure full development and full employment.

Since that time, as Jacques Rueff points out with biting irony, it has learned nothing from its previous failures and so repeated them at the Smithsonian institute Conference in Washington when the dollar was devalued.

The IMF has really only done one thing new—it created “paper” gold to use as a reserve when it discovered that the United States simply could not redeem its promise to redeem dollars in gold. That economists today, in the twentieth century, could take the concept of paper gold seriously shows that they have forgotten all about what they used to say about fiat money during the nineteenth century.

On the whole the record proves that the members of the IMF are all champions of expediency and not champions of what is economically sound and morally right.

That there are economists who try to escape from pseudo-economics is demonstrated by Irving Fisher.1 His interest in macro-economics dominated his life; his interest in microeconomics was minimal. An activist as well as a theorist, he organized the Life Extension Institute, which became a great success, and the Stable Money League, which did not. He tried to persuade the whole fraternity of the importance of stable money. I had the pleasure of trying to help him a little during the Great Depression in the 1930’s when he was trying to create a workable scrip when money was almost unobtainable. But it was his work on index numbers which I consider outstanding. I believe him to be as greatly underestimated as Keynes has been overestimated.

Ever since Stanley Jevons in England published a paper which he called “A Serious Fall in the Value of Gold” and began to use index numbers to measure changes in prices, there has been no excuse for the failure of economists to use them as a means of establishing a stable unit for monetary measurement. Since Fisher’s exhaustive work in this field, there is not a single technical problem which cannot be solved in connection with establishing a stable dollar, a stable pound, a stable mark, or a stable franc. The problem which is insoluble is how to get politicians to give up the political leverage inflation provides for keeping them in office, and how to get investment bankers to give up the leverage it provides for launching securities when prices are going up. In a way this is only saying that not only does the quest of power corrupt but that the quest of greed is equally corrupting.

So far as economists are concerned, they already know how to establish a stable currency unit—for statistical purposes. Don’t they already distinguish between what they say in constant dollars from what they say in current, variable and inflatable dollars? Index numbers make it possible to do this, but they make it possible to do much more—they make it possible to issue a stable money. If constant dollars are ever to be moved from the charts and statistics and from the books and papers which abound in the abstract world in which economists live into the real world in which people earn and spend and buy and sell, economists must give up expedients and palliatives like Keynesianism and accept the fact that nothing short of replacing our rubber monetary units with stable monetary units which have a constant purchasing power, will do.


Among the cynics of today there is a saying: “statistics do not lie, but statisticians do”. In the preparation of the chart describing the history of the dollar, I discovered that what used to merely irritate me was in fact a means of misrepresentation, of concealing the truth, of—to use a short and ugly word—lying. I have always been irritated by the frequency and the variety of the “base years” used in statistical tables and charts. When I wanted to prepare a single graphic chart to show what had happened to the dollar since it came officially into existence, I was faced with four sets of base numbers. The only available data consisted of four sets of Wholesale Price Indexes with four different base years: 1910-1914=100; 1926=100; 1947-1949=100, and 1957-1959=100. To convert them into a single table was a tedious, tricky and irritating job.

The current issue of the “Survey of Current Business” uses still another base year to show the movement of prices, 1967=100. Why all these changes? To mystify? Why do statisticians and economists change these base years for the indexes which purport to show the cost of living and the purchasing power of the dollar? Why do they change them more and more frequently since inflation has become a part of the American Way of Life?

The fact is, their changes make it easier to misrepresent the facts, to avoid the truth, to lie in the meanest way—by telling a half-truth. The truth about the matter is that if the increase in wholesale prices which was shown as 115 on a 1967 basis had been shown on a 1926 base, the figure which would have had to be used would have had to be around three times as much, 445—a figure so startling as to focus attention upon the real magnitude of the inflation with which the Country is cursed.

The base year I am using in my chart is 1793—the year the dollar came legally into existence. The chart makes a graphic presentation of the fact that since Keynesianism took over, Washington has been murdering the dollar. No wonder there is an undercurrent of unease even in Washington. Unconsciously Washington knows that we are sitting on a time-bomb and that the moment something happens so that confidence in the dollar is threatened, something like 1929 will repeat itself. They talked about a “New Era” before the Great Depression. They are not calling the present period a New Era today. But the psychological climate is the same— everybody has been conditioned to feel that the laws now regulating money and banking make a repetition of anything like 1929 impossible.

I wonder. The nature of technology changes; we now use atomic bombs instead of bows-and-arrows. But the nature of the human animal does not—or changes so slowly that for all practical purposes it does not change at all.

There is another “lie” to which I think it worth calling attention—an inadvertent rather than a deliberate lie. This is the lie represented by the use of the word inflation. The word suggests something getting bigger—when a balloon is inflated, it becomes bigger. But they are not inflating the dollar in Washington, they are degrading and debasing it. They are increasing the quantity, but they are debasing its quality.

It would be a very healthy thing if we substituted the word debasement for the word inflation whenever we talk about what Washington is doing to the dollar. If the politicians in both parties were to start accusing each other of responsibility for debasing the dollar, politicking would be much more realistic.

I have referred to what is being done in Washington as murdering the dollar. But murdering of the same kind is taking place all around the world—from Washington to Tokyo, on the other side of the world. In 1971, prices in the United States went up 6.2% but in Sweden they went up 6.3%, in Japan 8.3%, in Brazil 21,7%, and in Chile 29.3%. Said a Swiss economist:

The greatest trouble for the world now is American inflation. If the United States, with its powerful economy and the world’s leading currency cannot hold its rate of inflation below 5 to 6 percent annually, what hope is there for the rest of the world to restore stable conditions?

For nearly 200 years the farmers, the businessmen, the manufacturers, and the rank and file in America have labored under an incubus which alternately inflicted upon them the miseries of “hard times” and then spasms of wild speculative prosperity. The record constitutes a blistering indictment of bankers, politicians, businessmen, economists, statisticians and everybody who has had anything to do with the issuance of money. It is no exaggeration to say that the free economy, which the founders of the Republic considered essential to the building of a free society, is foundering.

The vision of a world composed of free nations may finally fade out because of the mishandling of their monetary systems. Among the principal culprits responsible for this will be those in power in the Wall Streets and the Washing-tons of each free nation—the bankers and the politicians who have issued and managed their currencies. It is they who should be held responsible for the sorry record to date and they who should be pilloried for what they are continuing to do at present.

The United States Treasury Department produces detriments and not goods by issuing money and inflating the quantity of it with the assistance of the Federal Reserve Board and all its member banks throughout the country.

It alternately expands and contracts the supply not in accordance with the needs of the economy but in accordance with the needs of Washington at best, and in accordance with the needs of Wall Street at worst. So intimate is the tie between Washington and Wall Street that it is difficult to decide to whom to assign the major responsibility for the debasement and murdering of the dollar. But that these two centers do bear the major responsibility is incontestable: Wall Street by printing insecurities and the Treasury Department in Washington by printing dollars. Wall Street issues pseudo-securities and Washington pseudo-money. Similar centers exist in all the large industrial nations of the world. England, with the appearance of the Industrial Revolution, pioneered in pseudo-production. Japan is the latest present-day industrial nation to join in the game of pseudo-production.  No doubt others will arise until the last of the free economies disappear, and the verdict of the Inquest of History upon what Lincoln called “the last great hope of mankind” will be death by monetary suicide.

I will throughout this study stress the fact that neither Wall Street nor Washington should have any part in or control over the issuance of money. To make clear what I mean when I speak of Wall Street and Washington, it is necessary to distinguish between what they in theory are supposed to be and what they in fact are.

Wall Street, in theory, is the center of the financial system which provides properly and effectively for the capital needs of the nation. But Wall Street is in fact a speculation center organized and operated for the purpose of enabling a self-selected minority of men and of boundless greed to become millionaires and billionaires. Whatever Wall Street does to provide for the capital needs of the nation is incidental to, and misshaped and distorted by, what it in fact is.

Washington, in theory, is the establishment which governs the nation for the purpose of providing for the protection and for the welfare of the people it governs. Washington in fact is an establishment misshaped and distorted for the purpose enabling men of boundless ambition to gratify their desire to exercise power and to exploit it as long as they can.

In theory the functions which the two perform are entirely different. In practice, however, both the men of greed and the men of power have found that they can gratify their desires far more effectively if they work together. In practice, Wall Street and Washington operate as if they were Siamese twins. And this is the way they are both operating in dealing with Keynesianism.


Chapter 3: The Story of the Escondido Memorandum

On September 15, 1943, in the middle of World War II, I spoke about inflation at a dinner meeting attended by over five hundred people at the historic Aldine Club in New York City. The Chairman who presided was Dr. William H. Kirkpatrick, Emeritus Professor of Education of Columbia University; I was introduced by Pearl Buck, then one of the leading novelists of the day and a distinguished Sinologist. After my talk, a panel of equally distinguished authorities in many different fields discussed my prediction that after the war inflation would cause a depression of catastrophic consequences.

Five years later I wrote for the publishing division of the School of Living what today would be called a paperback. It embodied most of what I said at the Aldine Club in 1943. It was entitled “Inflation is Coming! and What To Do About It”. But I brought it up-to-date; I took into account what had taken place a year before at the Bretton Woods Conference.

Of the sixteen books I have written, “Inflation is Coming!” is the only one which became a best-seller. A little less than half a million copies were sold. I used to be amused when I visited a book store I patronized down in Wall Street to see two stacks of books side by side, one of my “Inflation is Coming!” and another by a Wall Street analyst, W. J. Baxter, entitled “No Inflation Is Coming!” Both seemed to be selling equally well.

In spite of immense sale of my book, in the thirty years since it was published nobody in power in Washington and nobody in the prevailing Keynesian establishment has paid any attention to my call for the establishment of a stable dollar. Irving Fisher, of Yale, to whom they should have listened, had been calling for a stable dollar for years. He had enlisted the support of some of the most influential economists, bankers and business leaders both here and in England. They formed an association to promote the idea. But he had no more influence on official policy than someone as little known as myself.

But those who are making monetary policy today ought to be listening. If they believed Fisher “dated” and that his ideas are irrelevant today, they ought to listen to what Chancellor Jacques Rueff, of the French Academy, who is one of France’s most distinguished economists, spelled out in detail in the book he published in 1972 entitled “The Monetary Sin of the West”. In his book he says, and includes the evidence to prove it, that the inflation which was started in 1944 is now irreversible and that it is going to end in one of the worst catastrophes in the whole economic history of the world.

They ought not only to be listening but also doing something about it. But they are doing neither.


The idea of conducting a series of experiments to demonstrate the feasibility of creating an inflation-proof monetary system, instead of writing another book about inflation, came to me on March 3rd, 1972. At that time my wife and I were wintering at a resort near Escondido, California, and I was working on a book I planned to call “Wealth and Ilth”.

On March 3rd—I made note of the day on what came to be called the Escondido Memorandum— was in Escondido looking up some material for my book at the library. While eating lunch I picked up and began to read a copy of the New York Times. Like the rest of the press that day, the Times featured under banner headlines the crisis caused by the first devaluation of the dollar. For days representatives of the International Monetary Fund from all over the world had been meeting at the Smithsonian Institute in Washington, trying to decide what to do about it.

It suddenly occurred to me that an experiment to do what neither my own book nor the books of my friend Irving Fisher had done, might rivet attention on the importance of replacing the present unstable and inconstant dollar with a stable and constant one. I made some notes about what such an experiment would entail, finished them when I got back to the ranch and my typewriter, and decided that if I could persuade the two banks in Exeter, New Hampshire, where I lived, to make it possible for me to launch such an experiment, I would do so.

Both banks, perhaps, because they both knew me, agreed to make it possible for me to conduct an experiment. The experimenting then began. I began to create a complex alternate currency system which was to include the issuance of bank-money, the printing of paper money, and the minting of a coinage. The whole system was to be based upon a substitute for the dollar to be called a “constant.”

The first constants were issued at a conference of about three hundred people in Conway, New Hampshire, on June 21st, 1972 called together to discuss “The Human Future” by the School of Living of Freeland, Maryland. The last constant was issued in the summer of 1973, when I was convinced that the feasibility and acceptability of the idea of such an alternative currency had been proved, and I felt, because of my age, unable to transform what was an experiment into an international bank of issue.

I want to take this opportunity to thank the hundreds of people all over the United States—beginning with those who bought the first constants at Conway—whose cooperation made the Exeter experiments possible. Perhaps this account of my experiments may eventually lead to transforming what they helped to do into a viable stable alternative currency system; perhaps it may lead some one or some group with the administrative talent, necessary resources, the statistical and banking “know-how”, to create an international bank to issue the constant.

What their cooperation proved is that there must be hundreds of thousands of worried victims of inflation, and perhaps millions who are ready to abandon the dollar the moment an alternative like the constant becomes available.


Chapter 4: The Exeter Experiments

The Exeter experiment began on my return from California in April 1973. Once the experimenting began, the number of different kinds of experiments needed to establish the feasibility and the acceptability of the idea kept increasing.

What became plain as they proceeded is that all three of the forms in which money is issued—bank-money, paper money, and coinage—called for experiments of many kinds if the proper method of issuing them was to be established. It was this fact which made it necessary to change almost everything we did from time to time until experience finally made clear the best way of doing it.

What also became plain when I began to plan the experiments was that two problems had to be solved before even the first experiment could be conducted: (1) the problem of eliminating political control and government interference, and (2) the problem of how to support a bank which issued a currency based upon a commodity reserve without turning for support to ulterior interests either corporate or governmental in nature.

The idea of a commodity-backed currency has always labored under two disadvantages. The “Proposals for an International Commodity Reserve Currency” submitted to the conference at Bretton Woods by the Committee for Economic Stability of which the two Grahams were leading members—Frank D. Graham who wrote “Fundamentals of International Policy” and Benjamin Graham who wrote “World Commodities and World Currency”—labored under both disadvantages.

The first was that all of the advocates of such a currency, including the Grahams, took it for granted that the currency would be issued and controlled by the same kind of central banks which now issue the money used everywhere in the world.

The second was that the cost of storing a commodity reserve was plainly prohibitive. The cost of providing a reserve of gold or silver, because they took up little room, was so low that their use seemed practicable. The cost of storing a reserve which included commodities such as wheat and rice was so that their use as a reserve seemed utterly impractical.

Both disadvantages disappeared in the approach to the problem upon which the Exeter experiments were based. The first disappeared when the plan adopted for the experiments rejected the idea that governmental central banks should have anything to do with the issuance of the new currency. The second disappeared when the cost of storing the reserve was eliminated by arbitraging it whenever possible instead of storing and immobilizing it. Instead of burdening the bank-of-issue with costs of storage, the costs of storage would be borne, as is the case today, by the users of the commodities—by the mills and industries which process basic commodities and by the importers and exporters who ship them from producer nations to consumer nations. When a mill buys wheat to process it into flour, it pays for the cost of storage during the time it was stored by the growers and includes this cost in the price it charges to the consumers of flour. When an importer in Britain buys wheat from an exporter in Australia, the cost not only of storage in Australia but also of “storage” while it is in transit, is included in the price the importer pays for the wheat.

