Chapter VI:
The Paper Money Economy

Now that we have gone this far, the reader will see the drift of events. The bankers and their friends, principally the big corporations, had a good thing going. Their interests lay in operating and developing the paper money system. If an academic economist supported paper money, the bankers would try to advance his career. If a politician defended paper money, the bankers would donate to his campaign (or otherwise support him).

How Americans Fought the Bankers

Most of American history can only be understood in terms of the bankers’ attempts to enrich themselves through paper money and the counter-efforts of a small element who understood money and fought against them on behalf of the people.

When America was a colony of England, it was naturally under the British economic system, including William Paterson’s Bank of England. After independence, an attempt was made by Alexander Hamilton to reinstitute the same system with the Bank of the United States. Jefferson, who understood too well the dangers of central banking (and indeed all expansion of bank promises beyond their gold) fought him tooth and nail. When Hamilton persuaded George Washington and the Congress to support the bank, Jefferson quit the Federalist Party, formed his own political organization and was elected President on a hard money platform. When the Bank's charter expired in 1811, James Madison, a Jefferson supporter, was President, and the inability of Congress to override his veto killed the bank.

But knowing the connection between paper money and war, the bankers (particularly the wildcat bankers1 in Tennessee and Kentucky) agitated for U.S. entry into the Napoleonic Wars. The idea that the U.S. went to war in 1812 to prevent the impressment of American seamen is false. It was the propaganda of the war party. The section of the country with the most seamen (New England) was against the war, and the most violent pro-war agitation came from landlocked states that had no seamen at all. Unfortunately, Madison fell for this ploy and let himself be drawn into the fever. By the time the war ended in 1816, the finances of the country were a mess, and Madison betrayed Jefferson’s principles and acquiesced in a second central bank.

Jefferson was very angry. By this time he was an old man in retirement at Monticello. A young politician, Martin Van Buren, went to visit him, and Jefferson poured out his heart about the evil path the country was taking. Van Buren was fired with enthusiasm for the people's cause. He recruited an old war hero, Andrew Jackson, and put together the first really modern political organization, the Democratic Party. The Democrats swept to victory in 1828 on Jackson’s name, but the real battle came in 1832 because whoever was President in ‘36, when the Bank’s charter expired, would have the power to veto its extension. Unlike 20th century politicians, Jackson did not compromise his principles or betray his supporters. He declared that the people could have a bank and no Jackson or no bank and Jackson. They chose the latter, and the second American central bank was destroyed.

Then started the most amazing series of events. The small country, far from civilization, clinging to the edge of a giant continent, which America was in the early 19th century, began to grow. It vibrated with economic energy. It performed miracles of economic expansion. It began to increase its wealth faster than any other country at any time of history. It defied all the rules laid down by the banker-economists. It welcomed millions of poverty-stricken immigrants. It broke through hostile deserts. It distributed its new wealth so that the poorest member of society lived in greater comfort than had a medieval king. If paper money really stimulates our economy, then what happened in America between 1836 and 1914 must have been a miracle to test our faith.

It is strange to look back at that period of heros and then contemplate the pygmies which most Americans have become today. As noted, inspired by the great victory over the bankers, the Democratic Party adopted the periodic celebration of Jefferson-Jackson days, and modern Democrats, blindly following the behavior of those who have gone before, continue this tradition. While they celebrate the destruction of the second central bank, most of them do not know that they have helped to create a third central bank, the Federal Reserve System. And while they praise Jefferson by name, they are in fact the enemy against which he fought in his time. Were he alive today, he would denounce them as enemies of the people. Were Andrew Jackson alive, he would have them horsewhipped and ridden out of town on a rail.

How to Play the Stock Market

I indicated previously that it did not make sense to try to profit from the paper money system. There is, however, one exception. The expansion and contraction of money (and credit) by the bankers has an effect on the stock market. In fact, it is the most important determinant of stock prices over the major (2 to 4 year) term. If you understand what we have learned so far and you follow the politics of paper money and the actions of the central bank, then the future course of stock prices will be laid out for you, as on a map.

