About the Author Jason Unruhe is a small amateur journalist on YouTube who has written several books including "The Economics of Fallout Society", "Memoir of a Minimum Wage Security Guard", "Understanding Maoist Dialectics", “Marxism and Financial Crisis”, "The Economics of Fallout Society". He writes the companion blog for the news channel and has written for the Democratic People's Republic of Korea's diplomatic office of Norway and Young Pioneer Tours. He lives in Niagara Falls.

UTOPIAN

CAPITALISM

THE FED, GOLD STANDARD,

CRYPTO-CURRENCY, AND

OTHER NONSENSE

MONETARY THEORY

UTOPIAN

CAPITALISM

JASON UNRUHE

MRN PUBLISHING NIAGARA FALLS

Utopian Capitalism

ISBN 5-800112-150571 Published in 2015 by MRN Publishing Copyright © MRN Publishing This edition © MRN Publishing All rights reserved

© MRN Publishing 2015

To my fans that have shown me the loyalty I've needed to keep going.

Table of Contents

Note on Language I. Introduction The Shock of Reality . . . . . 2 The Marxist View of the 2008 Crisis . . . . 4 Saving Capitalism from Itself . . . . 14 A Very Public Reaction . . . . . 20 Enter the Utopianists . . . . . 28

II. Anarcho-Capitalist Methodology Why Methodology? . . . . . 38 Political Economy: Subjective vs. Objective . . . 43 Point of View: Historical vs. Ahistorical . . . 52 Point of View: Production vs. Consumption . . . 62 Conclusion . . . . . . 65

III. On Money and Currency Money as Universal Equivalent . . . . 68 Money and it's Categories

1. Price . . . . . . 70 2. Buying and Selling . . . . . 75 3. The Currency of Money . . . . 78 4. Coins and Paper Money . . . . 81 5. Additional Functions of Money . . . 85

What is Capital? . . . . . . 90 The Source of Surplus Value . . . . 94 Labour Power as a Commodity . . . . 97

IV. A Lot of Wrong Ideas About the Federal Reserve

and Fiat Money Why the Fed? . . . . . . 104 Who Owns the Federal Reserve? . . . . 105 Auditing of the Fed . . . . . 109 The Federal Reserve is Not a Conspiracy . . . 111 The Fed is Constitutional

McCulloch v. Maryland . . . . . 114 Osborn v. Bank of the United States . . . 117 Nixon v. Individual Head of the St. Joseph Mortgage Company 119

The Federal Reserve Can Legally Print Money . . 122 How Fiat Money Actually Works . . . . 122 How Fiat Money Is . . . . . 123

Fiat as Inside Money and Outside Money. . . 125 Hoes Does Fiat Money Have "Value"? . . . 129 The Libertarian Misinformation on the Money Multiplier . 131

The Dollar Hasn't Lost 96% of Its Value . . . 134

V. The Gold Standard Modern Gold Bug Fever . . . . . 140 What Gold Means to Particular Austrians . . . 150 What Gold Means to Karl Marx . . . . 157 The History of the US Gold Standard. . . . 158 VI. Why the Gold Standard Doesn't Work What about Gold? . . . . . 170 Problems Switching to the Gold Standard . . . 171 Problems with a Gold Standard

Trade Surplus Nations Hoard Gold . . . 177 Constantly Fluctuating Price . . . . 179 Gold Does Not Prevent Price Inflation . . . 183 Classical Gold Era Myth . . . . 186 Gold Is Especially Vulnerable to Speculation . . 190 Limiting Government Ability to Help End Recession . 193 What Value Does Gold Really Have? . . . 195 Gold vs. Fiat Consumer Price Inflation . . . 197

Conclusion . . . . . . 200

VII. False Theory of Inflation What about Inflation? . . . . . 202 Milton Friedman's View of Inflation . . . . 206 Looking at Real World Conditions . . . . 212 Real Causes of Inflation

1973 Energy Crisis . . . . . 219 Housing Booms . . . . . 220 Asset Market Boom . . . . . 221 Supply Shock . . . . . . 223 Zimbabwe . . . . . . 223

More Real Life Problems . . . . . 226 Class Perspective . . . . . . 233 Distributive Conflict Inflation . . . . 235

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VIII. Digital Currencies Introduction to Digital Currencies . . . . 238 Centralization or Decentralization? . . . . 245 Value and Utility . . . . . . 253 From Currency to Exchange Mechanism . . . 258 Digital Currency as a Stock . . . . . 261 Competition among Digital Currencies . . . 263 The Fatal Flaws . . . . . . 266

Easily Losable . . . . . . 270 Bitcoin is Ridiculously Unstable . . . . 271

Bitcoin and Taxes . . . . . . 276 How Would Bitcoins be Taxed? . . . . 279 How Much Tax would be Paid for Bitcoins? . . 279 Bitcoin Anonymity in Tax Evasion . . . 283

Can Bitcoin Save the World's Poor? . . . . 286 Proof of Concept: Bitcoin's Failure . . . . 296

Notes . . . . . . . 299

Note on Language

In this work I tend to use the terms libertarian, Austrian, "anarcho"-capitalist (an-cap) interchangeably. The reason I do this is because they all have a near identical view point on political economy. Some libertarians are not totally in favour of the removal of the state. Regardless of this difference, the economic theory of all these groups is primarily based on, or is, the Austrian School of economics. Because of their near identical nature I tend to use the terms interchangeably. The criticisms however remain the same.

This trend continues as I continually use the words "digital currency" and Bitcoin interchangeably. The main reason for this is my excessive use of the word Bitcoin which I felt was necessary. Hopefully this will break up its use and make it more readable. When I say Bitcoin I am generally speaking of digital currencies as a whole. Bitcoin isn't any different in operation from any other digital currency, thus any criticism can apply to almost all others. In certain moments I refer to specific digital currencies, either for clarity or to speak about a specific aspect that that currency has.

I. Introduction

"The oppressed are allowed once every few years to decide which particular representatives of the oppressing class are to represent and repress them."

- Karl Marx

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The Shock of Reality

In late 2008 the global capitalist system came into the recession portion of the industrial cycle, (or business cycle in bourgeois economic terms). The system was suddenly struck with unrealized values as the housing market was finally exposed as being unable to meet their mortgage obligations. The general financial crisis brought on by the mortgage crisis sent shock waves through the country, and later the world. Top hedge fund managers, stock brokers, and finance capital bankers suddenly had their whole worlds bottom out from under them. The ignored, yet always very possible reality struck their velvet cushioned worlds.

The so-called "Wall Street wizards" went off into a panic unable to decide how to handle the crisis. The most solid of solid investments, real estate, was plunging fast with seemingly no end in sight. Telephone calls were made across the globe to financial and monetary experts that firms had on speed dial, begging for a solution to the growing monster of a problem. I quite imagine that those who made the calls could almost hear the shoulder shrugging of the men on the other end of the line. I also imagine that this was only making their panicked state even worse.

It did not take long for all their frightened eyes to turn towards Alan Greenspan praying that he knew what was going on and that, more importantly, he had a solution. Greenspan was dragged before Congress and made to answer the burning question that the entire financial sector was dying to ask. At first it seemed that Greenspan didn't have much. His answers before Congress were rather vague. They didn't offer much in the way of an explanation. In fairness to Greenspan he had little time, if any, to investigate what had happened. But what came next was most telling of all. He uttered the words that are probably still burnt into the minds of many of those who faced that panic:

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“Yes, I’ve found a flaw. I don’t know how significant or permanent it is. But I’ve been very distressed by that fact.”1

I remember watching the news and seeing the look on Greenspan's face as he spoke those words. He seemed to me like a father about to tell his children some bad news. I could easily see the next words out of his mouth being about the sudden death of the family pet. I imagine that moment was agonizing for him. After all he was touted as nearly an invincible expert in the field of finance who had all the answers, and had up until now, been the head of a prosperous time in US finance. His words were ominous and seemed to foreshadow terrible times ahead that were bound to get worse. I quite imagine this made many an experienced financial expert nervous, and many young starting out traders even more panicky. All the hearing before Congress did was leave those in power and those in finance demanding even more answers. As we saw, things were about to get worse. The temporary solution to the crisis of capitalism was about to be unveiled to the outrage of the taxpaying public.

The middle class in America ended up being brutalized and losing everything about them that gave them their identity. The labour aristocracy was suddenly hammered down to the lower levels of the working class, or even worse, becoming part of the lumpen proletariat. The regular citizen of the US, those of us outside the so-called "99%" were feeling the effects of the loud arrogance of capitalism in its delusional belief that growth was infinite and that prosperity was here to stay. The American dream it seemed, had just been ended and the population had woken up to the economic reality.

If we can describe what happened to the middle class as being "brutalized", then what happened to the working and poor class can only be described as economic genocide. Millions upon

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millions of people were thrown from employment as manufacturing was devastated even further. Those who were already struggling to survive were made to face long term unemployment, homelessness, deep depression, suicide and crime. For all the tears of the Wall Street banks and their red ink, it paled in comparison to the devastation wrought upon those who actually make up the population of the country. The patriot flag waving of war had finally begun to wear off as the illusion of being the "best country in the world" was finally pried from their eyes.

The delusion of "the end of history was" was finally shattered and laid bare for all to see. The financial aristocracy had allowed themselves to be lulled into a utopian concept of capitalism promised by many a great economic thinker of the past, and fantasized about by many a first year economic student. It would be the people, and the people alone who suffered the brunt of this realization.

So we ask, what really happened with the crisis?

The Marxist View of the 2008 Crisis

A crisis is a disruption in the network of economic relationships that allow the capitalist economy to function normally.

Possibly the main aspect to the 2008 crisis was the lack of a faith that loans will be repaid. This in turn causes lenders to stop lending or severely restrict lending because of this fear. (Also known as a freezing of liquidity). The business sector requires this flow of credit in order operate, so they can meet their short-term, day-to-day needs. Most firms have to produce before they can sell, and in the mean time they regularly borrow in order to pay its workers and its suppliers.

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This is how a large part the capitalist system functions, if workers don't get paid and supplies don't get bought, nothing gets produced. Or worse, the debts they owe can't be paid off. If this continues for a lengthy period the whole system can collapse.

A lot of Leftists and many far-rightists think that the bailouts were unnecessary. It’s commonly repeated that it’s the proof of the greed of the capitalist class or that of big government somehow being socialist by supplying the rich with free money. (While at the same time these Rightists claim it’s taking from the rich and giving to the poor that is socialism. Showing they have no idea what they're talking about.) Another argument that is made is that the money could have been spent differently, on protecting mortgages from being foreclosed on people's homes or invested in infrastructure. However this is only focusing on one aspect of the disaster, the slump, which is not worst of it.

In truth, not having the bailouts of the financial sector would have completely destroyed the capitalist system in the US, possibly the entire world given how interconnected the international financial institutions are.

The real immediate problem was the liquidity lock that capital was not flowing to those who needed it because of a break in confidence that it would be paid back. This lack of lending had to be dealt with somehow, this is why the Federal Reserve became the lender of last resort and put through what is known as "quantitative easing". This is just putting more money into the system and demanding that it be loaned out to end the credit freeze. Unfortunately for capitalism, credit institutions didn't really give out that much of the money once they got it. They just entered it into their books as profit. This happened essentially because there is no mechanism to actually force them to give it out. Insanely enough, they proceeded to do this twice more afterwards with the same result.

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There literally is nothing else that could be done to end the crisis within the context of maintaining capitalism. There are socialist alternatives in ending the crisis, through many measures including nationalizing the banks. No matter how hard a market fundamentalist may cry "that's not real capitalism", it is, and that was the only capitalist solution to its crisis.

Karl Marx spoke of capitalism being a system of contradiction. This could not be anymore a perfect example of it. The economy recovers when the money becomes liquid. But the financial institutions won't allow it because they don't have confidence that it will be paid back. They don't have confidence because the economy is not moving, but the only way it moves is buy loaning out that money. This is one of the reasons why capitalism is in my opinion stupid.

One of the views of the roots of the 2008 crisis is that its roots lie in the crisis of the 1970s. A crisis from which the world never fully recovered from, a destruction of capital that has not been repaired like it was with the post-World War 2 boom. Anyone in any serious economic circle has been afraid of a repeat of the Great Depression, and as such has put forth policies to slow down and prevent the destruction of capital. (A crashing of the value of capital assets as well as physical destruction of capital).

The destruction of capital is not only an effect caused by a slump, it is also a mechanism leading to the next boom. If a company can generate say $3 million annually, but the value of the capital invested into the business is $100 million, the rate of profit is only 3%. But if a destruction of capital value takes place and a new owner buys it up the business for $10 million instead of $100 million, the new owner’s rate of profit is 30%. That is a catalyst for a new boom.

This massive destruction of capital hasn't taken place in the likes of the Great Depression, so as a result there's only been a partial recovery. Largely through these factors:

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(1) declining real wages for most workers and other austerity measures, as well as exporting the crisis into the 3rd world, and

(2) a mountain of debt-mortgage, consumer, government, corporate-to paper over the sluggishness and mitigate the effects of the declining real wages.

Because of all this debt being run up, there has been a constant debt problem and it will continue until it has been dealt with:

(a) sufficient capital is destroyed to once again make investment truly profitable. (The present crisis may well end up being this moment.). Or

(b) there’s such a panic that lending stops and the economy crashes, ushering in chaos or fascism or warlordism or whatever, or

(c) capitalism is replaced by a new human, socialist society.

As we can see, credit bubbles are the result of trying to grow the economy through debt faster than the creation of value in production. The more complicated and widespread credit markets are, the greater degree in which the there is a forced expansion that can take place. In doing so there is a greater degree to which there is more of a credit bubble than there is real value created in production. Thus you get a greater crisis.

“Imagine that demand for assets such as homes or stock shares increases, without a corresponding increase in new value being produced. This causes the prices of these assets to rise; and on paper, people’s and businesses’ wealth increases, so they now have the means to borrow more, and they may become "irrationally exuberant"; and all of this leads to a further increase in demand, and so forth and so on.”

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What caused the credit bubble in the 2008 crisis was the housing bubble. This bubble was actually created by a weak US economy. First the “dot.com” stock market bubble burst. This caused the economy to go into a recession that was exacerbated by 9/11 attacks later that year. To deal with the fear that there would be a financial collapse after 9/11, the Federal Reserve lowered short-term interest rates. Once the recession ended about mid 2003, employment continued to fall, thus the Federal Reserve continued the low short-term interest rates and reduced them even more. For three full years beginning in October 2002 the federal funds rate (inflation-adjusted) was actually negative. As a result, banks borrowed money from each other and then lent that money out paying back less than they borrowed once inflation was taken into account.

This economic strategy that was dubbed “cheap money, easy credit”, created a new bubble. Now because the stock market recently shrank from the “dot.com” bubble, this new “cheap money, easy credit” flowed into it, primarily into the housing market at first. Because it was so easy to get credit, those who normally wouldn't be able to get approved for it, now could. Working class people who couldn't get a mortgage before now could, because credit it was so cheap.

Many, many people who now for the first time could get a mortgage went out into the market looking for homes to buy. Of course when many people are out to buy something the price goes up because of demand, thus the prices of homes inflated. In fact those prices grew astronomically. The total mortgage debt and home prices grew at almost exactly the same rates between 2000 and the end of 2005, 100% and 102% respectively. (As measured by the Case-Shiller Home Price Index.)

Followers of Marxist economic theory understand that crisis in capitalism stems from the system of production-value-

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production, a fact that the market and production are not linked in a simple cause and effect way. Generally it is understood that there is not a single disturbance in the sphere of production that causes a crisis. Rightly, what happens in the sphere of production sets limitations to what occurs in the market. So it is undeniable in this sense that the root of the US housing crisis is in the system of production. The increase in the price of homes was far greater than the creation of new value in production to repay the mortgages in the long run. This new value from production is the source of all income for homeowners to be able to pay their mortgages.

To demonstrate this, from 2005 to 2008 the increase in income for regular home owners was only 1/3 of the rise in home prices. Meaning that the people who purchased the homes never received enough income to pay the mortgages. This is the reason why there was a real-estate bubble. A rise in asset prices or the expansion of credit themselves are not excessive. They are excessive only in relation to the underlying flow of value. Bourgeois economists use different language to describe the relationships between economic actors. In fact, it’s common place to assess whether homes are over or under priced by looking at the underlying flow of income.

Of course some economists are not blind and did see this crisis coming. That did not however cause them to stop doing what was causing the coming crisis. Instead they just continued to reap in the big profits from the cheap easy credit and then try to protect themselves when the day came that it all fell down. Here we can see that the mindless drive towards profit not only caused the crisis, it actually prevented those who were aware of it from trying to stop it, stop contributing to it, or at least properly protect themselves.

A reason why a lot of people in the industry didn't foresee the problem is largely attributable to the fact that home prices in

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the US have never fallen at a national level since the Great Depression. So it was seen as “natural” that home prices would keep rising. This is what caused a lot of people to ignore the fact that people who were a less worthy of credit risk were getting that credit through risky sub-prime mortgages. If the home prices continued to climb, the homeowners who had difficulty paying the mortgage would have been able to get the additional funds needed by borrowing against the increased value of their homes, and crisis would have been averted.

Theoretically if home prices had just stopped growing or even receded a little bit there could have been no crisis. Bong-rating agencies can see that historically, the worst case scenario would be that home prices would have dipped by a few percent. Because of this they gave a high rating to a large amount of pooled and repackaged mortgage debt (mortgage backed securities) that included subprime mortgages and the like. Basically they said these mortgage-based investments are good investments because historically housing prices have not collapsed since the Great Depression, the worst case being a small percentage decrease. Had the bong-rating agencies been correct in their assertion then those investments would have paid off greatly. Instead according to Case-Shiller Index figures US home prices fell 19.5. They became known as “toxic” assets.

The reason this is so important is because these mortgage-backed securities became investments that moved through the financial system. So when these investments went bad, they went bad in the financial sector as well. This is how the mortgage crisis spread into the financial system and became a general financial crisis.

Now begs the question, who is to blame for all of this? Well the primary factor is capitalism itself. The term “Zombie Capitalism” was coined by Chris Harman to describe the mindless drive towards profits. That is the very nature of capitalism itself,

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profits or death. That's why capitalists have the saying, “you're either growing or your slowly dying”. If the drive towards maximum profits is not being met, than any enterprise doing so will be crushed by its more profitable competitors. Capitalism is not going to do anything but make greater and greater profits with no regard to the consequences, even at the risk of its own destruction.

At this point many (intellectually honest) people would be arguing that this is the very reason why we have regulation. To prevent crisis like this from happening, to restrain the mindless drive towards profits and its inevitable consequences. That is true; however it is important to note that these money manipulators, investors, have no limit to the creativity and resourcefulness they can draw upon to get around any regulation written. No matter how many new regulations or laws are written, they ALWAYS find a way around them creating the same (and newer) risky investments that put everyone at risk. It doesn’t matter how many times you regulate them or in what way, they always invent new ones.

The fact is capitalism is always praised for, and is, based on the idea of risk. Except this is not some notion of a Mom and Pop convenience store going out of business, this is the global economy crashing that impoverishes hundreds a millions of people. Vastly affecting the cost of food and causing hunger as a result. This is one of the reasons why market fundamentalists (Libertarians) always use the example of two isolated producers in exchange, leaving out the social context, or even acknowledging that these exchanges take place on a much large scale in real life. This deliberate ignoring of how economics functions outside two small producers is what leads to the inevitable non-sequitors and strawmen arguments the ideology makes.

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This is the reason why radical leftists use the term: “Capitalism can't be reformed”. Because, it literally cannot be reformed.

This is not to say the capitalist class cannot recognize inherent weaknesses in its own system. They can be blind to them at times, and completely ignore them. At no point will they learn some lesson in some way. They do after all, have a vested interest in keeping the capitalist system, it's their source of wealth and privilege. They are already aware that a “truly free market” does not, cannot and will not ever work. That is why the capitalists who really hold power in society do advocate regulation. Basically because they're greedy, not stupid.

Here enters the idea of state intervention in the economy, more so the regulation of the financial sector in this case. The real capitalists, the people driving the world economy know this is necessary. (As opposed to pretend capitalists, the Libertarians who don't own the means of production and employ others in their use.) Every time a crisis happens they think (or willing delude themselves into thinking) that this will be the last one. As a result they keep needing new interventions in order to save the capitalist system. This is why the banks really got a bailout. Because it would have meant the death of the capitalist system globally if they didn't. If you support and believe in capitalism then you simply must support the bailouts. If not, you'd be condemning it to die.

During the aftermath of the crisis the US government dismantled Bear Sterns and nationalized Freddie Mac, Fannie Mae, and AIG. Combined with the bailouts it seemed to send a mixed message to the public on exactly what was happening. Some people decried it as making the rich richer, not allowing the rich to pay for their mistakes. To soak up the risk of their own failed investments. Others saw it as a progressive move, a move away from the “free market”. Both these views are incorrect.

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The government works for the capitalist class and as such is dedicated to defending its interests. These takeovers by the government are not ideological shifts, they are pragmatic ones, because they know they need to be done in order to save the class as a whole. Capitalists are willing to sacrifice the lives of tens of millions every year in order to sustain their wealth, it’s just that this time some of their own along with those tens of millions had to be sacrificed to keep the system going. This is in keeping with the reality of capitalism, a mad run towards profits no matter the cost, even if they have to trip a few of their own along the way.

This semi-nationalization is in keeping with Marx's writings. It was a necessity that the capitalist class recognized. It was not an ideological shift, it was a pragmatic one.

As Marx noted,

“The capitalist functions only as personified capital …. [T]he rule of the capitalist over the worker is [actually] the rule of things [capital] over man, … of the product [capital] over the producer”2

The capitalist class profits from the existence of capitalism, but the force of capitalism itself is inherently beyond their control. Capitalism will always drive toward the accumulation of value for the sake of value, regardless of how destructive (even self-destructive) it is. This is one of the major points missed by those who advocate reforming capitalism, like social democrats. Or as it was put by Cuban economists who are attempting to justify a turn towards capitalism: “markets with social justice”.

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Saving Capitalism from Itself

The story of the bailouts is long and fraught with bias and hostility, as you imagine it would. I'll attempt to do the best job that I can here in regards to providing an unbiased explanation as possible. There is one most important fact that is lost on just about everyone due to ideological manipulation. A painful truth that those who support capitalism are sometimes desperate to ignore: If there had been no bailout for the banks and financial firms, capitalism would have come to an end.

There is no denying this. It was of absolute paramount priority that these bailouts be made in order to save the system from itself. Many deny this simple fact. We must however ask ourselves an honest question: What would have happened if all those banks had failed? Moreover, what would have happened if all the banks had failed? These banks were linked deeply with other banks all over the world. People who deny the necessity of the bailouts usually have no answer for this. What do you think would happen if the entire financial sector of the economy collapsed? Everything runs through the finance sector. They loan the money to enter into production, and their vaults hold the money. The majority of the money in the world is credit money, all of which is dependent on finance. If the banks and financial companies had been allowed to fail, the entire global economic system would have come down. The bailouts didn't just save the US, it saved the world.

If you like and defend capitalism, you simply must stand behind the bailouts. If not, then you're essentially calling for the destruction of it. Global capitalism would have died had it not been for the actions of the US government.

Having said that, allow me to return to the subject of the origins of the bailouts.

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Near the end of 2008 the country began hemorrhaging employment. In October 380,000 jobs were lost, and in November 597,000 jobs were lost. Something big was going on, but the banks didn't realize it right away. Economies always do this, they always have down turns, and there are always contractions of the economy. Obviously nothing was seen as out of the ordinary right away. It's normal to just have the working class people's lives destroyed. However, when enough of these failures began to manifest, a lot of banks ended up not getting back the money they loaned. For them, the circuit of capital was breaking.

The circuit of capital, in this case the circuit of finance capital, was according to what Marx laid out: The finance capitalist loans out money to the industrial capitalist to enter into production. The production creates commodities and those commodities are sold for more money than was loaned from the bank. The industrial capitalist pays back the financial capitalist with interest. Except now there were a bunch of industrial capitalists not paying them back. The circuit was broken for the banks. The financial elite were starting to suffer from the ill effects of everything they were doing. Now it seemed, was the time to start paying attention.

Banks left and right started failing. I don't mean they stopped being profitable, I mean they started dying. Blood in the form of value was gushing out like a breaking dam. Lehman Brothers ended, Merrill Lynch was sold off quickly. A big moment was when Washington Mutual went bankrupt; it was the largest banking failure in US history. Stocks all over the country crashed. The warning lights had now gone full their brightest read, and the klaxons were at their loudest ever.

It was official, capitalism had failed once again.

The financial aristocracy had finally dug themselves so deep; they might have buried themselves alive. Or had they? As is

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often forgotten by non-Marxists, we all live in a bourgeois liberal democratic state. Meaning the government is firmly in the hands of the capitalist class. All the banks needed to do were to ask for assistance, after all, they had always gotten it previously. There seemed like no reason they wouldn't get it now... And they certainly did.

The capitalist class now knew how dangerous this situation was. They knew the death of capitalism globally was at hand. What they needed most of all, was money. Debts were not being paid back and betting schemes had failed. Properties no one could afford to buy were sitting on their books unsold. The situation was desperate. So they reached out to the only people they knew could bail them out: The United States government and the free money they would ultimately receive. What they needed was for Congress to vote on it.

Congress bailing capitalists out was nothing new, it had been done in the past. Here are some notable examples according to propublica.org3:

Penn Central Railroad - $3.2 billion in 2008 dollars

In May 1970, Penn Central Railroad, then on the verge of bankruptcy, appealed to the Federal Reserve for aid on the grounds that it provided crucial national defense transportation services. The Nixon administration and the Federal Reserve supported providing financial assistance to Penn Central, but Congress refused to adopt the measure. Penn Central declared bankruptcy on June 21, 1970, which freed the corporation from its commercial paper obligations. To counteract the devastating ripple effects to the money market, the Federal Reserve Board told commercial banks it would provide the reserves needed to allow them to meet the credit needs of their customers.

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Franklin National Bank - $7.8 billion in 2008 dollars

In the first five months of 1974 the bank lost $63.6 million. The Federal Reserve stepped in with a loan of $1.75 billion.

Chrylser - $4 billion in 2008 dollars

In 1979 Chrysler suffered a loss of $1.1 billion. That year the corporation requested aid from the government. In 1980 the Chrysler Loan Guarantee Act was passed, which provided $1.5 billion in loans to rescue Chrysler from insolvency. In addition, the government's aid was to be matched by U.S. and foreign banks.

The Airline Industry - $18.6 billion in 2008 dollars

The terrorist attacks of September 11 crippled an already financially troubled industry. To bail out the airlines, President Bush signed into law the Air Transportation Safety and Stabilization Act, which compensated airlines for the mandatory grounding of aircraft after the attacks. The act released $5 billion in compensation and an additional $10 billion in loan guarantees or other federal credit instruments.

These alone seem like exorbitant amounts of money. This time however, it would be very different. They would be asking for sums of money unlike anything in the past.

Members of Congress pretty much describe the events the same way. They all went home on a Friday afternoon thinking that everything was fine and the economy was pushing ahead full steam. Later that night they got calls from higher ups saying there was going to be a vote on Monday asking for hundreds of billions in bailout money. They all describe being confused about what was going on, but they describe the sense of panic that

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was put into them. They were essentially told that the destruction of the US economy was imminent if they didn't vote for the bailout. Despite angry protests to the contrary, this is very true.

What happened was, a series of meetings were set up between big names on Wall Street and senior members of Congress together with top officials from the Bush Administration. It's not entirely known exactly what was said in these meetings, but I think we can figure it out. It appears that the richest most powerful people in the economy went to the government to plead their case that the destruction of capitalism was at hand, and that the United States as we knew it was going to be destroyed if there wasn't a bailout offered to them. I'm certain that the financial aristocracy make very clear to the bourgeois government exactly how desperate the situation was. The result as we know it was the wholesale rescue of capitalism. Of course this was paid for out of the pockets of the working class, and the super exploitation of the Third World. During the Bush administration years the rich had almost all the taxes they had to pay removed from them. (Continue to tell yourself that the government isn't in the hands of the capitalist class.)

(It should be noted here that Wall Street didn't beg for anything. They pretty much walked in the door and told the government what it is that they wanted. Both sides, as described by witnesses, acted like old friends, smoked expensive cigars and patted each other on the shoulders. Being that there is virtually no separation between many bureaucrats and those in the most powerful positions on Wall Street. Frequently we see them pass back and forth between high power public and private sector jobs. For example: Timothy Geithner, Robert K. Steel, Edward Forst, Robert Zoellick, and Henry Paulson. This was contrasted sharply with the reception that the auto industry received when they went looking for a bail out. They were put through the wringer and blasted on television for bad practices.