The elimination of government central banks eliminates political considerations and national interests from the issuance of money. The elimination of costs of storage by resorting to arbitrage not only makes the use of commodities as a reserve practicable but provides an income which will help to make the bank-of-issue self-supporting. Unless such a bank is entirely independent and completely self-supporting, it would have to turn to the government for support or to other ulterior vested interests. Instead of being free to render a necessary service, impartially it would find itself being used either to promote private special interests or to promote what the politicians in control of the government call the national interest.

This plan eliminates both of these objections. It eliminates political considerations and national interests from the issuance of money. It makes it possible to avoid taxes and other hindrances in nearly every country, including the United States, on the movement of funds from one country to another. By substituting an independent bank-of-issue chartered in some country like Luxembourg (which does not interfere with currency movements) for a government controlled central bank, the needs of trade rather than the needs of the government would be served. There are several countries like Luxembourg and the proposed bank-of-issue might actually incorporate in several of them so that it could move from one to another if one of them tried to interfere with its operations.

Initially I believed that all the essential experiments could be finished within a year. This might have been possible if my resource had been large enough. Working only as fast as my limited resources permitted, it took another six months to reach the point when it was no longer necessary to think of the creation of an alternative stable monetary unit such as the constant as experimental in nature.

To include a detailed account of all the experiments is not a part of the plan of this book. But to give the readers of it some “feel” for what took place, I believe the best thing is to include one of the best of many stories which appeared in various magazines and newspapers both here and in England. What follows was a feature story written by Mel Most, the Financial Editor of The Bergen Sunday Record, of Hackensack, New Jersey. It occupied a full page in its issue of February 4, 1973. Mel Most took a particular interest in the matter because I used to live in his neighborhood and he knew something about me. This is his story, word for word:

Would you believe—a new, worldwide, inflation-proof money? Pensions, insurance benefits, and annuities paid in the dollar value of the day they were signed for? Imports and exports that arrive with prices unaffected by shifts in exchange rates after they were ordered? Wages that adjust by themselves to the rising cost of living?

Ask Dr. Ralph Borsodi, an author-economist who shook up Rockland County with his social experiments when he was a mere 50 and is doing the same to Exeter, N.H. at 86.

He’s been quietly testing a currency designed to keep pace with prices — suddenly spotlighted by recent headlines:

President Nixon’s lifting most wage-price controls; a 20-year record, one month jump in wholesale prices; the cost of food expected to go up 50 per cent higher than forecast for the first half of this year.

For seven months, Borsodi has had Exeter shoppers, merchants, banks, and schools paying and receiving with monetary units he calls ‘Constants’ used like dollars.

Thousands of dollars of bank money orders and personal checks for Constants have circulated like money, been used for buying and selling, and have been cashed by tellers.

The big difference is that regular money buys less and less as time passes, while the Constant is pegged in value to the government’s cost-of-living index. That means one Constant should always buy the same amount of goods on the average.

For example, people who bought Constants from Borsodi’s organization at say, $2.18 a 10-Constant note, were surprised later when the bank gave them $2.19 for it. That was because the cost of living index had risen by a half-percent or so in the meantime.

The experiment worked so well in the sleepy New England town of 8,892 inhabitants that the University of New Hampshire Press in Durhanif is printing a first issue of 275,000 Constants in currency form.

Now worth about 22 cents a Constant, the bills will go into circulation next month—with coins to follow—in denominations of CI, C5, CIO, C25, and C100. The Constant is designated by ‘C’ crossed with an ‘equal’ sign.

‘We need something more stable than all the paper currencies today which are really nothing but overdrafts’ Borsodi said. ‘The Constant will be pegged to the price of commodities.”

Backing it, he said, are enough capital reserves—$100,000—to cover an unheard of, sudden 10-point rise in the cost of living index. The interest alone has undoubtedly been enough to pay for the test runs, although it won’t provide the permanent basis of operation. Backing the project, too, has been a lot of confidence—the indispensable ingredient that make currencies rise and fall in value.

Even the staid, wealthy Philips Exeter Academy prep school paid in Constants for thousands of dollars of printing and supplies.

Joining his following among businessman, volunteers come halfway across the country from Borsodi’s other disciples—the youth.

Youths rebelling against the urban-suburban rat race have rediscovered his book on homesteading in Rockland County, Flight from the City, republished almost 30 years after it spurred a back-to-the-land movement in the Suffern area during the Depression. Borsodi left Rockland County in the early 1950’s.

Another book written by Borsodi during his 33 years of homespun living in Rockland warned that ‘Inflation is Coming” and led to the Constant.

‘Inflation is the meanest of all tragedies’, he said. ‘It strikes the old who have counted on their savings.’

Borsodi, an energetic, wiry man, walks every morning to his office at Independent Arbitrage International, his non-profit organization which issues and redeems the Constant. He almost always goes home for lunch with Mrs. Borsodi, whose picture is prominent on his desk.

As conservative in dress as he is radical in his monetary theory, Borsodi was flanked by two college-age office volunteers and admirers, Richard Sexton from Memphis, Tenn., and F. Paul Salstrom from Rockport, Ill.

Up to now, the Constant has been backed by the $100,000 reserve, which is on deposit at banks in Exeter, Boston and London. The plan is funded by users themselves, since they pay or deposit money with the organization to get their Constants.

First National Bank of Boston and two Exeter banks confirmed that Independent Arbitrage International (I AI) was a substantial depositor and was considered responsible. Besides Borsodi as chairman, its advisory committee includes bankers, brokers, editors, attorneys and economists.

In a new phase, the organization has incorporated in Luxembourg—where there are no restrictions on movement of money—to form an international banking institution which will be completely free of any government’s needs.

‘The difficulty with the International Monetary Fund is that they use it to finance the government’s deficits. We’ll be doing a banking job instead,’ Borsodi said.

In place of capital based on payments and reserves, he plans to base the Constant on goods—and instead of being pegged to the government price index, it will be pegged to the world price of those goods.

Here’s how the idea works. Suppose a fanner puts aside a $1,000 profit on his summer harvest to pay for cattle feed next winter. By the time the winter comes, the feed may cost $1,100 and he is short $100.

Instead, if he got title to the feed right away, he’d have it in the winter at no extra cost, no matter what the price then is. In fact, he would sell his title for $100 more than he paid for it.

Arbitrage proposes to make each Constant a title for a tiny share, not just in a single commodity such as feed, but in the 30 top commodities in world trade.

What these commodities sell for ultimately affects most world prices, and as their price average went up, so would the value of the Constant based on it.

IAI doesn’t intend to store any goods, or to speculate in commodities futures on the markets. Commodities arbitrage (rhymes with ‘garage’) is a form of simultaneous trading in different places. It serves buyers and sellers as an international clearinghouse and saves on shipping goods back and forth, if they can be supplied locally.

‘We’re interested only in spot (immediate) commodities—no storage expense, no speculation,’ Borsodi said. ‘You make money, you have an income from it.

Now the Constant will be backed by actual commodity values in arbitrage, adjusted monthly to a price index based on world trading prices in the 30 commodities since the mid-1960’s.

Prof. William R. Hosek, IAI economist at the Whitemore School of Business Administration of the University of New Hampshire, has just completed computer work on a sort of ‘Dow Jones’ index of the 30 commodities price averages.

Gold and silver prices, which used to be the sole basis of most of the world’s currencies, come back merely as two of the nine most traded metals, including aluminum, copper, iron, lead nickel, tin and zinc.

The index also includes the world’s 13 main food staples—barley, cocoa, coffee, copra (dried coconut meat), com, cottonseed, oats, peanuts, rice, rye, soybeans, sugar and wheat. Its other commodities are cement, cotton, hides, jute, petroleum, rubber, sulphur, and wool.

Hosek is enthusiastic about prospects.

‘The idea of the scrip is to have a currency that doesn’t depreciate as prices go up/’ he said. ‘It’s a test to see whether or not it would be acceptable and whether the people would hold and use the stuff. It clears through the bank like a check written in dollars.’

Asked if a savings account wouldn’t appreciate as much just on bank interest, Hosek shook his head: ‘You can’t use a savings account for carrying out transactions. You use a checking account. A checking account in dollars today, with just enough in it to buy a TV set, won’t buy a TV set three months from now.

But some bankers arc less than enthusiastic about the new issue of scrip, although they participated in the earlier system of using Constants as a money-of-account

Edwin R. Baker, Vice-President of Exeter Banking Company, which participated in the initial tests, said: ‘I do think there’s some basic merit in Dr. Borsodi’s original concept. If you’re dealing in dollars with a foreign business that may take three months to deliver, a businessman signs a contract for $2,000 and finds he has to pay $2,200. Or, if not, it’s the seller who has to lose money on it.’

He added: ‘Dr. Borsodi doesn’t expect a recession this year, but he believes it’s bound to come. If it docs, maybe we’ll all find he’s right about money. Part of the merit of the dollar is that it’s based on faith—when the faith is a little bit shaken, the fate of the dollar is affected.’

One merchant put it more baldly: ‘Maybe people will call it a funny money scheme, but the question is whose money is funny—his or ours?’

Baker’s bank won’t be involved in the scrip issue, but he told how Borsodi’s two-state tests worked.

The first was a check device, with amounts printed in Constants—10, 50, or 100. They circulated in town in thousands of dollars worth. Nobody questioned them. When they were cashed against the IAI account, the check was endorsed and we filled in the dollar amount, around $2.18 for $10, to start with.

‘Sometimes people filled in their own and made mistakes. With 50’s, the mathematics can get a little hairy.’

Borsodi then tested individual checking accounts in Constants, which are continuing.

‘Each person maintains an account in his own name with IAI,’ Baker explained. ‘Dr. Borsodi takes care of the individual accounts. As far as the bank is concerned, we treat them all as one account with many signatories. There are close to 50, mostly local, but we’ve also got some scattered around—New Jersey, Maryland, even one in Alaska.’

‘It worked perfectly all right because the system for clearing checks has been part of our financial system for many years.’

The problems with the scrip will be that there is no individual endorser, Baker said. He also wondered about how the capital gains would be taxed as it went up in dollar value—presumably like a bearer bond, to be taxed when the gain is realized.

The biggest legal headache for a small bank, he said, was whether the scrip could circulate as currency. ‘Technically, they’re promissory notes.’

However, no objection was seen by Deputy Chief Counsel Westbrook Murphy at the Office of the United States Controller of the Currency, when reached in Washington:

‘They can circulate clamshells or pine cones if they want to, as long as people accept them. There’s plenty of Canadian money circulating in Northern New Hampshire.’

‘The law only provides that you have a right to demand payment in US currency as legal tender if you want to.’

Murphy did dig up an old law, intended to protect the coinage, which makes it a misdemeanor to issue anything intended to circulate in place of money, for less than SI.

That would affect only the 1-Constant denomination if carried out. But it would also prevent, for example a New York newsstand dealer from accepting or making change in subway tokens, and other common practices.

Borsodi is taking no chances.

‘We’re assuming that once this thing gets started,’ he said, ‘this is going to frighten the Treasury and the Federal Reserve System. It’s going to reflect upon the fact that we Americans are issuing a currency that’s being inflated.’

What had made him think of the idea? ‘In one study, I found some people had lost between five and ten percent of the purchasing power of savings they put into government savings bonds, which could only buy less at maturity than when they were acquired.’

When I decided that I had to discontinue the experiment I had started, I prepared a series of position papers which those who wanted to carry on with the idea might find useful. I can think of no better report on the results of the experiments than these position papers. All of them are here included, revised only enough to make them fit into a book which any intelligent layman, and not only a monetary economist, can understand.

The first dealt with the nature of inflation.


Chapter 5: On the Nature of Inflation

Nothing is more ironic than the fact that among the perhaps millions of words written about inflation, there is not one definition of the word, so far as I know, of which it might be said that it makes (a) what inflation is, (b) how it comes into existence, and (c) why it is so injurious to mankind so clear that its victims are moved to do something about it.

The explanation for this has its source in a curious fact: the fact that no meaningful definition of inflation is possible without defining its antithesis, deflation. And no meaningful definition of either inflation or deflation is possible without the definition of a word which designates a money supply which is neither inflated nor deflated.

Irving Fisher suggested the use of the word “stabilization” for this purpose. For a number of reasons I decided the best word to use was “normalization”. Normalization suggests what should take the place of both inflation and deflation, and normal can properly be used to designate a money supply which is neither too large nor too small, which is therefore neither inflated nor deflated.

1. Inflation: Inflation occurs when the money supply is increased by issuing money for such purposes as: for meeting the deficits of a government; for capital investments, for speculation of any kind, for loans to buy or hold stocks, bonds, realty and other securities; for the development and modernization of underdeveloped nations; or for stimulating business or reducing unemployment. Under these circumstances the increase is inflationary, the money supply is inflated, and prices of all kinds raised.

The failure of the government to interdict by law such inflation of the money supply is governmental nonfeasance and misfeasance; the act of the government itself in creating such inflation, malfeasance.

Inflation, since it stimulates speculation, is uneconomic, and since it cheats all those who work and all those who save, dishonest.

2. Deflation: Deflation occurs when the money supply is decreased by a refusal to issue money when needed to those properly entitled to borrow it, or when the interest rate is raised to deliberately discourage production. Under these circumstances the decrease is deflationary, the money supply is deflated, and the price level pushed downward.

When the freedom of banks to issue money, particularly during a depression, is restrained or forbidden by any activity of the government (this is government misfeasance and nonfeasance) or the government permits such restraint by permitting the private monopolization and centralization o banking (this is government nonfeasance and malfeasance) deflation is not only made possible but inevitable.

Deflation, since it reduces production, is uneconomic and since it cheats all those who either borrow money or produce goods, it is dishonest.

3. Normalization: Normalization occurs when the total money supply is maintained by issuing or retiring money in circulation so that it provides for all the short term needs, but only for the short term needs, of the producers and distributors of goods. Under these circumstances the money supply is normal. With normalization, the price level tends to be stabilized; the price level tends neither to rise or fall because of anything done or undone by the issuers of money; speculative exploitation of the banking system is made virtually impossible, and wages and profits tend to rise only as productivity is increased.

Since such a money supply is both honest and economic, neither inflation nor deflation, no matter how excused and rationalized is excusable.

If for the moment we postpone answering in detail what money should and should not be issued for until that question comes up later, then normalization of an inflated money supply calls for the retirement of money which should not have been issued at all; normalization of a deflated money supply calls for the issuance of new money which should have been issued to avoid deflation, while normalization of a normal money supply calls for the maintenance of a money supply which is already providing all the money properly needed—neither more nor less.


Chapter 6: On the Nature of Money

There is nothing more astonishing than the fact that those who ought to know most about the nature of money— including the central bankers who issue it and the monetary authorities and economists who supposedly know all about it—have the foggiest notions about what money in actuality is.

There are two reasons for this: (1) the fact that the truth about its nature is obscured by the complexity of the ways in which it comes into existence, and (2) the fact that, because of this, it is defined in all the texts on economics and in all the dictionaries and encyclopedias not in terms of what it is but in terms of what it is used for. To dispel this obscurity a whole book would be needed; to define it properly only a few paragraphs.

Existing definitions state that money is a medium of exchange, that it is a measure of value, that it is a store of value, and so on ad infinitum. None of these statements are true. They state not what money is factually but what money is used for functionally. A pencil can be used to scratch one’s head, but this does not justify anybody in saying that a pencil is a head-scratcher. No matter how used, a pencil is a pencil.