The important thing to understand is that the stock market is a capital market and yields a return on capital. It is thus competitive with the bond market, which is another capital market. Under the (partial) gold standard of the 19th century, it was normal for low risk bonds to yield about 5% and for good quality stocks to yield, say 8%. (This reflected the higher risk inherent in stocks over bonds.)

The fallacy of most Wall Street analysts is to assume that stock values — which they measure by the price:earnings (P/F) ratio — are absolute and that stocks go from undervalued to overvalued and vice versa. But stock valuations — which more sensibly should be thought of as the earnings yield (F/P) ratio — are relative. The earnings yield on stocks is relative to the (real) yield on bonds. If (real) bond yields are low, then stock prices ought to be high because the investor cannot get a good yield anyplace else. If (real) bond yields are high, then stocks ought to be low for the converse reason.

Thus the high interest rates of 1981 caused the stock market to be depressed. When Reagan put through the supply side tax cut of 1981, leading to the enormous budget deficits of his Administration,2 it was the signal for the bankers to create more money. Interest rates started to fall, and the money supply started to increase. Utility stocks, which are more sensitive to interest rates, hit bottom in September 1981, and the Dow Jones Average bottomed in August 1982. In July 1982, I advised readers of The Gold Bug:

If you want to go long in the bond market, make a play in real estate, or buy high quality stocks, you have my blessing.3

As will be discussed in Chapter VII, it is the effects of a money and credit expansion which are, incorrectly, called a boom by the banker economists. Some of these are as follows: After interest rates have fallen and bankers are more aggressive in making loans, sectors of the economy which are particularly dependent on interest rates start to boom. A mortgage is an important cost in buying a house, and it makes a big difference in the monthly payments. More houses are built when rates are low, and fewer are built when rates are high. The same is true (to a lesser degree) with regard to cars. Large item capital goods, which are normally financed over time, are in the same category. Since rates are lower, people spend more money on credit cards. Naturally, the construction, automobile, capital goods and credit card industries see a pick up in their business. These industries must hire new workers.

To get the new workers, the friends of the banker must offer higher salaries. The same principle applies here as with the man who sold his steam shovel for $100,000. The workers are fooled by the money illusion. They gladly accept the (slightly) higher nominal wages, not realizing that these wages are being paid in depreciated currency and are, in real terms, lower than what they had before. Thus, production is shifted from the normal economy to those goods produced by the bankers’ friends.

To see the process work in reverse, we advance to the spring of 1983. With the money supply hitting record highs, the Fed started to get concerned that it would become an election issue. Consequently, it pulled in its horns. Wall Street Journal writer Paul Blustein later admitted:

At one subsequent FOMC [Federal Open Market Committee] meeting, Mr. Mullineaux recalls, some people argued, More tightening will be necessary — and it’s a lot better to do it sooner rather than later, close to the election.4

With the Fed’s buying of government bonds now reduced, the bond market declined, and interest rates rose. The stock market tried to struggle forward, but gave up the ghost and collapsed in 1984. However, with the election just six months away, Reagan began to get worried. He stated:

But let me assure you, we are not pleased with the recent increases in interest rates …5


we want the money supply to be increased at a range that is commensurate with the increase in the growth in the economy.6

Since money growth had slowed from over 9%/yr. to 5%/yr., the Fed had positioned itself to respond. Two weeks after Reagan's statement, interest rates began to drop and bond prices to rise. Two months later the stock market began one of its greatest advances in history. In early January 1985, I advised:

Buy. Buy. Buy. Buy. Buy. Buy. Buy.7

The money supply for 1985 and for 1986 broke its 1983 record and for the first time in post-war American history went into double digit numbers, not a pace commensurate with the growth in the economy but far, far beyond.

At this time The New York Times — which remains firmly committed to the Keynesian theory of economics, which we shall study in Chapter VII — was deeply concerned that the stock market, then at DJI 1300, might have another collapse similar to that of 1929. They watched in astonishment as the market soared upward and upward, setting records and slicing through uncharted territory. It was only the Austrian Theory which both predicted and provided the scientific explanation for the enormous rise.