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When the time and the vote was about to be made, the American people made their voices heard. In the millions they sent messages to Congress telling them that they didn't want to pay for the inherent instability and contradictory nature of capitalism. The act worked, the bailout was rejected and the financial capitalists faced a setback in their goal. The system had for once finally done what it was it was always claimed it would do.

The reaction by the financial capitalists was as to be expected. The stock market plummeted from disappointment that there would be no bailing out. No doubt some panic had set in as well; the pending absolute destruction was still on its way. The talking heads of the media went out on television and argued that those who argued against the bailout should be removed from office so that this emergency could be taken care of. At this moment it could not be plainer for the public to see that the media is owned by the capitalist class, and thus ignored what the people wanted in favour of the interests of the capitalist class. If there was any moment for the people to come to the obvious realization of the class reality of capitalism, it was now... but once again they didn't.

Unfortunately, as people were about to learn, the system is limited by the people who actually control it. The capitalist class was going to get what they wanted even if they had to entirely subvert the theoretical democracy in order to get it. Immediately the Democrats became the best friend of George Bush and Wall Street. The union of the two parties became so apparent at that time they were virtually identical. (Usually we can see some flavour differences, but they were gone at this moment.) The whole of the US government showed us, without veil, who really held power in our bourgeois democracy: The bourgeoisie do.

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A bill (Emergency Economic Stabilization Act of 2008) was tabled with the intention of giving more than $700 billion dollars to the capitalist class. The vote was set up in a way so that the people would not be able to do anything about it. The bill was voted on and passed in what would later be described as similar to an intelligence operation.

Essentially what the world was witness to was the capitalist system once again taking whatever it wanted. This time however, it was to keep itself alive. This act was a matter of life support. To refer to it as simply a robbery is to undermine the seriousness of what happened. It also serves to undermine the necessity of what happened. This was no mere act of greed simply by a few financial capitalist elite. It was a necessity all capitalists shared in order to save the system. This is what is fundamentally misunderstood. Everyone sees this as a theft made by some people who worship greed going too far. This was and will continue to be the very essence of the system itself. Too support capitalism is to endorse these acts. There cannot be capitalism without it. The system would have ceased to function and crashed. You cannot separate the very heart of what capitalism is from these manipulations to obtain the bailouts.

A Very Public Reaction

The result of the bailouts left many, many people angry. It was at this time the US government may have feared some kind of revolt. Capitalism or at least the US system in general, must have seemed stagnant and beginning to crumble. (It very well was.) People had now gone through harder times than they had ever faced before. Middle class people had been decimated; they had been knocked from the American Dream into reality. You could say they woke up.

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Fortunately for America it was an election year, which meant the public had an opportunity to do something about it. They could at least in theory, vote those slimy money thieves out of the government. You would think by now people got the idea that voting doesn’t change anything. If they didn't then, they got it after the election.

In retrospect Barack Obama was the obvious choice for US president after such a disaster. Despite the fact that the "hope" and "change" offered by him was false, it was very much what people wanted to hear. This is exactly what people wanted. They had sat through eight years of Bush’s destruction of people's lives. (It was capitalism really, but people wrongly saw this as unique to Bush.) People were tired of the way things were, the same stogy old conservative order that had lead the country into so many problems. The country had hardly gotten better economically after the Dotcom bubble and the events of September 11th 2001. The profits of Wall Street had drastically increased, but the working class was being ground into the dirt.

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By the end of Bush's second people were pretty much fed up with the way he ran things economically.

The other major issue aside from the economy was the ongoing wars in Afghanistan and Iraq. Afghanistan was still dragging on with no end in sight. (To this day the war has still not ended.) The situation in Iraq was beginning to make many people outright enemies of the Republican Party, forgetting of course that in each instance the Democrats had voted to keep hostilities going. War is a hard thing even on the American people who don't actually fight it. When people see what kind of death and destruction the war brought, they started to feel bad about it. Then people (in larger numbers) started seeing that the war was unjust, it was all based on a lie. Being clearly tricked by the Bush administration (really US imperialism) was enough to light the fire that threatened the national order. However much, we don't know, but it was certainly cause of concern for the elites.

What people wanted was change. This is what Barack Obama promised them. The people were clearly tired of the same old

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stuffy conservative rule that had had a pretty strong grip on the country. They wanted fresh blood that was nothing like what was there now. They wanted change, not just in a metaphorical sense; they wanted a whole new America. They wanted the Bush era gone and a new dawn to rise with fresh new ideas and new ways of thinking. Frankly who could blame them? They had been decimated. Young people in larger and larger numbers were coming out to become part of the voting process.

Obama facilitated all of that. For a man running for president, he was young, the bare minimum age of 35 for the office. He had nothing of the financial aristocracy about him. He was well mannered and well spoken, in great contrast to Bush. He often spoke in puzzling jumbled terms and had a habit of spitting on the ground (You know, Texas and all.) He represented the opposite of what Bush made himself out to be. A Texan, down South good old fashioned America. Obama was tall, proud, heavily educated and spoke with an air of confidence that the stumbler Bush never could. Obama captured the imagination of young people everywhere, not just here, but around the world as well. He was not afraid to say things that were considered ungodly and off limits. He said things like "redistribution distribution of wealth", a phrase he uttered before the eyes of Republican tool Joe "The Plumber" Wurzelbacher, nearly send-ing him into conniptions.

Despite this they never let us forget that he too was like us, despite all the education and money and opportunity. He was a father of two children; he was a husband and a family man just like you. He was all these fresh new things, but he was still accessible to the common man, because he reflected many of the things they stood for. He seemed like a white collar, but still cool guy that you could go and have a beer with at the bar. He was embodying everything America, particularly the young wanted.

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All of this was still separate from his being Black. This captured the imagination of so many African Americans. For pretty much forever, African Americans had little reason to like the political system. It is one that had historically blocked them from wielding any power. Obama storms in the room as the head of the Democrats and it was like a new light of hope had gone off. Did African Americans get too excited and put too much faith in him? They certainly did, but who can blame them? They saw a Black man reaching for the Whitehouse. This obviously signaled new possibilities for them; this was in a manner of speaking hope. If a Black man can get into the highest most powerful office in the land, perhaps now anything was possible.

Obama represented a new world of possibilities for America, particularly for working class people who hadn't had it very good for some time now. I personally had warned a friend that nothing was going to change, he didn't listen, and it was hard not to get caught up in all of it. I admit I got kind of got caught up in it a little bit too. The presentation was very convincing. Not just for the people of America, but for the entire world. Leaders from all across the globe were giving the thumbs up to him. Islamic countries that traditionally hated the US were looking at his Muslim father and taking a more positive look at the country. It seemed as though it was possible for Obama to get the US on better terms with long time enemies.

It seemed as though there was nothing the guy couldn't do.

With all this going for him, what did his opponent hit back with? John McCain came off as a boring old man who sought to follow all the aspects of George Bush people hated. You saw that during the election, they tried to distance themselves from Bush, but also tried to show a unity in the Republican Party. This is a pretty good reason why Bush kept his head down during that time. McCain in appearance and speech almost copied Bush, but looked (was) even older. McCain really had nothing to throw at

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Obama other than subtle hints of racism. It was a shame, because McCain isn't racist. He has an adopted Bangladeshi daughter. This made it all the more painful to watch.

Even he knew he was pandering to racist demographics. There was the famous moment when he had to correct an audience member he was talking to in Lakeville, Minnesota who accused Obama of being an Arab. Over and over again we saw these scenes of blatant racism. I remember the Ohio appearance of Sara Palin where they spoke to the crowed about Obama.4 I remember the news report well. One woman there said she was afraid that if Obama won the "Blacks" would take over. She denied that he was a Christian and insisted he was a Muslim. The man speaking after her literally used the N Word to describe him while referring to him as a “second string” N Word. This really made up a lot of what the Republican base was. Door knockers for the Republican Party were advised to play up Obama's Muslim father, and to keep referring to him by his middle name Hussein.

It would have been nothing short of a disgrace to humanity and common sense if Obama hadn't won. Some people, like me, saw this as almost deliberate. I understand the choice of Obama was exceptional, but the actions of McCain and their campaign seemed almost orchestrated. It almost seemed to me as though McCain was supposed to lose. By no means do I wish to end up a conspiracy theorist, but it just looks really suspicious.

With it very clear that the people wanted change in society away from the capitalists wielding power, the people threw their support towards Obama. Sometimes Obama made people wonder where he was going with this "radical" talk of redistribution. It's not really important to them how minimal it was. It was there and that's all they needed to be worried about. With suspicions running high and public anger towards them growing, they did the only thing the bourgeois even need to do:

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Take control of the system, and Obama. How? The same way they do everything else, by owning a controlling portion of capital. In other words, fund his campaign.

It broken down like this5

University of California $1,799,460

Goldman Sachs $1,034,615

Harvard University $900,909

Microsoft Corp $854,717

JPMorgan Chase & Co $847,895

Google Inc $817,855

Citigroup Inc $755,057

US Government $638,335

Time Warner $617,844

Sidley Austin LLP $606,260

You can probably guess what happened next. All that enthusiasm was for nothing. Obama was on the side of the capitalist class just like every other politician in government, and just as the Republican Party is. Every single shred of hope for change was decimated. The capitalist class continued to get exactly what they wanted and even more. The bailout for the banks and others went on.

Here's a short list of who got what6:

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Fannie Mae Government-Sponsored Enterprise

D.C. $116,149,000,000

Freddie Mac Government-Sponsored Enterprise

Va. $71,336,000,000

AIG

Insurance Company

N.Y. $67,835,000,000

General Motors

Auto Company Mich. $50,744,648,329

Bank of America

Bank N.C. $45,000,000,000

Citigroup

Bank N.Y. $45,000,000,000

JPMorgan Chase

Bank N.Y. $25,000,000,000

Wells Fargo Bank Calif. $25,000,000,000

GMAC (now Ally Financial)

Financial Services Company

Mich. $16,290,000,000

Chrysler Auto Company Mich. $10,748,284,222

Goldman Sachs

Bank N.Y. $10,000,000,000

Morgan Stanley

Bank N.Y. $10,000,000,000

This is a pretty impressive grab of cash when we consider that this is only a small portion, but the top portion of the list.

Finally at long last, even the most energetic of supporters saw what was happening. Obama wasn't really all that different in the end. Many people were still hopeful for progressiveness on social issues: racism, sexual minority rights, abortion etc. As time passed on the wars continued. Eventually they were expanded

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into drone programs that pounded countries the US wasn't even officially at war with. Some of them were actually still allies.

The hope and change promised was pretty much dead. All that was left was for the adamant of Obama believers was to make excuses, and tell us that at least he wasn't as bad as Bush was. The final effect was as I think they probably hoped. The people had a pressure valve, they got to let off a lot of steam that had built up during the Bush administration and the crimes they are responsible for. The people had vented their frustration in whipping the Republican Party out of office. With their stream having died out they settled into disappointment... and hopes for the legalization of same sex marriage... and marijuana.

Enter the Utopianists

This depression over the failed attempt to make hope and change was made all the worse much later on once the domestic spying program was revealed. The enthusiasm of all those young people was finally crushed once they realized the system was not democratic. (Actually I would argue that it was never intended to be.) Finally people had to start taking a hard look at the system they were a part of.

People were getting angry again.

In the wake of the reoccurring bailouts and continued wars people were faced with the reality of what capitalism was. Many chose to look the system in the eye and begin to question all that it had told them, all that it had promised them. They question how much of what they were told was truth. For many, this eventually led to criticism of it. For others, this led to the worst act of all... Denial.

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A very interesting thing happened in the US that didn't occur anywhere else in the world. As people began looking into capitalism to see if it was a just system, some simply refused to believe that capitalism could be wrong. They had been told their whole lives that capitalism was the best system in the world ever created which nothing could possibly challenge it. All the alternatives were absolute evil that were coming to kill your family and take away your guns at any moment. Obviously I'm giving you the boogeyman view libertarians and "anarcho"-capitalists have of socialism.

A real dark aspect of America that many, including myself, had thought had been buried or at least pushed to the side showed itself. It wasn't long into Obama's election that the right wing came out in racist droves. I had always known the US was a racist country, I just never knew how bad it was. Right wingers started making lynched effigies Obama, invoking some of the worst horrors of the slavery south. Non-stop accusations of not having been born in America because he's Black would not leave the media. Relentlessly the right wing accused him of being Muslim even though he had been going to the same Christian Church practically forever.

Not long after his election, all the socialist and communist fear mongering by the right wing began taking hold. Almost overnight in America, communism went from being a conspiracy by atheists and Gays to Muslims. Since then there has been this belief that communism comes from Islam. Many people in the media pushed it, FOX News, Glenn Beck, Alex Jones, and even Republican Party officials. You might say Glenn Beck and Alex Jones are just nuts, but they're nuts with a lot of people who follow them. It's not so much how fringe the people are, but how much influence they have. It's the fact this ridiculousness became so popular out of nowhere. This belief just materialized out of nothing but stupidity and hate.

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From day one this baffled me, how they can suddenly make that connection. As if the previous fifty to sixty years of Soviet Union bashing as being some godless empire just simply never happened. It's just unfathomable to me how people can just go out and be so blatantly racist. People went out and started connecting Islam to big government, and to socialism. I just can express how astoundingly ignorant it is to me. Every one of these people started complaining about the freedoms that were being taken away by the government, yet when these same freedoms were taken by Bush they spoke not a peep. All of a sudden it became Obama the Muslim Brotherhood is taking away our freedoms in order to force people to convert to Islam. Which by the way never happened, nor did the knock on the door in the middle of the night to take people's guns away either. What did these people harp on about? Obama's birth certificate, this was the main focus of attack, the cloak placed over racism that was used.

Not everyone reacted with this stupidity. Some decided to react by reaching for utopian visions.

For some reason which is beyond me, some people in the US just absolutely refused to investigate what had gone wrong with capitalism, if anything had at all. Instead they read classical liberal economic work incorrectly. They went and read "anarcho"-capitalist economic work like Murray Rothbard, Ludwig von Mises, and Frédéric Bastiat. These authors had utopian views of capitalism that rested on some pretty grandiose views of how economics worked. These men promised that capitalism can do anything, create the greatest of all possible worlds. This could all be done; you could all be "rich, rich, rich" if only the state wasn't in the way. The conclusion, to libertarians/anarcho-capitalists had been reached: it was all the state's fault. The state caused the global crisis of capitalism. In that it wasn't capitalism at all. “Real” capitalism according to

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their opinion had no state whatsoever. Thus we witness the birth of, "That's not real capitalism!"

Rather than seek to understand capitalism, or even try to see if anything went wrong, they just shut down and went into denial. They stood from the praxeological axiom that capitalism was good and socialism was bad. Socialism is government so therefore all government must be socialism. Because of this, they determined that since the US has a government, the US must be a socialist country. Without using too many words, these people had decided that they were living under a socialist totalitarian dictatorship. The rest of us in the world looked at them as if they were insane, or just tremendously stupid.

This I find is a unique characteristic of the US people. "American exceptionalism" is a term that is used to describe this mentality of the US. They are a superior group of people, often this is based two beliefs, usually one or the other, but sometimes both. Either God blessed America to be a powerful and righteous nation, or there was some kind of quality inherent to Americans that made them superior to all other countries. This is wholly reflected in the application of their "anarcho"-capitalist ideology. This social arrogance is what drives the near delusional nature of their supposed superiority and their belief in an economic theory that has never been supported by empirical data. Not that empirical data actually means anything to them.

The position they hold, whether they know it or not, is that they are perfect and moral. Capitalism itself must be perfect and moral because it is an extension of them. Now because they cannot be wrong, and capitalism can't be wrong, there must be something else at work there. It is in their mind that some outside influence, some evil corrupting force is keeping them from their "deserved" and God sent prosperity. That invading outside force was to be declared the government. For them,

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there cannot be anything wrong with capitalism, it can't have flaws,

Blaming outsiders, real or not, is by no means unique to libertarians/"anarcho"-capitalists. The US has a long history of blaming others for their own failings or outright repressive behaviour. In the past accusations against women for being witches were just to justify the slaughter of women who dared challenge their husband's authority. Accusations of Native Americans being inhuman savages were used to justify murdering around 100 million of them to take their land. Rising civil rights concerns were blamed on communists to justify the brutal repression of sections of the US public that wanted equal rights. When employment began to decline in the late 70s and early 80s, immigrants were given blame. This happens even to this day. It would seem that all through the centuries of US history; everything was the fault of someone else.

Capitalism had brought economic depression, war and destruction. This is the reality of capitalism, no matter how much those who support it try to hide it. It was in this time where capitalism was fully exposed for what it was that the utopianists began promoting their ideas. As the long held belief in the invincibility of America was shaken, people like Ron Paul stepped in with their extremist ideas about property. The Koch Brothers began peddling Austrian economics to justify the further deregulation of industry and finance. Those who ideas had been laughed at in US society (and the world) for so long now found willing ears in those who refused to accept the limits and flaws of capitalism.

Money from the Koch Brothers flooded into "institutions" dedicated to promoting the ruling class economic ideology that Austrians follow. The Mises Institute, the Heritage Foundation, Lew Rockwell.com, the Cato Institute, to name a few started

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pushing this frankly utopian view of capitalism. They've come in making utopian promises of capitalism making everything work.

This didn't just come from billionaires looking to promote deregulation, bottom level libertarians/"anarcho"-capitalism supporters came up with new ideas. They flooded the internet with claims that they could come up with alternate methods of production and exchange that could (laughably) challenge the power of large productive firms and bring down the Federal Reserve. Some of which were actually created by large productive "not real capitalist" firms. These people found what they believed were means by which to produce and exchange outside the mainstream economy. These methods and creations are utopian. They cannot produce what they believe will come about as a result of their use.

The purpose of this book is to take a look at three of these most famous examples of utopian solutions and show how they cannot solve the contradictions and flaws of capitalism. In addition to them I will also take a quick look at the methodology of "anarcho"-capitalism that leads them to believe these fanciful claims behind these solutions. On top of that I will take a look into their concepts of the Federal Resave and money. When I began looking into these utopian solutions to the contradictions and flaws of capitalism, three of them stuck out right away.

A return to the gold standard is a popular position held by "anarcho"-capitalists. They believe we should return to a position where each dollar in the economy is backed with a particular quantity of gold. This idea is wholly out of date and purely utopian. In the immediate we see that there is nowhere near enough gold in the world to cover the money in the US economy. It is an old idea that was once an effective monetary policy, but its time of usefulness has long since passed. In this book I will show why it can't do what they think it will.

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In an attempt to deal with the central bank having relative control over the currency of the country, a digital usurper was created called Bitcoin by Satoshi Nakamoto. Using the Quantity Theory of Money as inspiration, he name created a digital currency which he hopes people will use instead of the official currency issued by whatever state the user is in. In theory this is supposed to be a monetary solution to what its users think is "out of control" inflation in the US economy.

All these solutions or suggestions if you wish, are all intended to save us from the "false" capitalism we face today. These measures are intended to correct what An-Caps see as statist control of their lives. Gold, and Bitcoin are measures these people intend to build true capitalism and eventually take down the "false" capitalism that rules the world today. The problem is that these are all utopian solutions that offer only utopian promises. The supporters of these measures have a vision of how an economy would work with these. Their vision does not correspond to how an economy works, it does not jive with how capitalism works.

I don't want to get too much into what is wrong with these ideas because they each have their own section of this book. But before I get into these proposed ideas, I think it's important we go over the methodology used by people who support such things. All of these are primarily based on Austrian economic ideas. The state as an evil influence upon capitalism pretty much all stems from this economic school of thought. It would be helpful to go over the basis for their school and see why it leads them into such utopian ideas.

No amount of tinkering with capitalism in these regards is going to save the system from itself. There is no solution to the contradictions that pervade the capitalist mode of production. It cannot provide for human life on a mass scale, it cannot protect the environment and it cannot sustain itself. These utopian ideas

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do not lead a society into any kind of "real" capitalism. They lead only to false promises.

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II. "Anarcho"-Capitalist Methodology

"...any economic theory depends on certain presuppositions having a sociological character and serving as the basis of an investigation of the economic phase of social life."

- Nikolai Bukharin

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Why Methodology?

To understand why the "anarcho"-capitalist/Austrian economic school has such utopian views, it is necessary for us to look into their methodology to see how they draw such conclusions. (For the sake of clarification I'll be using the term Austrian and An-Cap interchangeably.) If there is no stable logically linked base to an ideology, it will end up producing logically inconsistent results. I choose to critique the Austrian economic school methodology because it is their school whose modern day followers so highly promote the three utopian ideas I will write about in this book. They are the ones who pound the gavel so adamantly in declaring that we do not live in "real" capitalism. It is they who propose these alternatives to the formal economy.

Whenever we are talking about the productive forces of society, we cannot assume them to be separate or compartmentalized away from the social relations that go with them. When we enter into production, either as a capitalist or as a worker, we are engaging in a social relation between people. We have the relationship worker-capitalist. The relationship between he who produces the value and the capitalist owns it and sells it for a profit. This is most definitely a power structure, a relationship. We also see the relationship worker-worker, in which employees interact with each other in the place of production. They have varying hierarchal positions as well. In a workplace it can range from unskilled entry labour, to highly skilled technical labour, to management. Though strictly speaking these managers are not capitalists, they are still employees in which the worker has a social interaction with.

These productive relations build social relations outside the immediate realm of production. People of varying levels of income face entirely different standards of living and access to resources. Those with more money enjoy longer vacations, (if we even get them,) they have greater quality homes in safer

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neighborhoods. People from higher income brackets also enjoy a more favourable relationship with the government, particularly the police. These small examples are enough for you to see how a divide in society builds, and correspondingly, a social relation. This divide, is the social relation we call class. Capitalism is a class based society. There are those who own the means of production and those who do not. It is not enough to simply point out that this class divide exists; we would be negligent if we didn't speak about how it creates an antagonism.

(Even when we carry out our simple day-to-day activities this mode of production shapes our social relations. We don't see people working to produce things; we see things, the commodities themselves. When we go to the store and buy a bag of rice we see a product, not an impoverished peasant farmer in India or China. This can even be demonstrated on the school playground. The child with the most expensive and rare Yugioh cards has a higher social status. I know this is an odd example, but it gets the point I'm making across. It is the fact that the production of goods in society and the distribution of wealth shape our social relations to each other.)

This antagonism between the two main classes forms the basis for Marxist social theory. In society, there is what is called the mode of production, meaning the productive forces of society, i.e. capitalism. This economic relation doesn't just produce the products of our society (social product); it also determines the distribution of wealth in our society. The worker produces the commodity that the capitalist sells. The worker is aware that the capitalist is selling the product of his labour and every other worker there. They see the capitalist growing rich off of their work. This forms the basis for that antagonism between the capitalist and the worker. The question is who owns the value created by the worker. The capitalist would insist that he indeed owns the social product, the worker would say otherwise. In truth, all value is created by the labour of the worker, but since

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the capitalist owns the means of production, he becomes the lawful owner of the social product.

From this antagonism we see the manifestations of it. Capitalism is a system based on the narrow self-interest of the individual. In this mode of production (capitalism) we see how the self-interest of the worker is in direct conflict with that of the capitalist. Each of them seeks to obtain the value generated in production. It is from this that we see the previously mentioned manifestation. The capitalist is always trying to maximize profits, he is always trying to keep as much of the value for himself. He can do this many ways, but it primarily takes the form of high exploitation. It could be a lowering of wages, cutting benefits, have less employees do the same amount work. The worker pushes back in the form of strikes demanding higher wages and benefits, working slower etc. There is an antagonism there that openly manifests itself for all to see.

A particular set of productive forces in society will produce a particular set of social relations. In feudal society we had feudal social relations, Kings, landlords etc. In capitalism we have capitalists and workers. It was the Marxist Antonio Gramsci who created what we know today to be The Base and Superstructure.

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As our societies evolved from hunter-gathers, to primitive accumulation, slave society, feudalism to capitalism, there were different social relations between people. We don't have the same kind of social life now as we did in hunter-gatherer tribal societies. We see and interact with each other differently in different historical contexts. The recognition of this is what Marxism as a science of social change brought to the world of political economy. This is the basis for the Marxist world outlook and our understanding of social phenomenon.

The problem with Austrian economics is that this context simply doesn't exist. They see no historical development of economics. If you ask them, they really do think that the market now is the same as it was during the reign of King Henry. Meaning, they think modern day capitalism (2014) in exchange is the same as it was for peasant weekly markets in the Middle Ages. If we look at what they write and how they describe the act of exchange, they often describe it the same as the feudal era. In their descriptions and explanations there is no difference made between the two. How can they do this? In Austrian economics there is no social context to anything. It is only people exchanging goods and services. There are no social forces described, or more importantly, how the act of exchange affects the social forces.

In the Austrian point of view, everything begins with the act of exchange. Social forces don't interest these economists. In fact they don't even recognize inherent imbalances in the ability to exchange. For example, in terms of sales, a small mom and pop producer has the same ability and power to sell as Wal-Mart does. This is completely ridiculous, Wal-Mart has so much power in the market it has literally driven tens of millions of businesses into bankruptcy. Some people see that there is a disconnect between their macro and micro economic views. This is not correct; Austrians don't have a macroeconomic view. Everything is hyper focused on the simple act of exchange. That exchange is not looked at as existing in a system that can affect that act of

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exchange. Nor do they see how those acts of exchange can affect the system. They do not see the dialectical relationship between the two.

Economics cannot be separated from politics; this is why we call it political economy. Whenever you have an economic theory it has certain presuppositions that have a sociological character. They serve as the basis for the economic phase of social life. Some people may not overtly express them, but even vague opinions of society and its economics forms them, whether the person is conscious of it or not. If you have a belief about how society functions they inevitably form presuppositions on which it is based. For us Marxists we have the sociological theory of historical materialism. The Austrian school doesn't have any defined or vaguely defined sociological basis. Upon beginning an investigation into the Austrian school we quickly see contradictions between their fundamental thoughts on political economy and the actual basis for Austrian economic theory. Austrians have extreme individualism and an unhistorical view point that relies on everything being based on consumption or the single act of exchange.

With this view it is very easy to see why they have no insight into society and why it functions the way it does. This is the primary reason why their economic theories never correspond to reality. This is why their economic theories lead to utopian promises. The theories are idealist, in that they abstract from reality to make unrealistic claims. Methodology forms the basis for an entire ideology. If the methodology is unsound, so will the ideology.

Much of what is written here will be derived from the writings of Nikolai Bukharin in his work “The Economic Theory of the Leis-ure Class”.

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Political Economy: Subjective vs. Objective

The difference between Marx's chosen methodology of political economy and that of the Austrian school have been described as polar opposites. Marx was accused of "extreme objectivism" by his opponents. Most certainly as we will see the Austrian school the characterized by its "extreme subjectivism". Neither I nor any other Marxist sees any reason to disagree with either claim and find them to be correct. The study of social life and the economic life with it can be approached from two different viewpoints. These are again those same two polar opposites. We can begin with an analysis of the society as a whole which we could assume makes the determination of the individual's economic life. This would be to create a theory that would show the connections of various social events and the individual events. On the other hand, an analysis could begin from looking at the connections in individual life, and then assume that these form the social life of society. Meaning we would begin by looking at the small individual economic exchanges to see how they create an entire economy and the social forces behind it. A person has a choice in these two approaches when they want to look at the society and its phenomena.

Marxism has us look at value from an objective stand point. This is the Marxist Labour Theory of Value. This again stands in contrast to the classical economic (and Austrian) position that value is subjective. This primarily comes from the economist Adam Smith who created a subjective theory of value. In his theory, value was determined by an individual's personal estimate of commodities, it corresponded to the quantity and quality of labour used to create them. Marx had the opposing view, an objective view of value. His theory is a law of social prices. Value is expressing the connection between the social productive forces and the prices of commodities that are determined by the market. What Marx is saying is that he is not interested in why people engage in production and exchange

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when it comes to determining value. Society has to exchange; it has to produce, their subjective individual motivation for doing it is irrelevant because it is going to take place anyway. The subjective theory of value sees, “nothing but ‘motivation’ everywhere, for each [individual] economic transaction.”7 Marx holds the opposite. He considers, “the social movement as a process of natural history governed by laws not only independent of the human will, consciousness and intelligence, but rather, on the contrary, determining that will, consciousness, and intelligence.”8

For Austrian Schooler Böhm-Bawerk, in his analysis he saw only the motivations and consciousness of the individual economic person.