What money in reality is, is a claim. It is a claim in the same sense that bills and invoices, promissory notes and mortgages, and entries of accounts receivable in a ledger are claims against those who are obligated to pay the bills, the notes and the accounts they owe to those to whom they owe them.

But it is a claim which differs from all other kinds of claims in four ways: (1) the holder’s claim is a claim against the government or bank-of-issue whose money he has accepted; (2) the money itself may consist either of bank-money on deposit in a bank, printed notes, or coinage; (3) the holder of the money is entitled to the redemption of his claim in full on demand; and (4) the value of the goods or services he can buy with the redemption must be the same as the value of the goods he sold or the services he rendered when he accepted the money. If the value is either more or less, cheating takes place. If its purchasing power has been reduced, those who use it to buy are cheated; if it has been increased, those who accept it in selling are cheated.

True, when money is used to buy and sell things it is used as a medium of exchange. True, when it is used to put a price on something, it is used as a measure of value. And true, when it is stored in a tin box or safe for future use, it is used as a store of value. But no matter how used, it is none of these things. No matter how often it changes hands and no matter how different the uses made of it, it remains at all times a claim against the original issuer of the money.


Money, is not, however, just a claim the repudiation of which injures only the claimant. Repudiation, even if only partial, injures everybody who has or uses money. Inflation of the money supply is such a partial repudiation. Only the issuer benefits from this; everybody else loses by it. It injures everybody who uses the money because it raises the price level by making everybody pay more money for the same goods and because it reduces the purchasing power of everybody who earns money or saves it.

For the full significance of the fact that money is a claim to be appreciated, it is important to bear in mind that this is what not only the United States but all the nations which are members of the IMF are ignoring. What they are doing is in effect a form of massive repudiation of honest claims which should be fully and honestly redeemed. What they are doing should not be called inflation; it should be called legalized embezzlement.


While all the many kinds of money used throughout the world are claims—each nation has its own kind—the fact that there are three basic kinds of money must be taken into account and positions with regard to each of them taken. These three basic kinds of money consist of what will be called in the terminology of this study (1) bank-money, (2) paper-money, and (3) metal-money.


Chapter 7: On the Issuance of Money

All the different kinds of money in use today (the dollar, the pound, the franc, the mark) and all the different kinds used since money was first invented (coins, paper-money, bank-money), have obviously had to come into existence and have had to be issued in some way. Inflation will never be properly dealt with and the evils for which it is responsible never corrected until the way in which money is now issued and the way in which it should be issued is understood.

To understand what is right and wrong in the issuance of money, it is of the utmost importance never to forget that it came into existence for only one reason, to make it possible to replace bartering with buying and selling. The fact that this is habitually ignored by both the masses of people who use money and by the central bankers and the treasury department officials who issue it is responsible for most of the monetary confusion and most of the monetary evils which call to high heaven for correction.

In bartering only two parties are involved. Each barterer has something the other party wants, and the transaction is consummated when each exchanges what he does not want for what he does. But in buying and selling three parties are involved: the buyer, who pays for what he wants with money, the seller, who accepts the money, and the issuer of the money used. In such a transaction, the seller exchanges the goods which he sells not for other goods but for a claim (evidenced by the money) which he can later use to buy what he then wants.

What will be called commerce in this book will refer to transactions of this kind. For the sake of ending the existing confusion about money, the word commerce ought to be used for no other purpose.

That in modem nations this third party, the issuer of the money, behaves like an unscrupulous scoundrel is proved by the fact that he not only inflates the money but sometimes deflates it; by the fact that this cheats the holder of the money when the holder finally spends it.

The process of cheating begins when the money is issued. This is what makes understanding the issuance of money so important.

Issuance, as the term will be used in this discussion, refers to the activities of central banks, in the United States the Federal Reserve System, in the minting, printing, creating and circulating of money. The machinery used in doing this is so complicated that it would take a book of its own to describe it. AH that is essential for the purposes of this study is to make clear why the issuance of money for improper purpose—for such a purpose of growth and development, for instance—makes inflation not only possible but possible as a deliberate policy. Keynesianism, as I have tried to make clear, is the rationalization of inflation as a deliberate policy.

The crucial question is what is back of the money which the central banks operating on Keynesian principles issue? There is some gold of course, but today gold reserves are not only trifling but for the most impounded. Most of it is “backed” by loans which should never be made—loans made to monetize the debts of the government; loans made to finance war and the military-industrial complex; monetize the securities of giant corporations which should not exist at all, and to finance speculations in securities, commodities and land. Finally there is back of it money issued to finance the needs of commercial banks in making legitimate commercial loans. Insofar as the debts discounted and monetized in this way really consist of loans made for legitimate commercial purposes, there is no abuse involved. But most of the loans discounted by commercial banks, just like those made directly by central banks, are made to finance precisely the same activities which should not be monetized at all.

What I have called the monetization of debts here is just another way of saying the issuance and circulation of money. The means by which the money issued is circulated is provided by payments made for labor employed, for the commodities used, and for the capital equipment purchased by ail these borrowers.

Now what must never be overlooked to understand what is going on are two things: that all the money issued and circulated in this complicated fashion consists of claims held by those who have accepted the money and that it is the banks-of-issue which are ultimately responsible for the redemption of these claims.

The position which I am taking with regard to issuance is based upon five positive and six negative principles all of them in turn based upon the above two indisputable facts: (a) the fact that money consists of claims, and (b) the fact that the banks which issue the money are responsible for redeeming the claims.

The five positive principles are:

  1.  The issuance of money is a banking and not a government function. The establishment of the monetary-unit, the determination of its unit of redemption, the printing of the currency, and the minting of the coinage are functions which should be performed by a bank-of-issue organized for service and only to serve the needs of commercial banks in making legitimate commercial loans.
  2.  The only proper purpose for the issuance of money is to facilitate the buying and selling of commodities and merchandise.
  3.  The money issued should have a constant and unvarying purchasing power.
  4.  The money supply must be increased or decreased only in accordance with the volume of trade. There are no circumstances which justify or which make it really necessary to issue money for any other purpose.
  5.  The money supply should not become legal tender for the payment of debts by the ipse dixit of the government but by agreement between the buyers and sellers who use the money issued by the third party to all monetary transactions.

The negative principles are:

  1.  It must never be issued to provide money for capital investments by anybody or to provide capital for any kind of enterprise no matter how apparently desirable. It must never be issued to finance capital investments in land and buildings, machinery and durable production equipment, stocks and bonds, or loans and mortgages on such investments.
  2.  It must never be issued to finance the growth of developed economies (such as that of the United States) or development of the economies of underdeveloped nations (such as that of India).
  3.  It must never be issued to finance government debts.
  4.  It must never be issued to finance charitable, educational, religious, or other non-commercial enterprises.
  5.  It must never be issued to provide employment, reduce unemployment, or support the unemployed.
  6.  It must never be issued to finance personal loans or finance consumer purchases.


Chapter 8: On the Redemption of Money

The term redemption as it will be used in this study refers to the only honest conclusion to the series of transactions initiated when a bank—any bank-of-issue anywhere—issues money which is accepted and which circulates until some one who holds it decides for any reason whatsoever to redeem or retire it. Retirement means not only redemption but also extinction. If the redemption is to be honest, the bank must in the end deliver to the holder of the money the same amount of purchasing power as the amount for which it was originally issued. When the purchasing power is reduced by inflating the money supply on Keynesian principles, as it is being reduced in the modem world, the holder of the money is cheated. Redemption, unless it is to continue being dishonest, must be the act of restoring to the holders of money the value of what they gave—neither more nor less—when they accepted the money.

Though almost never explicitly stated on the money now issued and used today, redemption by the bank which originally issues it is always implied. No failure to state it on the money issued relieves the bank from the obligation created by its issuance. The fact that the users of the money temporarily relieve the bank of its obligation by continuing to use and circulate it does not relieve the bank of the ultimate obligation of redemption and retirement.

What is involved becomes clear the moment a check is issued to someone with a claim against the writer of the check. If John Doe enters a clothing store, buys a suit of clothes for $100 from the storekeeper, and gives the storekeeper a check in payment for it, he writes an order on a bank in which he has deposits instructing it to “Pay to the order of Richard Roe (the storekeeper) $100. If Richard Roe goes to the bank, cashes the check, accepts from the teller $100 on notes issued by the Federal Reserve System in settlement of his claim against John Doe, and later uses this $100 to pay his grocer for groceries delivered to him, two claims have been temporarily settled and discharged by these transactions. But no matter how often the $100 in notes is transferred (circulated) from one person to another, the Federal Reserve System and the government of the United States which is responsible for its original issue, is not relieved of the claim against itself which it created when it issued the $100 worth of notes. The fact that in practice today the Federal Reserve System never finally redeems it does not relieve it of the obligation. What it does do is to make the whole practice of issuing money a fraud, and to justify designating such money as dishonest.

When American money was honestly issued, the gold and silver notes issued stated in the most explicit manner how they would be redeemed. They stated that the bearer would be paid (on demand) a certain weight and grade of gold or silver. As long as these notes were redeemed, they were honest money. When the Roosevelt administration in 1933 repudiated this promise, so far as its own citizens were concerned, and when in 1971 the Nixon administration repudiated the same kind of promise made at the Bretton Woods Conference to the IMF in 1944, these were grossly dishonest acts justified purely and simply in terms of expediency.

Because of the indifference to this kind of chicanery by the public which is not expected to know anything about monetary economics, but also by the established authorities who ought to know all about it—economists, bankers, and treasury officials—not only is this continuing dishonesty ignored, it is compounded. Custom permits, and the law enables, those responsible for the issuance of fiat money to multiply the losses and injuries this inflicts upon the users of the money being issued. When they inflate the total money supply and ignore the problem of redemption, they cheat those who earn money, save money, and lend money. They stimulate speculation by professional speculators, by businessmen and even to an extent by the public as a whole. When a housewife, for example, begins to hoard sugar because its price is going up, she is engaged in nascent speculation.

What professional speculators do to profit from the rise and fall in prices, and what they do to intensify fluctuations in prices, is bad enough. But what legitimate businessmen do to “overheat” the economy (a) by increasing inventories so as to avoid having to pay higher prices in the future, and (b) by the premature expansion of their plants, is much worse.

What is now being done to deal with this terrible situation and the even more terrifying catastrophe for which it is setting the stage never goes to the heart of the matter; it leaves untouched the causes which create it; it consists only of expedients which postpones the day of reckoning. Nothing is being done to provide for the honest issuance and the honest redemption of money.

Only on the notes (the paper-money) issued by a bank-of-issue is it possible to state in the most explicit manner the way in which the notes will be redeemed. It cannot be stated on checks drawn on commercial banks because the banks are not responsible for the issuance of the cash in which they promise to redeem the checks drawn by their depositors.

And it obviously cannot be stated on the coinage. It is my position that this should be stated in the most explicit and detailed manner on every note issued for monetary purposes. The issuer should be unable to disclaim ultimate responsibility for their redemption by failing to say in what way it will be redeemed.

It is my position that the issuers of money must provide for the redemption and retirement of the money they issue in one or more commodities which everybody wants and uses. Gold is such a commodity; that is the reason that money which is redeemable in gold is more honest than the fiat money which is now being issued. Like all the fiat money, the money now circulated by members of the International Monetary Fund is only redeemed (if that can be called redemption) when somebody, who still has confidence in it, most often either a storekeeper who accepts it in payment for goods which he has on sale, or an employee who accepts it in payment of his salary or wages. When confidence in it disappears, the willingness of anybody to accept it also disappears. Those who are then “stuck” with it discover what fiat money really is. They discover what an irredeemable currency has meant over and over again in the history of mankind.


Chapter 9: On the Nature of Measures of Value

The terms “measure” and “standard” refer to two different things. They designate two entirely different concepts. Confusion is made certain if they are used interchangeably in discussing money.

A measure is a device used to determine the weight, length, area, volume, capacity or value of anything. The devices used as measures are varied in the extreme. To measure length the device used may be a yardstick; to measure grain, a bushel-basket.

In the case of measures of value, the device used is money. Money as a matter of fact is often defined as a measure of value. Dollars, pounds, francs, and marks are used to measure and determine the value of things being bought and sold.

A standard, on the other hand, is one specific measure— the so-called standard—accepted by common consent as exactly correct. Measures used as a standard are usually declared by law to be correct, though many which do not give rise to legal problems are devised by scientific authorities. Most standards are made out of something tangible which is unaffected by use, temperature, and anything else which might change its accuracy.  They are devices really devised for the purpose of measuring measures—for establishing the accuracy of an ordinary measure by determining the extent to which it conforms to the standard.

To provide a standard for the purpose of determining the accuracy of yardsticks, the government has on deposit in a vault in Washington a platinum rod which it has declared the official and legal length of a yard. A rubber yardstick which can be stretched will obviously not measure accurately. It can therefore be used to cheat—to say that a thing is a yard long when as a matter of fact it does not measure up to the length of the agreed upon standard yard.

The measures of value used today—the dollar, the pound, the franc, the mark—though accepted and used as measures of value, are like rubber yardsticks. Their value or purchasing power fluctuates. The value of the dollar, for instance, as I write this in 1974, is shrinking at the rate of 10% a year. The dollar, therefore, though used as a measure of value is not a standard of value. Because of this it causes infinite mischief, and makes it possible to cheat those who accept and use it. Until there is some alternative monetary unit, like the one I called a constant in the Exeter experiment, which is in fact a standard because it does not fluctuate in value, dependence upon rubber-yard sticks like the dollar will continue.

So will cheating.


In the history of mankind almost every imaginable thing has been used to provide such a standard. The Romans used cattle, the American Indians wampum, the French Revolutionists land. Frequently, but for a time only these worked. But they proved themselves to be measures of value, not standards of value. None of them, not even gold, provided what a world which had replaced barter with money really needed. Once the trade of the world was not only monetized but also commercialized, industrialized and internationalized, the need not only for measures of value but for a standard measure of value became crucial.

Or did it? Is there, or is there not, a real need for such a standard?

This is the real problem. It was at the heart of the Exeter experiment. And the most curious thing about the matter is that since Keynesianism took over at Bretton Woods, it is hardly exaggerating to say that the problem has been systematically evaded. Is a monetary standard such as I have here attempted to define really needed? Can “paper gold” be made to replace the gold standard by the fiat of the members of the IMF?


In the course of monetary history—of monetary evolution or perhaps I should say of monetary desperation—all other solutions of this problem were eventually discarded in favor of the gold standard. The traditional mystique which made gold desirable and valuable to everybody everywhere was accepted. With gold at least everybody knew what he was talking about. Gold is valuable; it can be graded; it can be weighed. A gold standard has these virtues.

Unfortunately not even gold provides an invariant measure of value. No one commodity can. Gold fluctuates in value relative to other commodities. Europe discovered this when the Spanish Empire flooded it with gold from its American conquests. The United States discovered it when, with and without the gold standard, it was periodically afflicted with inflationary and sometimes deflationary depressions. Irving Fisher proved this in a little classic he called “Inflation”, published in 1933.