After advancing for three years and more than doubling in price, by the summer of 1987 the stock market had become completely dependent on the credit expansion. With the low interest rates8 provided by the expansion, DJI 2,700 was low. Without them, DJI 1,300 was high. At this point, Treasury Secretary Jim Baker made an agreement, called the Louvre Accord, with six other major industrial nations, an agreement which required a modest tightening of credit.

Austrian analysts compare an economy which is injected with paper money to a person taking drugs. Both get an initial, false good feeling from the injection. But they soon become dependent on a continued supply. Pretty soon, if they do not get their fix, they suffer the pain of withdrawal. Thus the stock market, in mid-1987, was like an addict who did not get his daily shot. In late summer, the bond market began to weaken, and on October 1, I advised:

From now on the prognosis is bearish.9

Less than 3 weeks later came Black Monday — the greatest stock market crash in history. Had Baker understood Austrian Theory, he never would have agreed to the Louvre Accord. Hype the market up; get the Yuppie vote; and reelect the Republicans in 1988 were his objectives. The Louvre Accord was the right policy followed for the wrong reason. By the time prices started to rise, the Republicans10 would be safely past the ‘88 election, and the stupid public would not know what happened. Let the next President deal with it.

The drug addict analogy is useful in another sense. When the market or the economy comes down to earth, the process is painful (for the paper aristocracy), but it is essential to the long range health of the country. With the stock market down 1,000 points by late October 1987, a part of the painful process of recovery had been accomplished. But when he is in the throes of withdrawal, what does the addict want? He wants another fix. And that is precisely what the Fed moved in to give him. The Administration abandoned the Louvre Accord, and the Fed bought Government bonds like they were on sale. The bond market had its greatest one-week rally in history. So on December 2, 1987, I advised:

For the past month, the stock market has been laying the base for one of the most powerful rallies in its history.11

What made it possible for the Reagan and Bush Administrations to expand money so rapidly with only a modest effect on the consumer price index is the commodity pendulum. Many commodities only respond to the forces of supply and demand with a long lag time. Using the Commodity Research Bureau index we can see that commodity prices essentially ignored the money creation of the 1960s and were thus very undervalued by 1970. Therefore they made up for lost time, so to speak, and advanced more rapidly than the money supply during the 1970s. By 1980, commodity prices were too high; supply was brought in, and prices were forced down until 1992. This decline in commodity prices kept consumer prices from rising as rapidly as the money supply, and this allowed the Reagan and Bush Administrations to win banker support by printing money and lowering interest rates. However, commodity studies indicate that most commodities have hit their bottom and that the decade of the late 1990s and early 2000s will be a repeat of the 1970s. This means that commodity prices will rise rapidly; consumer prices will outpace the money supply; and the Federal Reserve will be pressured, by the rising price indexes, to allow interest rates to rise back toward their free market level. These higher interest rates will hurt the stock market so that the decade from 1995-2005 will resemble the ‘70s.

The Problem of Economic Calculation

Most of us think that the only serious problem in economics is the problem of production, how to produce enough goods to meet our needs.12 However, there is a second problem which we all face and which is almost as important as the first. Some needs are more important than others. The meat and potatoes which sustains our life is more important than the frosting on our birthday cake. In our minds there is a list of which needs are most important, which are least important and which are inbetween.

The problem of economic calculation results from the fact that all of our needs cannot be satisfied. Resources are limited. Raw materials are limited. Human labor is limited. And time is limited. We can satisfy the most pressing needs. The wealthy can satisfy a greater number of their needs. But nobody can satisfy every last one. Perhaps it is stating the obvious, but what we want an economy to do is to devote the resources that exist to satisfying the most pressing needs.

In an economy where each family is self sufficient, this calculation of needs and allocation of resources to the most important is easily accomplished. Everybody knows his own needs and devotes his labor to satisfying the most pressing of them. If you need a sweater, knit a sweater. If you need food, plant more corn.