“The social laws, whose investigation is the task of political economy, depend on coinciding transactions of individuals. Such uniformity of action is in turn a consequence of the operation of like motives determining action. Under these circumstances, it is not easy to admit a doubt as to the propriety of explaining social laws by tracing them back to the impelling motives determining the actions of individuals, or, by starting with these motives."9

Thus we can see that the difference between the objective and the subjective method is viewing things through the social relations and the individualist methods. This explanation is not complete there is more that must be expanded upon. It is important to emphasize that for Marx the reason why people go into production is irrelevant. It is a given people will engage in economic activity because they have to. Just as important "the economic individual" must be better defined because it is the beginning of all Austrian school analysis. Marx made it clear that the social relations are made by people just as much as the products they produce in production. This does not mean

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however that the social consequences of the production of the social product are contained within each of the individual's consciousness as an impelling motive.

Modern society, with its chaotic structure, with its market forces and their elemental action (competition, varying prices, etc.), provide us examples in favour of the assumption that the “social product” dominates over its creators. This shows that the result of the motives of the individual economic men, not only does not correspond to these motives, but at times even enters into direct opposition to them. To clarify with a good example, we should look at the determination of prices. Buyers and sellers go into the market with a general idea of the value of their goods as well as the goods of others. (When you go to the grocery store you have a general idea of what bananas cost, and the producer has a general idea of what he can sell them for.) When the struggle between what people are willing to spend and what producers want to sell them for is complete, they arrive at a certain market price. This price will not correspond with the estimates people on both sides made beforehand. In this market determination of price, producers run the risk of having a price established that will cause a destructive effect. The market may determine a price that will force them to go out of business; there can be circumstances in which profitability will not be possible. Another prime example of this is making money on the stock exchange where the entire sphere acts as a gigantic gamble.

In capitalism (or any economic system) there can be an investigation into the individual intentions of people entering into production and the social forces driving production, but these two cannot be seen as completely independent of each other. It would be ridiculous to claim that human history is not made by the wills of men, but in spite of this will, precisely the opposite is the case. Both of these forces, the individual transaction and the social phenomena are in an organic

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relationship with each other. The results of the individual acts can only be seen as objective if you ignore the social context in which they exist. Meaning, the individual economic exchange can be seen as the point of departure for analysis only if you remove the social forces that influence it.

The “product” dominates its creator; at any given moment, the individual will is determined by the already achieved resultant of the clash of wills of the various “economic individuals.” The entrepreneur defeated in the competitive struggle, the bankrupt financier, are forced to clear the field of battle, although a moment ago they served as active quantities, as “creators” of the social process which finally turned against them.10

This event displays the irrational nature of the "elemental" (competition, varying prices, etc.) character of the economic process of a commodities economy. This is the basis for what Marx described as the psychology of commodity fetishism.

What we are really dealing with is a series of individual phenomena that exist in a number of social phenomena. There is a connection between both these types of categories (individual and social), and between the various phenomena in each category. This is especially true of the social phenomena that are dependent on each other. This is what Marxist analysis is all about, the study of the relations between the various social phenomena. What Marx does is study the casual nature of the results of the various individual wills, without examining the wills themselves. He investigates the laws underlying social phenomena without paying attention to the phenomena of the individual consciousness.

We will now look at Böhm-Bawerk and his "economic subjects".

Böhm-Bawerk sees the "economic subjects" as the atoms of society. He, like almost all Austrians, does not begin any

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investigation with a single person acting in his social relations with other people. He only looks at the "economic Robinson Carusoe". A single lone producer engaged in exchange removed from the context of a society that has social relations: “A man is seated by a spring of water which is gushing profusely”, a traveler in the desert, a farmer isolated from the rest of the world, a colonist, “whose log-cabin stands lonely in the primeval forest”. Already we see from the beginning that the Austrian examples of exchange only work if you remove the act from the society in which it takes place. This is by no means limited to just Böhm-Bawerk. Frédéric Bastiat also presented the same way of approaching analysis. In his work Economic Harmonies, Bastiat says:

“The economic laws operate in a uniform manner, whether we are dealing with a totality of lonely persons or with only two persons, or with a single individual, obliged by circumstances to live in isolation. If the individual could live for a period in isolation, this individual would simultaneously be a capitalist, an entrepreneur, a worker, a producer, and a consumer. The entire economic evolution would be realised in him. By reason of his opportunity to observe every step in this evolution, namely: the need, the effort, the satisfaction of the need, enjoying the free use of profit of labour, he would be able to form an idea of the entire mechanism, even though it might be in its simplest form.”11

He also says the following in the same book:

“I maintain that political economy would attain its goal and fulfill its mission if it had finally proved the following fact: that which is right with regard to one person is also right with regard to society."

W. Stanley Jevons makes a very comparable declaration:

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“The general form of the laws of economy is the same in the case of individuals and nations."12

This is a prime mode of thinking for not just Austrians but classical liberals as well. The difference is that Austrians take this to an absurd degree, as a literal truth. Despite the fact it has been held for a long time, it is completely fallacious. Society is not a mathematical equation of solitary individuals. The opposite is the truth; each specific individual act is pre-supposing a definite social environment in which the social relation of the individual economies finds its expression. The motivations of an individual acting in isolation are entirely different from a person acting in any particular social setting. The former lives in an environment of basic conditions in often primitive settings in absolute simplicity. The latter is not only surrounded by such conditions, but also by a social milieu. This use of economic actor working and trading in complete isolation makes exchange and production entirely disconnected from society. On what basis does Austrian economics think they can analyze or ever explain the economic activity of a country? Their entire, their point of departure for analysis pre-supposes the non-existence of society. You could of course take a bunch of these isolated economic examples and force them into a "totality" or economic theory. They would however literally not be a society. The totality brute forced by Austrian economics would have to be one completely artificially constructed. The Marxist one would not be, because it is an analysis of society. From this we can determine that a single economic subject (a person) is not an isolated "atom", but a member of a social economic system. The actions of this economic subject adapts its actions according to the prevailing conditions of the social phenomena in which it finds itself. Those prevailing conditions of social phenomena impose limits or constraints on the individual motives. This true not only of the Base, but also of the Superstructure as described in the introductory section of this chapter. As an example we once again turn to prices. The

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individual estimate of prices will always begin with prices that have been fixed; the desire to invest capital in a bank depends on the interest rate at the time; the investment of capital in a particular industry is determined by the profit yielded by the industry; the estimate of the value of a plot of land depends on its rent and on the rate of interest, etc. Individual motives have their "opposite effects", but we must keep at the fore that they contain a social content, and thus no "social law" can be determined from the isolated subject. You cannot determine a social form from an individual's motives devoid of a social context, because all individual motives exist in a social context that influences them. The opposite is also true, if we begin an investigation into the isolated individual presupposing the social factors as given, we will trap ourselves in a loop:

"[...]in our attempt to derive the “social,” i.e., the “objective,” from the “individual,” i.e., the “subjective,” we are actually deriving it from the “social,” or doing somewhat worse than robbing Peter to pay Paul."13

As we can clearly see, the motivation of the individual isolated economic actor is the beginning of any investigation by the Austrian school. This not to say that they never display a correct representation of the social structure overall. The problem is that they begin once they start this analysis with the individual motivations they not add into the social connections between them. At one time this was a common position held by bourgeois economic theorists. Today this is not taken as truth; Keynesians accept that there are social forces that affect the act of exchange. However, to this day the Austrian school still proclaims this lack of social connection between economic actors to be an adequate representation of economics. It continues to be the basis for their development and introduction of new theories.

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It is this fallacy in dealing with social forces that leads the Austrian school to their entirely subjective view of value. This subjectivism is the basis for their entire theoretical structure. This is one of their most holy of holy ideas held. As long as value is subjective, it justifies the theoretical system of capitalism. Despite this reverently held belief, this fallacy alone can provide us the firepower to destroy this economic theory alone. It should be noted in addition, that the actual capitalist class doesn't give these ideas any mind. Actual capitalists know that these economies don't work, nor are sustainable in the way which the Austrian school describes. There are of course a few "power players" in capitalism that fund the spreading of these ideas. Primarily they are intended to achieve the objective of ending regulation.

The intentional isolation of the economic subject in the Austrian school, the ignoring of the social relations, is the logical failure of their entire ideology. The question before us now is to ask if it is possible to set up a "theoretical formulation of the economic life". Can the Austrian school determine what its casual laws are without taking into account the causal laws of individual motives? Can they present an objectivism which constitutes the basis of Marxist theory? Böhm-Bawerk himself admits this possibility: “Not, to be sure, causally conditioned actions without causal motivation, but indeed a recognition of causally conditioned actions without a recognition of the attending motivation!" But Böhm-Bawerk assumes that “the objectivistic source of knowledge ... can contribute at best only a very small part, and one especially insufficient for its own purposes, or the total attainable knowledge, since we are concerned in the economic field particularly with conscious, calculated human actions.”14 As we have already demonstrated, it is these individualistic psychological abstractions that the Austrian school propounds that cause them to consistently fail in analysis. It is not so much that it is an abstraction; it is a necessary element in the process of collecting knowledge. The failing of

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their abstraction is that it ignores the social phenomena which they are studying. You cannot go directly from the individual to the social, even if there had been a historical process of transition. Even if this had actually happened, there would be a solid historical description of this development. Even if it had, it would be impossible to set up a theory.

Okay say we create a fictitious world as Austrians always do. In this world particular isolated producers enter into an economic exchange with each other. Say they are united in this exchange of goods and eventually develop a society of exchange on the modern model. Now let's look at the subjective evaluations made by these modern men. These evaluations are based on the prices formerly established. These prices would, in turn, be shaped from the motives of economic subjects of the past; but those prices have been dependent on prices established by an even earlier period; these two have are the result of subjective evaluations based on even more ancient prices. From this we finally are faced with the evaluations being made by individual producers no longer involving any element of price. This is because the social bonds, the society itself, are removed from them. This analysis of subjective evaluations that begin with the modern man, ending with the hypothetical Robinson Crusoe; would really be a historical description of the process of transformation of the motives of isolated man into the motives of modern man. The analysis would actually proceed in the opposite direction of which we are supposed to go. Even then this analysis is merely a description. It is equally impossible to create a general theory of prices or a theory of exchange in the same way. Any attempt to build such a theory will lead us to fallacious circles in the system, as long as we prevent ourselves from seeing (and explaining) the social element. As long as we focus only on the economic individual in this way and ignore the social forces, we end up not formulating a theory of economic society. If we do (as Marxists do) look at the society and how it affected the individual economic subject, we end up doing

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history as well as economics. This is the point, we have to. Economics (let alone capitalism) cannot be removed from the historical context in which it existed. We have seen just previously what happens if we do this. This is why Marxist economic theory is vastly superior to the completely incorrect Austrian school. For us Marxists, the studying of the society in which exchange takes places allows us to understand it and critique it. This gives us the power to understand why events happen in bourgeois economics. At no point do we simply stamp our feed and heap all blame on the Federal Reserve or the government. It is our Marxian method of analyzing historical characteristics that allows us to formulate theories on political economy. (i.e. a combination of abstract deduction and object-tive method that will not lead us into self-contradictions.)

We need a historical point of view.

Point of View: Historical vs. Ahistorical

Karl Marx wrote the following in Theorien über den Mehrwert about Physiocrats1: “It was their great achievement to have conceived these forms [i.e., the forms of the capitalist mode of production] as physiological forms of society: as forms emanating from the natural necessity of production itself, and independent of the will, politics, etc. They are material laws; the fallacy of the Physiocrats consists in having conceived the material law of a specific historical stage of society as an abstract law dominating all the forms of society in a uniform manner.”

1 Physiocrat: a member of an 18th-century group of French economists who believed that agriculture was the source of all wealth and that agricultural products should be highly priced. Advocating adherence to a supposed natural order of social institutions, they also stressed the necessity of free trade.

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This was a description by him of the difference between having a social point of view and a historical-social point of view. It is possible to understand the social economy as a whole, yet not recognize the significance of them as they have developed historically. We face the unhistorical point of view all the time; it's usually accompanied by a failure to comprehend social connections. These two methodological views must be clearly distinguished, for an "objective" approach may not always place things in a historical context. The Physiocrats provide us with a prime example of this.

Marx makes it clear to us that there is a historical character to his economic theories and the relative nature of its laws. “According to his opinion, each historical period has its own laws. ..... As soon as life has gone beyond a given period of evolution, has passed from one given stage into another, it also begins to be guided by other laws."15 This does not mean that Marx did not believe in relative laws that have great influence over the direction of social life and each step in its evolutionary development. As an example, the materialist theory of history creates particular laws that are meant to give explanations of social evolution at every point in its development. These particular laws do not however exclude specific historical laws of political economy. These are different from sociological laws, as they describe the makeup of a particular social structure, in this case capitalist society.

There is a criticism that would easily pop into the reader's mind that should be addressed. If we kept these historical principles it might take us to an entirely descriptive type of theory that became a study of particular scientific facts and processes, which would be distinct from general laws. This is what is defended by a group of people called the "Historical School". However, this criticism would be the same as confusing a number of things. Here it would be beneficial to quote Bukharin:

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"Let us take at random any general method of the idiographic sciences par excellence, for example, statistics: we have the “empirical law” of population statistics that there are between 105 and 108 male births to every 100 female births. This “law” is purely descriptive in character; it indicates no causal relation. On the other hand, any theoretical law of political economy must be capable of formulation as follows: if A, B, C, are present, D also must ensue; in other words, the presence of certain conditions, “causes,” involves the appearance of certain consequences. It is obvious that these “consequences” may also be of historical character, i.e., they may actually supervene only at the given time. From a purely logical point of view, it is quite immaterial where and when these conditions actually occur, even more immaterial whether they occur at all — in this case “we are dealing with eternal laws”; but, insofar as they occur in reality, they are “historical laws,” for they are connected with “conditions” occurring only at a certain stage in historical development. But once these conditions are present, their consequences are also indicated. Precisely this character of the theoretical economic laws makes possible their application to countries and epochs in which the social evolution has already attained a corresponding level; it was possible, therefore, for the Russian Marxists to prophesy correctly the “destinies of capitalism in Russia,” although the Marxian analysis was actually based on concrete empirical material gathered with reference to England."16

What this means is, the "historical" character of the laws of political economy does not transform political economy into an idiographic science. In addition, it is only the historical view point that is of scientific value in this field.

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Political economy as a science can have as its object only a commodities society, a capitalist society. In an organized society there should not be any problems that cannot be solved in the realm of theoretical political economy. These problems are bound up with the commodities economy; this is the most stark in capitalist form: the problems of value, price, capital, profits, crisis, etc. This is not a random or arbitrary occurrence. In the system of "free competition" we have right now, the very nature of capitalism creates these expressions. It is only in the production of commodities, in the capitalist mode of production, that we experience the "fetishism of commodities" that Marx spoke about in Capital. In capitalist society the personal relations between people in the production process become impersonal relations between things. With an analysis of capitalist society we can use a method that looks into the casual connections in the elemental life of modern society. This allows us to formulate some laws that are independent of human consciousness.

This character of commodity relations is itself a historical one that is unique to commodity production. In an unorganized social economy, the organizations of the parts of production are organically developed outside of human planning. In capitalism the manifestation of social economy, meaning the distribution of the social production forces are a consciously planned act on the part of people based on a collection of data. In the current chaos of production, goods are brought to people through a mechanism of prices, by the rising and falling of prices, the pressure to produce profits, by a collection of crises and so on. Meaning distribution is not made by planning, it is made by the power of social forces, a series of social-economic phenomena, particularly the market price. To clarify: Where the productive forces are assigned and what they produce is planned by capitalists, the method of distribution and the act of distribution itself is left up to the anarchy of the market. All of these aspects collected together are what we call political economy. In

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socialist society, political economy will lose its reason for being. In its place will be left “economic geography” (an idiographic science), and "economic politics" (a normative science). The reason for this is because the relations between people will be clear. The "fetishism of commodities" will not form those relations any longer; they will be replaced by the connections made by the conscious planning of society. This reality is alone enough to demonstrate to us that an investigation of capitalism must take into account the traits of it that are unique to capitalism itself. To study capitalism is to study what makes it different from any other social organization that has existed. If we ignore the aspects of capitalism that are unique to it, we produce general ideas that can be applied to any productive condition that cannot explain the particular evolutionary process of modern capitalism.

(This is the fundamental flaw in Austrian economics. They literally detach the act of exchange from its historical conditions. They give us, "A lone producer in the woods" or "a man on an island alone". The removal of economic acts from their context is what causes them to be unable to understand capitalism and resort to, "that's not real capitalism" whenever they can't explain something. That's not what happens in their fictional detached scenario, even though it is a product of the very system they are speaking of.)

When capitalists speak of the eternal harmony of existing social relations, usually they claim that capitalism is natural, it is this law of historical context that they forget. It must also be remembered that capitalism is a developed from of commodity production. What is unique about it is not the act of exchange (as this has existed in other societies as well), but by the fact it is the capitalist method of exchange. In capitalism, our labour power appears on the market as a commodity. Meaning, the economic structure of society (production conditions), not only contains relations among the producers of commodities, but

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also the relations between the capitalist class and the working class. (To the capitalist class we are no longer people, but sellers of a commodity, labour power. This essentially dehumanizes us from people, to a commodity.) Thus we can see that any investigation into capitalism requires not just a look into the general exchange of commodities, but also a look into the specific structure of capitalism itself. If this latter aspect is left out of an investigation, it could by no means call itself a scientific investigation. Such an unscientific investigation serves only the purpose of glorifying capitalism, to uncritically champion the rotten system that it is and ignore its global ill effects. As Marx said with the introduction of Capital:

“The wealth of those societies in which the capitalist mode of production prevails presents itself as ‘an immense accumulation of commodities’, its unit being a single commodity. Our investigation must therefore begin with the analysis of a commodity.”17

We can now see that Marx's investigation into capitalism begins along a historical path, the analysis shows the concepts fundamental to capitalism in its historical context. “Every product of labour,” says Marx on the subject of value, “is, in all states of society, a use-value; but it is only at a definite historical epoch in a society’s development that such a product becomes a commodity, viz., at the epoch when the labour spent on the production of a useful article becomes expressed as one of the objective qualities of that article, i.e., as its value.”18

Marx's words on capital are similar:

“But capital is not a thing. It is a definite interrelation in social production belonging to a definite historical formation of society. This interrelation expresses itself through a certain thing and gives to this thing a specific social character. Capital is not the sum of the material and produced means of production. Capital means

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rather the means of production converted into capital, and means of production by themselves are no more capital than gold or silver are money in themselves.”19

Now, we compare this with the definition of capital according to Böhm-Bawerk:

“Capital as such is the term we assign to a sum total of products serving as means for the acquisition of commodities. The narrower concept of social capital may be detached from this general conception of capital. We assign the term social capital to a congeries of products serving as a means for the acquisition of social-economic commodities; or, in short, a group of intermediate products."20

We can see clearly that these two definitions of capital begin at two entirely different points. Marx places emphasis on the historical character of an aspect as an important trait of it, Böhm-Bawerk completely ignores the historical aspect. While Marx delves into the historically determined relations between people; Böhm-Bawerk instead gives predetermined universal forms of relations between people and things. (For example, assuming all exchange is done on Barter Island.) When you leave out the relations between people being subject to historical conditions, you have only relations between people and nature. This leaves us with only "natural" categories (again we return to the false idea that capitalism is "natural"). If we were to follow this idea as the Austrian School people do, we would be unable to explain social-historical categories. As Stolzmann notes: “the natural categories may only afford technical possibilities for the development of economic phenomena.”21

It is certain that the labour process, the process of production and distribution of commodities can have different historical forms that produce particular social-economic phenomena. Only when the means of production for the sole purpose of producing

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commodities lies in the hands of the capitalist class, leaving the worker only his labour power to sell, do we have the phenomenon called capital. This is where the "profit of the capitalist" begins. This is also true of rent.

That fact that there is a varying ability of soil to produce in agriculture (or diminishing returns from the soil) should not result in land rent. Rent only appears when real estate, which lies on the basis of commodity production, has been monopo-lized by a class of landowners. Capitalism, the process of the production of commodities, leads to a monopolization of land and thus to the phenomenon of renting out land. Land can only be rented out so long as it has a value, meaning you can do something with it. The individual ability of land to produce, which varies, is what gives land its value. Böhm-Bawerk's complaints that his detractors, which he criticizes for not being able to distinguish the difference between "what capitalism is" from "the way it affects the exterior society", are without merit. What he can't do, so to speak, is see the forest through the trees. The essence of capitalism is not in its “aggregate of intermediate products”, but the resulting social relations that come from a number of economic phenomena that did not occur in other periods. It can be said that capital is a product of the means of production of our society today. It cannot be said that modern capital today is a universal manifestation. The capital that exists at any given moment corresponds to the prevailing means of production. Capital is not the same under feudalism as it is under capitalism. As capitalism evolves, the manifestation of capital evolves with it. This can also be seen as "the negation of the negation".

Value itself has a historical character. The way the Austrian school describes the act of exchange is not wrong per se, this would be a correct basis for a subjective view of value. The problem is that the individual evaluations of each producer and consumer are not the same now as they were in simpler times.

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His mind doesn't work the same way, he does not have the same psyche as pre-capitalist man. These detached examples, “sitting by the brook” or “starving in the desert”, do not describe the modern capitalist society we live in. The modern capitalist producer, whether his is industrial or financial, doesn't care about the consumption value of what he produces. His only concern is for production with the intent to exchange it in the market. Meaning, the product produced has not use-value for the capitalist, he is only interested in its exchange-value. From this we understand that value as a key piece of political economy, cannot be explained by using examples and analysis that can be universally applied. It is not enough to just show that commodities satisfy some need; despite this fact, it remains the basis of method for the Austrian school. This us brings us to the conclusion that the Austrian school has a completely incorrect methodology for investigating capitalism as it ignores its

peculiarities. Any method attempting to explain the social-economic relations of people and society must contain a historical view point. Attempting to do so with it can find similarities, like accurately describing the bare minimal exchange between two people. From this it can propose an explanation of how society works, which may describe it in a very vague general sense. It cannot however explain certain aspects of capitalism, because this method of analysis has eliminated them by presupposing that they do not exist. The problem with Böhm-Bawerk is that he gives these completely "hypothetical economies" with "hypothetical examples of exchange". Thus when he investigates "laws" of exchange, they are completely detached from the economic reality they as supposed to be describing. What happens to people, who end up following Austrian economics, is that they do not realize this fundamental error. Böhm-Bawerk himself didn't even seem to realize the limitations of his method of investigation:

“I should particularly have liked to fill the gap still left in the investigation of the nature and importance of the

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influences of the so called ‘social category’, of the relations of power and authority flowing from social institutions .... This chapter of social economy has not yet been satisfactorily written ...... not even by the theory of marginal utility.”22

Already we can see that this "chapter" literally cannot be written in Austrian economics as they don't believe in "social categories" as a part of society, only "economic categories". Supporters of the theory of marginal utility cannot possibly begin to investigate this as it presupposes that it doesn't exist. Because they don't believe in "social category" as an organic part of the "economic category", they end up seeing it as a force which invades from outside of the economy. It is from this that we get the Austrian school claim that certain problems or forces in society are caused by the State. This is why Austrians love to pass off all problems of capitalism onto the government. Often when something negative happens in capitalism which violates the predetermined beliefs of it, the state is blamed with no explanation as to how the state caused it. Sometimes an explanation is given, though ridiculous.

Again Stolzmann criticizes Böhm-Bawerk as someone who does not see the "social-organic" method while he does:

“The so-called ‘objectivism’ thus enters into a new stage, becoming not only social but also ‘historical'; there is no longer any gulf between the systematic-logical science and the historical-realistic science; they now have a common field of labour; both are concerned with the study of historical reality."23

The goal of uniting the abstract classical method with "objectivism" and "historicism" had already been accomplished by Karl Marx.

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Point of View: Production vs. Consumption

“The first theoretical treatment of modern modes of production,” says Karl Marx, “started out necessarily from the superficial phenomena of the process of circulation .... The real science of modern economy does not begin, until theoretical analysis passes from the process of circulation to the process of production.” This is the opposite of what Böhm-Bawerk and the rest of Austrian economic community do; they begin everything with the point of consumption.

Marx sees society primarily as a "production organism" since the basis of life is the production of goods society needs. The economy of said society is the "production process". Böhm-Bawerk on the other hand sees production as merely unimportant when compared to the needs and motivations of the people engaging in exchange. Because of this we can see why Böhm-Bawerk begins with a particular quantity of comm-odities a priori, a “supply” that is only an estimation. This largely unknown variable is the basis for the entire theoretical stance on value.

Since the actual system of production is removed from any analysis, the theory of value the Austrian school presents would be separated from it. He applies the same "isolated abstraction" method in his analysis of value, instead of selling commodities; he has people “dispense with them.” This is why Austrians don't see "production or reproduction" as something to be investi-gated, but something that interferes with analysis. Because of this view it is only natural that "utility" would become a central concept of Austrian economics. It is from this that they get their subjective theory of value. This utility they use doesn't include any "expenditure of labour", its conditions of production, any active relations between people and things. It only includes passive relations, not "objective activity". It is as Bukharin said, "a certain relation to a uniform given state". From this we can

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see that the totally subjective utility theory can be applied to people in the fictional abstract scenarios given by Austrian economics: "A lone producer in the woods" or "a man on an island alone".

This point of view shows us that they cannot understand any social phenomena or their evolution. The social phenomenon is the driving force behind the increase in the productive forces, the productivity of social labour, and the extension of the productive functions of society. No one is negating the fact that consumption is necessary for production to take place, this need will always exist no matter what. What we do recognize is that production has a very prominent manipulative role in consum-ption. This influence of production manifests itself in three ways:

First, production creates the material for consumption.

Second, it determines the mode of consumption, meaning its qualitative character.

Third, it creates new needs.

As Marx said, “Production thus produces consumption: first, by furnishing the latter with material; second, by determining the manner of consumption; third, by creating in consumers a want for its products as objects of consumption.”24

This is fact when we investigate the relationships between production and consumption in general without referring to a particular given historical structure. When studying capitalism there is another aspect that must be considered: “..... The ‘social demand,’ in other words, that which regulates the principle of demand, is essentially conditioned on the mutual relations of the different economic classes and their relative economic position, that is to say, first, on the proportion of the total surplus value to the wages, and secondly, on the proportion of the various parts into which surplus-value is divided (profit, interest, ground-rent, taxes, etc.).”25 The relationship between classes in turn is

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influenced by development under the effects of the growth of the productive forces.

We can see clearly: the dynamics of the requirements are determined by the dynamics of production. Firstly, this means that in an analysis of the dynamics of the requirements, we must first investigate the dynamics of production. If an analysis is based on a static production of a specific quantity of products, it would have to involve a static consumption. If this static conditions is an aggregate of the economic life, it is one of life altogether.

When Marx set out to do all of his economic investigations he determined that the “evolution of the productive forces” was the primary force behind his attempt “to lay bare the economic law of motion of modern society.” This shows that the Austrian school cannot investigate any questions of social dynamics, which are the most important questions of political economy. George Charasof says, “They [the representatives of the Austrian School. — N.B.] are incapable of even formulating, to say nothing of solving, such fundamental questions as the evolution of technique in a capitalist society, the origin of capitalist profit, etc.,”.26 One particular Austrian schooler came to this realization, Josef Schumpeter. He actually published this view telling others that their Austrian approach cannot give to evolutionary processes: “We see, therefore, that our static system,” says Schumpeter, “does not by any means explain all economic phenomena, e.g., interest and the profit of the entrepreneur.”27

“... Our theory breaks down, in spite of its firm foundations, before the most important phenomena of the modern economic life.”28

“It again breaks down in the face of any phenomenon that can ... be understood only from the point of view of evolution. Among these are the problems of the

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formation of capital, and other problems, particularly that of economic progress and crises.”29

The Austrian school clearly cannot answer the questions of political economy. All the great and reoccurring dynamics of capitalism: industrial crises, concentration of capital, uncommon progress in technology, are all things beyond the investigative skills of Austrian economics. Only Marxist economics can do so.

Conclusion

To fully understand why the utopian solutions or "new toys" of capitalism introduced by An-Caps won't work, we need to understand these three fallacies of the Austrian school. In every analysis they make, these errors can be found failing to understand the forces or errors before them. This is why they are failing to confront the current crisis of capitalism with any meaningful effort. They always resort to these three failures when developing new tactics and "new toys".