The gold standard, as long as it is not only the standard but also as long as there is enough gold available, is a better solution of the problem than no solution at all. But it fails to provide what is really needed. For one thing, there doesn’t seem to be enough gold to redeem the amount of money which needs to be issued for the normal requirements of business in the modern world. Even worse is the fact that there is not only not enough gold but can never be enough to redeem all the money which governments find it politically profitable and speculator-dominated banks find it financially profitable to issue. As long as the public can be fooled, as lone as the public will stand for it, this will continue.


In what seems to me desperation, the IMF, led by Arthur J. Byrnes, the Chairman of the Federal Reserve Board and leading exponent of “paper gold”, has turned to what I think of as a “fiat solution”.

A Fiat is a command by which an apparently omnipotent power creates or constructs something out of nothing. As the term was used in speaking of fiat money by the 19th century economists, it meant paper-money declared by the government to be legal tender for the payment of debts, but which was not backed by gold, silver, or any other commodity, and which contained no promise of redemption other than, by implication, acceptance for taxes.

When fiat money replaces money backed by gold or silver, or something equally tangible, its backing is simply the ipse dixit of the government. The government can issue as much or as little as it wishes; it can issue it to pay its own debts and meet its own deficits; it can issue it for any purpose good or bad, of which the worst purpose is probably to finance speculative banking, speculative lending, and speculative exploitation. It can, in sum, issue it without regard to the normal needs of normal commercial transactions, without regard to the needs of “trade”.

The fiat solution of the problem is simply the issue of fiat money—in practice the substitution of paper for gold, of “paper gold” for real gold.


Since the United States went off the gold standard in 1933, (retaining it only internationally), and off the gold standard even internationally in 1971, the dollar has steadily shrunk in purchasing power. The Federal Reserve System which issues the dollar redeems it from what might be called a pool of debts, a pool in which government debts are the single biggest item. It pays off what it owes for its dollars simply with another debt. But the new dollars with which it pays off the old always have less purchasing power. They would have hardly any purchasing power at all but for the fact that the pool of debts from which it redeems them includes the commercial debts which commercial banks had previously discounted. Unfortunately, the ratio of government debts to real commercial debts in the pool is constantly increasing.

The situation of the IMF itself, as compared to each of the nations belonging to it, is much worse. Its pool of debts, which are called “special drawing rights”, consists only of the debts or overdrafts of its member nations—nations every one of which is running a deficit and every one of which is actually if not legally bankrupt. Very properly these alleged assets of the IMF are called paper gold.

Since the abandonment by the IMF in 1971 of the pretense of gold redemption and the abandonment of all pretense of a standard for measuring values, the inflation of not only the dollar but all the currencies of the members of the IMF has become steadily worse and worse.

In every nation, prices rise no matter how great its prosperity, no matter how much it is producing, no matter how completely everybody is employed, and no matter how much the gross national product is increased. But even more mysteriously, prices continue to rise when unemployment is high, when there is a surplus of goods, and when depression replaces prosperity. This is what makes inflation seem so inexplicable. This is why nobody seems to know what to do about it.

The simple truth about the matter is that nothing can be done about it in the absence of a satisfactory standard measure of value. Such a standard must meet four requirements. It must consist of a large number of tangible commodities (a) which are internationally used and consumed, internationally wanted and traded and internationally valued; (b) which as a unit are constant in value; (c) which can be used to redeem money and (d) of which there are always ample supplies available for the purpose of redemption. Neither solid gold nor paper meets these requirements. Solid gold meet two of them: it is universally wanted and can be used for redemption. Paper gold meets only one of them: ample supplies of it are available. No matter how great the demand for redemption, paper can always be supplied in limitless quantities.

This is the reason I became interested years ago in Irving Fisher’s idea of a “staple dollar” and in Frank Graham’s and Benjamin Graham’s idea of an “international commodity reserve currency”. This is the reason for my attempt to demonstrate the practicability of a standard based upon an international staple commodity price index and upon a unit of redemption consisting of what came to be called a “basket of commodities”—a basket consisting of commodities which can be graded, weighed, stored, and arbitraged.

Until such a standard unit of value is established and such a unit of redemption is made available by a bank-of-issue, dishonest inflation and monetary dishonesty will continue unchallenged. There is no way of justifying the failure of economists, bankers, and government authorities to grapple with this problem. It is high time that they gave up inventing expedients to make the existing lunacy and chicanery less intolerable. It is high time that the economists to whom it is logical to look for guidance in this matter unite in a call for the substitution of a commodity standard and commodity unit, such as the one with which I experimented and which I called a constant, for the paper gold pseudo solution of the IMF.

The attempt to create an International Staple Commodity Standard was based upon studies which I began to make in 1965. The last, made during the course of the Exeter experiments, was made in 1973. The various versions made differed as to the commodities used, the weighting of the importance of the commodities, and the base years used. In the first nine versions the base year was 1965. The tenth differed from the ninth only in the weighting of gold and silver. The eleventh version was based upon the year 1970; it differed as to three commodities, and the resulting weighting. The fact that no measure of value can be perfected has to be accepted. Even with physical measures some minuscule margin of error has to be accepted. The margin of error in the best possible measure of value is certain to be larger because of the number of variables involved. But good sense plainly prescribes that measures in which inaccuracy is inbuilt should be discarded and a standard substituted which in its essential nature is accurate and can become more and more accurate the longer it is used.

There is nothing sacrosanct about my version—particularly my thirty commodities. Better statisticians than I with greater resources than mine will, I am sure, produce a better version than the one I used.


Chapter 10: On the Nature of Bank-Money

Most of the money used in the modern world consists of what in this study will be called bank-money.

Most of the exploitation of man by man—of the inhumanity of man to man in its modernized and legalized respectable forms—is made possible by the abuse of power which commercial banks exercise when they issue and create bank-money. Most of the millionaires and billionaires in the modern world on one hand and most of the poverty in the midst of plenty on the other is made possible by this same abuse. And the ironic fact that most of the commercial bankers, and those working hard at their desks and counters in these banks, do not know that they are engaged in this kind of illegitimate activity, is due to the mis-education of everybody by the economists in our schools, colleges and universities; by those who ought to know what is taking place and who ought to be teaching the truth about it. What makes this possible is the incredibly ingenious and the incredibly complicated way in which the perfectly proper issuance and creation of bank-money is mixed up with its abuse. It is this which makes possible the rationalization of what is indefensible and inexcusable.

Yet the truth about it becomes obvious the moment an effort is made to understand the nature of bank-money, the manner in which it comes into existence, and the one basic principle which should govern the purpose for which it alone should be created.

There was a time when banks both in the North and South of the United States, and all those employed in them, financed directly or indirectly the ownership of slaves. Bankers and those working for them thought no more about whether it was right or wrong to finance slavery than they now think about whether the financing of speculation and of government deficits is right or wrong. I hope that there will come a day when nobody will be able to ignore the fact that there is an equally important moral distinction between financing legitimate business transactions and financing illegitimate speculative and government transactions.

Slavery was a visible evil. Speculation and similar respectable evils, thanks to the ignorance of our economists, is an invisible one. This not only makes it difficult to fix the responsibility for the exploitation this causes; it even makes it possible for speculators themselves to be ignorant of the fact that what they are doing is in a sense the same thing which slave owners used to do—engaging in the exploitation of their fellow men.


Bank-money, as the term will be used in this study, consists of the demand deposits created by commercial banks when they make loans to borrowers and, instead of giving them cash, credit them with a deposit for the amount loaned to them and make it possible for them to use it by drawing checks on the deposits with which they have been credited.

It is impossible to determine the exact proportion of all the money issued which consists of bank-money because banks do not keep separate records of (1) demand deposits which consist of money previously saved and owned by their depositors, and (2) demand deposits which banks create when they credit their borrowers with deposits of the amount they lend them. It is of the utmost importance to understand the significance of the difference.

It is customary for economists and statisticians to approximate the amount of bank-money in existence by equating it with that part of the total money supply (the total money-supply is defined as the sum total of (a) the amount of demand deposits in all the banks of the nation, and (b) the amount of paper-money and coinage in circulation outside of the banks) which consists of the demand deposits in banks at any given time. On this basis, the amount of bank-money in the United States in 1970 consisted of 77.3% of the total money supply.

It is necessary to distinguish more clearly between these two kinds of money and two kinds of deposits. The first kind—the kind which consists of money saved and already in existence—consists of money received by those working for wages or salaries, of money received by an “entrepreneur” in the ordinary course of operations of a farm, store, or any other kind of enterprise, or of money received from the sale of some kind of property—perhaps from the sale of real estate.

If the depositor needs to use this money currently, he deposits it in a checking account and draws it out from time to time by writing checks. Deposits of this kind are demand deposits; the depositor can draw them out without any prior notice to the bank.

If he does not need what he has deposited for current use, he is apt to put it in a savings account so as to receive interest on it. It then becomes a time deposit. The bank is sure of having it on hand for a period of time; it can delay repayment of the deposit for an agreed upon time. Time deposits and savings deposits, whether in commercial or savings banks, are one and the same thing;

The second kind of deposit which consists of bank-money newly issued and not money already in existence, comes into existence only when a borrower from a bank is credited with a deposit of the amount he had borrowed. What it is of the utmost importance to bear in mind is that today bank-money comes into existence in two ways, one legitimate and one illegitimate. Legitimately it can come into existence only if made for strictly commercial purposes. It comes into existence illegitimately if it is made, as unfortunately is the case today, for the purposes of financing investments, speculations, or government deficits.

Deposits which consist of money already in existence cannot be used to inflate the money supply. Being already in existence they are already a part of the money supply. To inflate the money supply, new money must be created and issued and unfortunately new bank-money can be created and added to the money supply to an almost limitless extent. When represented by legitimate commercial loans, the new money can be readily redeemed. When represented by loans for investment purposes, it cannot be redeemed on demand. When represented by loans for speculation, its value can be entirely wiped out whenever a speculative bubble bursts. We have had dozens of such “bursts” on a grand scale. The worst one came with the Great Depression in 1929 after the banks had created billions of dollars of new money to finance the speculative orgy during the New Era of the 1920’s.

Yet the lesson has not been learned. The issuance of new money to finance investments is bad enough; the issuance of new money to finance government deficits is worse; the issuance of new money to finance speculation is worst of all.


What makes this all possible is the fact that banks do not need to have on hand all the money they have on deposit; all they need to have is a reserve of “cash” sufficiently large to take care of all daily withdrawals by their depositors. It is the amount of this reserve, the so-called reserve rate, which is of crucial importance so far as inflation is concerned.

Reserve rates today are not left to the discretion of each individual bank. Ever since government regulation of banks was instituted, banking laws have prescribed a uniform rate to be fixed by designated public authorities. This has enabled each government, directly through a public official or indirectly through a central bank, to increase or decrease the amount of bank-money commercial banks create. It has enabled the government to inflate or deflate the money supply. If the reserve rate is reduced, the money supply expands because banks then find that they can add to their profits by creating new bank-money and increasing the amount of loans they make. If the reserve rate is increased, it forces the banks to reduce the money supply by making them call in loans they have previously made.

Most of the time during the period of the Exeter experiments, the required reserve rate was ten percent. At various times in the past it has been nearly twice that high.

If the reserve rate is fixed at fifteen percent, it is possible for the banks to pyramid lending nine-fold; it becomes possible for them to lend over four hundred dollars of newly created bank-money for every hundred dollars of existing money deposited with them.

If the reserve rate is reduced to ten percent, it becomes possible to pyramid lending twenty-two fold; the banks can then lend over eight hundred dollars of newly created money for every hundred dollars with which they start.

It isn’t just hyperbole to say that this provides the government with an almost limitless capacity for inflating the money supply. It is a mathematically irrefutable fact. So long as the banks of the nation cooperate, it is possible to inflate to whatever extent the government considers desirable. That they will cooperate is taken for granted because it is so profitable for them to do so.

Since interest rates rise along with everything else during inflation, their profits tend to become unconscionable. What used to be called usury has become respectable. It is doubtful if interest on short-term commercial loans need ever exceed three percent. But if they are to be kept within the bounds of the real needs of the economy, commercial borrowers ought to do what the members of credit unions have been doing on an enormous scale for more than a century. They ought to organize cooperative banks. The competition such banks would furnish to our existing profit-oriented banks would keep them from fixing interest rates on the basis of all that the traffic will bear. The competition which credit unions furnish to loan sharks prevents what are called finance companies today from fixing their rates on the same basis. By providing loans for emergencies and other prudent purposes on a cooperative basis they make it possible for those with the most modest of incomes to keep out of the hands of loan sharks.


In a genuinely free economy in which commercial banks were independent and were locally owned and controlled, they would tend to serve their own community. They would tend to resist the temptation to abuse the issuance and creation of new bank-money. They would profit from its proper use but its exploitation to finance speculation, for instance, would be recognized as a betrayal of the interests of the community of which they are a part.

The moment, however, local banks cease to be genuinely independent, as is the case with most of them today; the moment their operations, and the use they make of the local money entrusted to them, begins to be controlled by giant banks in the financial centers of the country, as is also the case today; and the moment they become subject to manipulation by so-called investment bankers so that they become outlets for the corporate securities these promoters create, as is also the case today, the local banks of the nation become part of a huge machine perfectly devised for exploitation.

Had all the commercial banks of the nation not been mobilized in this way to finance speculation in securities in the 1920’s, there might have been a depression but there would have been no Great Depression. Recovery from the economic paralysis which that created—with most banks insolvent and finally shut down by the government, with bankruptcies large and small and farm foreclosures by the tens of thousands, and with a third of the labor force unemployed—would not have had to wait until the outbreak of the second World War, a long ten years later, to start turning the wheels of industry again.

It is the financing of speculation by the creation of new bank-money which is in large part responsible for the dangerous situation with which the nations of the free world are faced today. This threatening situation could have been avoided but for the failure of existing bank practices, existing monetary institutions, and existing economic teachings— particularly in promoting Keynesianism—to distinguish between the issuance and creation of new money for the legitimate needs of commerce, and the issuance and creation of new money to finance investment, to finance the government, and to finance speculation. Because of the general failure to recognize the illegitimacy and even the downright dishonesty of issuing new money for such purposes, we are literally sitting on a powder keg. All that is needed to explode it is a general loss of confidence in the value of the dollar.

One of the worst of existing abuses of power to create bank-money is caused by the government’s control, usually exercised through its central bank, over the operations of commercial banks. It is this control which enables it literally to force them to create bank-money (a) to finance its deficits, (b) to finance growth of the national product, (c) to finance development if it is an underdeveloped nation, and finally by resorting to these activities (d) to finance full employment on one hand and avoidance of unemployment on the other.

(a) Every government deficit is an abuse of political authority and political power. Governments ought to operate on a “pay as you go” and “tax as you spend” basis. Overspending and under taxation are both political ploys. Politicians like to spend; there is support and there are votes to be garnered by spending. But politicians do not like to tax; nobody likes to be taxed and least of all likes to have taxes raised. The idea and the practice, since Keynesianism became institutionalized, of financing government deficits by creating bank-money is both a moral and economic outrage.