But in a modern economy, based as it is on cooperation, the problem of economic calculation becomes more difficult. After all, a typical person in such an economy only performs a very narrow task. A worker forging steel for the structure of a bridge does not know if the most important use for that steel is the bridge or if it might be more important to use it for an automobile. Out in Oregon and Washington state we see lots of people cutting down trees. In Texas and Oklahoma we see them raising cows. In San Francisco and Boston we see them building, repairing and programming computers. What is society’s need respectively for lumber, beef and computers, and are the proper numbers of workers being devoted to each product in accord with its true importance to the economy? This is a difficult problem. How can we even answer the question important to whom, let alone come up with the solution?

It was Ludwig von Mises who solved the problem of economic calculation, showing as he did so that only a free economy could answer this question and that communist, socialist, fascist and welfare state economies invariably committed the absurdity of using their scarce resources to satisfy their less pressing needs while their more pressing needs went unfulfilled. (The outstanding example of this is the case of the old Soviet Union which, due to a bizarre13 ideological committment to industrialization, devoted too many resources to heavy industry while scrimping on agriculture. In the 1930s, this led to the starvation of millions of people in the Ukraine — a textbook example of central planning.)

Von Mises showed that it is the (free market) price which both passes on information and motivates behavior so that, when each individual within the economy solves the problem of economic calculation for himself, it is also solved for the economy as a whole.

First, each worker puts a (money) value on his labor. This can not be merely an abstract, theoretical value representing what he would like to be paid. It has to be what he really is worth, and the test of this is whether he can get an employer to pay it. If he can, then he is in the economy; if not, then he has no effect on the problem of economic calculation.

After labor values have been established in a society, a new person enters the picture, the entrepreneur. It is his job, in a cooperative economy, to solve the problem of economic calculation. He totals up the labor cost of producing a certain good plus the cost of the other resources, hires the workers, buys the raw materials and produces the respective good at the given cost.

Meanwhile all of the consumers are putting a (money) value on the items they want to buy. Again we are here concerned not with a theoretical value which they would like to pay but with the actual value which they do pay. A shopper may complain about high prices, but if he lays down the cash, then he is saying with his actions that he values the item more than the money and more than any other similarly priced item which he does not buy.

With all of these millions of valuations going on every day, the entrepreneur has one thought in mind. He is hoping that the price valuation of the consumers is higher than the sum of the cost valuations of the workers and suppliers of raw materials, etc. If they are, then he can sell his product for more than it cost to produce, thus earning himself a profit.

And this is the beauty of the system. If the use valuation is greater than the sum of the cost valuations, then the product is worth its cost. The decision to devote scarce resources to that particular product was a good one, and there is a net gain in value to society by so doing. The society has solved the problem of economic calculation. It has even solved the problem of who does the valuing. The use value is calculated by the user (not in any theoretical way that is going to allow him to pull the wool over our eyes because he must actually lay down the money for it). The cost value is calculated by the worker (again not according to how much he says he is worth but according to how much he accepts in practice).

In fact, the system works so wonderfully that we should all fervently wish the entrepreneur to continue his activity. Now notice, if the price valuation of the consumers is higher than the cost valuations of the workers (giving us a rational and efficient economic activity), then the entrepreneur himself makes a profit. And the bigger the disparity in valuation the greater the profit. Thus the entrepreneur has the most powerful of all motives to impel him to continue his activity — self interest. The system not only calculates what is most efficient and how resources ought to be used, it provides the motive to induce people to bring about this desirable state.

Furthermore, dear reader, if you are moved by envy to begrudge the entrepreneur his profit (despite the great good he does for society), consider the following. If he succeeds in solving the problem of economic calculation for a particular good, then other entrepreneurs will see his profit and imitate him. The competition will force prices down and wages up so that both the consumer and the worker will benefit from his wise decision. His profit, so large at the start, gets smaller and smaller and finally disappears. A good analogy to it would he the mechanical rabbit which bobs ahead of the greyhounds in a dog race or the carrot suspended in front of a donkey’s note. The lure of it is always ahead providing an incentive to make the system go, but very few can taste its joys.