They will in the ended, based on their false analysis, not be able to fully understand these new utopian tools, and why they don't work.

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III. On Money and Currency

"It is not money that renders commodities commensurable. Just the contrary. It is because all commodities, as values, are realised human labour, and therefore commensurable, that their values can be measured by one and the same special commodity, and the latter be converted into the common measure of their values, i.e., into money. Money as a measure of value, is the phenomenal form that must of necessity be assumed by that measure of value which is immanent in commodities, labour-time."

- Karl Marx

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Money as the Universal Equivalent

To understand how money operates in a system of commodity production we must first understand how money is a tool that aids commodity circulation. For monetary exchange to take place there must be some kind of equivalent possible, the money must be able to represent a particular amount of value in relation to another commodity. Marx brought us the universal equivalent.

In Capital Marx gives us an example:

20 yards of linen = 1 coat

In a sphere of exchange we could trade the 20 yards of linen for 1 coat because they are of equal value. It is the presence of the equal sign which tells us this is so. From this we can determine that in some way 20 yards of linen and 1 coat are the same. But how can they be the same if they are clearly two different things? In this case we ask what is being equated.

As Marx said both of these objects have a utility, meaning they are both of objects of value. We say they have use-values. Both of these objects are measured in some way using some kind of measurement unit. The linen is measured in yards while the coat is measured in individual coats. As we can see these two measurements are quite different. We must measure this way because a coat cannot be divided as linen can and still retain its use-value. This forces us to use the 1 coat as a unit of measurement for this exchange.

In addition there is a qualitative difference between the quantity of linen and a coat. Regardless of how many yards of linen you possess, they are never a coat. The inverse is also true; no the amount of coats they can physically be yards of linen. With this difference they are being equated in some way. For them to be exchanged like this they must be qualitatively the same in some

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way. This shared qualitative property is, as Marx said, the fact that they are both the products of human labour.

In this comparison we can plainly see that the labours for the production of a coat and the production of linen are very different. An hour of labour by one person is different from an hour of labour of another person. Even hours of labour performed by the same person are not the same, different conditions throughout the day or energy levels of the person make for varying levels of productivity.

If all hours of labour are different then how do we make such a comparison? We do this by making an abstraction. This is accomplished by leaving out the peculiarities of each worker and the labour they do. All we need to do is to look at the fact that they are acts of human labour. When we remove all these peculiarities we are left with the one thing that is common to all, human labour.

This looking at labour in the abstract is called abstract labour. It is this that produces the exchange-values in society. This is labour looked at as the general productive power of society. Capitalism which is a system of the production of commodities for the purpose of exchange is a system of abstract labour. On the other side of the same coin is concrete labour which is the production of use-value. It is production for the intention of immediate or personal use, not meant for the sole purpose of exchange.

This is what is being compared in the act of exchange. The shared qualitative property of the coat and linen, which is their exchange, is abstract labour. The unit by which we measure the labour for the process of exchange is time. Marx chooses to use hours of labour for measurement. Concrete labours cannot be compared because they are qualitatively different. This is why we use abstract human labour because it is homogeneous in a way that concrete labour cannot be. Labour in the abstract can

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be broken down into units and measured. Of course we are not claiming that abstract human labour is a physical substance like a raw material we can see in a product. Instead it is a social substance; it is this that is being equated in the comparison of a coat and 20 yards of linen. Wealth in capitalist society is created via abstract human labour.

What do we get when we look at commodity production in this way as oppose to the selling of labour power? Why can't we just assign a labour voucher for the time spent working in capitalism?

First, if we did this we'd see something the capitalist would rather you didn't, the rate of exploitation. In an 8 hour work day the worker would be have to be given a 4 hour voucher because the other 4 would be the surplus value (assuming a 100 percent surplus-value rate). Secondly, we would only be measuring the concrete labor, not abstract labor.

Money and its Categories

1. Price

The first function of money consists of serving as a measure of value, and providing the world of commodities with the material wherein value is expressed.

It is not through the use of money that commodities can be compared or be seen a similar. It is because, as exchange-values they are the product of human labour and that makes them comparable in money. Money as the measure of value is the necessary phenomenal form of the measure of value inherent in commodities, viz., labour-time.

The expression of the value of a commodity in money is its “money form” or price. For instance:

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1 coat = 10 grams of gold

The price of a commodity is quite different from its natural properties. It cannot be seen or felt in the commodity. The commodity owner must express this information to the purchaser. But in order to express the value of a commodity in the gold commodity, meaning to determine its price, real gold is not necessary. The tailor doesn’t need to have any gold on hand to be able to explain the price of the coat which he is offering for 10 grams of gold. Consequently, in measuring value, only imaginary money is used.

Nevertheless, price depends upon the actual money commodity. Apart from all the little things that may cause disturbances, the tailor can set the price of the coat at 10 grams of gold, if there is that amount of socially necessary labour embodied in such a quantity of gold as in the coat. If the tailor expresses the value of his coat, not in gold, but in silver or copper, the price expression will be different.

When two different commodities function as a measure of value, (i.e. gold and silver), all commodities will then possess two different price expressions (gold price and silver price). Every change in the value-relation of gold to silver causes price disturbances. Having more than one measure of value is an absurdity, a contradiction of the function of money as the measure of value. Whenever an effort has been made to legally make two commodities a measures of value, it has always been only one which has in fact functioned as the measure of value.

In 1903, in several countries gold and silver were the official co-existing measures of value. However, life has always shown this to be absurd. Like every other commodity, gold and silver are subject to constant fluctuations in value. If both are made legally the same value by law, and if you can make a payment in either metal, then payments would be made in the metal whose value was falling. The other would be sold according to the price of it

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somewhere else abroad. People will just buy commodities with the metal that has less value and then just sell off the other metal for more in another market where the price for it is high. In countries at the time where there was a double currency, (so-called Bimetallism,) only one of the commodities actually serves as a measure of value, and that is the one whose value is falling. The other whose value is rising will measure commodity prices by its own value, not the commodity itself. If gold’s price is rising, the value of the gold will serve as price, not the value of the commodity. If gold is really valuable it will be worth more than the commodity it will be exchanged for. If the coat is worth 10 grams and the price of gold doubles, the buyer won’t give all 10 gram for the coat, they’ll demand they only pay 5. The greater the discrepancy between the value of gold and silver there is, the more obvious the absurdity of Bimetallism becomes.

If your gold was worth more than your silver why would you exchange with your gold, if in exchange it is worth the same as silver? If the price for a commodity is 10 grams of gold or silver, why would you give say $2 worth of gold when you can give $1 worth of silver if they were considered the same? You wouldn’t, you would hoard the gold and trade with silver. This in turn would cause the price of gold to increase because everyone would be seeking it more than it would be if it were equal to silver, and they would be hoarding it.

For the sake of simplicity in Capital, Marx always assumes gold to be the only money commodity. As a matter of fact, gold tended to become the money commodity standard in all capitalist countries. This is something that is completely overlooked, and often outright lied about in Libertarian literature on Marxist economics. They frequently say that Marx wasn’t taking the gold standard into account, when he in fact was basing all money on gold.

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In the price expression of each commodity, it is imagined to be a specific quantity of gold. In addition it is necessary to measure various quantities of gold which represent the various prices, to establish a standard of price. You have to establish some way of measuring prices against each other in the use of gold. This has almost always been done using its weight, because it is natural to gold and weight is common to all commodities. The weight names of the metal, pound, livre (in France), talent (in ancient Greece), ala (among the Romans), etc., consequently form the original names of the units of the standard of price.

In addition to its function as a measure of value, we will now discuss the second function of money: that of being a standard of price. As a measure of value, money transforms the value of commodities into certain quantities of gold.

The distinction between the measure of value and the standard of price is clear when we observe the effect produced on each by an alteration of value.

Let us assume that the unit of measure of the standard of price is 10 grams of gold. Whatever the value of gold may now be, 20 gram of gold will always be worth twice as much as 10 grams. A rise or fall in the value of gold has therefore no effect upon the standard of price.

Let's assume instead that gold is the measure of values. But the value of gold fluctuates; and one day those 10 grams of gold becomes worth as much as 20 grams of gold. However in the productivity of tailoring nothing has changed. What happens? The price of a coat now amounts to 20 grams of gold because the cost of gold rose. The change in the value of gold expresses itself observably as long as it functions as the measure of value.

The standard of price may be arbitrarily fixed, just like the measure of length. On the other hand this standard requires general validity. In the first place it is conventional and given by

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the traditional use of weight in such exchange. Eventually this is fixed by law. The different broken up parts of the precious metal receive official names which differ from their weight. Prices are thus now not expressed in gold weights, but in the legally valid quantities, with names of the gold standard. (For example, 10 grams = $1, 20 grams = $2. Fixed amounts of gold are made particular units functioning as a measure of value.)

Price is the money-name of the magnitude of value of a commodity. But at the same time it is also the expression of the exchange-ratio of the commodity with the money-commodity, with gold. Meaning, in gold, it expresses the ratio of the exchange of a commodity with the commodity that serves as money. The value of a commodity can never become manifest as an isolated phenomenon, but only in the exchange-ratio with another commodity. However this ratio is subject to influences aside from the magnitude of value. This fact provides an opportunity for a deviation of price from the magnitude of value.

If the tailor says that the price of his coat is 10 grams of gold, or 30s., he means that he is prepared at any time to sell his coat for 10 grams of gold. But he would be premature if he were to say that everybody was immediately willing to give him 10 grams of gold for his coat. The transformation of the coat into gold is necessary for it to fulfill its purpose as a commodity, it has to be sold. The producer of the commodity wants high prices for his goods, but the commodity market works differently in real. The gold is not always spent on those commodities he has produced, and they are left on the shelf unsold.

Let us look at the events of the commodity in its relationship with gold more closely.

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2. Buying and Selling

The tailor goes to the market and he exchanges the coat he has made for 30s. With this money he buys a bottle of wine. Here we have two diametrically opposed transformations: first the conversion of commodity into money; then the re-conversion of money into commodity. But these two commodities on opposite sides of the conversion are completely different. The coat was a non-use-value for the owner, while the bottle of wine does have a use-value for him. The usefulness of the coat consisted as a value, as the product of general human labour; as it can be exchanged with another product of general human labour, with gold. The usefulness of the other commodity, the wine, consists of its material properties, not as the product of general human labour, but a definite form of labour, of vintage, etc. To the tailor the coat had value only in exchange, it was general human labour. The wine is a use-value to him, for him it consists of definite form of labour.

This is the basic form of the circulation of commodities: Commodity–Money–Commodity; (sell in order to purchase).

In these two transformations, Commodity-money and Money-Commodity, the first is the most difficult. There is no difficulty buying when you have money, but it is incomparably more difficult to sell in order to obtain money. And money is necessary to every commodity owner under a system of commodity production. The more the social division of labour is developed, the more one-sided is its functioning, the more manifold it becomes.

If the commodities purpose is to be turned into money, it is most importantly a use-value that satisfies a need. If this is the case and it turns itself into money, the first question must be how much money?

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This question doesn’t concern us very much at this moment. Its answer belongs in the analysis of the law of prices. What we are exploring here is the morphing of Commodity-Money, regardless of whether or not there is a loss or gain in the magnitude of value is involved. The price doesn’t really matter at this moment; we’re discussing how the commodity is turned into money.

Okay, now the tailor has sold the coat and has received the money for it. We will assume that he has sold it to a countryman. For the tailor this is a sale, for the countryman this is a purchase. Every sale is a purchase and vice versa. But where does the countryman’s money come from? He received it in exchange for corn. If we follow the track of the money commodity, the gold, from its source of production at the mines, passing from one commodity owner to another, we find that each of its changes in ownership has been the result of a sale.

The metamorphosis Coat-Money, as we have just seen, is not one but two metamorphoses. The other is: Corn-Money-Coat. The beginning of the metamorphosis of one commodity is also the close of the metamorphosis of another commodity, and vice versa.

Let us assume that the vinter buys a kettle and coals with the 30s. which he received from the sale of his wine. Then the metamorphosis, Money–Wine, is the last link in the series Coat-Money-Wine, and the first two other series Wine–Money–Coal and Wine–Money–Kettle. Each of these metamorphoses forms a circuit, Commodity–Money–Commodity. It begins and ends with the commodity form. But every circuit of a commodity intersects the circuits of other commodities. The whole movement of these innumerable intersecting circuits forms the circulation of commodities.

The circulation of commodities is essentially different from the direct exchange of commodities or barter between two lone

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producers. The exchange between two small producers is the result of the productive forces growing beyond the limits of primitive (or tribal) communism. Through this exchange the system of social labour is extended beyond the boundaries of a community, the effect being that the members of various communities work for each other. But this simple method of exchange formed an obstacle. As the productive forces continued to develop, this obstacle was overcome by the circulation of commodities.

The simple exchange of products requires me to take the product the other person produced while the other person takes the product I produced. This limits the act of exchange because one may have something the other does not, thus making the exchange impossible. This obstacle is removed in the circulation of commodities. Every sale is also a purchase; the coat cannot be sold unless it is bought by another, by the countryman. But it is not necessary that the tailor purchase something immediately. Hey may stash the money in his wallet and wait until later to purchase something he needs or wants. He is also not required to purchase something from the countryman who bought the coat from him, or to buy in the market where he sold it. The time, local, and individual limits of the exchange of products, therefore, vanish with the circulation of commodities.

Another distinction between barter and the circulation of commodities must be made. The simple exchange of products consists in the alienation of unnecessary or useless consumer products. This does not affect the forms of primitive communism, which were forms of production under the direct control of the participants. Meaning useless superfluous commodities didn’t exist in this primitive exchange because the participants were producing for their immediate survival need and a very useful surplus. Because of this, useless things were not produced.

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The development of the circulation of commodities on the other hand, makes the relations of production more complicated and uncontrollable. The simple producers become more independent of each other, but they are more than ever dependent upon social ramifications which they are no longer able to control, as was the case under primitive communism. Consequently the social powers assume the shape of uncontrollable natural forces like storms or earthquakes which could impede their activity or disturbed their equilibrium.

And the basis of such catastrophes is developed with the circulation of commodities. The possibility which it offers of being able to sell without being immediately obliged to buy contains the possibility of congested markets, of crises. But the productive forces must develop beyond the limit of simple commodity production before that possibility becomes a reality.

3. The Currency of Money

Let's remember the commodity circuit is: Corn–Money–Coat–Money–Wine–Money–Coal, etc. The path of this circuit gives a movement to the money, but it is not a circuit. The money that comes from the countryman moves father and father away from him.

The movement of the money given to it by the circulation of commodities constantly sends it further away from its starting point, in order to make it pass from one person to another. This is called the course of money, or its currency.

The currency of money is the consequence of the movement of commodities, not as bourgeois economics thinks, money moves commodities. Commodities don’t move because of money, money moves because of the need to exchange commodities. In the simple circulation of commodities (before commerce and re-selling), the commodity as a use-value soon falls out of circulation and is replaced by a new commodity (use-value) or

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an equivalent commodity-value. In the circuit Corn–Money–Coat, corn disappears after the first metamorphosis Corn–Money, but various use-values return to the seller of corn: Money–Coat. Money as the medium of circulation does not drop out of circulation, but constantly revolves in its sphere.

We now come to the question, how much money does the circulation of commodities require?

We already know that every commodity is equivalent to a certain quantity of money and as a result its price is fixed before it comes into contact with the real money. Consequently, the price to be realized for every single commodity and the total of the prices of all commodities are settled beforehand – assuming the value of the gold remains constant. The total prices of commodities are definitely an imaginary amount of gold. If the commodities circulate, it must be possible to transform the imaginary sum of gold into a real sum of gold. The quantity of the circulating gold is therefore determined by the total prices of the circulating commodities. (We must keep in mind that we are still operating in a realm of simple commodity circulation, where credit money, the adjustments of payments, etc., are as yet unknown.) Assuming that if the prices do not vary, this sum total of prices fluctuates with the quantity of the circulating commodities (the more commodities there are the greater the sum total of prices is). The quantity of commodities remains constant no matter what happens. If inflation takes over, or there is a fluctuation in the market prices, or a change in the value of gold, the quantities of commodities remains the same.

But the sales of commodities are not always partial, nor do they all proceed simultaneously. How many of them get sold does change, they are not all automatically sold, this can fluctuate.

Let's use our former example. We have the series of metamorphoses: 5 bushels of Corn–30s.–1 Coat–30s.–40 liters of Wine-30s.–2 tons of Coal–30s. The sum total of the prices of

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these commodities amounts to 120s, but to effect the four sales 30s. alone are sufficient, which change their place four times, and thus executes four moves one after another. If we assume that these sales all take place in one day, this gives us the amount of money functioning during one day as a medium of circulation within a certain sphere of circulation as

120 / 4 = 30s.,

Or as commonly expressed:

Total Commodity-prices / Times the money changes hands during a definite period = Total money in circulation.

The number of movements made by the various pieces of money in a country is of course a varying one; one coin may remain in your pocket for years, while another moves 30 times in one day. But its average velocity or movement is a definite magnitude.

The velocity of the movement of money is determined by the velocity of the movements of commodities. The faster a commodity disappears from circulation in consumption, the more quickly it can be replaced by a new commodity, the more quickly money moves. The slower the movement of commodities, the slower the movement of money, the less money there is to be seen. People who are only looking at the superficialities then think that not enough money is in existence, and that the shortage of money is the cause of weakness of circulation. While this can happen, it hardly happens in this day for any extended period.

(This is where Keynesians go wrong with quantitative easing and lack of effective demand. This however remains to be discussed in another section of this book.)

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4. Coins and Paper Money

In exchange it was very inconvenient that you had to measure the quality and weight of gold every time. This made it necessary for a generally recognized authority to produce a correct weight and quality piece for money. This eliminated the need to do all the measuring and quality inspecting of every piece of gold in every exchange that needed to be done over and over again. It was from this need that metal coins were created by the State from bars of metal.

The shape of coins comes about as a result of this function as a medium of circulation. But once money was minted into coins, the quality of the coin no longer mattered. The reason is, in circulation the coin was assigned a particular value, independent of the value of the metal. The guarantee by the State that a coin contained a certain amount of gold or was equal to it was enough under the given circumstances to allow it to function as a means of circulation quite well. The same as a full and real quantity of gold.

This is brought about by the currency of pieces of money themselves. The longer a coin remains in circulation, the more it gets used. As this happens its face and intrinsic value will deviate from each other. An older coin is lighter than one that was just minted. Yet, under these circumstances they both may represent equal values as a medium of circulation.

The distinction between face values and real values becomes even plainer when coins began to be manufactured with inferior metals. Inferior metals, such as copper, very often constitute the first form of money, which is later replaced by precious metals. Copper and, after the introduction of the gold standard, silver cease to be the measure of value, but the copper and silver coins continue to function as a means of circulation in petty transactions. Now they are fractional parts of gold; the value they represent varies in the same ratio as that of gold; it remains

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unaffected by the fluctuations of the value of silver and copper. It is manifest that under certain circumstances their intrinsic value as metals has no influence upon their function as coins, and that it may be arbitrarily determined by legislation what quantity of gold shall be represented by a silver or copper coin. It only needed a small step to replace metal money with paper money, to legally make a valueless piece of paper worth a certain quantity of gold.

Let me back up for just a minute. As an example of the problem with pure metal coins that arises, allow me to use my own native Canada as an example. Our 5¢ piece is called the nickel because the coin was made out of the meal of the same name. This became a problem when the intrinsic value of the metal exceeded the assigned value of the coin. People began collecting the coins and then melting them down to sell the actual metal for more than the coins were worth. This ended the nickel being made out of nickel.

Thus as a result, paper money issued by the State came into existence. This is not however, to be confused with credit money, which grew out of another function of money.

Paper money may replace gold money only as a means of circulation, not as a measure of value. The paper itself represents a certain quantity of gold. Paper money as a means of circulation is subject to the same laws that govern the metallic money that takes its place. Paper money can never replace a larger amount of gold than can be absorbed by the circulation of commodities. If the circulation of commodities in a country requires gold amounting to £5,000,000, and the State puts into circulation £10,000,000 in notes, the result would be that I should be able to buy, with two pound notes only as much as with a golden sovereign. In this case, the prices expressed in paper money are twice as high as the gold prices. Paper money is depreciated by its excessive issue.

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This what happened during the World War 1. All the States involved in the conflict chose this method of finance because it was more convenient than the imposition of taxes. Regardless, this excessive issuing of paper money became a form of taxation that was hard on the population. By continuously creating new paper money the State was forcing up prices, and as a result confiscating for its own benefit a portion of the purchasing power of all the income receivers. This was particularly hard on sections living upon fixed sums of money, such as renters, mortgagees and so on, but also the workers and officials, whose incomes exhibit a certain consistency.

At the same time the State destroys its own source of revenue, as the taxes and duties are paid to it in the money that is continually being depreciating. It is therefore never able to cover its expenditure, and is ever and again obliged to resort to the printing press. This can be observed with special distinctness in the States in which the War and the Revolution have administered severe shocks to the national economy.

The most immense issuing of money during that time was the issuing of paper money in Germany. In the year 1914, the note currency amounted to 2.41 milliards of gold marks, in January, 1923 it was up to 1280.09 milliards, and in November it went to 524,330,557 milliards. The gold value of these astronomical figures, were however quite small. It was estimated that all these various kinds of paper money (emergency money) together represented a value of 300.3 millions of gold marks, whereas the total value of the various kinds of money (gold, silver, and banknotes) circulating in the year 1913 was valued at 6,070 millions of gold marks. The value of the means of circulation in October, 1923, therefore, represented only 4.95 percent of the corresponding figure in the year 1913.

From these figures we can see two things emerge: (1) the velocity of circulation was greatly accelerated. Everyone was

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trying to get rid of the money whose value was disappearing, as fast as possible. The smaller amount is compensated for by accelerated circulation. (2) There has been a reduction in the quantity of commodities in circulation, which has considerably diminished the total price of these commodities, reckoned in gold.

The total value of the means of circulation considerably increased and immediately the stabilization of the value of money diminished the velocity of circulation and increased the economic activity, thereby raising the total prices of the commodities in circulation. On the 30th November, 1923, the total means of circulation amounted to 1584.7 millions of gold marks, equal to 26.11 percent of the figure for the year 1913, for the 31st December, 1923, the corresponding figures were 2273.6 millions of gold marks and 37.48 percent.

This measure of inflation was outrageously higher than all the countries, even Russia, Poland, and Austria. It was more than from all other periods such as the Great French Revolution. At that time 45,581 millions of francs of so-called “Assignats” were in circulation during seven years (1790 to March, 1797).

The great fluctuations in the value of paper money, which in particularly severe cases lead to its total devaluation and its replacement by a stable foreign currency, seems to render it inexpedient for the State to issue paper money. Almost always after currency catastrophes of this kind, the State is legally prohibited from issuing paper money. In view, however, of the reluctance to forgo the economies which the circulation of paper money offers in comparison with the pure gold currency, the issue of paper currency is transferred to a bank infested with special privileges and duties. The most important provision among all the statutes of these banks is the obligation at any time to redeem the money tokens issued by them for gold. This redemption obligation distinguishes the banknote from State

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paper money, and places it on an equal footing with paper money.

5. Additional Functions of Money

We have witnessed how simple commodity production spreads and with it an increase in the function of money as a measure of value and means of circulation. However money is not limited to these functions.

During commodity circulation there is a need and a want to keep and hoard gold (the money commodity). The peculiarities of money correspond to the peculiarities of commodity production. Social production is carried out by independent producers so money is a social power. It is not a power exercised by society, but may be the private property of any individual. The larger an amount of money a person has the more social power they have. The more they can enjoy goods, the products of other people’s labour whenever he wants. Gold can seemingly do everything. It is the commodity that everyone wants and everyone will take. This is how gold grew with the circulation of commodities.

Now in the course of development commodity production the accumulation of gold becomes not only a goal, but a necessity. The more products become commodities, the less a producer creates goods for his own consumption, and the more necessary the possession of money is for his survival. He must buy continually, and he must first have sold in order to buy. But the production of the commodities he produces takes time, and their sale depends on chance. In order to keep the commodity production in operation and in order to live during the production, he must have a supply of money. A deposit of is also necessary to relieve congestions in circulation. As we have previously seen, the quantity of money in circulation is dependent on the prices of commodities, their quantity, and the velocity of their movements. Each of these factors is constantly

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changing, and as a result the amount of circulating money is in a state of constant fluctuation. Where does the needed money come from, and where does the money that is superfluous go?

“Hoards of money which accumulate in the most diverse places form conduits which serve now to absorb, now to release money, thus neutralising disturbances in the process of circulation.”

At the beginning of commodity circulation two commodities were always directly exchanged with each other, which is barter. Now it is different because one of the commodities is always a general equivalent, the money commodity. The development of commodity circulation is however different. The alienation of a commodity becomes separated in a point of time from the receipt of the sum of money corresponding to its price. Now we have circumstances which cause a commodity to be paid for before it is received, or, as is often the case, to be paid for later. Here is an example to clarify this point.

“Let us take the case of an Italian silk weaver of about the thirteenth century. He obtains the silk which he weaves in his neighbourhood. But the woven product is destined for Germany, and three to four months must elapse before it can arrive at the place where it is to be sold, and before the purchase money can be received in Italy. The silk weaver has finished a piece of silk goods at the same time as his neighbour, the silk spinner, has spun a certain quantity of silk. The silk spinner apparently sells his commodity to the silk weaver, but the latter does not receive the proceeds of his sale until four months later. What happens? The weaver buys the silk, but does not pay for it until four months have elapsed. Buyer and seller now appear in another light. The seller becomes a creditor, the buyer a debtor. Money also is now invested with a new function. In the

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present case it does not effect the circulation of the commodity; it brings the movement to a close as an independent factor.”

Here its function is not a means of circulation, but a means of payment. It's a means of fulfilling an obligation to supply a certain quantity of values. This obligation does not necessarily arise from the process of the circulation of commodities. The more commodity production develops, the greater the efforts are made to convert supplies of particular use-values into a supply of money, the general form of money. In a similar what is owed to the State is made into money taxes, and that is what is given to officials is money salaries. The function of money as a means of payment now extends beyond the circulation of commodities.

Now let us return to the example. He purchases the silk from the spinner without immediately being able to pay for it. This is not charity; it is business so he must have a way of agreeing to pay in the future. He therefore obtains from the silk weaver a document, in which the latter promises to pay a sum of money corresponding to the price of the purchased silk after four months. But the spinner still has bills to pay before the four months are up. Since he does not possess cash, he pays with the document given to him by the silk weaver. This document now functions as money; a new kind of paper money that has come into existence: credit money (Bills of Exchange, Cheques, etc.).

There is yet another situation that may come up: The silk weaver bought the silk in the amount of 25s. from the silk spinner, but the latter purchased a bangle from a goldsmith for 30s.. Now at the same time the goldsmith received from the silk waver articles of silk of a value of 20s. Now all the payments are due at the same time. All three of our economic actors meet together to settle accounts. The first has to pay the last 30s., and at the same time to demand 25s. from the silk weaver. He pays the

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goldsmith 5s., and refers him to the silk weaver for the rest. The latter, however, has 24s. to receive from the goldsmith; consequently he pays him only 5s. Thus by means of mutual adjustment, three payments amounting in all to 75s. are effected with no more than 10s.

Of course transactions in real life are not as simple as they are in the example. In fact the payments of commodity sellers partly adjust themselves, and indeed to a constantly increasing extent with the development of the circulation of commodities. The concentration of payments at a few places and at definite times creates proper institutions and methods for this adjustment, for example, the virements in medieval Lyons. The clearing houses which serve the same purpose are well known.

It is only payments which do not adjust each other that have to be made in cash.

The credit system thus causes hoarding as a form of enrichment to disappear. Anyone who wants to keep their wealth no longer has to hide gold in their home once the credit system was developed. He can lend out his money. At the same time, the credit does necessitate temporary hoarding, piling up a sum of money which serves to pay debts becoming due on the day of settlement.

Unfortunately for capitalism it is not always possible to accumulate such a hoard. Let’s go back to the weaver example. He promised to pay after four months because he hoped to have sold his commodities by then. But what if he cannot find buyers and makes no sales leaving him unable to pay? The silk spinner is counting on that payment, because of that promise to pay he has made agreements with other producers like the goldsmith. The goldsmith is also counting on his payment to pay another. From this we can see that the inability to pay one involves the inability to pay the others, and all this in a greater degree, the more the system of successive and simultaneous payments and

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their adjustment is developed. Now let us assume that no one, but many producers are unable to sell their commodities due to a general over-production. Their incapacity to pay involves the incapacity to pay of others who have already sold their commodities. The promise to pay now becomes without value as now everyone is demanding cash (the general equivalent). A general shortage of money, a money crisis comes up, which at a certain stage in the development of credit becomes the inevitable part of every production and commercial crisis.