(b) Government participation in promoting growth of the national product—in promoting growth of the gross national product—is in a free economy equally anomalous. If the government nevertheless does engage in such activities, it should finance them as they should be financed in the public sector, not with newly created bank-money but with money saved and already in existence. Providing atomic power, one of the many ways in which government is now promoting growth, is in its essence no different from the provision long ago of steam power and more recently of electric power. Activities of this kind, both in the public, the quasi-public, and the private sectors of the economy, call for financing on a self-liquidating investment basis.

(c) What has been said above applies equally to the financing of what is called development by creating bank-money. “[Development” of an underdeveloped nation is really the same thing as “growth” of a developed nation. Both are politically activated and only ostensibly economically motivated. Both should be financed as all investments should be financed with money saved and not with money newly created.

After thirty years of the abuse of the power to create bank-money for these purposes by all the members of the International Monetary Fund, all the nations belonging to it are operating on the brink of disaster. Inflation, they are discovering is uncontrollable. All that is necessary for the disaster to be precipitated, is for something to happen, as sooner or later it will, which finally undermines what is left of the confidence in the dollar. When confidence in the dollar, which is still the reserve currency of the IMF, ultimately collapses, the catastrophe into which the nations of the free world will find themselves plunged will make all previous depressions seem like mere picnics.


Chapter 11: On the Nature of Paper-Money

Only 22.7% of the total money supply of the United States consisted of paper-money and coinage in 1970. Only 2.2% consisted of coinage. About one-fifth of the whole money supply, 20.5% consisted of paper money.

The smallness of these percentages, compared with the huge percentage consisting of bank-money, provides no justification for mistaking the importance of both paper money and coinage. Paper money is important in part because of the manner in which it comes into existence and in part because it has come to be considered, like coinage, “cash”.

The dictionaries define “cash” as, strictly speaking, coin or specie: less strictly as paper money, and speaking very loosely as money on deposit in a bank. What gives rise to the value traditionally attributed to cash and the peculiar use made of the word today, is that it has from time immemorial meant metallic money—money which has an intrinsic bullion value; money which did not have to be redeemed because the gold, silver and even copper in it had a value as a commodity in its own right.

When paper money began to be called cash and valued as if it was cash, it was because it was still easy to turn it into gold or silver. What follows from this is that paper-money, if it is properly created and issued, should be as near to cash—as near to being a valuable commodity—as it is possible to make it.

The monetary principle of which this is a reflection is that paper money should represent and should be redeemable either in gold or silver or in commodities as universally valued as are these two. This principle is violated if the paper issued cannot be redeemed on demand in such commodities. It is violated if the paper represents only an irredeemable fiat backed by a pool of debts—most of them debts of the government. It is now violated by all governments which belong to the IMF. It is flagrantly violated by the paper money issued by the Federal Reserve System today.

If paper money is to be made constant in value by making it redeemable in a unit of redemption consisting of all the commodities in the International Staple Commodity Standard described, issuance—and circulation—should be provided for as follows:

  1.  It should be issued to pay the producers or owners for the commodities in which it is to be redeemable. Payment should be made in printed promissory notes redeemable on demand. The notes should state that those who hold them— those to whom they were originally issued and those to whom they were subsequently transferred—can redeem them in all the commodities in the unit of redemption or, at the request of the holder and at the option of the bank-of-issue, in any one of the commodities, in an amount which equals the value for which they were originally issued.
  2.  It should be issued for the transfer to the bank of title to warehouse receipts evidencing the fact that the amount and grade of the commodity involved is stored in a public warehouse.
  3.  Finally it should be issued for the transfer to the bank of title to bills-of-lading evidencing the fact that the amount and grade of the commodity involved is in transit to be delivered to the order of the bank.

For those who accept the paper money issued in this way, this would mean the monetization of their commodities—they could buy with the notes they received for them whatever they needed or desired. For them and those who subsequently obtained the notes as they circulated throughout the community, this would mean that they held money redeemable on demand in any or all the commodities in the unit of redemption.

For everybody who accepted and used such notes, this would mean that there was a 100% reserve of commodities back of all the paper money issued and a 20% reserve back of all the bank-money created. In practice the commodity reserve needed would be much less, but what it should be is something which only experience can determine. The greater the confidence in the notes, the less call there would be for redemption.

Finally for the world as a whole it would mean that the chicanery of inflation which has marked the history of paper-money since it was first invented had been, so far as one bank-of-issue’s money was concerned, made impossible.


Certain things about the nature of paper money must be mentioned, things of peculiar importance to such a bank-of-issue which is here being proposed. To begin with, it is a misnomer to speak of dollar-bills or of any paper money as a bill. Paper money consists of notes, not bills. A bill is an instrument stating how much and for what the person to whom it is sent is indebted to the issuer of the bill. A note is the exact antithesis of such an instrument; it states what the signer and issuer of the note owes to the person to whom it has been given. Its very language states that it has been given by the issuer “for value received”.

What follows from this is that every issue of notes by a central bank or any other bank-of-issue represents a loan of capital to such a bank by those who accept and use its notes. But unlike all other kinds of loans, the lender receives no interest on his loan. It is like a demand deposit—the depositor lends his money to the bank and asks no interest on it because of the convenience it provides. The bank which receives it, however, when it loans it to borrowers does receive interest on it, and the revenue when it pyramids it in the form of bank-money is not just simple interest but multiple interest which may provide it with ten-fold the revenue obtainable from simple interest.

There is another source of revenue obtained by the issuers of paper money which must be mentioned—attrition. A part of every note issued is lost. And loss may mean it is never found. Lost notes can only be redeemed if somebody happens to find them. Unlike ordinary promissory notes, which are payable to particular persons, the loser cannot call for their redemption because of the possibility that they may have been found by somebody who may redeem them. Every such permanent loss is a gain to the bank which has issued the notes.

But attrition takes place far more often in fires, in residences, for instance, but probably most often in stores in which paper money is stored in cash registers and in safes. It even takes place when ships sink. Banks-of-issue are in effect the innocent beneficiaries of what I am calling attrition. Every source of revenue—even unearned revenue of this kind—helps to make a bank-of-issue self-supporting. And this is doubly important for such a bank-of-issue as is here proposed which must maintain its independence and not become dependent upon the government or any other institutions with interests other than service to the community as a whole.


Chapter 12: On the Nature of Metal Money

Only 2.2% of the total money supply of the nation consists of metal money—of coinage. Yet the total amount of this in 1970 was four billion six hundred twenty million dollars. The fact that this is so small a percentage of the total does not, however, justify treating it as unimportant. For one thing it is what is meant, strictly speaking, by “cash”. For another, unlike both bank-money and paper money, it does not have to be “cashed”; it is itself “cash”; it is itself intrinsically valuable. Most of it consists of precious metals; sometimes even small coins minted out of ordinary metals like copper become valuable in themselves. As I write this, the American copper penny has become worth more as copper than as money; the government is making plans to substitute less expensive metals for the copper and to call in all copper pennies.

There are basically two different kinds of metal money: (1) precious metal coins, which have from time immemorial been valued more for their bullion than as monetary tokens, and (2) base metal coins, valued for use as change in making small purchases and not for their metallic content.

Precious metal coins, such as the original American silver dollar and the original American gold eagle, have five kinds of value each of which varies independently but all of which in combination determine the value the public attached to them: (a) their value intrinsically as bullion—as a quantity of gold or silver; (b) their denominational value— the “value” stamped on them by the mint as in the case of silver dollars; (c) investment or hoarding value; (d) speculative value, and (e) numismatic value.

Except for the denominational value, these values need no discussion; they are self-explanatory. It is the part which stamping them with a denomination plays which needs clear understanding. It is the abuse of this which has made it possible for governments for over two thousand years to debase the coinage and to use it to cheat those who use it. It is an abuse to which the United States has repeatedly resorted, and to which it resorts, like all other countries to this day. It will continue as long as the significance of the distinction between denominating a coin by the weight of the bullion it contains and denominating it as a monetary unit is not understood.

Terms like pounds, lira, ruble, and drachma were originally weights. The ancient Attic drachma was a weight; in metric terms the drachma weighed 4.30 grams. But when terms like these are stamped on a coin today, they turn into a token—a token which means only whatever the government which mints it wants it to mean. The debasement of the coinage which this makes possible will continue until the practice of denominating them as monetary units is abandoned.

The principle which should govern the minting of precious metal coins is that they should be designated only by the weight and the grade of the gold or silver they contain; they should not be stamped One Dollar or One Pound or One Franc or One Mark; they should be stamped One Ounce or a Half Ounce of Gold or of Silver as the case may be. This is the way the silver coins minted in the course of the Exeter experiments were designated. The purchasing power of precious metal coins would then be determined by the market value of their bullion content.

In effect precious metal coins should be “sold” by the bank issuing them at prices which cover the cost of the bullion content and the cost of minting them. Once honest paper money was available, the purchasing power of which was constant, the demand for precious metal coins would tend to decrease.

The problem with regard to base metal coins—coins minted only to provide change—is different. Here the coin is a token in the same sense that paper-money is a token. Ideally the base metals used should have no bullion value at all—as is the case with paper.

Base metal coins, like precious metal coins, should be sold for the full cost of minting them. But unlike the precious metal coins they would continue to have utility—they would be handier than paper-money of small denominations for making change.


Note: Seigniorage is defined by the dictionary, so far as coinage is concerned, as the difference between the circulating value of coins and the cost of bullion and of minting them. In its oldest signification, however, the word referred to something claimed or taken by virtue of sovereign privilege. But the revenue obtained from the issuance of coins does have a legitimacy which these definitions ignore. Coins provide two utilities—their utility in facilitating trade and their utility as cash. They are more than metal tokens. Their bullion content justifies the designation of coins as cash. The lack of any intrinsic commodity value makes paper money a mere token.

The seigniorage on its coinage would provide such a bank-of-issue as I propose with a revenue which would help to make it self-supporting and to keep it independent. Even though it would not provide it with an important source of income, it would transform the minting of its coins from a loss into a profit.


Chapter 13: On the Nature of Arbitrage and of Speculation

All the proposals for establishing a monetary system in which redemption is to be provided for with a “basket of commodities” have foundered because of their inability to resolve two problems, the problem of how to provide for the cost of storing the commodities, and the problem of how to cope with the instability of commodity prices. It is these two problems which make consideration of arbitrage and of speculation so important.

The costs of storing gold and silver are very low; they can readily be covered from the ordinary income of a bank-of-issue. But this is not true of commodities like corn and wheat. If these have to be stored, the costs would make their use for redemption impossible. If, however, instead of storing such commodities they were arbitraged and title to the desired quantities held by the bank only during transit, two things would happen: (1) the importers who would be buying them would not only pay all the costs of transportation (during which storage is provided) but, (2) if the arbitraging were done as well as in practice it is customarily done, it would yield the bank a substantial revenue.

To provide the commodities which are included in its unit of redemption, the bank should arbitrage those which cannot be economically stored, and store only those which can be stored at low costs. In practice it should have on hand in its own vaults enough of the precious metals—not only gold and silver but platinum whenever it is advantageous to do so—to take care of all calls for redemption. Any calls for redemption in a commodity other than one of these, should be taken care of out of those which it owns while engaged in arbitraging them.

Initially it is probable that redemption calls would probably be restricted to gold. Only if the supply of gold proves insufficient to meet all the calls would it become necessary for calls for redemption to be met with other commodities. It is the fact that the supply of gold is almost certain to prove insufficient that makes it necessary for the bank-of-issue to have both ownership and possession of the other commodities which will be needed to take care of this contingency.

It is also important to bear in mind that as long as each nation has a currency of its own, calls for redemption in these national currencies are certain to be more common than calls for redemption in commodities, including calls for gold.

Perhaps the most conspicuous fact about the prices of commodities today is the wildness of their fluctuations. That they should fluctuate does not call for any but the most obvious of explanation: they fluctuate because both demand and supply fluctuate and both fluctuations are independent variables. What needs explanation is why they fluctuate so widely and why they go way up and then way down so rapidly and so frequently.

The facts are these:

Human needs and human desires change, but they change very slowly. Human beings in the mass do not change their consumption habits suddenly. The demand for wheat, as a result of the consumer’s desire for wheat products, is quite stable, and this is true of all staple commodities. That is the reason why they are called staples.

The production of wheat, on the other hand, may increase or decrease very greatly within a specific national growing region, but the variation will take place only between one growing season and another. Such marked increases or decreases, however, are not world-wide; they are national and regional only. Increases in one country tend often to offset decreases in others. World production, in other words, changes more slowly and is much more stable than national and regional production.

On the basis of the variable desire for wheat and the variable production of wheat, wheat prices should be expected to change. But they should change gradually, not suddenly and wildly.

Prices, however, in the modern world are not made on the basis of desire and of production. They are made on the basis of demand and supply. And here something new enters into the equation: speculation. Demand is not determined by desire any more than supply is determined by production. In our modern organized markets the demand for and the supply of any of the basic commodities, such as wheat, is almost wholly determined by speculation.

Here mass-psychology enters into the equation.

Reports of a poor wheat crop in some major wheat producing nations are published. Speculators begin to buy wheat, and the more they buy the faster prices go up. As more and more speculators enter the market in the hope of profiting from the rise, the prices tend to shoot up—sometimes fantastically—with no regard to the equation of desire and production. Finally the shrewdest speculators begin to realize that they have gone too high. They begin to unload; prices begin to drop and all the speculators tend to unload; prices then drop as drastically and as rapidly as they went up. And all this may take place over and over again, as rumors about production spread one way or another, within a single growing year.

To deal with both these problems, the problem of the storage of a commodity reserve, and the price fluctuations, arbitrage is not only needed but must be enormously increased.

Arbitrage is the act of entering into two transactions simultaneously, one in which the arbitrageur or “dealer” buys a supply of a commodity, of a foreign money, of a security, or of any other kinds of goods from a seller in one place at one price, and another transaction in which he sells it to a buyer in another place at a price high enough to cover all the costs of making both transactions, (including all delivery costs), and to provide him with a profit. Arbitrage is not a new but an old business activity still regularly carried on by banks dealing in foreign exchange and by importers and exporters dealing in commodities.

Speculation, on the other hand, is the act of entering into transactions in which the speculator either (1) buys something at one price in anticipation of subsequently being able to sell it at a higher price, or (2) sells something which he does not then own at one price in anticipation of being able to buy it subsequently before it has to be delivered at a lower price.

The essential difference is that the arbitrageur buys and sells simultaneously while the speculator buys and sells at different times. The effect of arbitrage on price movements is to stabilize them; the effect of speculation is to intensify them.

If arbitrage were to be conducted on a large enough and wide enough scale, speculation would become less and less enticing. But perhaps even more than this, if it were to be promoted and practiced by an independent international agency such as the bank-of-issue I am calling for on the magnitude this would make possible, it would stabilize prices to such a degree that stabilization as a serious problem would disappear. Stabilization would make speculation peripheral instead of central in the determination of the prices of the basic commodities of the world.

To deal with the realities involved in establishing a stable alternative currency system on the basis of a commodity reserve, the bank-of-issue I propose must engage in two kinds of arbitrage operations and set up two arbitrage departments, one to deal in the staple basic commodities which are most important in world trade and one to deal in foreign currency or foreign exchange.


Chapter 14: On Currency Arbitrage

Hundreds of millions of dollars worth of foreign exchange transactions take place all over the world daily.

