5 fallacies about dollars coursing through veins of local economy


A million dollars in paper money sits on a glass table top in a brief video that shows you how big a pile of bills is Uncle’s F$16 trillion in debt obligations.

By Paul Hein

Let’s look at some commonly held conceptions about our monetary system, its problems, and their “solutions.”

Fallacy No. 1: The government prints too much money

Among people with just a touch of economic sophistication, this is an extremely popular idea. It is untrue, both in what it says and what it implies.

First, as regards what it says: the government does not print money because money is not and never has been printed. The role of the printing press has been to print receipts for money on deposit. The printed currency might be referred to as warehouse receipts, or claim checks for wealth available for redemption by the holder of the currency. Of course, there have been receipts printed which were not claim checks for money on deposit. These were referred to as counterfeit when that word still had significant meaning, but actual money was never printed, only coined. I’m sorry if this seems like pedantic quibbling, but if you do not understand this point, you fail to grasp the most important single fact of our monetary system. May I suggest you re-read my “The odd lightness of coins in your pocket makes Noogacentrism silly”?

The implication of Fallacy #1 is that the government prints money for its own use, thus flooding the marketplace with increasingly useless currency. This is also untrue. Although the actual manufacture of Federal Reserve Notes takes place on government property, with government personnel operating government presses, the currency is printed at the request of the Federal Reserve System, a private banking cartel. It is printed in denominations requested by the Fed and turned over to the Fed for distribution. The Fed “pays” for the currency, incidentally, at cost, which is a few cents per bill, regardless (of course) of the denomination. The bill on top of the stack, in other words, will “buy” the rest. (It’s as though you could pay for grapes with grapes. Select a nice bunch at the produce counter and give the check-out girl two or three of them to pay for the rest. Nice deal!) Proof that the government does not use the currency it prints for its own needs is the national debt. To whom could the government owe money if it were the source of money?

Fallacy No. 2: A balanced budget would solve our economic problems

I believe that there are some people who believe this and who also believe Fallacy #1, yet if you believe that the government prints money, how can you believe that it can have an unbalanced budget?

The problem with this fallacy is also more in the implication of the words than their literal interpretation. A balanced budget, per se, is a fine thing; but those who propose it fail to suggest any way by which it can be accomplished, or what benefit would result if it could. The blind spot in their thinking if the factor of interest. Interest must be paid by the government on money previously borrowed (which was borrowed to pay the interest, which was borrowed to pay the interest, etc.). It is simply an incontrovertible fact that government borrows to pay the interest due! A balanced budget, under such circumstances, is unthinkable. Should the government decide to settle its account with the bankers once and for all by using its armed might to simply seize the people’s money (taxation), where would the people obtain the money?

Why, by borrowing, of course. Even now, many people borrow to pay taxes. Those who don’t are perhaps in that enviable position because they borrowed to meet other expenses. So if the government decided to balance its budget by taxation rather than borrowing, the people would have to do the borrowing instead. Thus, the national debt would remain, but now it would rest directly upon the people, instead of indirectly, through their government. The problem which must ultimately be faced is that of debt repayment when no money is provided. When debt is “paid” with IOUs and “obligations” it is not paid at all, but merely recycled. When the debt (money) accumulates to the extent that it can no longer be taken seriously, the system collapses. Balancing the federal budget is thus irrelevant.

Fallacy No. 3: We can’t use gold as money because there isn’t enough

Yes, the Russians, among others, control much of the world’s gold. But they can’t eat it! Don’t they want our wheat? Don’t they want our technology? Then let them spend the gold to get it. And once they do that, they don’t have the gold any more. The world’s gold, were it to be used as money, would soon become distributed among the people. A miser, it is true, would simply hoard his wealth; but miserliness is a mental aberration, not a national policy! Gold — or any other precious material used as money — gives its possessor power only when it is spent.

Isn’t it remarkable that so many people believe that there isn’t enough gold to use as money? Do these same people ever worry that there isn’t enough steel for our refrigerators or automobiles? Do they wring their hands with worry that we might run out of wood for our homes and furniture? Do they fret lest we run out of salt for our soup? Not that I’ve heard. So why do they think that we might run out of gold? I think that their fear is based upon the fact that when gold was used as money, the people who issued currency redeemable in gold often— perhaps usually — issued more claim checks for the gold than they could honor. In other words, had everyone tried to redeem his currency simultaneously, there would not have been enough gold. And this occasionally happened, of course, in those situations termed a “run on the bank.” But the very reason that runs on banks occurred is that people suspected that the bank was counterfeiting.

The prevention of runs on the bank lies in the enforcement of laws against counterfeiting. In other words, a paper currency should be 100% redeemable. When the Federal Reserve System first began issuing its notes a 50% backing in gold was required, and this was later reduced to 25%. Such a system seems to work very nicely because there are never many people demanding redemption of their currency at any one time.