What this shows (in addition to other things) is that in a system of commodity production money cannot be replaced by mere commodity certificates.

Money has two spheres of circulation: the internal market of the community State in question, and the world market. It is only inside a country that money assumes the form of coins and value tokens, not in exchange with one country and another. On the world market, it re-assumes its original form in bars of precious metal, gold and silver. In the past both have served in the world market as a measure of value, while in the sphere of internal circulation only one commodity can really function as a measure of value.

“Moreover, it may be said that since Marx wrote Capital, gold has shown an unmistakable tendency to become the sole money commodity, even in the world market.

“The chief function of universal money is to serve as a means of payment, for the adjustment of international balances.

Further, payments from one country to another take place in consequence of excesses or deficits of imports as compared with exports of commodities, as well as in consequence of payments or revenue in the form of

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interest on and redemption of foreign loans, of emigration remittances, freight, bank and commercial expenses in international traffic (thus almost every country pays England large annual sums for the transport of their commodities in English ships and for the transaction of banking and commercial business by London banks and so on).”

Now that we've been introduced to the general idea of credit, we should see how crisis functions in our modern industrial system, and then return to credit in the financial cycle to see how they flow together.

What is Capital? Now we shall take this one step further. In a system of simple commodity circulation the commodity owner sells his commodities in order to purchase others. While doing this in a society, after a certain amount of time a new form of movement in commodities emerges: buying in order to sell. We already know the formula of simple commodity circulation is Commodity-Money-Commodity. The formula of this new circulation is Money-Commodity-Money.

Now we shall compare the two formulas.

The movement Commodity-Money-Commodity has consum-ption for its purpose. I sell a commodity which does not have a use-value for me in order to purchase commodities that do have a use-value for me. The movement Commodity-Money-Commodity is complete in itself. The money that is collected from the sale is now transformed into a commodity which is consumed, and as such it falls out of circulation. The money itself is spent and increasingly moves farther away from its owner. The commodity that began this circuit is equal to the one

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that closed it. This is under the normal conditions of the simple commodity circulation, and only this is discussed right now.

It is otherwise with the movement Money-Commodity-Money. The purpose of this is not consumption, the final point of this is money. The money thrown into circulation at its beginning is not spent, but merely advanced. It returns to its original owner. The movement is not one that is complete by itself; it keeps repeating itself. The money which was advanced returns, in order again to be thrown into circulation and to return. The movement of money which is set in motion by the circuit Money-Commodity-Money is unlimited, it can keep moving so long as the economy functions.

But exactly what is the driving force of this movement? The motive of the circuit Commodity-Money-Commodity is clear, but doesn't the circuit Money-Commodity-Money seem senseless? "If I sell a Bible, in order to buy bread with the proceeds, the commodity at the end of the movement is different from that at the beginning, although of the same value." One will satisfy a spiritual hunger, the other will satisfy a material hunger. "If, however, I buy potatoes for 100s., in order to sell them for 100s., I am no farther advanced at the end than I was at the beginning; the whole procedure has neither object nor advantage." There is only an advantage if the sum of money at the end of transaction were different from the beginning. But one amount of money is distinguished from another by its magnitude. Thus we can see that the movement of Money-Commodity-Money is only undertaken if the sum of money at the end is greater than the amount at the beginning. This increase in the sum of money is the driving factor for this movement. "On the other hand, the movement Commodity-Money-Commodity only proceeds normally, as we know, if the value of the commodity with which it closes is equal to that of the commodity with which it begins."

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Every purchase is a sale, and vice versa. The movement Money-Commodity-Money seems therefore to run on the same lines as the movement Commodity-Money-Commodity. But we can already see that the two movements are essentially different.

To keep to our example. If I buy potatoes for 100s. in order to sell them again, I do so with the intent to sell them for a higher price of 110s.. Which is the original 100s. plus an additional 10s. for profit. If we denote the commodity by C, the original sum of money by M, the increment by m, we may represent the complete formula in the following manner:

M - C - (M + m)

This m, the increment value, which emerges over and above the originally advanced value at the end of this movement, is called by Marx surplus-value. It is not to be confused with its phenomenal forms, profit, interest, etc., any more than value is to be confused with price. So far our investigation is only concerned with the foundation of the economic categories. This is said to avoid misunderstandings.

Surplus value forms the reason for this movement M - C - (M + m). The value that moves through this form of the circuit is invested by the surplus-value with a new character, it becomes capital.

This movement is the essence of capital. It is value that breeds surplus-value. Those who deny this movement and instead try to show that capital is an inert thing will constantly involve themselves in contradictions. This is the confusion in orthodox text-books concerning the idea of capital and which things should be regarded as capital. Some define it as a tool, which implies that there were capitalists in the Stone Age. Even the ape which cracks nuts with a stone is a capitalist; likewise the tramp’s stick with which he knocks fruit off a tree becomes capital and the tramp himself a capitalist. Others define capital

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as stored-up labour, according to which marmots and ants would enjoy the honour of figuring as colleagues of Rothschild, Bleichroeder, and Krupp. Some economists have even reckoned as capital everything which promotes labour and renders it productive, the State, man’s knowledge, and his soul."

Such general definitions lead only to common places thoughts, not advancing our knowledge of human social forms, how they work, their laws and driving forces. Marx was the first to wipe these commonplaces away from political economy which had ruled for far too long. This applies greatly to the branch which is said to describe the peculiarities of capital.

We have seen that capital is value that breeds surplus-value, and its general formula is: M - C - (M + m). The implication of this is that the money form is the form in which every new sum of capital begins its movement. The facts support this assumption. It is also obvious from this formula that the movement it represents determines the conversion of capital form from the money-form into the different forms it takes in the commodity world, as well as the re-conversion of these forms into money.

What we also see from this formula is that not every sum of money and not every commodity are capital. They only become capital if they execute a certain movement. But this movement is dependent upon certain historical conditions which we shall discuss. The money that I spend in order to buy an article of consumption, bread or a coat, for myself no more functions as capital than the commodity which I myself have produced and sell functions as capital in this transaction.

Means of production, accumulated labour, etc., certainly constitute the material of capital, but only under certain circumstances. If the certain circumstances are ignored, the peculiarities of the modern mode of production cannot be seen. If we don't see the material of capital in our particular

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circumstances, we lose sight of what they do and how they operate.

The Source of Surplus-value We now know the general formula of capital: M - C - (M + m). We do not know the origin of m, surplus value. This formula seems to show that the act of buying and selling creates the surplus-value and that it springs from the circulation of commodities. This is the opinion of bourgeois economics. This is based on a confusion of commodity-value with use-value. This is especially true of the claim that both parties gain in exchange, because each gives what he does not need and receives what he does need. This may be expressed: "I give away something which possesses little value for me, and receive therefore something which possesses more value for me." This view of the origin of surplus-value is only possible where ideas about value are still cloudy. In order to hold on to this view a person has to forget that while the exchange of commodities is based on the differences in use-value, it is also based on the equality of their commodity-values. Unfortunately most people simply accept the stories of single lone producers in isolation as an accurate representation of how exchange is carried out in the real world.

We know now that surplus-value does not originate at the stage of barter, it originates at commodity circulation. It is affected by money and the surplus-value appears in the form of money. "Profit", in the sense of gaining something that has a use-value for me in exchange for something that has no use-value for me, is meaningless to the transaction expressed by M - C - (M + m).

Here we can see the tactics of bourgeois economic thought intended to obscure an understanding our current economic conditions. It attempts to transplant an explanation of profit from a previous time onto our own so that we do not identify the source of our exploitation.

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What we are discussing here is not barter, but the circulation of commodities. Under normal circumstances, neither one can produce surplus-value of equal commodity-values are exchanged.

Let us assume the laws of commodity circulation are violated. Say this gives the commodity owner the ability to sell a commodity at 10% above its original value. The tailor sells his coat for 33s. instead of 30s. But he finds that his cask of wine which he used to but for 30s. now costs him 33s. He has now gained nothing.

We can still make an attempt to explain the origin of surplus-value by the fact that some (not all) commodity owners have discovered how to buy commodities for one price and then sell them for a higher one. For 90s. a merchant buys from a farmer 4 tons of potatoes which are worth 100s., and sells them to the tailor for 110s. At the end of this exchange he finds he has a larger value than he began with. But the sum total of existing values remains the same. At the beginning we had values of 100s. (the farmer) plus 90s. (the merchant) plus 110s. (the tailor) = 300s. At the end 90s. (the farmer) plus 110s. (the merchant) plus 100s. (the tailor) = 300s.

The greater value in the hands of the merchant is therefore not from an increase in values, but from a reduction of the values in the hands of others.

The historical beginning of the appropriation of surplus-value occurred in this manner. From the appropriation of value either by the circulation of commodities through merchant`s capital, or by the means of the usurer's capital. But these two types of capital are only possible by violating the laws of commodity circulation, being the only equal values are exchanged, So long as capital assumed the form of merchant's or usurer's capital it stood in antagonism to the economic organisation of its time. It was also in antagonism with contemporary moral conceptions.

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In Antiquity and likewise in the Middle Ages, trade and especially usury were considered immoral; they were denounced by the ancient heathen philosophers as well as by the Fathers of the Church; by Popes and by Reformers.

If we want to understand the capital which determines the economic structure of modern society, we should not start out with outdated usuer's and merchant’s capital. It was not until a higher type of capital was formed that intermediate types arose which bring the functions of merchant’s capital and interest-bearing capital into harmony with the laws of the prevailing mode of commodity production. From that point on capital ceased to wear the character of simple extortion and direct robbery. Merchant’s capital and usurer’s capital can only be comprehended after the basic form of modern capital has been investigated.

It is therefore understandable why Mary excluded merchant’s capital and interest-bearing capital from the first two volumes of Capital; these books are devoted to an analysis of the basic laws of capital.

As a result we don't need to concern ourselves with the first two mentioned forms of capital. What is to be remembered is that during our investigation we learn that surplus-value cannot arise out of the circulation of commodities. Neither buying nor selling creates surplus-value

But, surplus-value cannot arise out of the sphere of circulation either. A commodity-owner may transform a commodity through his labour and add new value to it (which is determined by the measure of the socially-necessary labour), but the value of the original commodity is not augmented; no surplus-value adheres to the latter through this process. If a silk weaver buys silk to the value of 100s. and works it up into silk material, the value of this material will be equal to the value of the silk, increased by the value which the labour of the weaver has

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created. The value of the silk as such is not augmented by this labour.

We are now faced with a problem: surplus-value is not created by the circulation of commodities. It is not created outside the sphere of circulation.

Labour Power as a Commodity Let’s look at the general formula of capital more closely. It goes: M - C - (M + m). It consists of two acts: M - C, purchase of commodity, C - (M + m), sale. According to the laws of the circulation of commodities, the value of M must be equal to C, and C equal to M + m. This is only possible if C itself is increased, if C happens to be a commodity which creates during its consumption a greater value than itself possesses. The mystery of surplus-value is solved when we find a commodity whose use-value possesses a property that creates value. One that the consumption of creates value. So that in relation to it the formula M - C - (M + m) reads M - C ... (C + c) = (M + m).

Now we know that commodity values are only created by labour. The above formula can therefore only be realised if labour-power is a commodity.

"Under the name of labour-power," says Marx, "we include the entire collection of those physical and intellectual faculties which dwell in the human frame and constitute the living personality, and some of which the individual puts into operation whenever he produces any kind of use-value."

Labour-power has to appear in the market as a commodity. But what does this mean? As we have already seen, the exchanging of commodities is based on the absolute right of commodity owners to dispose of their commodities. The owner of labour-power, the worker, must therefore be a free man, if his labour-power is to become a commodity. His labour-power must

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remain a commodity; consequently he must not sell it outright, but only for definite periods, else he would become a slave, and be transformed from a commodity owner into a commodity.

Yet another condition must be met with before labour-power can become a commodity. We already know that in order for a commodity to be one, its use-value must be a non-use-value for the owner. Labour-power must also be a non-use-value for the worker, if it is to appear in the market as a commodity. The use-value of labour-power is its ability to create other use-values; but this process presupposes access to the necessary means of production. If the worker owns the means of production he is not selling his labour-power, he is using it himself and selling his product. For labour-power to become a commodity it must be separated from the means of production. Most important of them, is the ownership of land.

The worker must be free from any personal dependence, but also detached from the means of production. These conditions must exist before the money owner can transform his money into capital. They are not provided by Nature, nor do they characterise, all social forms. They are the result of a protracted historical development, it is only lately in their development that they are able to. The modern story of capital begins with the sixteenth century.

Now we know the commodity which creates surplus-value. What is the extent of its own value?

The value of labour power is determined like that of any other commodity, by the socially-necessary labour time for its production, by this we mean its re-production.

Labour-power presupposes the existence of the worker. The existence of the worker requires a certain quantity of the means of life for its continuance. This means that the labour-time necessary for the production of labour-power is equal to the

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labour-time socially needed to produce the level of means of life required. A combination of circumstances determines what exactly this "level" is. The more labour-power the worker expends, the longer and more intensively he works, the more of the means of life he requires in order to replace the energy expended, and to be able to work on the next day in the same way. The needs of different working classes changes with different countries according to cultural values and natural needs (like harsh weather conditions n comparison to other countries). "A Norwegian worker requires a larger quantity of the means of life than an Indian; the nourishment, clothing, dwelling, firing, etc., which the former requires to be able to exist necessitates a longer labour-time for their production than the means of life of the Indian worker." In a country where a worker doesn't wear shoes or read books, their needs will be less than those who do require these things. "In contrast to other commodities," says Marx, "a historical and moral element enters into the determination of the value of labour-power."

The worker is mortal; this is a known fact, while capital aspires to be immortal. In order for capital to be immortal the working class must also be immortal. This means he must propagate his species. Therefore the maintenance of the worker must include supporting his children and sometimes his wife.

In the production cost of labour there must also be dealing with the costs of education, there are educational cost incurred by those who require certain knowledge to perform a particular task. For the majority of workers these expenses constitute a diminishing quantity.

The magnitude of the value of labour-power of a particular working class is determined by the particular circumstances it finds itself in.

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So far we have not dealt with price, only value. Not profit, but surplus-value. Therefore you we keep in mind that we are dealing with the value of labour-power, not with wages.

Now we must deal with a peculiarity in the payment for labour-power. In bourgeois economics the capitalist advances the wages to the worker, because in most cases because in most cases the capitalist pays the worker before he has sold the products of the worker’s labour. In reality, it is the worker who credits the capitalist with the work he has performed.

"Let us assume that I buy potatoes in order to distil whisky from them. I pay for the potatoes after I have distilled the whisky, but before I have sold it. Would it not sound absurd if I should assert that I advanced to the farmer the price of his potatoes because I paid for them before I had sold the whisky? No, it is rather the farmer who credits me with the price of his potatoes until I have distilled whisky from them. If I say that I pay cash, I only mean that I pay for the commodity as soon as I buy it. Merchants would be very much astonished at the economic wisdom which asserted that those who only pay for their commodities after they have used them not only pay cash, but even pay in advance."

The bourgeois economists are happy to display this kind of nonsense in front of the workers. If the workers sold their commodity labour-power for cash, they would have to be paid the moment this commodity passed into the hands of the capitalist, and therefore at the beginning, and not at the end, of each week. Under our system of payment, workers not only risk their wages but are also obliged to live upon credit forcing them to live with all the questionable practises of traders. The longer the period of wage payment, the worse the workers are off. A fortnightly or a monthly payment of wages is one of the most oppressive burdens for the wage-workers.

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Whatever form of payment the worker faces, he is always confronting the capitalist (under normal conditions) as two commodity owners who mutually exchange equal values. Capital now operates no longer in contradiction to the laws of commodity circulation, but on the basis of these laws. This lie propagated by capitalism (and in the extreme Libertarianism) is that this is a free and voluntary exchange of values. It most certainly is not.

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III. A Lot of Wrong Ideas About the Federal Reserve and Fiat Money

"Nevertheless, in most advanced countries, the following will be pretty generally applicable. [...] 5. Centralisation of credit in the hands of the state, by means of a national bank with State capital and an exclusive monopoly.” - Karl Marx & Frederick Engels, The Communist Manifesto

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Why the Fed?

There is a great mythology surrounding the Federal Reserve, what it does, how it operates and even who owns it. In modern history there has hasn’t been an institution subject to as much speculation, hysteria and conspiracy as the Fed. Depending on a person’s political and economic stripe there could be all kinds of different accusations that could be made. Anywhere from it being a private bank to it being a global conspiracy by the Jews, or the Illuminati. Obviously as Marxists we would never take such an unscientific approach to anything. To understand the Fed and what it does we must investigate why it exists, what are the conditions under which it was created and what does it actually do.

The most virulent of accusations made against the Fed are made by libertarians and “anarcho”-capitalists. The crux of their arguments is that the Fed is a deviation from their “real” capitalism. To them there is no central bank in a truly free market, otherwise it isn’t free. The problem with their thinking is that it pre-supposes (praxeological) that the market is some kind of natural force like gravity or electricity. Any intrusion into it is considered an invasion of a natural force, and thus since the market is pre-supposed to be freedom it is therefore an intrusion upon freedom. There is no critical thinking in their view whatsoever. No matter what, anything that disagrees with them is automatically an attack upon a certain perception of freedom.

Here I will take on some of the myths surrounding the central bank known as the Federal Reserve. The reason I do so is because the American society is the one that produces the most hysteria and conspiracy around it. Other countries have a much more reasonable approach to their central banking institution. This is not to say such a mentality doesn’t exist in other countries, it certainly does. It is that the intensity and creativity

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of thought surrounding the institution finds its greatest expre-ssion in the American public.

The fact is the Federal Reserve plays an important role in society, one that needs to be understood correctly. All these conspiracy theories abound reflect only the lack of knowledge on the subject. For those who lack a true understanding, anything at all could be the answer to their ignorance regardless of how ridiculous it may be. As the primary banking institution in society it wields significant influence in the economy. I say influence, not control over the economy. The Fed certainly does not have as much power as many people claim. At best the Fed’s job is to keep capitalism from imploding via its own internal contradictions which it attempts to regulate. One must keep in mind is that the Fed’s power and actions are determined by the system in which it exists, in this case capitalism. In another system the central bank operates in a completely different manner, including policies.

There are fundamentally incorrect ideas surrounding the Fed that inhibit people’s ability to gain a correct understanding. By this I do not mean ideological bias, simply a particular economic view does not necessarily make it wrong. Some things are objectively correct or incorrect. With all that having been said, let us get right into looking at the Federal Reserve by addressing some of the most common misconceptions about it.

Who Owns the Federal Reserve?

One of the most hotly debated aspects of the Fed is who actually owns the institution. Whether you are right or left you can find people claiming it to be some kind of conspiracy by the international bankers. We’re probably all familiar with the Zeitgeist movie where they claim a “clandestine” meeting of bankers and government officials on Jekyll Island where they

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conspired to rob the public. This is certainly not the case. Others, particularly the right, continually assert that the Fed is actually a private bank. This seems odd to me because if it was a private bank and they support that, then there should be no problem. Others suggest that it is a wholly state bank which the government uses to secretly inject socialism into the nation. (If this is true they’re not doing a very good job.)

The truth is actually both; it is a hybrid of both public and private aspects. The reason for this lies in the very nature of capitalist banking itself. The market must be allowed to function in particular way or it simply won’t work. The market however cannot be allowed to function completely unhindered by regulation or we get disasters like the Great Depression that caused us to need the central banks to begin with. This is one of those aspects of capitalism that bourgeois economists can’t wrap their head around. The market is NOT a perfect entity. Due to the inherent self-destructive contradictions of a system of private appropriation and common wealth, a system is needed to be set up to try and prevent them from reaching their ultimate conclusion.

Another aspect of the monetary system that nearly all bourgeois economists don’t understand is the creation of fictitious value. In Marxist economics we understand that credit or promises of repayment on interest are fictitious value because they have not yet been realized. They require the creation of value in order to pay these loans or bets back. When a house is sold the cost of the house goes into the mortgage and a little bit extra for profit. This debt that paid for the house is a fictitious amount of capital, or value. It is not real, something of substance until it is paid back. This is one of those moments where money is created upon book keeping entry. What exacerbates this process is the fact that banks hold outstanding loans as assets which represent value on their balance sheets when really nothing is there yet until it has been realized.

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Due to something as simple as this a good deal of regulation is required. This is one of the problems that lead to the creation of the Federal Reserve to begin with. Before the central bank came into existence the “health” of the monetary system was greatly dependent upon the “health” of the private banks. The weakness of this was realized in the late 1800s and early 1900s when a series of financial “panics” lead to serious damage of the banking system for long periods of time and caused recessions to be longer than they could be. There was not a national currency which showed to have several flaws in it. The lack of regulation, counterfeiting, and the creation of extensive fictitious capital, combined with the possibility of bank runs made the system very poor indeed.

Regulation was clearly needed to solve these ongoing problems within the banking system. Solutions were set up to address these problems. Most well known are the National Banking Acts of 1863 & 1864 which brought national currency and some regulation. This did little to combat bank runs which were a big problem. Some clearing houses were set up but they did not have a large enough reach to take care of the rapidly expanding banking system. Later in 1907 the great Depression took place that shattered the US banking system right to the ground. Without this clearing house ability, a large enough one, the banks did not trust each other. This situation was only able to be dealt with when JP Morgan became a kind of central liquidity provider by making massive loans to the banks in New York. (Commonly this is believed to be a conspiracy by the Zeitgeist movement.) At this point it became clear that the system required a national central clearing house to watch over and interconnect the banking system.

It wasn’t until 1913 that that the Federal Reserve Act was created to institute the national banking system. When it was created it came with a central clearing house that could help private banks in times of crisis. Today it also produces a good

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deal of analysis and data collection for the public which is very valuable. This system contains both private and public aspects.

On top there is the Board of Governors which is national. These people are the ones who create the monetary policy the country follows; they handle the regulation of the financial services industry and monitor the nation’s payment system. Underneath them are 12 regional Reserve banks which are owned by private banks. Not all banks are members, only some are. These smaller regional banks offer services for bankers specifically. The very top is a national controlled component and the lower section is privately owned. It is a combination of the two. The adequately reflects the need for some state control over a market to keep it from collapsing in contradiction. Thus far this system has worked out the best for the US.

While these regional banks are owned by private banks their power over them is quite minor due to the structure of it. One of those structural restrictions is that the shares of stock in the regional banks cannot be sold, but they do yield a 6% dividend. This does not provide the banks with absolute control over who leads the bank. These members are obligated to elect 6 of the 9 Directors of Regional Banks which facilitate their daily operation. In this group of directors there are Class A Directors who are elected by member banks to give voice to stockholding banks30. Class B Directors are elected by those same member banks, but their function is to represent the interest of the public. Finally, Class C Directors are chosen by the Federal Reserve Board to represent the public. The Board of Governors are appointed by the US President.

Just as the capitalist system operates in contradiction so does the Federal Reserve. The job of the Fed is to facilitate the system of banking for the bourgeoisie, yet at the same time it is also protecting that same system from them. The bourgeois need someone to keep their unrestrained greed in line that would end

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up destroying their own system. It is presented to us that the Fed preserves the interest of the public in the banking system, but in the end the government itself is also controlled by the bourgeoisie. What the capitalist class needs is a largely autonomous body that represents their interests, but can also regulate their own inherent contradictions and competing interests between each other. The fail safe that the Fed supplies over all is the “lender of last resort” to provide aid to private banks if their health becomes too ill.

From what we have seen here the Federal Reserve is not a private nor is it a public institution. It is clearly a hybrid of the two reflecting the very nature of capitalism itself: the need to run free with markets, but enough restrictions to keep things from getting out of control. As we have seen in the real word its control is not absolute and cannot deal with all the problems that arise from the capitalist money, recession, corruption and unrestrained greed that continue to this day and have their negative effects.

Auditing of the Fed

One of the biggest claims made by libertarians is that the Federal Reserve is not monitored. This misconception stems largely from former congressman Ron Paul who continually called for an auditing of the Fed. The idea behind this is that supposedly the intuition can do whatever it wants to monetary and banking policy without any oversight and thus can do whatever it wants for the interests of the “big banks”. The reality of the situation is quite different. Despite this claim of unfettered central banking, the Fed is actually audited by several parties. Here are the actual rules:

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“Yes, the Board of Governors, the 12 Federal Reserve Banks, and the Federal Reserve System as a whole are all subject to several levels of audit and review:

- The Government Accountability Office (GAO) conducts numerous reviews of Federal Reserve activities.

- The Board’s financial statements, and its compliance with laws and regulations affecting those statements, are audited annually by an outside auditor retained by the Office of Inspector General (OIG).

- The Board’s OIG audits and investigates Board programs and operations as well as those Board functions delegated to the Reserve Banks. Completed and active GAO reviews and completed OIG audits, reviews, and assessments are listed in the Board’s Annual Report. (Before 2002, the reviews were listed in the Board’sAnnual Report: Budget Review.)

- The financial statements of the Reserve Banks are also audited annually by an independent outside auditor.

- Each week, the Federal Reserve publishes its balance sheet and charts of recent balance sheet trends, as well as provides an interactive guide to the Fed’s balance sheet. The balance sheet is included in the Federal Reserve’s H.4.1 statistical release, “Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks.”

In addition, the Reserve Banks are subject to annual examination by the Board. The Board’s financial statements and the combined financial statements for the Reserve Banks are published in the Board’s Annual Report.

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See our audit page for more information on all of the above audits and more information on the accounting, financial reporting, and internal controls of the Federal Reserve Board and Federal Reserve Banks.”31

The reason why there is this idea that the Fed is unregulated or unaudited is because the libertarian view places the Fed as some kind of gigantic monolithic entity beyond the control of regular people. They do not in any way shape or form understand that there is a collective class interest behind the creation of the Fed. Private Banks wanted it because their system was going to be destroyed without it. This conspiracy is also the product of a general ignorance of capitalism itself. Libertarians have a utopian view that the market is perfect and can do no wrong, or that anything the market does is okay because “that’s what the market said.” To them there can be no errors no flaws in capitalism. Thus in their minds any regulation is therefore completely unnecessary. When the problems of the real world strike them, they have no choice but to automatically blame the government or regulation for the problem, because capitalism “can do no wrong”. Since the Fed is the head of banking and has the controls, it is made out to be the target of all the failings of capitalism.

The Federal Reserve is Not a Conspiracy

Whether you’re libertarian right or Zeitgeist liberal there seems to be the idea that the formation of the Federal Reserve is a conspiracy which took place at a secret meeting almost a century ago. Of course I am referring to the now famous Jekyll Island meeting where big bankers and some high ranking politicians gathered to discuss how the central bank should be formed and how it should operate. This is truly one of those moments where imagination has taken over from fact and then transformed into myth and legend. In truth there was nothing

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secret about it, there wasn’t any real attempt to keep people from knowing about it. In fact big business meets with top politicians all the time. This is capitalism after all, it’s their system and they control it. To expect meetings like this not to take place is rather foolish.

In capitalism inherently everything is controlled by capitalists or is controlled by the market which serves capitalism. The politics of the system is no different. All politicians are funded by various capitalist interests in some form or another. We really only need to look no further than who funded who in what election to see that they’re relatively all the same. These politicians represent different interests among the capitalist class who are in conflict with each other. In the case of the creation of the so-called Obamacare it was the interests of employers and insurance companies came into conflict.

Since 1907 there was an effort to bring around a central bank, meaning there was an effort over all that was not secret.32 In 1910 the so-called secret conspiracy meeting took place on Jekyll Island that gave birth to what is known as the Aldrich Plan. This plan was the brain child of several moneyed interests and their representatives in government. Despite what the conspiracy claims the Aldrich Plan was actually defeated in a vote in the House of Representatives in that same year.