On the other hand, if the entrepreneur fails, if consumers refuse to pay more for the product than his cost so that he suffers a low, then the entire burden falls on him. Then the ignorant workers and consumers go merrily on their way waiting for a more savvy entrepreneur to use resources more effectively and painlessly raise their standard of living.

One of the aspects of this system which continues to amaze and delight me is the occasion of a socialist or a welfare statist, brainwashed in college, who graduates and, after getting a good dose of reality, seeks a career as an entrepreneur. This person doesn’t understand the system. He thinks he is doing evil (because his socialist professor taught him that the only way to get rich is to make someone else poor). Nevertheless, he helps to make the economic system work and to raise the general level of wealth. Such people are both stupid (because socialist) and venal (because they are engaged in an activity they regard as evil). But the system has turned them to its own end and uses them to do good for people, and this it does without the slightest bit of compulsion.

To go back to the lumberjack, the cattle rancher and the computer programmer, the buying public makes decisions every day concerning these (and of course many other) products. When it buys a product made of wood, it is valuing the work of the lumberjack; when it buys a steak, it is valuing the work of the rancher, etc. By the number of items it buys of each type and the price it is willing to pay, it expresses society’s valuation of the product of these people's labor. If it comes to value one of these types of products more than another (such as buying more wood houses and fewer steak dinners). This provides an incentive for entrepreneurs to build more houses and raise fewer cows. The demand goes out for more lumberjacks and fewer cowboys. Resources are thus shifted to meet the new, most pressing needs of the consumer, and the efficiency is preserved.)

(Workers often complain when a change in consumer desires or a new technology impels them to change jobs. If you suggest that they learn a new skill, they object strongly. But if they are to be indulged in their refusal to change, then economic progress will have to stop. In the abstract, the refusal to change is one of the most fundamentally evil of all possible human motives. And the best way to deal with it is by a swift kick in the rear. When such workers see that there is no sympathy for their laziness, they will get to work and learn the new skill.)

By contrast with the free market system, in a socialist economy the problem of economic calculation is dealt with by an economic planner (the kind who draws up five year plans). The free market entrepreneur has the information of prices and costs, which reflect the real value choices of the people. In a socialist economy prices and costs are arbitrarily set and do not reflect the choices of the people. In a free market, entrepreneurship is open to all. However, if the entrepreneur fails, he takes the entire loss himself; if he succeeds, he shares the profit with society. For this reason, it is a demanding profession and generally attracts a highly competent group of people. The socialist economic planner is, on the other hand, a political appointee, and there is no guarantee as to his competence. The free market entrepreneur is engaged in one business (or at most a few). He can become highly specialized and learn a great deal about his subject. But the socialist economic planner makes judgments about large classes of goods and can learn very little about each. The free market entrepreneur must be very sensitive to every whim of public taste. By comparison, the socialist planner does not really care what the public wants. Despite the socialist rhetoric about love for the masses, the only mistake which is likely to affect his job is one so gross that it causes a political upheaval.14

The result is that in socialist countries not only is there a lower level of production, but the goods which are produced are not those which satisfy the consumers most pressing needs. Their meager wealth is itself misapplied and wasted, and their poverty is thereby increased. The socialist dictator who builds a hydroelectric dam while his people starve is an archtypical example of this, and the fact that he will brag about the dam while ignoring his people's misery is a comment on the philosophy of modern socialists.

The point of this discussion of economic calculation is that the paper money system distorts it. In this regard, paper money acts like socialism. It fouls things up so that the free market cannot work, and it channels society’s resources to producing the less important goods while the more important ones fall by the wayside.

This can be seen on a very common sense level by considering housing starts. In 1974 American society built 1 million houses. But in 1977 it built 2 million. Then in 1981 it built only 1 million. This cycle in housing starts repeats for decade after decade. What is going on? The factors which lead people to build houses are long term and fundamental; they should not change every few years. Is valid U.S. demand for homes 1 million/yr. or 2 million/yr.? Why should housing demand regularly double and fall in half and then double, etc.? Are the American people fickle? Are housing entrepreneurs stupid?