A transaction in foreign exchange is essential whenever the parties involved are doing business in two different countries and have to use two different currencies to consummate it. Arbitrage makes it possible to provide the foreign exchange needed for such transactions with minimal risk. Since the bank-of-issue I am attempting to describe would be doing business all over the world, it would have to engage in foreign exchange transactions on an enormous scale. Its own currency would be a foreign one even in the country in which the institution was located. In the Exeter experiment, the constant was a foreign currency even in Exeter; every conversion of constants into dollars and dollars into constants was in fact a foreign exchange transaction.

To make it possible to discuss this concretely rather than abstractly, I am going to call the bank-of-issue the BISC—the Bank for the Issue of a Stable Currency, and the currency it issues a constant.

There are many reasons why such a bank would have to equip itself for currency arbitrage of which these four are typical: (a) it would be accepting foreign currencies for conversion into constants from its depositors. In the Exeter experiment the first problem we had to solve was that of the conversion of dollars into constants. Since the depositors in BISC would be located all over the world and the deposits would include their own national currencies, it would need to deal in foreign exchange to dispose of them (b) it would need foreign currencies for the withdrawal of funds by its depositors who had to use their own currency for local transactions (c) it would need them to provide for the needs of depositors when they engage in international transactions. Supplying this need would provide it with an enormous volume of business since it could provide it far less expensively than is the case today (d) the constant, being a stable international monetary unit, would make it possible for BISC to develop a source of income from the sale of the traveler’s check and similar instruments, since they would be inflation proof. It would, of course, have to accept foreign currencies for them and have to have foreign currencies on hand to redeem them.

What makes the existing methods by which foreign exchange is provided so risky and so expensive are two facts, the fact that the fluctuations in value and changes in purchasing power of existing national currencies are in each instance independent variables, and the fact that the only method available now for measuring the value of foreign currencies is measuring them in a currency which is itself constantly fluctuating in value.

For BISC or any similar institution to provide the foreign exchange needed for legitimate international business transactions, it would have to use two instruments, the International Standard of Value already described and the International Currency Price Index described in the appendix. Computation of such a price index monthly proved adequate for experimental purposes but once such an institution as BISC began to really operate on a large scale, computation on a daily basis would become necessary. Once computation of such an index was computerized, it could not only be issued daily, it could be issued hourly if any need for doing so developed.

Two enormously important steps toward international monetary decency and sanity would be made possible by BISC’s operations in foreign exchange:

  1.  Costs of making foreign exchange transactions no matter how large would be trifling since a mere check in constants would make it possible to transfer funds from one country to another. The monetary barriers between nations would be eliminated. An American, for instance, could pay with dollars for a purchase in England in pounds for no more cost than the charge his bank now makes for writing a banker’s check. If BISC’s operations become wide enough and both parties to such a transaction had checking accounts with their banks in constants, the American could pay for his purchase in England in exactly the same way he now pays for purchases in the United States, by simply writing out a check for it. When the Exeter experiments were extended to England by opening accounts there, this was made possible.
  2.  Speculation in foreign currencies would be rendered virtually profitless. This now often generates horrendous mass-movements of currencies from one country to another. In foreign exchange, as in any kind of trading, speculation would no longer intensify natural disparities in exchange rates. These are bad enough now that each currency is being inflated and inflated at different rates by each country. The existence of the constant and the operations of BISC would provide everybody everywhere an alternative to the use of their inflated currencies and at the same time deprive speculators of the opportunity to exploit existing disparities.

The whole situation so far as foreign exchange transactions are concerned would be transformed the moment a stable international monetary unit was made internationally available.


Chapter 15: On Commodity Acquisition, Arbitrage, and Lending

A bank for the issuance of a stable alternative currency would have to (1) acquire the commodities in its unit of redemption so as to have them available for redemption; (2) arbitrage and store them, and (3) make loans and discount loans for which the collateral would finally be commodities.

Assuming that the proportion of paper-money printed and issued to the amount of new bank-money created and issued by such an institution as BISC would be the same as is the case with most of the existing currencies of the West, then in theory about 20% of BISC’s assets would consist of commodities either in its own vaults, in public warehouses, or in transit. The actual percentage, however, need be only enough to cover all calls for redemption in commodities. In practice, once BISC became an established institution, the reserve needed might be only a few percent. That anything like twenty percent would be needed is extremely improbable.

The biggest calls for redemption would probably come from central banks, and these calls would probably be for gold rather than for all the commodities in the unit of redemption. BISC should be free to redeem the constants it issues in all commodities if for any reason its supply of gold was insufficient. It should, of course, have an ample reserve of all the commodities to cover every probable call.


The funds for the purchase of the commodity reserve would come in part from deposits and in part from the issue of constants. In the beginning, since nobody would have any constants, the deposits would consist only of existing currencies; later, when constants began to be accepted and to circulate, they would include both constants and existing currencies. In acquiring the commodity reserves needed, existing currencies rather than constants should be used; this would be one way of avoiding the accumulation of a superfluity of depreciating currencies.

  1.  Acquisition of the commodities can be provided for in two ways: (a) by arbitraging them and (b) by buying them outright for storage. Arbitraging is the preferred method for two reasons. First, it would avoid all costs for storage, and second it would produce a substantial income over and above all the costs involved. Even though the commodities would be in transit, those needed for redemption would be available because they would be arriving at their destinations constantly.Outright purchase of some commodities in the unit of redemption, specifically gold and silver, for storage might under various circumstances be advisable. They would then become available not only for redemption but would also be a part either of BISC’s commodity reserve or of its surplus reserves for various contingencies.
  2.  One of the things which arbitrage on a large scale would do would be to make it possible to redress the imbalance in the low prices paid ever since the industrial revolution, to the growers and producers of raw materials and the high prices middlemen and manufacturers have and still are except when prices are at their maximum for the year. He should be able to get all the credit he needs for storing his produce in public warehouses until such a time.
  3.  The loans and discounts by BISC on the security of commodities should have three characteristics: (a) they should be loans made to growers and producers and to importers and exporters, or discounts of such loans made by commercial banks; (b) they should be made on the security of warehouse receipts evidencing the fact that the commodities are in public storage or of bills-of-lading evidencing the fact that they are in transit, and (c) they should be made in limitless volume by creating bank-money or issuing paper-money to meet every legitimate need of those who grow and produce or import and export commodities.

The need for loans of this kind is enormous, particularly in underdeveloped nations such as India where the masses of growers are in the clutches of moneylenders. In the developed nations of the world, loans of this kind provide strictly commercial banks with a substantial part of all the loans they make. BISC should aim at acquiring the commanding position in this field. Its operations should be so large that they tend to reduce the existing instability of commodity prices.

BISC could very well become the biggest maker of loans and discounts of this kind in the world because its interest charges could be minimal. Assuming that its operating costs are around one percent, which is not unusual for any fairly large bank, it could make loans at an interest charge of 1 1/2 to 2 percent and still obtain a substantial net income from them. At the time I am writing this in 1974 the prime interest rate charged to preferred borrowers by the banks in this country is 11 percent; BISC could make loans of this kind for less than a third of this. To create new bank-money for this purpose would cost it no more than the cost of the accounting involved; to issue new paper money, no more than the cost of printing it. This is the reason its interest rates on such loans would be so attractive.


Chapter 16: On the Nature of Lending and Investing, and of Speculating and Exploiting

There is an important similarity but there are even more important differences between (1) lending and (2) investing, and (3) speculating and (4) exploiting. These differences become especially important in connection with banking. If the crisis Keynesianism has created is to be properly dealt with these differences must not be ignored.

1. A loan is a sum of money (this is called the principal) let by a lender to a borrower. It is a sum which the borrower is permitted to use usually for some agreed on purpose but only for a period of time and which is then to be repaid to the lender with an agreed upon compensation for its use (called interest).

2. An investment, on the other hand, is a sum of money (this is the capital) laid out by an investor for a long and often indefinite period of time for the purpose of obtaining a return for its use (the profit, interest, or dividends earned with the capital) without the loss of any of the capital invested. When such an investment is made by a bank it entrusts money of which it is the custodian to another party, perhaps by taking a mortgage on real estate from him or by buying stocks or bonds from a corporation.

The similarity between the two is obvious. In both instances money is laid out and in both instances a return for its use is provided for. But the crucial difference between them so far as commercial banks are concerned is that, because of their almost limitless ability to multiply the amount of bank-money they can create and lay out, (a) they should restrict themselves to the making of short term loans for commercial purposes only, and (b) they should neither lay out money for investments themselves nor make long term loans to be used for any such purpose. Loans to borrowers for investment purposes, in their own business or any other, even though called loans and legally considered loans, are in fact not bank loans but bank investments.

In practice today banks make both long and short-term loans. And in practice they make no distinction between whether loans are for commercial or for investment purposes.

Most of the confusion in connection with banking and most of the malpractice in banking today has its source in this fact.

If clarity is to replace confusion and integrity to replace indifference, the term loan should be restricted to loans for legitimate commercial and productive purposes only. Short term investing, on the other hand, is a contradiction in terms. A so-called investor who buys stocks or commodities to resell at a profit in as short a time as possible is not an investor but a speculator. When banks make so-called loans for such so-called short term “investments”, they are not financing legitimate investing but illegitimate speculating.

3. A speculation is a risky and hazardous transaction in which a sum of money is laid out not for any useful productive purpose but primarily and often only for the purpose of realizing a quick, a large, or both a quick and large profit from the difference between the amount laid out and the amount realized. Speculations in stocks and commodities are usually short-term gambles while speculations in land are usually long term gambles.

The similarity of speculations to both loans and investments is obvious. In all three money is laid out and a return for it expected. But the difference is of crucial importance, particularly so far as banking is concerned. When money is let or laid out for a productive purpose not only the lender and the investor gains but those who have the use of the money also gain. But with speculation this is not true. Only one of the parties to a speculation can gain. If the speculator is lucky and wins, he gains and somebody else loses what the speculator has won. If he is unlucky and loses, somebody else wins even though he has done nothing useful for what he has won. Speculation is a form of gambling, made respectable by modern business practice, but, as in all gambling, what one party wins the other party or persons involved must lose.

4. Exploitation is the result of any transaction which ends in the satisfaction and gratification of what one of the parties involved, the exploiter, wants and the deprivation of what his victim or victims do not want to lose. In monetary terms, the exploiter becomes richer while the victims of his exploit become poorer. It is because this is precisely and exactly what happens as a result of all speculative activities that even though perfectly legal they are, in human terms, exploitive.


A fifth definition, however, is needed, that of production, since the terms production and productive run all through this discussion. Production, as the term is being used here, refers to the results of any activity in which goods are provided to satisfy some human want and in which both the producer and the consumer, the seller and the buyer of what is produced, both gain. It is this which makes production a legitimate human activity, and it is the lack of this which makes exploitation inhuman.

If the present day abuses in which banking abounds are to be ended, commercial banks should be restricted to the making of short-term loans for productive purposes only. They should neither make loans—long or short—for speculative purposes nor themselves engage in speculating with the money of which they are custodians.

On the other hand, savings institutions—savings banks, building and loan associations, trust companies and mutual funds—should be restricted to the making of investments only, to the laying out of the money entrusted to them for a long period of time. They should have nothing to do with the making of short-term commercial loans. And of course nothing to do with speculations no matter what they may be called.

Speculators, like all other gamblers, should use their own money only; they should no more be allowed to borrow money from a bank (no matter what kind of collateral they put up for it) to gamble in anything—land, stocks, commodities—then ordinary gamblers should be allowed to borrow money to bet at cards or to bet at a race track. Yet the facts are that billions of dollars entrusted in all good faith to our banks today are loaned by the banks for speculative purposes in the ordinary course of what is called “banking”, every day that they are open for business.

Speculation can be rationalized, as it is by not only bankers but by economists. But nobody can justify it. It has not the slightest economic utility. On the contrary, all the evidence indicates that it is a dis-utility, that it intensifies and does not stabilize prices as those who rationalize it maintain. The more speculators win, the more the public as a whole—the economy as a whole—loses.


In this discussion the distinction between productive lending and investing, on the one hand, and the financing of useless, exploitive, speculative gambling on the other, is crucial.

The principle that commercial banks should only make short term productive loans and savings institutions only long term productive investments, and that neither should have anything in any way to do with the financing of speculations, becomes meaningful only if the distinction between production and exploitation is kept in mind.

Productive lending involves the making of loans to short-term borrowers for three purposes; (a) for the growing or fabricating of goods which can be sold at prices which will cover all the borrower’s costs including the cost to him of his loan; (b) for the purchase of commodities to be wholesaled or of merchandise to be retailed, again for prices which will cover all the costs involved, and (c) to enable the borrower to extend to his customers the credit (in the form of current accounts receivable) it is customary in his business to extend.

Productive investing, on the other hand, involves the laying out of money for a long term (the capital of the investment) for a return to be received for its use from time to time (the profits, interest, or dividends on the capital) without impairment of the original amount of the capital invested.

The money laid out can include both what is needed to finance short term productive expenditures (such as those referred to in connection with productive lending) as well as to finance for a long term other enduring requirements such as (a) land and buildings for homes, for farming, for manufacturing and for other productive undertakings; (b) machinery and other tangible equipment for any kind of industry, (c) transportation equipment—planes, trains, ships, airports, docks, etc., and even (d) expensive office equipment like duplicators and computers.

Lending and investing which increases the production of goods is one thing, but, lending, or so-called investing, if it is for the purpose of increasing the profits of the investor is something altogether different. That there will always be some speculation is certain; man seems to be a gaining and gambling animal, but, that bankers should take the money entrusted to them and the new money they can create available for such a purpose, no matter how profitable this may be for them, is a malpractice which should be recognized as intolerable.

Yet the fact is that billions of dollars are made available by bankers everywhere in the nation for this purpose daily. Wall Street could not survive without this flow of money from all over the nation. It could not carry on without the billions of dollars which, if properly laid out by bankers for genuine production loans, would transform a worried and distraught nation into a saner and more civilized one.

But to do that, bankers would have to stop concentrating on what is going on in Wall Street and in Washington and stop making a dirty profit out of what both call upon them and expect them to do. They would have to begin studying what the rural regions and the small communities of the nation need. They would have to forget their present preoccupation with the needs of big cities and big industries. But they would then begin making possible a town and rural renaissance by making available to every legitimate borrower, including those in the small communities of the nation, the funds this would require. They would then use the funds now channeled into speculation to finance land trusts which would make land available to those who want to get out and stay out of the urban and industrial rat race and to finance those who want to devote themselves in the useful and the artistic crafts.

That such a development is entirely possible is indubitably true, but that it is a probable development seems to me, I am sorry to have to say, very improbable. It is as difficult for two-legged leopards to change their spots as it is for four-legged ones.


Chapter 17: On the Acid Test: Deflation

My interest in money as a problem began during the Great Depression forty years ago. The problem then was not inflation but deflation; not rising prices but declining prices. When I was lecturing about the situation in Bloomington, Illinois, at Illinois Wesleyan University, com which had gone up to $2.00 a bushel during the post war boom, was selling in that center of the Great American Com Belt a 20 cents a bushel. Everything in America, from the stocks and bonds which had been unloaded on the public during the New Era of Perpetual Prosperity in the 1920’s, to the land which farmers had gone into debt to buy during the war, was selling at similarly low prices. Not only were the investors and the farmers bankrupt—so were the banks which had financed them.