The Aldrich Plan called for the creation of a “National Reserve Association” which would be made up of 15 regional district branches and 46 directors pulled from the banking industry. The purpose of the institution was to provide emergency loans to member banks, print money, and act as the fiscal manager for the U.S. government. It also had the idea of allowing State and nationally chartered banks to be able to own specified stock in their local branch.33 The plan was eventually defeated by the Democratic Party who won control of the White House and both chambers of Congress in 1912. Their concern was that the

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government would have too little control. It was also opposed by rural and western states that feared it would become a tool of the bankers to take power in the country (which happened anyway). A large player in the creation of it was the Money Trust of NYC, they were investigated by the Pujo Committee, a subcommittee of the House Committee on Banking and Currency chaired by Democratic representative Arsene Pujo from Louisiana.34 Democrats ran on a platform strongly opposing the Aldrich plan. They instead offered a series of reforms that would protect the public from the "domination by what is known as the Money Trust." The offered alternative was actually quite similar to the Aldrich plan but offered mainly more control to the government. In the end a plan very similar was put into place, the spirit of the Aldrich Plan survived, but not the totality of the power it wanted.35

The final Federal Reserve Act that was passed placed great restrictions on the activities of bankers in comparison to what had existed before. If it was some kind of grand conspiracy it was an utter failure. Much of the insane operations of the unregulated banking industry were brought under reasonable control. What those bankers wanted was an unquestioned safety net for the freedom to be a risky as possible with all the power of the state to rescue it if anything happened. Instead what were passed were a leash and a net that put great restrictions that held the banks back from the worst of their practises. Unfortunately much of those restrictions would be eroded over time. The Fed largely came down on many of the dangerous practises that were taking place.

No one denies that the banks have a good deal of influence over the monetary system, or that they had a good hand in the creation of the Federal Reserve System. It is not however a conspiracy to take over the world and rob the public of all their wealth. This is the capitalist system, capitalists have their hand in absolutely everything, and it is their system after all. However

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rational heads prevailed as appropriate restrictions were placed on the industry to keep it as functional as possible. There is far more to fear from capitalism itself than from the Federal Reserve.

The Fed is Constitutional

Since libertarians have a fetish for the Constitution as though it were some kind of holy document, they point to it in an attempt to show that the Fed is an illegal organization because of it. This view is also largely held by sovereign citizens who believe themselves exempt from society due to a series of bizarre sham definitions of common law. These two groups tend to overlap but hold the same idea that the Fed is somehow illegal according to the constitution. This belief largely stems from an irrational desire to use gold as money as well as a complete lack of research regarding the legality of the institution. The fact is the Federal Reserve is completely legal, it has been challenged in court several times and it has almost always won. Here are some prime examples:

McCulloch v. Maryland

The most famous instance was McCulloch v. Maryland in which the Supreme Court ruled 9-0 that the Second Bank of the United States was constitutional.36 At the time the US government was installing a branch of the “Second Bank of the United States”37 into Maryland. The State government did not approve and began efforts to hinder it. What it did was impose a tax on all banks that were not chartered in Maryland. The logic was that since the Second Bank of the US was technically an out of state bank they felt it would be acceptable. In reaction to this knowing that the law was created specifically to attack the Second Bank, they evoked the Necessary and Proper Clause of the Constitution that gives them (the Federal Government) the

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power to pass laws not specifically mentioned in the Constitution’s list of express powers, only so long as those laws further the power of Congress under the Constitution.

The outcome of the case made two important principles in constitutional law:

1. The Constitution grants to Congress implied powers for implementing the Constitution's express powers, in order to create a functional national government.

2. State action may not impede valid constitutional exercises of power by the Federal government.38

The matter was eventually appealed all the way to the Supreme Court where it was eventually defeated on the ruling of Chief Justice Marshall who presented his ruling with four primary arguments:

1. President shows that the government has the right to create such banks due to the historical constitutional creation of the First Bank of the United States. If he had ruled otherwise this would have made the Federal Reserve illegal. When the first Congress created the bank they did it with the approval by an executive "with as much persevering talent as any measure has ever experienced, and being supported by arguments which convinced minds as pure and as intelligent as this country can boast."39

2. Chief Justice Marshall rebutted the claim that a state has ultimate sovereignty because they ratified the constitution. "The powers of the general government, it has been said, are delegated by the states, which alone are truly sovereign; and must be exercised in subordination to the states, which alone possess supreme dominion."40 The claim was that it was the people who ratified the Constitution not the state. It concludes that the people are sovereign not the states.41

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3. Marshall spoke on the reach of congressional powers under Article I. In it the court laid out the Congress’ authority before they went on to the necessary and proper clause. He said that the Constitution did not give the power to create a central bank but that it did not close the book on whether or not Congress had the power to create such an institution. He wrote, "In considering this question, then, we must never forget, that it is a constitution we are expounding."42

4. “…Marshall supported the Court's opinion textually by invoking the Necessary and Proper Clause, which permits Congress to seek an objective that is within its enumerated powers so long as it is rationally related to the objective and not forbidden by the Constitution. In liberally interpreting the Necessary and Proper clause, the Court rejected Maryland's narrow interpretation of the clause, which purported that the word "necessary" in the Necessary and Proper Clause meant that Congress could only pass those laws which were absolutely essential in the execution of its enumerated powers. The Court rejected this argument, on the grounds that many of the enumerated powers of Congress under the Constitution would be useless if only those laws deemed essential to a power's execution could be passed. Marshall also noted that the Necessary and Proper Clause is listed within the powers of Congress, not the limitations.

“The Court held that for these reasons, the word "necessary" in the Necessary and Proper Clause does not refer to the only way of doing something, but rather applies to various procedures for implementing all constitutionally established powers. "Let the end be legitimate, let it be within the scope of the constitution, and all means which are appropriate, which are plainly adapted to that end, which are not prohibited, but consist with the letter and spirit of the constitution, are constitutional."

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“This principle had been established many years earlier by Alexander Hamilton:”43

“[A] criterion of what is constitutional, and of what is not so ... is the end, to which the measure relates as a mean. If the end be clearly comprehended within any of the specified powers, and if the measure have an obvious relation to that end, and is not forbidden by any particular provision of the Constitution, it may safely be deemed to come within the compass of the national authority. There is also this further criterion which may materially assist the decision: Does the proposed measure abridge a pre-existing right of any State, or of any individual? If it does not, there is a strong presumption in favour of its constitutionality....”

“Chief Justice Marshall also determined that Maryland may not tax the bank without violating the Constitution. The Court voided the tax on the grounds that it was unconstitutional. The opinion stated that Congress has implied powers that need to be related to the text of the Constitution, but need not be enumerated within the text. This case was a seminal moment in the formation of a balance between federalism, federal power, and states' powers. Chief Justice Marshall also explained in this case that the Necessary and Proper Clause does not require that all federal laws be necessary and proper and that federal laws that are enacted directly pursuant to one of the express, enumerated powers granted by the Constitution need not comply with the Necessary and Proper Clause, holding that the clause "purport[s] to enlarge, not to diminish the powers vested in the government. It purports to be an additional power, not a restriction on those already granted."”44

Osborn v. Bank of the United States

During the banking crisis of 1918 there was a kind of credit crisis affecting many of the banks in the country. These banks

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demanded repayment for loans they had made on credit they didn’t have, this of course includes the Second Bank of the United States.45 This caused an economic decline as it created a shortage of money. Then in 1819 Ohio created a law that allowed them to place a tax upon the bank of the United States. The idea was to use this law to collect taxes to take to the state government in order to begin to solve the problem of money scarcity.

On September 17th, 1819 an Ohio Auditor Ralph Osborn was sent to seize $100,000 from a branch of the bank of the United States. However his agents mistakenly took $120,000. They did quickly return the excess $20,000. In retaliation the Bank of the United States chose to sue Osborn in order to take back the remaining $100,000 amount. The ruling declared that Osborn had violated a court order which barred the taxing of the bank. Osborn challenged that he hadn’t been properly served with the order but still had to return the money. In the confusion of the situation it came out that Osborn could not pay back the full amount, only $98,000. The remaining $2,000 had been used to pay the salary of Osborn's tax agents. In 1824, the Supreme Court of the United States ruled in favour of the Bank of the United States, ordering the return of the disputed $2,000.

Essentially it was being argued in a roundabout way that the Fed was not legal. The issues raised were, did the court have the jurisdiction to hear this? More Specifically: Did the act of congress creating the bank give it this jurisdiction? Did congress have the power to do that? All of these were agreed to or affirmed. The statute gives the bank the power to sue and be sued. The executive can execute any law that the legislature can make, and the judicial department can receive from the legislature the power of construing every such law. This was a contract suit, but the contract depends on a law of the US (i.e., the act creating the bank), so a federal court can hear it. It's got a federal ingredient, even though there are non-federal claims.

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Again it came down to the fact that the government needed the necessary power to “expound and enforce their own laws.”46

Nixon v. Individual Head of the St. Joseph Mortgage Company

In September 1981 a pro se (self-represented) litigant Ronnie L.R. Nixon took a mortgage from St. Joseph Mortgage Company, Inc. to purchase a home. Nixon attempted to argue that he did not need to pay back his mortgage of $24,900 because the bank had supposedly not given him “legal money”. His argument was that “the Mortgage Company and others, claiming breach of contract, fraud, usury, "illegality," unjust enrichment and two counts of racketeering because the Mortgage Company did not have "legal money" (i.e., gold and silver coin) on deposit to back up the loan, but instead had only "credit and checkbook money" — a bookkeeping entry for the loan — which cannot be legal tender.” He claimed that the bank loan promises to pay “money”, thus the act of providing him with a bookkeeping entry supposedly violated the constitution which he claimed requires that all money be gold or silver coin, thus causing Nixon an injury.

Banks are already familiar with such ridiculous arguments and as such are skilled in fighting them. The fact is the bank money created by book keeping entry is completely legal. In response St. Joseph Mortgage Company filed a motion to dismiss the claim on that ground.

The motion to dismiss was based on a failure to state a legitimate claim. The court must assume that the facts presented by the plaintiff are true, and then they must decide if the evidence offered supports those claims. A complaint should be dismissed for failure to state a claim only if it appears "beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief."47 This means the plaintiff must prove that an injury was caused to him in order for his suit to be taken as valid.

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The court ruled to have the case thrown out on the grounds that he did not suffer an injury as he describes, nor did the bank commit the actions Nixon alleges. A cheque issued by a bank is not required to be “legal tender” in order for a loan to be considered valid. What was given to Nixon was a cheque that was used to purchase a home, which he did receive by entering into the mortgage. As we can see Nixon received exactly what it was he asked for, a loan to purchase a home. He has not suffered an injury in this transaction. He claims the bank promised to pay in dollars which it did not have to back up the representation of, that being the cheque. Whether or not this money was physically held by the bank is irrelevant because the cheque still allowed Nixon to purchase a house.

There is no fraud as cheques are legal to use. No, it is not legal tender in the same manner as coins or bills, but it does have the quality of negotiability. The cheque is a negotiable instrument under the terms of Articles 3 and 4 of the Uniform Commercial Code. This gives it the ability to be negotiated and used as a medium of exchange if the two parties agree to it, which they did by signing a contract for the loan. When paying a debt you don’t necessarily need to pay in legal tender as defined by Congress48 if both parties agree. In this case it is accomplished by singing a loan agreement. In this situation the cheque has been accepted by all parties. Nixon agreed to receive the cheque via contract, and the person from whom the house was purchased from also accepted it from Nixon. In receiving the house in exchange for the cheque all parties agreed via contract that the cheque was valid. If Nixon’s claim was true, then he would find himself is guilty of this same accusation for exchanging a house for that same cheque.

Another import fact is that these cheques and mortgages can be exchanged or converted into legal tender. Obviously the person who sold Nixon the house took this cheque to his bank and exchanged (cashed) it for money to be used in another

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transaction at some point in the future. Just about any cheque can be used in the same way, particularly one drafted by a mortgage company, can be taken to a bank where it is exchanged for federal reserve notes in an amount equal to the value stated on it. The Mortgage Company's check is a promise to pay legal tender which can be redeemed at almost any financial institution or bank. When the Mortgage Company issues a cheque it will be forced to pay that value of that cheque to the bearer or indorsee at some point in the future. The cheque is a liability for the company thus something of value has been given, a promise to pay the amount on the cheque.

Finally, Nixon’s argument relies upon article 1, § 10 of the Constitution which demands that "no state shall ... make anything but gold and silver Coin a Tender in Payment of Debts ...", but this isn’t applicable here. All the parties in this mortgage transaction are private individuals, not states. When private people engage economically in trade they can exchange whatever they wish if they agree what is being exchanged are of equal value, even banks, they don’t have to be gold or silver. The Mortgage Company traded its cheque for a promise by Nixon to pay executed when the mortgage was created. Nixon himself exchanged that cheque for a house. Nothing in this series of transactions violates a restriction on the states.

Nixon’s own actions indicate his own dishonourable intentions. When he received the cheque he showed no sign of being concerned about its legality. It was only until 1984 when the bank began to foreclose on his home that the lawsuit was filed. He obtained the house, used it, yet he sought to eliminate the cheque. His argument was ridiculous as the marketplace and the law already recognizes "credit and chequebook money". Nixon has no valid claim, and it appears as though Nixon was just trying to get out of a mortgage that he was not paying for whatever reason.

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The Federal Reserve Can Legally Print Money

One of the lesser known arguments in the mainstream media is the claim that the Federal Reserve is in violation of the Constitution. According to believers of the conspiracy theory the Fed cannot legally perform its function because the Constitution states that the government must mint coins, determine their value etc. From this we get the libertarian, anarcho-capitalist, Constitutionalist denunciation of the Federal Reserve. This claim like all others fall to a lack of legal knowledge that is fed by an irrational hatred of authority. (This is not to say that there can’t be a rational hate of it.)

First and foremost it is Congress that has right to coin money and regulate its value. Secondly Congress has the right to regulate interstate commerce. Banking would definitely fall under this power because the law has to decide the outcomes of various legal actions between institutions. Courts have already ruled that banking is an interstate jurisdiction. Thirdly the Congress has the 'necessary and proper' power (Art. I, Sec. 8, Cl. 18) to do what is required to carry out its responsibilities. This includes the power to create a Bureau of the Mint as a mechanism to coin money. Finally Congress has the power of delegation or enumerated powers, “To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures.” This too has already been decided in a court of law.49

How Fiat Money Actually Works

There is a great deal of misinformation regarding how fiat money works in our modern capitalist society. This misinform-mation is spread, of course, primarily by libertarians and anarcho-capitalists who mindlessly repeat what is claimed by former congressman Ron Paul. According to their beliefs fiat

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money is worthless it has no value and thus is should not be used ever. Some even go so far as to claim that any money which is not backed by gold is illegal. Of course this relies on certain false legal assumptions. Generally speaking the libertarian crowd has very little idea how money actually functions, and the role it has in society. This misunderstanding is even greater when we consider their beliefs on how money is created in the monetary system.

The primary cause of their inability to understand how money functions stems from their inability to understand value. Money is a representation of value not value itself. Money is meant to be a mechanism by which commodities are exchanged. When you sell something you are given a particular value in money. That value is then exchanged for another commodity. The money itself is not value, it is a representation of value that is embedded in the commodity which was sold or purchased. Libertarians insist that the money itself must have value. It must be gold or silver or whatever. This is actually not the point, money is supposed to be a means of transferring value, not value itself. It’s true that money carries out other necessary functions as well, but its primary function is to lubricate that act of exchange. Money doesn’t necessarily need to have value. What is does need to have is a guarantee as a representation of value.

How Fiat Money Is

Over the existence of human monetary exchange different things have constituted money: From gold to shells to pieces of paper. All human societies that mass produce commodities solely for the realization of profit use money in some form or another. Today in our modern Western liberal democratic capitalism we have what is called a fiat money system. Even in our monetary system today we have several kinds of money:

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Commodity money - Gold, silver any kind of precious metal that is generally accepted.

Token Money – Pieces of paper or coins that represent value, but are not particularly valuable themselves.

Credit money – Money that is usually only digital but can exist as a paper document, it is created via bookkeeping entry with the purpose of creating a loan.

Money serves a number of functions in society, but here we will be speaking exclusively to it as a means of exchange since that is its primary purpose. It is also the use that best helps us describe the modern fiat money system. Not all forms of money serve the purposes of money equality. Commodity money cannot be used as credit for example, a highly necessary function. Credit money cannot be used as a store of value, commodity money is however excellent for this purpose.

The most common form of money today is fiat money. It is something that exists as money due to a legal declaration, meaning it is brought into existence via law. Fiat is a physical representation of value, not something that is valuable itself. Because of this it doesn’t need to exist as a physical thing, it may also exist as numbers on a computer. It serves well the purposes of a medium of exchange and a unit of account. The government determines that the US dollar is the official currency and is charged with the duty of overseeing its regulation within the US payment system. Other forms of money can exist in the US but only the US dollar applies to the specific US monetary system as a unit of account. For example, you cannot have 1 .lbs of gold as a unit of account, only a “dollars” worth of gold.

Money is important because it makes up our social bond. The reason we produce and exchange all the values that make up our society conform to money at some point or another. It is the means by which we exchange these commodities and gives rise

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to the antagonisms that appear in society as a result. Different forms of money have different “moneyness”. Meaning some forms of money are accepted more than others given personal preferences or material conditions. Cash is almost universally accepted, credit cards less so, gold in few instances.

The primary form of money we use is fiat dollars. Its value is determined by legislation which declares it to be a unit account. We must however acknowledge that money still is a social construct which people trust in for acts of exchange. That trust can be broken if there are particular disasters in the monetary system, or if there is a loss of the US government. Because we use it, it has social power. We produce things and exchange things because we agree to do so in this society. If no one wanted money it would lose all of its power in this regard.

Fiat as Inside Money and Outside Money

Fiat money in America exists in a capitalist system and the Federal Reserve. This means money is largely distributed through private banks which compete for loans that are made by customers in a money lending market place. A majority of all the money in society dwell in banks as bank deposits as a part of the payment system. Money is distributed via a private money supply system to the private banking system. This means that the money we use on a day to day basis is under the control of private banks, not the Federal Reserve itself. However that money is also subject to the market and all the varying forces that come along with it.

Bank money is the bourgeois term for money that is created by the private sector of banking. This includes bank deposits that come into existence via loan creation. This is the primary form of money in our monetary system. It has also become increasingly more electronic as technology has evolved in business, which includes how money is exchanged between customers and businesses, and between businesses. Due to our level of

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development it is now the most common way money is transacted. The days of dollars being exclusively a physical object is now gone, they almost all exist as numbers on a computer.

The way the system works is that private banks function for the creation of money in a market demand for it and circulate it via that same private banking system. That system is regulated by the government as the private banks carry out those functions. While the government merely oversees the process, the private banks maintain the relative autonomy of processing all the transactions that occur within it.

Currently in the United States it is estimated that only 26% of all transactions that take place are done with physical currency while electronic constitutes the rest. It is also a fact that currently 90% of the money in the system was created by private banks. It is believed that cash is the predominant form of money; in fact the digital money is the majority of the money supply. This is what the average person in the U.S. thinks and it is wrong. The incorrect idea held by libertarians is that this digital money isn’t really money at all and that it’s merely a digital representation of physical bills. This too is false. Actually the digital money held in banks is the real money and the paper bills are a physical representation of it. The reality is the inverse of what libertarians actually believe. Cash is “outside” money meaning it was created by the Federal Reserve. This physical money facilitates the exchange of the predominating money form which is digital, the “inside money”.

Let me be clear: digits on a computer are not a digital representation of physical money. Physical money is a physical representation of the digital money if someone wishes to use it in a physical form. This is where libertarians and Venus Project people get their wrong ideas about money. The pamphlet Modern Money Mechanics does say what they claim it does,

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(that creation is upon book keeping entry,) but they don’t understand what it means and how that aspect functions within the monetary system.

Here’s why we have this system of inside and outside money: the money created by banks is inherently unstable because of the institutions that create it and the market for it itself are inherently unstable. The 1800s and early 1900s were fraught with unstable banking that caused many problems and all manner of self-destructive behaviour and attempts by banks to sabotage each other. This happens due to an inherent contradiction within capitalism itself, the production for profit (exchange-value) not its use (use-value). This drive for profits is there very heart of capitalism, something that it cannot exist without even if it threatens to destroy the system itself. As capitalism is functioning properly self-regulation gets lackadaisical leading to instability. The appearance of stability covers the reality of the growing instability that is inevitably coming. Those who lost everything in the Great Recession of 2008 could tell you all about it. The purpose of government money is to help stabilize this product of that contradiction between use-value and exchange-value.

Now for some words on the other kind of money the “outside money”. This is money created outside of the private banking sector. It includes forms such as cash notes, coins and bank reserves. The cash and the coins are created by the U.S. Treasury while the bank reserves are created by the Federal Reserve. These bank reserves are generally considered to be deposits held on reserve at the Fed. As we can see from our current society physical forms of currency are becoming obsolete, but they still remain very useful and important. Physical money (coins and paper) exist mostly for convenience. We can go to the ATM and take money out physically. Thus we see that physical money serves generally those who use inside money and want to use it in a convenient way.

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The most crucial form of outside money is the bank reserves or the deposits that are held on reserve at Federal Reserve banks. The reason for this has a two-fold purpose: 1) to settle payments between each of the banks; 2) to ensure that banks keep the required reserves. These bank reserves are only used between the various banks (or the interbank market) and are not used in the non-bank private sector. Here’s a way to explain it: Banks do business with each other all day moving money back and forth. At the end of the day they add and subtract all the transactions until they get to a final balance that has to be moved from one bank to another. Once calculating all transactions up we find that Bank of America owes Citigroup $50 million from their transactions in the course of a day. That debt is paid by moving BoA’s reserves held at the reserve bank to the account of Citigroup also at the reserve bank. This way they settle their debts with each other in timely manner with oversight. They don’t have to physically move money from one bank to another; the bank’s bank can do it via the interbank system. This interbank system is a market place where the Federal Reserve helps the payments between banks function more efficiently and also provide stability and liquidity when necessary.

The point here is to understand how the outside money’s main job is to keep the system of inside money going. This outside money and the interbank system is used as a tool to facilitate and stabilize the exchange of inside money which is the primary form of money in the economy. The existence of the outside money and interbank system is what gives the government the ability to be a stabilizing force in a system of private banking that is inherently unstable due to its competitive nature.

The most important thing to learn here is that the private banks call the shots, they have the power up until the point where they destroy everything (such as in 2008) and the Federal Reserve, the government, has to come in and fix their errors. Almost all of the money that exists in the economy is created from loans and

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the government’s job is to facilitate this process of private money creation. The government really only prints money to fulfill the need for physical money to carry out the transactions taking place with inside money.

Hoes Does Fiat Money Have "Value"?

Money in capitalism is motivated by several different variables. Given that money is a social construct with no real value, what gives it this value? How does near worthless paper and cheap metals exercise such value? How do digits on a computer do it? In truth there are two answers, a bourgeois economic explanation and a Marxist one.50 For the sake of simplicity and continuity I’ll be using the bourgeois one here. Essentially it comes down to the demand for money into two halves of one whole.

The first is a matter of value because people accept it and the second is its value via its quantity. The first represents society’s readiness to accept the money as valid. If the society chose not to take it, then obviously it would fail. This is made possible by legislation that makes the U.S. fiat dollars legal tender. It has a legal existence with a particular guarantee behind it. In addition to this the government takes up the task of regulating the currency as well. However this is no guarantee of its use alone, the government literally couldn’t force anyone to use it if they flat out refused to. This is also known as an acceptance value.

The other is called quantity value. It involves the currency’s value in purchasing power, inflation, exchange rates, production value, etc. This particularly refers to a currency’s ability to function as a store of value. Generally speaking the value is stable and instituted by legislation, the quantity value is prone to instability that could lead to an entire collapse of the monetary system.

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In the final bourgeois analysis of capitalism this money paper or digital is a representation of some kind of production that can be purchased. The money itself has no intrinsic value, but as a means of moving goods and services through the economy they do. In bourgeois theory the consumer use of this currency depends on the value created in output (productivity), the ability of the government to regulate the currency, and the banking system’s ability to distribute it.

In modern bourgeois economic theory the value of fiat money is taken from three important elements:

1. Output/Production 2. Money Supply Management

3. Laws & Regulation

Production is absolutely important in money having a value. The ability to produce and exchange commodities in the economy is what makes fiat money viable as currency. Thus as we can see the government has a strong incentive to promote production and maintain a sound and properly functioning monetary system and money supply. Doing the opposite would put the economy, the country and possibly a lot more at risk for destruction. The weakness here is that the government is made up represe-ntatives of the private sector who can determine what is acceptable as money and play an important part in regulating the stability and supply of money. Corruption, greed and generally the profit motive places all at risk.

The state cannot be the end-all-be-all of what makes a kind of money acceptable in society. Just because the government says money is valuable doesn’t necessarily make it so. It also involves the other aspects just described. John Maynard Keynes liked to compare money to a movie ticket in order to explain:

“money is the measure of value, but to regard it as having value itself is a relic of the view that the value of

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money is regulated by the value of the substance of which it is made, and is like confusing a theatre ticket with the performance”.51

This seems to be a good description of the fiat money system. The currency in and of itself doesn’t have any value; just as the movie ticket doesn’t have any value outside the paper it’s printed on. The ticket has value according to the show that people are willing to pay to see. The ticket is a representation of that value. Money works the same way; the use of money is only as valuable as your ability to use it. If a movie theatre mismanages the production of the tickets and create too many it will lower the value of the ticket. This is the same as the U.S. government’s regulation of the money used in the economy. The ticket is only as valuable as the quality of the show it lets you into. If the show is good (a high productivity) the remaining number of tickets is not mismanaged, meaning that regulation of the supply of money has been accomplished properly. Just as the ticket has value according to the quality of the show, fiat money has value according to the output and demand of commodities and services in society.

The Libertarian Misinformation on the Money Multiplier

It is clear that the U.S. monetary system was specifically designed to give the power of money creation to privately owned banks. The majority of the money in the system is comprised of bank deposits and most of the private transactions take place with it. Inside money is the dominant form of money in the modern day fiat money system. By comparison the outside money created by the Fed plays a much smaller role but a facilitating one.

While both the government and private banks both issue money, it is the government that issues net financial assets. Banking transactions always involve the creation of an asset and a liability. Banks create money free from total government

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control except for a regulatory framework. Because banks can make money without restriction to their reserves, this leaves the money multiplier with a great potential to be abused.

The problem lies in the fact that the U.S. was designed to be a competitive private banking system. The banking system is not a partnership between private and public designed to serve the interest of the public. The private banking system is privately owned part of a system that was designed for profit. The idea was to decentralize the power of money creation away from a total government control. Much of the controversy comes from the fact that the Fed is an agent of the government that works its policies via the private entities. A lot of people interpret this as the government working with private banks against the needs of the public. The true purpose of the government is to facilitate and support the private banking system. The point of the government is to help create a sustainable credit system while trying to deal with the actions of banks when they come in conflict with public interest. The capitalist money system is an inherently unstable system that requires regulation to keep banks from destroying themselves through the competition mechanism which provides the banks with the very purpose of their existence.

Keep in mind that aside from a little regulation, banks can create as much money as they see fit. A bank takes a deposit and then leverages it up to 10 times. This is why the system is called a “Fractional Reserve Banking” system. The general idea is that banks loan a portion of their “reserves”. However, in reality the banks are not restrained by their reserves. Banks are only ever capital constrained. Some countries like Canada don’t even have reserve requirements.52 The reserves that exist in the U.S. are used for two reasons. First, it is used to settle payments in the interbank system. Second, to meet the reserves the Fed demands of it. The reserves have little in the way to do with the

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day-to-day money lending. The Fed is very open about this publishing this:

“Changes in reserves are unrelated to changes in lending, and open market operations do not have a direct impact on lending. We conclude that the textbook treatment of money in the transmission mechanism can be rejected.”53

This is a very important point to keep in mind because the wrong idea about reserves makes certain assumptions about Federal Reserve policies such as Quantitative Easing (QE). It is from this we get the idea that QE can cause inflation and hyperinflation. In reality what it does is add money to the reserves held by banks usually in exchange for government bonds. Because banks don’t lend or multiply their reserve, it doesn’t mean there will be more lending providing more access to capital.

Now because the banks are not constrained by reserves, it means banks only lend money when a creditworthy customer asks for it. Loans create deposits, not the other way around. Banks will create new loans regardless of their reserves and the Fed alters the composition of outstanding financial assets in order to determine a proper interest rate and insure smooth functioning. In the process a bank first creates a loan (creating a deposit) then will obtain a necessary reserve afterward. (Usually this occurs in the overnight market or from the Fed).

The bank carries out a payment system for the economy to use for transactions. On top of this they create money for the system via loan creation. Banks obtain profits by having their assets exceed their liabilities. The banks need to run their own payment system in order for it to run smoothly, but will do it in a manner that generates profits.