But as regards the currency as a whole, it means that 75% of it is counterfeit, i.e., not issued against the deposit of anything available for redemption. Of course, as we have seen, a run on the bank can mean disaster for such a system of partially honest currency. But 100% redeemable currency leaves control of the economy in the people who produce the gold and silver used as a medium of exchange. Therefore, the possibility of a run on the bank was eliminated in another way: by making none of the currency redeemable. What’s the point of taking your claim check to the bank to claim your money when the bank is going to tell you that the claim check is the money? More importantly, when the claim checks (now fraudulent, of course, because they can “claim” nothing) are accepted as “money,” control of the economy–and of the people–passes to the printers of the paper.

Fallacy No. 4: The dollar is backed by the gross domestic product

What nonsense! Who produces the gross national product? We, the people, product it. Who produces modern “money?” The bankers, every time they make a loan. They get it from thin air. Now can you seriously accept the idea that the banker’s liabilities (checkbook money) are backed by—our goods? That’s like trying to pay your rent with an IOU. When asked what backs your IOU, you reply that the landlord’s property backs it! Pretty good arrangement, isn’t it? You can pay your bills by issuing notes based upon other people’s wealth. But isn’t that what you believe when you believe that the Fed’s “notes” are backed by our own goods? And what about consumption? If the gasoline in my car’s tank is backing for the currency in my wallet, what happens when I burn up the gas? Do my Federal Reserve “notes” somehow disappear?

A very great proportion of the gross domestic product is consumed. Is someone adjusting the amount of “money” in circulation to compensate for this fact? And are new Fed “notes” only issued except as more goods are produced? The answer to these questions is obviously “NO!” Our modern “money” comes into existence, as we have seen, when a loan is made, and that loan is not necessarily to increase production. Indeed, it is far more likely that the loan is made, in part at least, to pay the interest on loans previously made by others and passed along as an added cost of doing business. This is a vicious circle that can only lead to disaster. Our present system provides no means of escape.

Fallacy No. 5: America is the land of the free and home of the brave

Don’t confuse reality with the lyrics of a song. When you and I are obligated via legal tender laws to accept scrip for our goods and services, then we are under the thumb of the printer of the scrip. The control that is exercised over our lives may be much subtler than that exercised over the lives of black slaves a century and a half ago; but it is there, nonetheless, and its subtlety makes it all the more pervasive.

Consider just how free you are: Can you send your children to the public school in your neighborhood? Can you sell your home to whom you wish? Can you even be said to actually own your home, or is that “ownership” dependent upon perpetual payment of taxes? Can you put the type of gasoline into your car that makes it run best? If you sell natural gas or electricity, can you determine for yourself what your charges and fees will be? Can you fly where you want, and set your own charges, if you own an airline? Can you write a book advocating the treatment of cancer with apricot pits, and send it through the mail? Can you buy a tire without giving identification? Can you, as a farmer, raise as much as you please of what you please? Can you decline to provide financial support for total strangers?

This is a very abbreviated list. If you are in business, you could no doubt add dozens of things, proscribed in this “land of the free.” Most of the things which we are forbidden to do are proscribed via the various regulatory agencies which issue “guidelines” having the force of law. These hundreds of agencies are made possible — like war — by the government’s access to unlimited money in the form of its “obligations” which oblige the government not at all. Money, they say, talks. When it is real wealth, produced and owned by the people, it speaks loud and clear, telling the government that the people are paying the piper and calling the tune.

When it is counterfeit issued by a group of citizens immune from prosecution for that crime, it also speaks loud and clear. Its message then is that we had better live our lives as the issuers of “money” think best. And the agency by which the counterfeiters’ desires are translated into our actions is the government, which, as George Washington pointed out, is not reason, but force. For counterfeiters, money is no object. They can buy anything — including a government. And, sad to say, in the land of the brave, the power of money creation has replaced those who once said “Don’t tread on me!” with a new generation which whines, “You can’t fight city hall.”

This video is just over five minutes long, and gets a little preachy at the end. But it makes a great point about Uncle’s unsustainable debt problem and gives you insight into our arguments that you prepare for crisis.

Dr. Paul Hein, a retired ophthalmologist who lives in Ballwin, Mo., has always had the keenest eye for the misdoings of our betters on a fundamental point of economics. That is, their printing of unbacked paper notes that pretend to be lawful, valuable dollars and which promise nothing except the ruin of the federal republic. Dr. Hein is the author of a favorite book about economics, All Work and No Pay; Life Saving Lessons in Modern Money, from which this text is adapted, and was president of the Monetary Realist Society.  He is married and father of four children.

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