This fluctuation has a harmful economic effect because workers are sucked into the field of construction, only to find themselves unemployed a few years later. And here the unemployed know that starts have fluctuated in the past and so have a reasonable motive to stick it out.

The solution lies in the fact that the bankers, in their pursuit of paper money, lower the nominal rate of interest, including the rate of interest for home mortgages. We have concentrated on labor as the principal cost of production, but the interest rate, representing the cost of the time from production to consumption is another cost. And for an item such as a piece of heavy machinery or a house, the interest cost can be considerable.

By artificially lowering the rate of interest, the bankers lower the cost of home mortgages, which dramatically lowers the monthly payments on a house. People are led into buying more houses. Resources are drawn into house production. Had the interest rates remained higher, society would have produced fewer houses and more of something else. Which decision represents their correct valuation? Obviously, it is the decision made in the absence of any artificial change in the rate of interest. In the same way, the low interest rates cause an increased production of all goods which are normally bought on time. Resources are diverted away from other goods, which consumers would have chosen had there been no manipulation, and these other goods never come into existence. Paper money thus accomplishes more subtly what socialism does directly. It misallocates resources, not by compulsion but by deception. It (periodically) makes housing and other time oriented products cheaper in terms of money than they are in terms of the real resources of society. It causes individual buyers (of houses, capital goods and other time oriented products) to make choices which do not add up to the general good; whereas the normal actions of consumers in a free market economy, each acting in his own interest, do add up to the general good. Stated baldly, it diverts the productive powers to the creation of luxuries at the expense of necessities.

Needless to say, considerations such as the above were completely lost on the people who constructed gross national product as a measure of the nation's wealth. They had no conception that consumers prefer some goods over others and that the most preferred goods should count the most in a measure of national wealth. When the paper money system caused a misallocation of resources so that less desirable goods were substituted for more desirable, they did not count this as a decline in wealth. When luxuries were built in place of necessities, they did not subtract this from GNP. They did not even understand that the problem of economic calculation existed.

One of the few genuine arguments that the banker economists have been able to invent is based on the existence of unemployment during a depression. Why is it that the system allows human labor and resources to stand idle? Is this not wasteful? A study of these periods of large unemployment in American history shows that they are always preceeded by a massive expansion of money and credit wherein resources are misallocated and wasted through the lowering of the rate of interest.15 (This waste has never been recognized by the majority of economists.) When the credit expansion stops, the wastefulness of the activity is communicated to entrepreneurs by means of losses, and they move to terminate the waste. Thus there will be a period of unemployment (of both people and capital) before entrepreneurs can once again figure out how to best use the resources that exist to satisfy the most pressing needs of the public. This period of unemployment is a gain in wealth and a first step in righting the economy from the distortion caused by low interest rates. To view the unemployment as the problem is exactly backward. Waste is the problem. Stopping the waste (which causes unemployment) is the first step in the solution. Reemploying the unemployed in more useful work is the second step. Starting another round of money and credit expansion, like the addict’s fix, solves the apparent problem for the short term, but it is the fundamental cause of the problem in the longer term. Instead of motivating entrepreneurs to find useful work for the unemployed (meaning work which satisfies society’s most pressing needs), the unemployed are drawn into malemployment, into jobs which will only exist given the distorted conditions of money expansion. When the money expansion causes a rise in prices and the Fed tightens again a few years down the road, they will once again find themselves unemployed.

Money And Credit

I have been at pains to point out that the banker expansion is both a money and a credit expansion going on at the same time. This is an important distinction because the early banker-economists came up with a theory that money and credit were pretty much the same thing. This has been given a great deal of credence in today’s economic discussion by Milton Friedman, who created a new version of the money supply — which he called M2 — based on classifying a type of credit (savings deposits) as money. So it should be emphasized that money and credit are fundamentally different things. They should not be added together or confused with each other.

Money is the medium (middle portion) of an exchange. It is the third good in an exchange which is not consumed directly but accepted so that it can be exchanged again. If I give you shoes in exchange for corn and eat the corn myself, we are engaged in barter. But if I give you shoes in exchange for corn and then trade the corn for a pot, then I have used the corn for a medium. In that society, corn is money.