Banks don’t use their deposits or reserves to create loans. Banks make the loans and then later obtain reserves if it is needed.

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Since for banking having assets is cheaper than having liabilities, they look for the cheapest source of funds for their payment system. That cheapest source is usually bank deposits. This is why it looks like banks “fund” their loan book by obtaining deposits, but this it is not always the case. The bank is a spread business where it looks for the cheapest liabilities to sustain its payment system to obtain the highest profits.

Here is an excellent example of how a loan is actually made:

We’ll assume that a bank has $150 in assets and liabilities made up of currency, reserves, equity and deposits. Of this $150, $50 of it is deposits. These deposits are liabilities for the bank and an asset for the household it belongs too. Meanwhile the owners of that money can withdraw it at any time.

The bank has a reserve but it is not necessary to make a loan. All it really has to do is remain solvent according to regulations. When the household wants to take a loan for $80 the bank credits the account of the household. As the new loan is made the household deposits increase to $130. Household loans increases by $80. Bank assets increase by $80 (the loan) and bank liabilities increase by $80 (the deposit).

If there should be a situation where the bank requires help settling its payments it usually borrows from other banks in the interbank market. If this is not possible, or unwanted, the bank can borrow from the Federal Reserve Discount Window. This is why the Fed is called “the lender of last resort”. It’s a buzz word that we all heard during the Great Recession.

The Dollar Hasn't Lost 96% of Its Value

Finally in dealing with incorrect ideals surrounding the Federal Reserve and money I’d like to finish with a very common myth. It

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has been repeated by many people, both professional investors and by internet blog recyclers (more of the latter than the former) that the U.S. dollar has lost more than 96% of its value in just about 100 years. This line is repeated Ron Paul basically as a campaign slogan and The Zeitgeist Movie holds it up as proof of the corruption of capitalism. Gold bugs like Peter Schiff whose sole job it is to whip up demand for gold production also parrots this line without question. Neither is the conspiracy crowd unfamiliar with it. Alex Jones himself has repeated it as proof of “The Globalists” who are taking over our money to build a one world government.

In truth there is no such phenomenon as the dollar losing nearly all of its value over the past century. By no means am I defending capitalism. I’m clearly not a fan of it. However I would like to set the record straight because the purpose of this book is to deal with the claims made by libertarians and anarcho-capitalists. In their minds these conspiracies justify their unscientific world view. It’s a kind of confirmation bias that gives them the fuel they need to push their phony economics. Let me be clear, the dollar did NOT lose 96% of its value over the last 100 years. Allow me to explain.

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First we’ll begin by looking at a place where we have complete data to work with, 1913-2006. Now what does it mean to say that the dollar has lost such value during that time? Their argument basically states that the average good/service that cost $1 in 2006 would have cost ₵4.9 in 1913. The statement is that the cost of the average goods/services has increased by 1930% since 1913. This is correct they are not mistaken on this at all. However, the average income earned by people has also increased 6560% during that same time. That average earned income went from $740/yr in 1913 to $49,300/yr in 2006. Once we adjust for inflation we see $740/yr in 1913 is $15,000/yr in 2006 dollars. This shows that the average income actually surpassed price inflation 230%.

So can we really say that the dollar has lost such value? What does it matter? The truth is that the average person has increased their real purchasing power by 230% during that time. The real world comparison can show us a lot. Yes the prices of goods/services were lower back in 1913, but then again $740 a year didn’t purchase much. In 2006 this was $15,000 a year which also wouldn’t buy you very much today either. However, what isn’t taken into account here is the massive increase in living standards during that time. Yes $15,000 a year is below the poverty line now but people have all manner of luxuries someone didn’t have back then. For example they have, indoor plumbing, electricity, television, indoor cooling, even a home phone... let alone the internet. We also have a vast array of measures that prolong our lives that people in those times couldn’t even dream of, like vaccines. Keep in mind that life was so difficult and barbaric that it was common to die of a simple cold. Today it is little more than an annoyance.

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It’s clear that if the idea that if the dollar has lost 96% of its value, then life would have been better off a hundred years ago. So yes the value of the dollar has fallen, but it means nothing in the face of the fact that average incomes and savings have stayed ahead of price inflation.

There are also some other flaws in their argument. If what they claim is true, then that means the dollar increased in value during the Great Depression. It essentially claims that deflation is the dollar increasing in value.

Another argument that is made is that this decreasing dollar destroys people’s savings. The problem with this argument is that I can’t think of anyone who has had cash lying around being saved for almost 100 years. In fact most people don’t have any significant savings at all. The bottom 40% of households have an

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average net financial wealth of $-10,500, yes they are in debt. The third quintile (40% to 60%) has little financial wealth at $26,500. The fourth quintile has the most of the financial wealth.54 Even then this is assuming people are holding it all in cash. In reality they hold many different things like stocks, bonds, and real estate which wouldn’t be affected significantly by a depreciating dollar.

The Federal Reserve is not scheming to steal all the value of your money. If you think this then you have a lot of wrong ideas about the Federal Reserve and fiat money.

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IV. The Gold Standard

"Although gold and silver are not by nature money, money is by nature gold and silver."

- Karl Marx

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Modern Gold Bug Fever

As I stated previously the global crisis of capitalism brought about a questioning of its function to a lot of people. Many of them very stuck in the "capitalism is the perfect system" mindset. This is especially true of Austrian schoolers the so-called "anarcho"-capitalists. In a time of crisis people tend to challenge the beliefs they have, question the very foundations of their ideology to see if they are still valid. Strangely, among a good portion of the population this did not take place. Many (in a very American phenomenon) resorted to making conspiratorial claims against the government, and of the financial aristocracy. The sudden drop in the value of the financial markets, the Dow Jones, Wall Street etc., just couldn't have been caused by any natural tendency towards crisis that capitalism has. The literal fact of deregulation, massively so under the Bush and Regan years seemed to play no part in their judgment of what took place. Instead conspiracy theories grabbed hold where investigation should have. When looking at problems with money, these Austrians made superficial glances at works written as opposed to actual investigation.

People who are strong believers in capitalism always need someone to blame. Their adamant belief that capitalism has no flaws contradicts reality sharply. We know, not just from Marx, but reality as it is, that capitalism tends towards crisis. It happens almost every 10 years or so. It is not a perfect system; it is riddled with contradiction and inherent instabilities. Even the more rational Keynesian view is still, like the Austrian model, built upon a false premise of infinite growth. As long as capitalism keeps growing there is no problem. This is not the way it works in real life. When this happens and this view is challenged, the soldiers of capitalist ideology look for someone to blame. Often times the government is blamed for not filling in the gaps of capitalist ideology. Or it could be the Federal Reserve's fault for bad monetary policy. Other times it could be

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the fault of foreigners working their nasty plans to upset our American exceptionalism. No matter what happens, someone must be blamed for the failings, inherent instabilities, and contradictions of the system itself.

In the course of people trying to find out what happened in 2008, they stumbled upon the idea of gold as money. Gold has served as an object of currency for an extraordinarily long time. For thousands of years the commodity of gold served as a medium of exchange in countless societies. It has always had a special place in the hearts of men, the origins of which are not well understood. Anyone with any measure of an ability to pay attention to our economic system knows that we do not use a gold standard anymore. The reasons for this are highly misunderstood by many people, not just Austrians. There are a decent number of leftists that don't understand why we don't use gold. This seems to be a topic that is misunderstood even by modern economists who really should know better, like Alan Greenspan, "An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense... that gold and economic freedom are inseparable."55 So this topic should not be seen as one confused by merely laymen or Austrian schoolers.

The reason for this confusion is quite simple. The main byproduct of any economic crisis is a loss in value. It's lost all over the place, the stock market, housing, financial sector etc. Thus when this happens people tend to look at what has value. Mistakenly people will look towards money and where its value comes from. When they look at money they see that we used to have gold, and now we have "worthless" pieces of paper. This shallow view can lead many people to think that somehow we've been cheated when it comes to money. It is however absolutely true that a piece of paper is worth less than a portion of gold. This is only true, of course, if we remove the fact that

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the piece of paper is backed by the US government through the Federal Reserve which purchases assets to back them.

This seeming lack of value is what drives most gold bugs to think that money backed by gold is the only currency that can have a value. There is often also a false correlation/causation connection made between economic crises and using gold as money. They believe that if we use gold as money, and eliminate the Federal Reserve, we would eliminate economic crisis. This is of course false, there were crises while we had the gold standard and lacked a central bank. Gold bugs think that gold is an end-all-be-all solution to economic problems. In addition, they're also under the impression that a gold standard will make them rich. This view is not devoid of argument, they are however very weak and not well understood. The reason this religious-like believe in gold is so prevalent is because many high profile people have gone into the media extolling its virtues.

One of the biggest names in the pro-gold crowd is Peter Schiff. He has an internet audio show and is a frequent contributor to several financial television shows, including many appearances on Russia Today. The man is not without respectability; his opinion is sought after by institutions looking for advice. He went to the University of California at Berkeley. Definitely he is not without an education either. He's even run for political office. In 2010 he ran for a seat in the United States Senate in Connecticut. He was in the Republican Primary but eventually lost to Linda McMahon. Schiff is as you would expect a big proponent of the Austrian school of economics.

Some credit him with predicting the 2008 global crisis with this line from FOX News back in 2006, "The United States is like the Titanic and I am here with the lifeboat trying to get people to leave the ship... I see a real financial crisis coming for the United States."56 On December 31, 2006 in a telecast debate on Fox News, Schiff forecasted that "what's going to happen in 2007 is

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that real estate prices", which had peaked at the end of 2005,57 "are going to come crashing back down to Earth". Frankly a good number of people saw it coming. A bubble as large as the housing bubble would have been hard to miss. I can point to at least one Marxist who did see it coming in 200458, but his warnings were ignored because of ignorant prejudicial views towards Marxists. Many important people who did need to see it missed it though. I frankly don't put much stock into Austrian claims that a crisis is coming. They make these predictions every 3 months. In fact the Austrian school has been predicting hyper-inflation, Zimbabwe-style, for the US since the 1960s. Obviously as we can see, this has never materialized.

It should be noted Schiff is the CEO and chief global strategist of Euro Pacific Capital Inc, which is a broker-dealer based in Westport, Connecticut. It should be noted that he is big investor in gold and has advocated gold products in the past. One of those products was a "gold chocolate bar" that people were intended to carry around with them to make purchases with.59 It's a small barterable bar of gold that can be broken into little 50$ pieces for exchange. As to be expected no one wanted to carry around 2,500 dollars worth of gold in their wallet. My point is that it seems to me that Schiff is always hocking gold because he has so much invested in it. Or in some cases, is paid to promote it.

When it comes to promoting the gold standard I can think of no name bigger then Ron Paul. The man needs no introduction, anyone reading this would already know who he is. Before he retired he was a Representative for Texas' 14th and 22nd congressional districts. He's a notorious libertarian who, in 2012, tried to run for the leadership of the Republican Party. He was not successful but did gain a huge cult following. Ron Paul made all kinds of promises to legalize drugs and end the wars. Things basically anyone could get behind. They were also the two

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biggest issues young people were interested in, which is a big reason why a good portion of his supporters were youth.

Paul was big supporter of gold and claimed that if he won presidency that he would return the nation to a gold standard. Interestingly he gave no plan as to how to implement this, basically because he wouldn't be able to. I honestly don't know if Ron Paul is aware that the gold standard wouldn't work. In terms of monetary policy Paul has said some frankly scary things. He's made references to more "Christian currency" and more "Christian capitalism". As far as I know this "Christian capitalism" isn't defined in anyway shape or form. The "Christian currency" as you can probably guess is gold, he mentions that gold was the currency in biblical times. I find it very strange that he invokes the Bible when talking about monetary policy. This is actually pretty scary to me, the thought that a president, an office that holds so much economic power, would be taking advice from pre-capitalist economy holy book. What's next? The Bible also forbids charging interest on loans. Would Ron Paul halt the operation of the entire financial sector? This would destroy the entire banking industry. Needless to say it's very dangerous to base your monetary policy off of the Bible. Of course I'm not suggesting that Ron Paul would do such a thing, but it does demonstrate his lack of critical thinking on economic subjects. His ideas can be outright wacky sometimes.

This brings about a very strange phenomenon where it appears that certain people believe that capitalism is eternal, it is an eternal force. We see this view from the Austrian school that doesn't see any historical context to production and exchange. They do this with money as well; gold is an eternally valuable thing that also exists outside a historical context. Money today is not the same as it was 100 years ago, let alone 5,000 years ago. These things, money, productive forces, social relations all evolve over time; the market is not a permanent being with immutable laws and unchanging functions. When we see this

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mentality in full context, the economic theory and monetary theory we get almost a kind of neo-Platonism idea.

Peter Schiff is at least far more rational with monetary policy than Ron Paul is. It should be no surprise that these men, along with the anarcho-capitalists, are big the supporters of gold. The Austrian school is also a very big supporter of the gold standard.

Conspiracy theories surrounding economy and money are nothing new, particularly in the United States. So we should not be surprised they appear with regards to gold. This gold bug fever is largely centered on the US. Now consider that the US also has a proclivity towards conspiracy theories.

Since gold is surrounded by such a fringe audience, it's reasonable to expect a fair amount of conspiracy theories surrounding it. We really don't have to go so far as Alex Jones to find them, they're right there in public when gold hits the news for some reason or another. We're talking about people's lives here, so it's reasonable to expect people will get overexcited about it and likely defensive. The other source, or rather primary one, lies in the very reason people who support the gold standard choose gold. It will supposedly always go up in value, and it functions in a way that prevents you from being robbed by fiat currency. Yes, they believe that fiat currency was specifically designed to rob the public of their wealth. Fiat currency only inflates, gold only deflates. Deflation is when a money increases in value. Supposedly gold is better because supposedly you can't control its price. This is supposedly why gold was confiscated and why the gold standard was abolished, so that the government acted of its own volition of course, could straight out rob people. As long as people have gold they have wealth it is assumed.

I personally think it's reasonable that these conspiracies would pop up among the population, particularly now more than ever. The nation has clearly gone through an economic crisis which

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has left a good deal of the population questioning their economic beliefs. Obviously there is something wrong; the capitalist system had a huge failure that was born out of its own contradictions. These gold bugs, rather than question capitalism and look for these contradictions and fatal flaws, chose to look to see if an invading influence came along to cause a disruption. There must be some aberrant behaviour somewhere. Instead of looking in a text book, they start looking over their shoulder and resort to near teenage-like distrust of those in power. There's a time to be critical of those in charge, those who hold authority. Then there's a time to start questioning your ideology. Since the US is heavily infused with hyper individualism, to the point of narcissism; such introspection is impossible. In a manner of speaking, "there's nothing wrong with capitalism, someone must be just trying to rob me because they're jealous of what I have." "They" of course is always the government.

This conspiracy lies on several false assertions. First it requires the belief that the government is alive and has its own consciousness. The government is plotting against you because it's some evil presence that is out for its own interests. There is a damn near religious belief that the government is a living thinking being that is trying to take over your personal life. No, the government is a tool wielded by particular people, particular class interests. It is controlled by some group of people somewhere; realistically this is the capitalist class inside of capitalism. Government is the gun they wield for their system.

The government is not out to take away people's money, as the government isn't running itself, its being controlled by the capitalist class. It is economically harmful for the population of a country to not have money. Anyone who understands even the most basic concepts of capitalism knows that people have to consume goods and services in order for the economy to function, there has to be at least basic a velocity of money in order for the economy to function. If the population has no

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money, they can't spend that money. The government knows this. Growing inequality, a reduction in real wages, does not come from falsely claimed "ever expanding inflation", it comes from the struggle between the capitalist class and the working class. When you receive less in wages, minimum wage remaining stagnant, it is the result of class struggle. Reducing wages and class antagonisms robs regular people of income, not inflation.

Secondly, this stands on a premise that "inflation is out of control". Austrians and general conspiracy people think there has been this massive inflation that has destroyed people's lives. We have to ask ourselves if this is really true. The problem here is that Austrians think the increase in the money supply is inflation. It most certainly is not, inflation is a general rise in consumer prices, which is why we use the consumer price index as a measure of it. Is it out of control? (Figure 1) No it isn't, this can hardly be called out of control. Inflation is not directly linked to the increase in the money supply, this is a proven fact. The study “Is Inflation Always and Everywhere a Monetary Phenom-enon?” has shown that there is a correlation, but that there is no solid causation.60 An increase in the money supply can cause a drop in the value of the dollar, but what is important is the purchasing power of that dollar. As we can see it is not a troubling issue right now. Many Austrians have been calling for Zimbabwe-style hyper inflation at any moment for several years now. This has not happened even with three rounds of quantitative easing.

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Figure 1

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Here is a prime example of that alarmism from Peter Schiff:

PAYNE: So, where are you then, Peter, with respect to inflation? Do you think this is going to be the big story of 2010?

SCHIFF: You know, look, I know inflation is going to get worse in 2010. Whether it’s going to run out of control or it’s going to take until 2011 or 2012, but I know we’re going to have a major currency crisis coming soon. It’s going to dwarf the financial crisis and it’s going to send consumer prices absolutely ballistic, as well as interest rates and unemployment.

- “Austrian” economist Peter Schiff on Glenn Beck, December 28, 2009

The final aspect that is ignored is the premise that deflation is good. Deflation (in the Austrian sense) is when a currency increases in value. This is one of the arguments in favour of gold; it will always increase in value. The problem is that deflation is a bad thing, particularly for those who hold debt, which is just about everyone. Almost about all production firms and small businesses borrow money to enter into business or another round of production. Say for the sake of simplicity, they borrow $100. They enter into production, or business or whatever. Profits have been made and it is time to pay back that loan. During this time the currency has increased in value, meaning it requires less currency to make the same purchase. A product you are selling caused you to receive fewer dollars because the currency value increased. You've now taken in fewer dollars than you planned for when you borrowed the money. You are now obligated to repay a particular number of dollars, thus you are now paying back more than you borrowed. This could rob you entirely of your profits. This happened not because of a flaw in your production planning, but because of some "hidden force" beyond your control. This would be very damaging for everyone

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who borrowed, great for those who loaned. This is an inherent instability in currency that capitalists don't want because it disrupts their ability to plan.

The government is not out to rob you because we don't have a gold standard. The gold standard doesn't work; the purpose of this section of the book is to prove that. Conspiracy theories help no one, and only show the economic ignorance of those who support it.

What Gold Means to Particular Austrians

Ludwig von Mises had a peculiar view of money in the economy. He did not see it historically as being fully meshed with the market economy. He saw it instead as existing in a strange form, partly in the market and partly under the authority of the state. To him this represented an evolution into a perverted existence that resulted from increasing intervention on it by the state. Gold to Mises is what caused the worldwide growth of economy and trade. It was gold according to him that gave us a world economy. In his view World War One was when the gold standard came to an end after hundreds of years. Countries attempting to finance the Great War finally resorted to fiat currency to keep their respective war machines rolling.61 (From here we a get a glimpse of the Austrian ideology, only states go to war so therefore the state alone wanted the gold standard gone. In fact there is another reason which is discussed else-where.)

Mises believed that the true key to economic prosperity was to eliminate government as an influencing role in the economy. This was particularly true of monetary policy. To him gold could provide a purchasing power outside the fluctuations of politics and government intervention.62 Thus the history of money was one long chain of government attacks debasing the monetary

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unit that caused a corresponding disruption in economic and social development. (In Mises' view crisis can only happen as a result of monetary policy, i.e. government.) This was accomplished by deception on the part of various authorities, from Biblical kings debasing the gold or silver content of coins, to the transition to fiat currency today. They were done to enact a theft in his eyes of a portion of the public's wealth that was not plain to the eyes. He called it a hidden tax and along with it a tactic of inflation. This seizure of money elevated the power of the state and provided the people with an illusion that it had certain powers above them. Those powers were the ability to create benefits for them. Mises insisted that this was an illusion, that the government only had the ability to provide such services by taking from the people. It could, in his view only redistribute wealth. It could not create it. As Mises put it:

Because, as conditions are today and for the time that can be foreseen today, the gold standard alone makes the determination of money's purchasing power independent of the ambitions and machinations of governments, of dictators, of political parties, and of pressure groups. The gold standard alone is what the nineteenth-century freedom-loving leaders (who championed representative government, civil liberties and prosperity for all) called "sound money."63

In Mises eyes, as long as the government had power over money, it would be misused for short lived political objectives. The government, being an irrational creature in his view, could not responsibly set any kind of monetary policy. This power should remain in the inherent power of gold itself. It is only the removal of government from money that could cure the cycle of boom and bust.

Murray Rothbard had his own particular views which some Austrian economists disagreed with. He like many Austrians saw

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the First World War as the death of the gold standard as military production exceeded the usefulness of gold as currency. It was from here on in his view that when fiat money began, it supposedly caused the "skyrocketing chronic inflation" we've been suffering from since the 1930s. Of course this "skyrocketing chronic inflation" is in actuality a slow steady growth in the money supply that is natural to a modern economy. As many of those who follow this belief missed, wages also increased during this time. So long as wages keep up with the rate of inflation, there is no problem. Of course the struggle to keep those wages at a reasonable level with inflation is another matter. Capitalists try constantly to drive wages down as much as possible. I feel it important to note that I am not defending capitalism here; I am merely showing why even in the bourgeois economic view that Austrians are wrong.

The primary danger Rothbard saw with fiat currency was his perception that any government that used it would, not could, just keep endlessly printing money because they would be unable to resists the urge to do so. This falls on two particular premises. First, it assumes that there's some kind of benefit to intentionally causing inflation. There is none, it causes damage to the economy and increases instability. There is to a small degree an acceptable level of it, there is not however, a benefit to causing mass inflation. Secondly, it falsely assumes that the money supply is the direct cause of inflation.64 If we look at what Austrians define as inflation, they literally define it as an increase in the money supply. Right away we see the problem. Austrians have changed the definition of inflation to an increase in the money supply. All other economic ideas use the real definition of inflation: “an average increase in the price level.” This is often not directly linked to an increase in the money supply.

Mises denied that a rise in the supply of money would have a corresponding increase in the general level of prices. It is others

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who hold this ridiculous belief that inflation is only caused by an increase in the money supply.

Austrians have essentially two criticisms of inflation. The first being the rise in prices. Those prices being of goods and services. They also include financial and real assets, meaning they include stocks, bonds, other financial assets, real estate, and commercial property.

Their second criticism is that the increasing money supply stops the money stock from remaining stable and hence it prevents deflation. A rising money stock, does not allow money’s purchasing power to increase through price deflation.

In asset price inflation, the Austrian view ignores the fact that effective financial regulation can (theoretically) prevent bubbles, especially in real assets like housing and real estate. The US, for instance, had stable housing prices from about 1950 until the mid-1970s, and the same was true in many other countries, because of regulation.

Now as for deflation being a good thing, I’d like to respond with the following. Despite the fact it does increase the money’s purchasing power, it also has other serious consequences. Debts are fixed, deflation causes wage and price falls making them harder to pay back.

Often Austrians will suggest a return to the gold standard. This makes the level of the money supply subject to external factors like discoveries of gold and the current account balance.

We hear endless rants about how increasing the money supply always and automatically devalues or reduces money’s purchasing power. What really reduces the purchasing power of money is an average increase in the price level.

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Frederic Hayek, another well known Austrian economist was a big proponent of competing currencies.65 He didn't seem to be a big supporter of the gold standard; in fact he advocated something else. He supported the "Denationalization" of money which would end legal tender laws allowing any person to just declare they have their own currency. In his theory the state would still have jurisdiction over whatever particular currency was being used, but it would allow for competition. This is often described in the same way as allowing competing delivery services to exist alongside the US Postal office.

There is a really big flaw here, which even other Austrians acknowledge exists. People chose particular products based on a subjective preference. In doing so, they compare the utility of each product against each other to fit their own "personal scale of value", for example comparing utilities. This is all well and good when dealing with choosing one product over another; it does not however work with choosing a currency. Money is not sought after for its own sake, but because it functions as money, meaning a confidence that it is going to be easily accepted in the process of exchange. People use money not for any particular quality contained in it, but because they know they will be able to exchange that money for goods and services they desire. The problem is that the issuance and acceptance of a currency are two different matters. How does anyone even know what the worth of each currency is? After all anyone could just create their own currency in their garage. Anyone can just come into your store with a currency and demand products or services. (If you think the person will just walk away calmly after being rejected, you've clearly never worked as a cashier.) Good luck finding someone to convert the currency you just had rejected. What is the exchange rate again? How do you determine what that is? What kind of stability could we be looking at in terms of these exchange rates? There are a ton of unanswered questions by those who advocate competing currencies. Capitalists want a single monopoly currency that the government can enforce

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stability on. Those who actually engage in capitalism want a currency to remain the same and not to fluctuate making planning difficult.

From this we can determine that Hayek wasn't really interested in gold as money. For money to have value in the Austrian sense, money has to be based on some kind of non-monetary commodity. A precious metal is the obvious chose in this regard, gold being the most obvious. In truth, a gold standard (with all its tremendous flaws) is a far more rational choice over a system of competing currencies.

Carl Menger (the father of Austrian economics) in his system was very similar to classic economic thought like Adam Smith. Often he is credited with creating the basis for the theory of subjective value and a theory of the origin of money. Later in his career he published other works, about seven on monetary theory and currency reform. Unlike almost all other Austrians, he actually acknowledged a historical context to the development of money: "the kinds of money appropriate to particular peoples and to particular historical periods." He did not see money as a measure of price and claims to have refuted the notion. In his view the problem was the purchasing power of money, or as he called it, its exchange value.

Menger did not believe that authority, meaning government, was the construction of money and indirect exchange. He instead saw that individuals were interested in exchanging, less marketable goods for those of greater marketability, durability, and divisibility. A man's search for more marketable goods would eventually bring him to the most marketable goods. Without any other force interfering, individuals will naturally exchange their goods and services for more marketable ones, despite the fact they are not needed at the moment. In his view people will exchange things anyway, simply because they are of

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greater value. This economic good that emerges as most marketable is called "money".

This claim is actually blatantly false. He draws false origins from predetermined conclusions. This is quite common of the Austrian school as demonstrated by this book’s section on meth-odology. The real origin of money will be dealt with in another section of this book.

More than 20 years later he completed his work on the origins of money, where he claims that socialists and "statists" proclaimed it was government that invented money. Its true people wanted the government to regulate money in various forms, the issuance of it, standardization of gold content of coins, particular minting. There is not however a general claim by socialists and "statists" that their ideas of government invented it. I looked into this extensively; there has been no such claim. This was false claim by Menger, he is outright lying. This is a straw man argument intended to give his view credibility. In fact it's commonly found that money was created before states were. Menger claims that he discovered that people exchanged goods for money because money could be exchanged for other goods. It was "his discovery" that it was people who decided that a certain goods were to be the medium of exchange.

As for gold, Menger thought it was the only currency for civilized nations. He laid out his reasons for this in his work "Contrib-utions to the Currency Issue" where he extolled the virtues of using it. He felt nothing, not even silver could take the place of gold in a crisis. In his view markets and international trade was growing exponentially, and only gold could satisfy these new expanded exchanges. The use of gold it seemed, would force smaller nations who didn't use it to join larger trading areas and adopt it as a medium of exchange. The balance of payment internationally between countries could only be settled in gold.66 Unfortunately for Menger he ignored the primary flaw in the use

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of gold, eventually there would not be enough of it. Its inflexibility would become the major drawback and eventually cause of its removal as currency. The supply of gold would eventually fall very short of the demand of money. His answer to this was quite puzzling and runs contrary to the function of money as a means of exchange: "Surely, even if all the fears of declining gold production should come to pass, gold coins will not lose their function as media of exchange, but rather serve it ever more conveniently as their purchasing power continues to rise."67 Increasing the value of a currency doesn't inherently decrease the need for it in circulation. He did not foresee the global expansion of capitalism to the degree that we have witnessed it. Nor did he see the overwhelming need for credit money that was to come much later on after his death.

As we can see, there's a variety of ideas of surrounding the use of gold as money for Austrians. They are however inherently flawed for the reasons I will give in due time. It is important to show that there is not uniform over all idea that all Austrians have. They generally have a consensus as to the basic principles behind it, but there is still some variety.

What Gold Meant to Karl Marx

There is a belief by anarcho-capitalists that Marx was against the gold standard and supported fiat currency. Often I've had completely uneducated an-caps claim that Marx never took the gold standard into account so therefore all his theories are wrong. The claim is baseless as Marx never advocated fiat currency. All throughout his seminal work, Capital, he continually referrers to money as gold. In the book he assumes gold is money. Here is a small selection that can be found in Capital vol.1, Chapter 3.