The problem then was not a superfluity of dollars, as is the case today; it was an insufficiency of dollars. Everybody was hoarding the dollars they might have managed to save from the holocaust; nobody could borrow dollars for love nor money.

The acid test of my experiment with the constant and of my proposal for a bank to issue a stable currency is: What would have happened if the experiment had been tried during the Great Depression? What would have happened if the problem to be solved had been deflation and not inflation as is the case today? To answer that question in detail would take another book just as large as this one. But no such book is needed. All that is needed is a statement of the principles and policies which should govern the operations of BISC in such a contingency.

Fortunately, the answer to that will only take a few pages.


Suppose that by some miracle the country, instead of finding itself still in this period of nearly full employment, were to find itself in a period when nearly a third of the labor force was unemployed? Suppose the headlines in the newspaper dealt with deflation instead of inflation? Suppose that the Federal System had been and was still continuing to reduce the money supply instead of increasing it, as it has been ever since the IMF was organized? Suppose that reserve requirements for all the banks of the country had been increased so as to reduce the total money supply still further? Suppose that the country was confronted not with easy money but with the fact that it was almost impossible to borrow any money from any bank for any purpose however legitimate? What would happen?

Prices on everything would drop precipitously, the cost of living index and wholesale price index instead of rising as they are now would be dropping each month. Corn prices would drop, gold prices would drop, stock prices would drop, and land prices would drop. Demand for everything and sales of everything would drop. Factories would shut down, stores would go out of business, and farmers would get almost nothing for their crops. Bankruptcies would become epidemic as they became epidemic during the Great Depression. Unemployment would shoot up; it would increase not to five or six percent as it has during the depressions since Keynesianism took over, it would increase until one-third of the labor force was unemployed as it was after the stock market collapsed in 1929.

What would BISC be able in such a contingency to do? Would the principles by which it should be guided as they have so far been described apply? Would they make it possible for BISC to cope with deflation as the Exeter experiment indicated it would be able to cope with inflation? Would a stable monetary unit such as the constant be driven out of circulation by the fact that the dollar, instead of losing purchasing power, was all the time becoming more and more valuable?

What would be the principles and what would be the policies which would guide the officers and the trustees in dealing with such a deflation-produced depression as I have tried to visualize?

Very briefly, the principles which would guide them would be exactly the same.

Their policies, like the principles upon which they are based, would also be the same. BISC would continue to do business as usual, continue to accept deposits as usual, to make loans as usual, to maintain the commodity reserve as usual, and to make redemptions as usual.

What now would happen if BISC dealt with a deflationary depression in exactly the same way in which it dealt with an inflationary explosion?

Deflationary depressions, different as are their histories, are all alike in one respect. The Great Depression, like all deflationary depressions, was caused by just one thing, a drastic reduction in the money supply. Dollars virtually disappeared. The banks stopped making loans for any purpose. Most of them couldn’t have made them even if they had wanted to—they were insolvent. During the 192Cs they had been financing the speculative orgy called the New Era; they had loaned billions of dollars on the security of stocks and bonds; suddenly they found themselves loaded down with defaulted securities—securities which were worthless or salable only for a few per cent of what they had loaned on them. To top it all, the Federal Reserve System refused to issue the dollars which it should have been able to issue if it too had not helped finance the banks in financing the New Era. Finally, those who had managed to hang on to their dollars in spite of the debacle hoarded them and refused to use them.

With BISC in existence and with a complete alternative currency available based upon constants, not dollars; with BISC doing business as usual, making loans and discounts as usual, and issuing and redeeming constants as usual, people would very quickly have discovered that an alternative to the dollar was available. They would have discovered that they could do with constants what the deflation of the dollar supply had made it impossible to do with dollars. They would have started doing business in constants. Farmers would have sold their crops for constants; manufacturers would have paid for their raw materials with constants; salaries and wages would have been paid with constants, stores would have sold the consumers what they wanted for constants. Legitimate borrowers would have found that they could borrow what they needed in constants and that productive undertakings of any kind could be financed with constants.

That’s what would have happened.

And that’s what did happen in one small city in Germany during the Great Depression when a viable alternative currency to the mark was made available to the people and the businessmen in that city.


During the 1930’s someone handed me a copy of a pamphlet called ‘The Miracle of Woergel”. Woergel was a very small city in Germany which by some miracle was doing business as usual when nobody in the rest of Germany was doing anything as usual at all. The pamphlet introduced me to the ideas and to the writings of Silvio Gesell.

Our economic amnesiacs, if they ever heard of Gesell and his idea of a demurrage currency, have forgotten all about him and all about the fact that in spite of the Great Depression, at least in Woergel, his idea had worked. His idea was the issuance of a currency on which a demurrage charge was made each month. A stamp had to be purchased and affixed to each note monthly. Notes which were without all the stamps needed were accepted only at a discount. The notes in effect lost purchasing power each month. Naturally everybody spent them as fast as they could, particularly toward the end of each month when the stamps had to be affixed. The income from the stamps paid for the operation of the organization which issued the notes. Nobody, Gesell maintained, would hoard this kind of currency as they were hoarding the ordinary marks. The trouble with the mark was simply that it wasn’t circulating as it should. Begin, he said, making demurrage charges, on the notes being used. Money would begin to circulate again and a revival of business would take place.

I have grossly oversimplified my description of what Gesell proposed. His was a seminal mind; he was creative; he had ideas, as his writings prove. But it is unnecessary for my purposes to go into details about what Gesell proposed. The essential point is that his currency idea was tried and that it worked. But practical as it proved to be, it dealt only with the problem of deflation, with the conditions created by the fact that money was not circulating as it should. Since purchasing power of the mark was constantly rising, everybody hoarded their marks. Nobody spent them or invested them because they could get more for them by hanging on to them and using them later—in the future when they could buy much more with them. Nobody spent them unless desperation required them to do so—because they were fearful that they would be unable to earn any more of them. Nobody hoarded Gesell’s currency. Everybody spent it, if anything faster than they had spent their money before the depression.

Ingenious as is the idea of such a currency and practicable as it proved to be during a deflationary depression, the acid test of Gesell’s idea would have been what would happen with such a currency during a period of inflation, just as the acid test of what I am proposing is what would happen to a currency like the constant during a period of deflation. The acid test of any currency is not circulation but stability. The crucial question is: is its purchasing power constant? If it is, people will buy and sell and conduct their transactions with each other without either cheating or being cheated by the currency they use.


Chapter 18: On the Nature of Banking

The “‘business of banking,” as Webster’s Unabridged Dictionary refers to it, originated in the middle ages when goldsmiths—in addition to accepting gold and silver coins from their customers for safe-keeping in their strong rooms— began to issue bills-of-exchange so that their customers could transfer their money from one city to another without having to transport the actual coinage itself. What was then called a bill-of-exchange is today called a check or a draft. What was then called safekeeping is today called depositing. What the goldsmith then did when he “cashed” a bill-of-exchange drawn on him by a goldsmith in another city is the equivalent of what a bank does today when it cashes a check presented by a customer but drawn on another bank.

Banking, no matter how complex in practice, reduced to its simplest form, consists of only two basic activities: (a) accepting deposits of money subject to withdrawal from those who entrust their money to a bank, and (b) lending or investing the money entrusted to it.

Banking, though universally considered a business, is not a business at all. That it is conducted as a business today by men who consider themselves businessmen—if by business is meant an enterprise conducted for profit—is a sad but outrageous fact. In its essential nature banking is a profession, and like every profession should be conducted to render a service by men whose motivation is service first, last, and all the time. They must, of course, be properly compensated for their work, but this, in its essence, should be a fee, not a profit.

The principles involved seem to me the following:

  1.  Banking, because of its essential nature, is a profession and not a business. The banker, like the lawyer and the doctor, unless he stultifies himself, has to put the trust reposed in him before anything else. We entrust our health and even our lives to our doctor. We entrust our rights and our interests to our lawyer. We entrust our money and our wealth to our banker. The banker is a trustee, and he has no more moral right to exploit the funds entrusted to him than a doctor has a right to exploit the sickness of his patients, or a lawyer the problems and difficulties of his clients. Professional compensation is one thing, maximizing profits something altogether different.
  2.  Bankers, like lawyers and doctors, should therefore be licensed and only those qualified by study (usually at an accredited university) and who observe professional standards both in their practice and in their charges for their services should be permitted by law to engage in banking.
  3.  The banker, by the essential nature of the service he renders, is a fiduciary trustee. It is malpractice for him to do anything with the funds entrusted to him which he ought to know he should not, just as it is malpractice for a doctor to prescribe treatments which he ought to know endanger the health of his patients. Nobody, no matter how great the profit, has the right to betray those who trust him. It is betrayal to exploit the opportunity for profit which trust in his integrity creates.
  4.  Bankers should not be granted charters to operate banks as business corporations; they should not be legally authorized to earn profits from stockholders because corporations limit the liabilities of those who own them. In practice the law makes it virtually impossible to hold their officers and directors liable for what they do. Banks should be owned and operated by sole proprietors, by partnerships, by mutual and cooperative associations, and all those who own and conduct them should be personally responsible and accountable for the safety of the funds entrusted to them. All laws which exempt bankers, as would be true of all laws which exempted any kind of professional man for full liability for his practices, are morally null and void.Governments because of their political nature, should not own, operate, or control any kind of bank. The sole responsibility of the government so far as banks are concerned should be (a) to see that they are continuously audited by qualified and impartial certified accountants and (b) that if any of these audits show malpractices of any kind that those responsible, directly or indirectly, are held both civilly and criminally responsible for them.


A bank is an establishment for the (a) custody, (b) exchange, (c) transfer, (d) lending, and (e) creation and issue of money.

There should be, to meet all the needs of the modern world, only three kinds of banks: (1) savings banks, (2) commercial banks, and (3) banks-of-issue.

Unfortunately there are four, the fourth one called (4) investment banks. They ought not to exist at all. They are frauds which engage in real banking only as a means of making respectable the business which they conduct. They are really corporation promoters; they issue securities; they manipulate the stock markets; they promote speculation as a means of unloading the securities they issue. Worst of alb they make millions both out of the rise in prices of their securities and out of their decline when the securities and corporations they create fail. They ought to be called promoters, as the law required them to call themselves when corporations for private profit were first legalized. By calling themselves bankers instead of promoters they have made it much easier, and more respectable, to engage in the malversation they practice.

In the modern world there are legitimate banks which mix up all the activities in which banks can legitimately engage, activities which ought to be properly conducted only by banks established to conduct only one. Mixing them up, no matter how profitable it may be to the bankers or to the stockholders of banks, provides no service to the public which is worth the danger of the malpractices which this makes possible. Many of the worst of the monetary evils of mankind would be eliminated if banks were restricted to only one kind of banking.

1. A savings bank is one of a large variety of savings institutions. These include building and loan associations, trust companies, mutual funds, and life insurance companies. All of these institutions have in common the fact that they are in essence (a) custodians of the savings entrusted to them, (b) that they pay interest or dividends on the savings, and (c) that they should be administered by trained professionals whose integrity is unquestioned. The principle which they should all religiously observe is that they should restrict themselves to legitimate investments (real estate and high quality “blue ribbon” securities), and that they should not engage in commercial banking, and should have absolutely nothing to do with the financing of speculators and speculations of any kind.

What distinguishes a savings bank pure and simple from all other kinds of banks is that it restricts itself to (a) accepting time deposits of savings accounts and (b) accepts no demand deposits or checking accounts. It restricts itself to acting as the custodian of the funds entrusted to it by those who wish to save and to invest their money in contrast to those who wish to use it for current needs.

The principle which should be observed in distinguishing between savings and commercial banks is that the first should restrict themselves to investments which in their essential nature cannot be liquidated in the ordinary course of the business of their borrowers.

There is hardly a single abuse of banking in the modern world which does not have its roots in the violation of this distinction. Commercial banks, most of which have savings departments today, violate this principle unless the funds of these departments are so completely separated that they are in effect operating two banks. The practice, which is justifiable only in terms of profits, should be abandoned.

To whatever extent commercial banks are responsible for inflation today, it is due to their failure to observe this distinction and (a) to commingle the time-deposits of savings banking and the demand deposits of commercial banking, and (b) to use their funds to finance speculations and government deficits. The Great Depression of 1929 was caused by the violation of this principle; the catastrophe toward which Keynesianism is leading the world is similarly being caused by its violation. It is only by what ought to be recognized as conspiracy between the bankers and bureaucrats of the nation, that it becomes possible for the sort of robbery represented by inflation, and the sort of misery inflicted by depressions, to take place.


2. A commercial bank is properly a bank which is engaged in facilitating the buying and selling of commodities and merchandise. No commercial bank should therefore invest or speculate with the funds entrusted to it, even if the investment or speculation is disguised as a loan. None of its funds should be invested in any kind of business, in any stocks or bonds representing a business enterprise, in any real estate or mortgages on real estate, or any kind of government securities.

The fact that stock markets make it possible to monetize securities, does not justify the violation of these principles. The fact that this process of monetizing or liquidating securities on stock markets can always break down must never be forgotten.


3. A bank-of-issue is not properly a bank at all in the manner of savings or commercial banks. Its functions are to establish a monetary unit (such as those now called dollars, pounds, francs and marks); to create and issue bank-money denominated in its own unit; to print and issue paper-money; to mint coinage; to accept deposits from and extend credit to banks; to support itself by interest charges, by service charges of various kinds, by seignorage, and by arbitrage; to distribute no profits but use them to set up reserves; and to be owned, operated and controlled on cooperative principles by its member depositors.

Banks-of-issue today are all government owned and government controlled even when, as is the case with our Federal Reserve System and the Bank of England, they are in form owned by bankers or private stockholders. They are political rather than banking establishments. Their primary function is serving national (really political) interests, their banking service is incidental to this and in practice is ruthlessly sacrificed when the public interest conflicts with the government’s interests.

One of the most important of the novelties embodied in the Exeter experiments was my proposal that there should be a bank-of-issue which was completely independent, which was established solely and simply to serve the needs of a modern economy, and which was free to devote itself to this necessary service because it was organized so that it was not controlled in any way by either private or government interests. The bank for the issue of a stable currency which I have tried to describe would be such a bank-of-issue.


In reading over what I have here written, I feel it necessary to call attention to the fact that these are not descriptions of banks as they are. This is not a study in what I think of as descriptive economics. Descriptive sciences are one thing, normative sciences another. The description of banks as they are and explanation of what is taking place in them is only the premise from which this is written. This is a study in normative economics, of what banks should be and how they should be conducted, taking the needs for which money and banking should provide into account. Central banks, including our Federal Reserve System, though in fact banks-of-issue, are not what banks-of-issue should be. The charge, certain to be made, that I am unrealistic will be irrelevant, unless it can be proved that I am mistaken in my premises or mistaken in what logic justifies deducing from them.

When Plato called for a “science of good and evil” twenty five hundred years ago, he wasn’t calling for an objective description of human conduct. What he was calling for was a normative science—a science which dealt with the problem of how human beings should conduct themselves and how they should treat one another. We need, it is true, a systematic and scientific description of the idiocies and the criminalities with which money has been and is being dealt with. We need no scientific rationalizations at all of Keynesianism and of the expedients now being used and proposed to keep bolstering it up. What we need to know is how money should have been dealt with in the past; what we need to know is what they should have done at Bretton Woods but did not do; what we need to know is what we should do about it now.