Credit is an agreement between two parties to exchange present goods for future goods. Credit transactions always carry a rate of interest (except when they are a form of charity). In a money economy, credit transactions may be denominated in money, but in a barter economy, they will be denominated in some good. It is possible to have a society with money but no credit or a society with credit and no money (or a society with neither or a society with both).

In short, money and credit are two completely different things:

money credit
a good16
buys whatever is for sale
carries no interest
is not consumed in the transaction
an agreement
will not buy anything
carries interest
can be either created or destroyed by agreement

Savings accounts, and all other time deposits, are a form of credit. They are an agreement with the savings bank. They yield interest, and they cannot be used to purchase goods. (Terminating your agreement, taking your money out of the savings account and buying something with that money does not count. That corresponds to selling a bond or stock and buying something with the proceeds. Nobody thinks that bonds or stocks are money. If you brought your savings account passbook into the store and tried to buy something with it, you would find that it was not acceptable as money.)

Our society, having accepted the bankers’ confusion between money and credit, tries to present the two things as the same. It calls its money ‘notes,' which is the term for a type of credit. It refers to one part of the money supply as demand deposits, to make it sound related to time deposits. Now that banks are compensating their depositors for currency depreciation, this compensation on demand deposits is being called interest. All of this nonsense reflects the degree to which our society has accepted the banker argument that money and credit are the same thing.

But money and credit are not the same thing. Adding them up is like the mistake some of your classmates made in 9th grade algebra when the teacher pointed out that you can’t add apples and bananas. Adding money and credit is worse than adding apples and bananas because both apples and bananas are things. But credit is not a thing; it is an agreement. It is something which in its inherent nature is different from money. To add the money supply and savings deposits together is the action of someone who does not understand what he is doing. It does not represent any quantity, let alone another kind of money. It is something like adding traffic accidents in Boston to heads of lettuce in California to laws passed in Washington in the month of March. One comes out with a number, but it has no significance. This is the secret of M2, M3, and all of the higher Ms that may have left you mystified.


  1. Since bankers did not want people to redeem their notes for gold, some of them would locate their banks in the most inaccessible areas — out where the wildcats roamed — hence the name.
  2. Supply side theorists did not blink an eye when their prediction that a tax cut would produce more revenue proved absurdly false. This is because they never had believed that prediction in the first place. It was merely a lie to justify the cut.
  3. Howard S. Katz, Letters column, The Gold Bug, July 1982, p. 9.
  4. Paul Blustein, How the Federal Reserve Under Volcker Finally Slowed Down Inflation, Wall Street Journal, Dec. 7, 1984, p. 23.
  5. Ronald Reagan, as quoted by Francis X. Clines, Rate Rises Displease President, The New York Times, May 11, 1984, p. D-1.
  6. Ronald Reagan, Transcript of News Conference by President on Money for the MX, The New York Times, May 15, 1984, p. A-10.
  7. Howard S. Katz, A New Theory of Contrary Opinion, The Gold Bug, Jan. 1985, p. 7.
  8. There was some difficulty calculating real interest rates at this time because the consumer price index was clearly not accurately measuring the rate at which prices were rising. I arrived at a true CPI figure of 7-7½% from a number of different calculations, which meant that real long term interest rates in the spring of 1987 were very close to 0!
  9. Howard S. Katz, Report for Kenneth J. Gerbino Investment Letter, Oct. 1, 1987.
  10. The Democrats have no justifiable complaint; they set up the system.
  11. Howard S. Katz, Report for Kenneth J. Gerbino Investment Letter, Dec. 2, 1987.
  12. except for the banker economists, who think that the only serious problem is consumption
  13. bizarre because Frederick Engels, the Communist ideological hero, was a violent enemy of industrialization, as he made clear in his book, The condition of the Working Class in England.
  14. such as starving a few million people
  15. for example, the large amount of commercial real estate space which was built during the late 1980s and stands empty today.
  16. Money today is a legal fiction, but in that legal fiction it is a good.