Appendix A: On the Statistical Problems Calling for Solution

The issuance and redemption of money, the purchasing power of which remained constant, became possible about a hundred years ago. Once Stanley Jevons made the significance of index numbers clear, no insurmountable difficulty would have been involved in establishing an inflation-proof currency system.

It is my position that since the redemption of money cannot be properly provided for by the simple expedient of using a single commodity like gold, redemption should be based upon the use of index numbers and of statistical data which has long been available.

Three statistical problems call for solution and all three can be resolved by compiling the necessary data to make possible (1) the computation of an International Standard of Value; (2) the computation of an International Currency Price Index or international exchange rate index, and (3) the computation of an International Commodity Price Index.

Without such an international standard of value the unit of redemption cannot be computed; without an international currency price index, the conversion into constants of deposits in BISC made in different national currencies is impractical; without an international commodity price index, constants cannot be properly redeemed in any of the commodities included in the unit of redemption.

The methods used in the course of the Exeter experiments in dealing with these three problems were as follows:

  1. Computation of the International Standard of Value—
  1. List thirty commodities economically most important in world trade.
  2. List the world production of the thirty commodities in 1970 by standard units used in trading.
  3. Because gold and silver have been used from time immemorial for money and because most of the production of both from time immemorial has been saved and not consumed as is the case with other commodities, their economic importance cannot be established merely by their world production. In this study, world production of both is multiplied by ten to provide for this.
  4. List the average dollar price in 1970 in one specified market (possible in New York) in standard trading units.
  5. Multiply (b) the world production by (d) the average price per unit. This will be considered their economic importance. Add all these dollar totals together; consider this 100%.
  6. Divide the economic importance (e) of each commodity by the total economic importance of all thirty commodities to determine the percentage represented by each commodity, carrying the percentages to the ten-thousandths (1/10,000).
  7. Convert the number of ten-thousandths of a percent of (e) each commodity’s economic importance in the basis of (one-ten-thousandth) .0001 = $1.00 which should make the total for all thirty commodities $10,000.
  8. Divide the amount in dollars (g) for each commodity by (d) its average price per standard unit to obtain the actual number of units this represents.
  9. Increase or decrease (i) the number of units to round them out, discarding fractions of a unit, to make a first trial apportionment.
  10. Multiply (i) the number of rounded out units by (d) their average price, to evaluate the first apportionment in dollars.
  11. Make a final rounding out of the number of units so that the total value in dollars of all the apportionments in units comes as close as possible to $10,000.
  12. Multiply the number of units in the final rounding out of the number of units by (d) their average price per unit, so that the total amount in dollars of all the final apportionments in units comes as close as possible to $10,000.


  1. Computation of the International Currency Price Index—
    Quotations on foreign exchange are published in all leading newspapers daily. The quotations in American newspapers like the Journal of Commerce, the Wall Street Journal, and the New York Times are typical and accurate enough to be used as sources upon which to base the computation of this index. As published, however, they evaluate other currencies in current dollars. The method used in computing the index must provide for the conversion of these dollar quotations into quotations in constants. This can be done by the use of the following conversion formula:
  1. As of 1970, the base year used in my studies, both prices in dollars and the purchasing power of the dollar are assumed to be 100.00 or $1.00 respectively. The conversion rate of dollars into constants in 1970 was fixed at $1.00 orC5.00. Finally the redemption rate of the constant in commodities was fixed atCl.OO = 1 /50,000 (one fifty-thousandth) of the quantity of each of the thirty commodities constituting the Unit of Redemption. The equations then to be used in all the computations then become $1.00 =C 5.00 andCl.OO = $0.20.
  2. Determine the value or purchasing power of current dollars (averaged for the month the index is to cover) in terms of the International Commodity Price Index (again averaged in the same way). If the period is to cover the period consisting of the month of June 1973, and evaluation shows by the commodity price index that commodity prices have risen to 110.0, the current dollar exchange rate (for each currency to be included in the currency price index) must be increased by ten points. This will then give them the price of each currency in constant dollars as of 1970.
  3. Determine the average monthly current dollar rate for each currency to be included in the currency index, by averaging the daily quotations at least once weekly.
  4. For illustrative purposes, assume that this procedure (c) shows that during June 1972, the exchange rate of current dollars and the Argentine peso was $0,102 = 1 peso. Adding ten points to the dollar price of the peso, as provided for in (b) above, then calls for the conversion of the current exchange rate as follows: $0.1122 = 1 peso. Since the conversion rate of current dollars into constants during the base year was $1.00 = C5.00, then the exchange rate for pesos in constants can be established as follows: $0.1122 x 5 =€0.561.
  5. Applying this formula to each of the currencies to be included in the index, could then give us the International Currency Price Index. This would provide for the measurement of these currencies in a constant unit of value instead of the fluctuation value represented by their quotations in current dollars.


  1. Computation of the International Commodity Price Index—The following five procedures will produce a monthly index:
  1. Determine the monthly averages of the prices of each of the commodities included in the International Standard of Value and Unit of Redemption (in my studies there were thirty), using price quotations published in the daily press. To ensure their international reliability, it would be best to average the quotations published in the best newspapers in various countries, newspapers like the Wall Street Journal in the United States and the Financial Times in England.
  2. Multiply the quantity of each of the commodities included in the International Standard of Value and Unit of Redemption by its monthly average price, (a).
  3. Add together the products of (b). The sum is the monthly average price of the aggregate of all of the commodities included in the Standard of Value and Unit of Redemption.
  4. Divide the sum produced by (c) for the month for which the index is being computed sum of (c) for the base year 1979. The product is the commodity price index for that month.

In the course of the studies I made, monthly averages were used; in practice daily averages could be readily produced by the use of computers.


Appendix B: On the Problem of How to Word Paper-Money

One of the things I wanted to do in the course of the Exeter experiments was to word the paper money we issued so that it might become a model for study. It is impossible to be sufficiently explicit on coinage or on the checks used for bank-money. But on paper money it is possible to be both explicit and complete. This was proved when we printed our paper money. It was not only possible to be legally formal and complete but even to include the weight of all the commodities included in the unit of redemption, as the wording on the Constant makes clear:



For Value Received Will Pay to the

Bearer of this Note on Demand,

through any IAI Bank Depository, the exchange value of One Hundred Constants in any currency as specified in the current monthly IAI Bulletin at that time, or after the establishment of its Commodity Reserve is announced, the equivalent of the value of One five-hundredth (1 /500) of the Unit of Repayment consisting of the thirty commodities listed on the back of this note, in any one of these commodities available and deliverable at that time in the nation in which repayment is sought.

The Unit of Repayment from the Commodity Reserve of the IAI consists of the following commodities, in the quantities specified, having a total value of Fifty Thousand (50,000) Constants at the time of the issuance of this series of notes.

Any changes in the commodities constituting the Unit of Repayment, or in the quantities included in it to ensure that the Unit has a value of Fifty Thousand (50,000) Constants at all times, will become effective immediately after announcement in the Monthly I AI Bulletin. As of the time of the issuance of this series of notes, the quantities and commodities in the Unit of Repayment are as follows:

Gold, 60 Troy oz.

Rice, 20,000 lbs.

Corn, 350 Bushels

Wool, 250 lbs.

Peanuts, 1,000 lbs.

Aluminum, 500 lbs.

Soy Beans, 50 Bushels

Rye, 50 Bushels

Lead, 200 lbs.

Nickle, 30 lbs.

Petroleum, 400 Barrels

Wheat, 400 Bushels

Cement, 125 Barrels

Cocoa, 1,500 lbs.

Copper, 500 lbs.

Sugar, 6,000 lbs.

Oats, 100 Bushels

Hides, 10 Pieces

Jute, 200 lbs.

Sulphur, 1 Long ton

Iron, 15 Short tons

Silver, 40 Troy oz.

Cotton, 2 Bales

Barley, 200 Bushels

Coffee, 3 bags

Rubber, 500 lbs.

Cotton Seed, 1 Short ton

Zinc, 300 lbs.

Tin, 20 lbs.

Copra, 1 Short ton


Constant front
A Constant Note, Face Side


Constant back
A Constant Note, Reverse Side


Appendix C: The Escondido Memorandum

  1. Can a stable “measure of value” be computed using index numbers for the purpose? Can the margin of error is such a “measure of value” be kept down to 1 percent and minus?
  2. Can a “basket of currencies” be used in place of gold to provide a reserve for the backing of a stable monetary unit? Can confidence in such a monetary unit be created and maintained? Can provision be made to guard against the devaluation and event the repudiation of its currency by a major power?
  3. Can a “basket of commodities” be used to provide such a reserve? How much will it cost to provide for the storage of such a basket?
  4. Can provision be made so that a “money of account” based upon such a reserve can be used as “legal tender” for all practical purposes in a national currency—specifically in the dollar?
  5. Can an experiment be conducted—say for a year—in circulating through our banks and clearing through the Federal Reserve System—the notes representing such a stable “money of account?” Are there any legal roadblocks which need to be removed to make such an experiment possible?
  6. Can the cost of issuing such a “money of account” by an international institution organized for that purpose be earned by it since it will have no taxing power; because resorting to taxing power would nationalize and politicalize it?
  7. Can arbitrage be used to provide for its expenses of operation? Can debentures be used to create a “revolving fund” which can earn enough to provide for such expenses? How much would have to be paid to investors in interest in addition to its inflation-proof feature on such debentures?
  8. Can the various currencies in which such debentures would have to be sold be invested through such a “revolving fund” so as to earn the expenses of the issuing institution?
  9. What other income is possible to cover the cost of maintaining not only the staff of economists, statisticians, and accountants, but also an advisory board or committee of outstanding economists, bankers and businessmen?
  10. How much will it cost to fund such an experiment for a year?


Ralph Borsodi

Escondido, California

March 3, 1972


Appendix D: A Bibliography of Materials on Free Banking and Currency Competition


Brown, Pamela J., “Constitution or Competition? Alternative Views on Monetary Reform”, Literature of Liberty, Vol. 5, Autumn 1982, pp. 7-52.

Cato Institute, “The Search for Honest Money”, Cato Journal, Vol. 3, #1, Spring 1983 (symposium issue). Selections include:

Alan Reynolds, “Why Gold?”

Joseph T. Salerno, “Gold Standards: True and False”

Lawrence H. White, “Competitive Money, Inside and Out”

Leland B. Yeager, “Stable Money and Free-Market Currencies”

______________, “Alternatives to Government Fiat Money”, Cato Journal, Vol. 9, #3, Fall 1989. Selections include:

Richard Rahn, “Private Money: An Idea Whose Time Has Come”

Lawrence H. White, “What Kinds of Monetary Institutions Would a Free Market Deliver?”

Campbell, Colin & William R. Dougan, Alternative Monetary Regimes. Baltimore: Johns Hopkins University Press, 1986.

Cobb, Joe and Philippe Nataf, Competitive Money and Banking. Greenwich, CT: Committee for Monetary Research and Education, 1983 (monograph).

Friedman, David, Gold, Paper, or is There Better Money? Washington: Cato Institute, 1982 (Cato Policy Analysis Monograph).

Groseclose, Elgin, America’s Money Machine: The Story of the Federal Reserve. Westport, CT: Arlington House, 1980.

Hayek, F.A., Denationalisation of Money: The Argument Refined. London: Institute of Economic Affairs, 1978.

Mises, Ludwig von, Human Action. Chicago: Contemporary Books, 1949 (1966, 3rd ed. Ch.17).

Rahn, Richard, “Time to Privatize Money?” Policy Review, Spring 1986, 55-57.

Rockoff, Hugh, “The Free Banking Era.” Journal of Money, Credit & Banking Vol. 6, No. 2 (May, 1974), pp. 141-167.

Rolnick, Arthur J. & Warren E. Weber, “Free Banking, Wildcat Banking, and Shinpiasters.” Quarterly Review (Federal Bank Reserve Bank of Minneapolis), Fall 1982, pp. 10-19.

_____________, “New Evidence on the Free Banking Era.” American Economic Review, Vol. 73, #5, December 1983, pp. 1080-1091.

_____________,  “The Causes of Freebank Failures.” Journal of Monetary Economics, Vol. 14, 1984, pp. 267-291.

_____________,  “Inherent Instability in Banking: The Free Banking Experience.” Federal Reserve Bank of Minneapolis, Working Paper 275, May 1985.

Selgin, George, The Case for Free Banking, Then and Now. Washington: Cato Institute, 1985 (monograph).

_____________, The Theory of Free Banking: Money Supply Under Competitive Note Issue. Washington: Cato Institute, 1988.

Siegel, Barry N., Money in Crisis: The Federal Reserve, The Economy, and Monetary Reform. Cambridge, MA: Ballenger, 1984.

Tullock, Gordon, “Competing Moneys.” Journal of Money, Credit and Banking, Vol. 7, November 1976.

Vaubel, Roland, “Free Currency Competition.” 113 Weltwirtschaftliches Archive, 433-459 (No. 3, 1977).

Vieira Jr., Edwin, Pieces of Eight: The Monetary Powers and Disabilities of the United States Constitution. Old Greenwich, CT: Devin Adair, 1983.

White, Lawrence H., “Competitive Money, Inside and Out.” Cato Journal, 281-301 (1983).

_____________, Competition and Currency: Essays on Free Banking and Money. Washington: Cato Institute, 1989.

_____________, “Deregulating Money and Banking”, Cato Policy Report, May 1983.

_____________, Free Banking in Britain. Cambridge: Cambridge University Press, 1984.

_____________, “Free Banking as an Alternative Monetary System.” M. Bruce Johnson and Gerald P. O’Driscoll, eds., Inflation or Deflation? Cambridge MA: Ballinger

Publishing Company, 1984.

_____________, “Gold, Dollars and Private Currencies.” Cato Policy Report, June 1981.



1. Irving Fisher’s main works dealing with money included Mathematical Investigations in the Theory of Value and Prices, Yale University Press, 1961; The Nature of Capital and Income, Macmillan, 1927; The Purchasing Power of Money: Its Determination and Relation to Credit, Interest and Crises, Macmillan, 1920; Why Is the Dollar Shrinking?: A Study in the High Cost of Living, Macmillan, 1914; Stabilizing the Dollar: A Plan to Stabilize the General Price Level Without Fixing Individual Prices, Macmillan, 1920; The Making of Index Numbers: A Study of Their Varieties, Tests, and Reliability, Houghton Mifflin, 1927; “Our Unstable Dollar and the So-Called Business Cycle,” Journal of the American Statistical Association, 20:179-202; The Money Illusion, Adelphi, 1932; Inflation?, Adlephi, 1933; Stamp Scrip, Adelphi, 1933; After Reflection, What?, Adelphi, 1933; with Hans R. L. Cohrssen, Stable Money: A History of the Movement, Adelphi, 1934; 100% Money: Designed to Keep Checking Banks 100% Liquid, to Prevent Inflation and Deflation, Largely to Cure or Prevent Depresions, and to Wipe Out the National Debt, New Haven Printing, 1935.


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