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"Throughout this work, I assume, for the sake of simplicity, gold as the money-commodity."

"The first chief function of money is to supply commodities with the material for the expression of their values, or to represent their values as magnitudes of the same denomination, qualitatively equal, and quantitatively comparable. It thus serves as a universal measure of value. And only by virtue of this function does gold, the equivalent commodity par excellence, become money."

"The expression of the value of a commodity in gold — x commodity A = y money-commodity — is its money-form or price. A single equation, such as 1 ton of iron = 2 ounces of gold, now suffices to express the value of the iron in a socially valid manner [...]"

There is nothing to speak of when looking at Marx and gold. He assumed it to be money, and it was presented as such in all of his works.

The History of the US Gold Standard

Gold arose as the currency of the US due chiefly to the fact its use was already widespread, just about everyone in the world was using it. How gold became a currency doesn't interest us here, we're focusing on the standard by which it was set for the US economy. The point is it that it was adopted in the US due to its already existing pervasive global use. It should also be noted that the US is a very large producer of gold in the world. It is always among the top 4 producers of it. Right now China is the world's largest producer.

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The US began with a bimetallic standard not exclusively a gold one. Gold occupied a place long side silver as the official currency with a different value assigned to each. It was Treasury Secretary Alexander Hamilton who decided how each metal was to be set. He "defined the dollar as 371.25 grains of pure silver minted with alloy into a coin of 416 grains. Gold coins were also authorized in denominations of $10 (“eagle”) and $2.50 (“quarter-eagle”). The ratio of silver to gold in a given denomination was 15 to 1."68 This was done with the first US coinage act in April 1792. It is interesting to note that at this time several foreign gold coins were also declared legal tender. In addition, the Spanish milled silver dollar was made legal and set as equal to the US dollar.

These metals were of great use given the US entry into the world market, it made exchange much easier and much more profitable. This did not come without its share of problems however. Being connected to the work market came with fluctuations in the price ratio of silver to gold. It didn't take long for silver to end up becoming cheaper. There was a silver-to-gold ratio of 15½ to 1. This had its ruinous effects. Gold began being used exclusively for international exchanges while silver coins were used in domestic markets. What happened was this caused the US to go on a silver standard for the first 40 years of its existence.

A silver standard was not welcome by Congress, who in 1834 sought to return gold to domestic use. The ratio was altered from 15-to-1 to 6-to-1 by reducing the amount of gold in each gold coin. "The pure gold in an eagle was reduced from 247.5 to 232 grains (and the coin itself reduced to 258 grains, almost nine-tenths fine)."69

As an interesting side note, this caused a class struggle in US society. The plan was to reduce the use of silver domestically in favour of an "equality" with gold. If silver was primarily used for

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domestic commerce and gold was used for international commerce, guess who held what? Right, working class people and farmers held silver while the capitalist class held gold.

Unfortunately this change turned out to be too immense. The ratio ended up causing gold to become cheaper comparatively to the world market price ratio. As a result silver began to be exported, making it not long before gold coins became the primary coin for domestic trade. The situation became even worse when California and Australia discovered huge deposits of gold. It took to about 1850 for silver coins to be entirely pushed out of the economy. A major problem arose out of this; silver coins represented particular fractions of what a gold coin dollar did. It took until February 1853 before this situation was resolved. An act had these divisions of a dollar contain less silver than determined by the official ratio and less than what was determined by world market price. Consequently they were set as legal tender for amounts less than $5.

Despite what many think, there was paper money in the period before the Civil War. There were several kinds and they circulated as much as coins did. Among them were private bank notes, some Treasury notes, and (in large transactions) financial instruments called bills of exchange. These were based on debt, meaning a promise to pay, either in gold or silver. As to be expected these became a fundamental component of the metallic money standard.

(It would be worthwhile for the reader to research these paper money instruments that existed. Some of them were quite creative. They are however, not relevant here as we are focusing on the removal and reestablishment of gold and silver. I do recommend people look into this as it is a fascinating subject.)

As the Civil War went on a gold standard became less and less feasible. Money was needed to fund war production, this meant forcing the government to start issuing treasury bonds some of

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which were convertible into gold or silver, and some not. This convertibility became extremely difficult to keep up and was eventually abandoned by banks in 1862. It was then that the government began issuing notes that could not be redeemed on demand or on a future date. These non-convertible notes became legal tender.

These new notes called "greenbacks" were legal tender for everything but customs duties. Those still had to be paid in gold or silver. With the convertibility to gold or silver officially gone, the gold standard was officially gone. People who owned greenbacks could still purchase gold and silver with them. Now there was not set standard of 23.22 grains per dollar due to the government no longer carrying out the function of maintaining the mint price of the dollar.

Due to the necessities of the war a great deal of greenbacks were produced causing significant inflation. A this time, just as it had in the past, fractional silver went out of circulation due to its greater value in foreign trade than what denomination was stamped on it. Private issuances of paper fractional currency appeared but they were quickly outlawed. Postage stamps were issued by the government that took the place of fractional currency, then eventually fractional currency of its own.

Once the Civil War was over Congress decided to return to a metallic standard as it was before the war began. In order to accomplish this there had to be a slow removal of greenbacks from circulation. It was a struggle but in time this was accomplished. In about 1875 it was decided that their numbers should be reduced to $300 million. By 1878 that number reached and stayed at $347 for a century.

The act of ending paper money and returning to a gold convertibility caused a few disturbances. A recodification of the law in 1873 had a huge impact on the monetary system. When the change was made they left out the old 412.5 grain silver

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dollar. This brought an end silver as anything but a fraction of a dollar. After this began "the only period in U.S. history that can strictly be called a gold standard: 1879-1933."70

How was it a true gold standard? Well, when the law was written silver had been widely circulated for about forty years. Thus there was no visible impact on silver right away. It took a few years to materialize; then the value of silver dropped. Restoration of a silver dollar at the previous mint ratio would have caused silver to take the place of gold as circulating currency. The legislation enacted in 1873 effectively made sure there would not end up being a silver standard.

Politics soon came into play as those who produced silver (worried for their industry and profits) pushed the government into changing the laws. It forced the Treasury to mint a particular number of silver dollars every year. In addition, it called for the Treasury to allow people to deposit silver coins in exchange for "silver certificates". These certificates were not permitted to be legal tender, they were however useable for paying taxes, which made them suitable for circulation. Later in 1890 the provisions for silver exchange were altered. It became possibly then to redeem silver certificates for gold.

Gold coins alone were not used during this time. The government also created gold certificates. These certificates were essentially promises to pay out gold to whoever held it. This allowed people to carry a particular amount of gold on hand in a paper form that was much easier to carry and use. Along with this was a law that determined a particular amount of gold that had to be held in reserve for people who wanted to redeem them.

In 1890 Treasury notes were brought back. They were created backed by silver held in the Treasury, which was based on the market value at the time of their issuance. They could also be

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redeemed at their market value at the moment. These were declared legal tender.

During the Civil War there was another important change, it was the creation of the national banking system. It was then that the federal government began chartering banks. They were very similar to the state banks in that they too could issue their own notes. These notes however had to be backed by government bonds held on deposit with the Comptroller of the Currency. They were however different in that they did not earn interest, thus these banks did not make a profit from issuing them. These too were not legal tender but did circulate because they could be redeemed for gold or legal tender notes. Their issuance was limited by the number of bonds that could be held as collateral and a law determining a particular sum.

Even after 1873 the government continued to toy with the idea of using gold and silver. This came to an end with the "Gold Standard Act of 1900". Silver's dropping price started causing too many problems. Any time the US Treasury tried to pay its debt service in silver, investors took notice and got nervous. This was particularly pronounced when the government's main source of revenue (aside from gold) customs duties decreased causing market instability. It was this act that finally declared once and for all it was gold and only gold. All money issued was tied to gold and gold was held in reserve. The remaining money, greenbacks, silver certificates, and silver dollars were kept on as legal tender, but were made exchangeable for gold. The Treasury notes however were phased out of service.

It should, be noted that the Federal Reserve and the gold standard existed side by side. Let me be clear: The Federal Reserve did not come into existence when the gold standard ended. The Federal Reserve did not destroy gold.

Checks as a form of payment appeared near the end of the 19th century. However since banks had lost the ability to profit from

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issuing notes, checks had to be innovated. Technological innovations had made it possible to use them in transactions between customers of different banks. (In some cases it allowed it in different regions of the country). Checks worked very similar to banks notes in that they allowed customers to engage with a smaller amount of coin and legal tender than they would otherwise have. This is because a portion of the money held in checking accounts had to be kept on hand. This was possible because most transactions were completed by cancelling debs against credits.

What had not changed with regards to checks and bank notes was the reoccurring phenomenon of bank runs. When hoards of people run to the bank at the same time to take all their money out, the reality of only holding a portion of the physical currency needed was displayed quite clearly. This lack of an ability to give out all the legal tender notes and bank notes at these moments caused banks to fail. This would mean a person who had put money in the bank wouldn't be able to take it all out because the bank literally didn't have it. Knowing these incidents could take place made people nervous about it occurring. This fear of it happening made it more likely to happen, literally causing it to happen more often. These were called banking panics.

In fact a particular form of this, needing currency when there wasn't enough available on hand, came in a predictable pattern. For example, for farmers this occurred at the end of harvest time. Farmers went to the banks around the same time to get their money. This system of gold and legal tender notes was not elastic enough to deal with this sudden upsurge in demand causing shortages. This problem had to be dealt with because it placed banking in a dangerous position.

The solution to this problem (along with others) was the creation of a central bank that oversaw this entire system. This was the birth of the Federal Reserve System. It had a twofold

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plan for dealing with the problem. Firstly it provided these banks with a way to borrow that money needed if there was a run on them. Secondly, it could create new money called Federal Reserve notes as needed, meaning it could expand or contract the money supply as needed.

It is this important fact about banking that we need to keep in mind when thinking about the Federal Reserve and anarcho-capitalist/Austrian ideology. They have a ton of conspiracy theories surrounding the creation of it. So I'd like to give you this piece here that the Congressional Research Paper would like you to know:

"The creation of the Federal Reserve had little if any effect on the gold standard. The dollar was still defined in terms of gold. Federal Reserve notes were redeemable in lawful money. The Fed not only operated under the gold standard, but was charged with maintaining it, and kept a percentage of gold cover for its notes. Gold still dictated the value of the dollar."71

While much of the world went off the gold standard during the First World War the US maintained it until several years after it. Other countries attempted to get back on it, but it took several years, usually ending in 1927.

It wasn't until 1933 that the gold standard in the US died. Even the Fed was not enough to stop bank runs that happened from 1930 to 1933. The central bank was not enough to provide the needed on hand cash for the demands of bank customers.

This problem was most probably the fault of the gold standard itself. Looking back, to do what needed to be done the Fed would have to have created much more money and lower interest rates. If they had done this, then investors would have taken gold out of the country and invested it overseas in order to obtain higher returns. The creation of enough money would

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have placed in jeopardy the perception of the government's ability to remain on the gold standard. So combine all these problems together: increased incentive to export gold causing a reduction in gold reserves, it becomes near impossible to keep the dollar at its legal gold value. The only solution to keep the economy from dying was to expand the currency. The Fed is stuck with a terrible contradiction of capitalism. (Marx was always pointing out the contradictions of systems.) Expand to save the economy and lose the gold, or contract to save the gold and lose the economy. Up to 1933 it chose contraction.

This is where history is forgotten and conspiracy theories start. The primary concern for the capitalist class is of course the economy. Without it they would have had nothing, no power, nor any wealth. It was clear that gold had to go. In the eyes of too many people it was at this moment that the government "robbed" people. Gold no longer sufficed as a currency, it was a proven failure. Not just by its historic instability, but also by its inability to allow the government to make necessary corrections to the system in crisis. It was not an evil plot by some secret illuminati collective to take over the world. It was capitalism doing whatever it took to keep capitalism alive. What makes this even worse is watching Venus Project follow this same Ron Paul, Austrian econ conspiracy garbage. (I have tremendous criticisms of the Venus Project but those will have to wait for another day.)

Franklin Roosevelt was elected president and drastically altered government policy. Through several bureaucratic mechanisms, including executive orders, the gold standard was officially removed from the US economy. Currency could no longer be converted into gold; private gold holdings were seized and nationalized. A 40 percent devaluation was created with a new parity. This parity however was only significant for international transactions.

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A closure of banks was ordered to end banks runs and prevent further gold from leaving the country. He also ordered banks to stop paying out gold or dealing in foreign exchange via Proclamation No. 2039. This was accomplished with the Trading With the Enemy Act of 1917. The act seemed like it was intended to deal with war time situations, but in fact it was used on the grounds of "national emergency". This required the approval of Congress which as granted, the Emergency Banking Act was thus created.

After this the Thomas Amendment to the Agricultural Adjustment Act was enabled giving the president the power to force the Fed to create $3 billion to pay for government borrowing. It also set the conditions for the issuance for more silver certificates.

Here's more detail from the Research Report:

"Under the authority of the Thomas Amendment, the market price of gold was allowed to increase to $35 by January 1934. At that time, the Gold Reserve Act was passed, and the President thereby empowered to fix the new value of the dollar at not less than 60% of its previous value. The Gold Reserve Act also gave legislative force to the nationalization of gold. Under its terms, title to all bullion and coin was vested in the U.S. government, gold coin was withdrawn from circulation, and the Treasury Secretary was given control of all trading in gold. Private holdings of gold were outlawed (except for numismatic and various industrial/artistic uses).

"In June 1934, the Congress passed the Silver Purchase Act. The act called for at least one-fourth of the United States’ monetary stocks to be held in silver, so long as the government did not have to pay more for the silver than its official monetary value. The silver could be

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coined or issued as silver certificates. Silver certificates were exchangeable for silver coin. Because the market value of silver was below its monetary value, this law provided for the issuance of a limited quantity of another form of what amounted to fiat money.

"The government’s abrogation of gold clauses in contracts was upheld by the Supreme Court in February 1935. Thus, the government could discharge all its interest and principal due in paper money. Because the dollar had depreciated due to official policy, it meant that the outlawing of gold clauses effectively reduced the amounts the government paid on its debts relative to what it would have paid in gold."72

The history of gold continues from beyond this point, but what is here is sufficient to show how gold acted when it was a currency. It also demonstrates the problems using money based on a commodity can cause, in this case particularly gold and silver. It's clear that a metallic money standard was useful in a particular historical period. This time however has passed and new currency must be used for a new era.

With all this information surrounding the gold standard settled, we can now begin to look at why it will not work, and why it cannot be created once again.

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V. Why the Gold Standard Doesn't Work "Marx explained that under capitalist commodity production, money must be a commodity before it can become money. This means that in order to function as money, the money commodity must be produced by industrial capitalists whose only motive is profit. The idea of planning the money supply while leaving production to the anarchy of the profit system is indeed a hopeless contradiction."

- Sam Williams, Critique of Crisis Theory blog

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What about Gold?

Having briefly reviewed the history of the gold standard we can see a little why it just doesn't work. Basing a currency on the value of a commodity presents us with a lot of problems. Particularly making the value of that currency subject to the price fluctuations of the commodity it’s based on. As much as many people don't want to hear it, gold is not a good currency. At one time it served a historical role that facilitated the act of exchange, but this time has passed. The mode of production we know as capitalism has evolved over a long period of time and with it changes have taken place. Financial capital alone makes the gold standard impossible, as most of the world's money now exists as credit money. As of this book being written there is $1.2 quadrillion, yes quadrillion, in notational value of derivatives globally.73 Compare this to the world GDP which is estimate to be $71 trillion. That means there can never be even enough commodity money to back stop these derivatives if they fail. Don't even think about considering if it would be possible to pay it with a gold backed dollar. This staggering amount of derivatives places the entire world in financial danger.

That danger is far larger than most people realize. We're talking about a crisis that would make the 2008 crisis look like a drop in the bucket.

Marx said that credit was the borrowing of money against the creation of future value. Meaning, money is borrowed ahead of production (or investment), then used to facilitate the creation of value. Once that value was realized in money, the credit is paid back. If the value cannot be realized, the credit cannot be paid back and the loan defaults. Derivatives are not much different in this regard; they too can fail to materialize. Making a "bet" on something or counting on the return of future profits is a risky business. At the end of January 2014 emerging markets where a lot of new investment is going lost $9 billion.74 I'm

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merely giving one example of an event. The amount lost that needed to be compensated in 2008 was a mere $12.2 trillion dollars. Now imagine what happens if half of that $1.2 quadrillion goes belly up? Compare the loss of $12.2 trillion to $600 trillion.

The consequences of that are frankly beyond my perception. The entire world capitalist system almost came to an end with a loss of $12.2tr; the scale of $600tr is unfathomable. We would be looking at the death of all economy worldwide... So yea, gold is going to step in and save us? No, gold cannot even begin to function as a currency in a modern capitalist financial economy.

With this small example given, let us begin to look at why the Gold Standard cannot return us to some theoretical time of prosperity. It never created one when it existed nor can it now. We will begin with looking at why a conversion to the gold standard is impossible. After that we will look at why it doesn't work.

Problems Switching to the Gold Standard

As we have seen briefly from the previous example, there simply isn't enough gold in existence to cover the issuance of every dollar currently. Basically the problem we face would be keeping the money supply up with the amount of currency needed in the economy. If there isn’t enough currency in the supply for the transactions made, you have a huge problem. We would probably be looking at a recession as a result. There must always be a particular amount money available in a system for it to operate properly. The question is, how much of a problem would this be in a gold standard?

Let’s start by looking at how much gold there is in the world. When we look at the world gold council it says there has been

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about 158,000 metric tonnes of it ever mined out of the earth. Divide that by ounces and you get about 50 billion of them. From this we can determine that it would be 24.4 trillion grains of gold, which sounds like quite a lot. The problem is we need to divide this by the population to get the most equitable distribu-tion of wealth we can for an example.

So if we divide it by the population we get 80,270 grains per person. This number isn’t as impressive as the 24.4 trillion but it leaves more questions as to what this means. What any gold based system would have to do next is determine how many grains are in a single dollar. Roosevelt set it to about 15.25 gains per dollar, meaning each person would have about $5,259 of gold per person in the US. Even that is assuming that the US held all the gold in the world.

This leaves the US with a money supply of about 1.6 trillion dollars. Even if this fictional scenario were true it would be totally debunked by the fact the US has a debt of 16.6 trillion dollars75. It would be impossible to pay down the US debt. The claim is that the US would never be in this situation if we had a gold standard, but that’s speculation. Right here and now if the US went to the gold standard it would be impossible to pay off the debt. This is what libertarians want, it would be impossible to do in our current situation.

Change the scenario and assume that there was no national debt and the country operated on the gold standard. The reality is there is a massive trade deficit. Currently it is about $38.5 billion a month.76 This means as US capitalism functions, large amounts of the U.S. dollar are being held by foreign nations. At this trade deficit rate it would take 3.46 years for the entire supply of gold to leave the country. Essentially the US would end up with no gold backed money at all. The money would not be coming back because the people who hold that money aren’t purchasing enough from the US, or else there wouldn’t be a

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deficit. The country would be without money. The only logical way out of this situation would be to borrow that gold back into the country again with interest. Doing that would create a debt based money system again.

We can even take this supply situation even further. If we look at the world GDP in 2007 we have a total of $65.61 trillion77. There would never be enough gold in the world to actually cover all of those dollars if the world was on the gold standard as libertarians would prefer. Now let us consider the global annual value of major financial asset market transactions in 2007 which sits at $900 trillion.78 When we add this reality of the world capitalist system we arrive at a situation that is beyond any possibility for gold standard to exist. Literally if there was gold standard in the world, the world economy would not be able to operate. If we reduced every dollar down to a single grain it would still be impossible.

For a moment let’s abstract into a preferable scenario. Imagine a new government has been formed in the US, one that sees the gold standard as being the only way forward to a bright future. This government would be well aware of the trade deficient and what a danger it poses to the new gold money supply. The only way to end a trade deficit is to begin producing those same products here. This would require all kinds of manufacturing infrastructure being built. Thousands upon thousands of factories would have to be built here in order for this to be possible. Consider the de-industrialization of the West that has taken place since around 1994 with the passing of NAFTA. It has taken almost 20 years for us to be in this situation. How fast can you have all these manufacturing jobs return to the US? 20 years of exporting jobs would have to be reverse in a mere 3.46 years. In reality to prevent all the gold from leaving the country it would have to be done in much less than 3.46 years. There are plenty of reasons of why you can’t bring those jobs back to the US, but that discussion is for another day.

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Even then, the money that would have been spent on those commodities overseas would have to be instead used to build the production facilities here causing a stop in the supply of those goods. You can’t have it both ways, you either spend the money on the goods or you’re spending it on the productive capacity to manufacture them here. You could make tradeoffs, half of it on the goods and half of it on the productive power of course. But then it would be impossible to stop the trade deficit in time to prevent all the money from leaving the country. None of which matters because that’s not possible to accomplish anyway.

We can only fathom the bureaucratic nightmare and social unrest from the public and business that would arise from organizing the economy this way. It would essentially be extremely heavy state planning in a free market economy. The effects of which would be disastrous.

I had someone in social media once argue that we don’t need gold for every single dollar. I explained to him how there are 24.4 tr. grains and that we would need 65 tr. to cover the world GDP. His response, being a gold standard supporter, was that we didn’t need gold to back every single dollar. The idea he proposed to me was to have two dollars for every grain that was produced. I told him this idea didn’t make much sense because if you do that then you now have dollars that are backed not backed by gold. If we can just arbitrarily decide that one piece of gold is worth twice as many dollars, then why stop there? Why not just make it three dollars per piece?

If you’re going to the point where not every dollar is backed by gold then how can you call it a gold standard? Arbitrarily raising the number of dollars past the amount of gold held in the central bank is the same as doing it with the gold. The idea is in fact the opposite of what it proposes to be.

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A good question to ask: if we assume what we have just discussed was irrelevant, where do we get this gold from? With such support for the idea of a gold back currency it’s important to look at what exactly would be involved in moving to one from where we are now. Because that’s what an-caps are calling for, a return to using gold based dollars if not outright using gold itself. This idea is fraught with many problems that are not even looked at. This is a problem libertarians have; they don’t look at what is necessary to build some utopian idea they have in their minds. This is why they resort to such infantile positions such as “that’s not real capitalism”.

So what would it take to actually convert to a gold standard anyway? Well, for one thing it would require actually obtaining gold to be placed in a vault somewhere. Some have advocated using Federal Reserve notes to make the purchases. If that is the case then why do we need gold because clearly it has some value with which to make purchases? If they’re legitimate enough to purchase gold then why can’t they be used to purchase everything else?

If you do this you’ve just valued the gold by dollars created by interest bearing loans. The value of that gold is now determined by a money system that gold dollar advocates claim is illegitimate. This new gold dollar now has a strange value since it has been purchased with interest bearing dollars. How do you pay the interest on the money that was used to purchase the gold? With the gold itself that is worth less than the note because of the interest?

Of course we come to the question as to why anyone would sell you the gold for Federal Reserve notes anyway. If you were about to abolish Fed notes as having value, then why would anyone accept them as payment for gold?

Imagine being a gold dealer that has this stranger come into your office asking to purchase the gold you have. The man

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wishes to buy a lot of it, possibly all of it. You’re delighted that someone wants to do so much business you get excited at the prospect of all the profit you’re going to make. Say you begin to recognise him from television, that’s the right hand man of the chairman of the Federal Reserve come to buy your gold! You know this man is important and has a lot of money.

Excitedly you layout how much you’re willing to sell your gold to him for preparing for a big payoff. Then he reaches into his briefcase and pulls out that exact amount of Federal Reserve notes. Suddenly you remember from the news that the government is switching to the gold standard. So wait, he’s handing you a form of payment that will no longer be valid once they’ve collected all the gold they’re looking for? That’s just ripping you off, taking the gold without actually paying for it. Why would you accept a form of payment that is just going to be declared worthless once the transaction is complete? You wouldn’t and that’s the point.

Doing this is basically theft. That is why Roosevelt ordered the confiscation of gold on 5 April, 1933. There was no possibility to buy the gold because any form of payment would have then ended up being obsolete. The public would have known this, large profit driven firms would know this and they both would refuse to sell it. This is exactly why an executive order was needed to take it.

Now, let us assume that the previous two points were of no consequence. We ask another important question: If we do transition to a gold standard, what do we do with the existing debt? There clearly won’t be enough money in the money supply to pay off existing debts let alone have enough to make the economy operate. Well we have to do something, either pay it off or write it off (and we certainly can’t ignore it like it doesn’t exist).

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If we just abolish the Fed notes that can’t be replaced with gold we’d be destroying the entire financial system. This would be more than enough to destroy the country. Entire financial giants would be going under literally overnight. This would make the global crisis of capitalism in 2008 insignificant. Most of the assets held are based on this. Essentially we would be wiping out the assets of many, many people. The wholesale destruction of such assets seemingly has no limit to the amount of damage it can cause. In truth it would be destroying the entire world economy considering how many Fed notes are held by countries around the world. Good luck dealing with China alone if that happens, never mind everyone else.

Problems with a Gold Standard

Now that we have seen that the transition to a gold standard is impossible, let us now investigate what would happen if that transition could be made. This is much more important as it shows the inherent failings of a system of gold itself. The previous display of the history of using gold gives us some idea, but it will be of benefit to look deeper in the context of our current economic condition.

Trade Surplus Nations Hoard Gold

A serious problem that would face any national economy that used the gold standard would be the trade surplus problem. No economy exists in isolation and must by necessity conduct trade with other nations. Meeting the demands for various resources requires some form of economic co-operation even if merely the market mechanism. In this system of capitalist commodity relations it takes the form of international trade. When we apply a gold standard to this we see how impossible it would actually become.

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In reality there are trade imbalances, actually making them equal would be frankly impossible. The very nature of capitalism itself, and its rejection of equality and serious planning, makes this a fantasy. When an economy imports more than it exports it has a trade deficient. This means more money leaves the economy than is going in. As a gold standard it is a tremendous problem.

The United States right now has a trade deficient of about $38.5 billion a month. If the US currency was backed by gold it would mean a lot of gold would be leaving the country. Obviously this is a situation that no country wishes to face. A country with no currency would not be able to operate. With a lack of currency (or just shortage), your country is at a constant risk of recession.

Without gold there is a contraction of credit because money cannot be created upon bookkeeping entry. If this happens capitalists cannot borrow money to enter into a new round of production. This would cease the cycle of production (and the circuit of capital) sending the economy into recession. There are many more problems that would be caused by a lack of credit.

In order to combat a lack of gold, the production of it would have to keep up with the loss of it. It would be practically impossible as currently only 2,500 metric tons of gold is mined in the entire world every year (2010)79. This just isn't possible with a modern capitalist economy. There would be no way to keep the production of gold up with a trade deficit.

Another effect would be that certain countries would end up with all the gold. Nations that have a trade surplus would end up polyopolizing the world's gold supply. This would leave certain countries holding the supply of the world's currency. This would cause the entire world economy to collapse which would be good for no one.

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Constantly Fluctuating Price

One problem is the constantly fluctuating value of gold. The value per ounce changes frequently leaving many people day-to-day not actually knowing the correct value of the gold in their possession. This is a major problem; if you own gold because it has value then you would certainly want to know what its value is. If you don’t care what the value is, then why do you have it? If you can’t determine the value of the gold you have, then how can you ever use it wisely? If you can’t effectively use the gold then why you would even both with it to begin with?

Sure anyone can go online and tell what the value of an ounce of gold is. Using a quick click through Google you have the means of multiplying a number by how many ounces you have. That’s not the problem I am pointing out. On a daily basis you can find out what it is, that’s no problem. The problem is it constantly fluctuating value. One day your gold is worth (hypothetically speaking) $1 an ounce and the next its $4 an ounce. The next morning when you wake up you have no idea how much money you’re actually going to have in the form of gold.

The difficulties this would cause would be agonizing to deal with. Yesterday you had enough money to go to the store and buy your groceries for the week with, say a pound, but when you go to the store this afternoon its requires 2 pounds. This makes planning how to spend your money very difficult. You never know day-to-day how much you really have. Sure, you know you have 100 pounds in your basement safe, but how much can you purchase with that? You end up walking into the grocery store not knowing if you can purchase enough food or not.

Yes, I know, I can hear the criticisms already: “all you have to do is check the price of gold before you get to the store.” Yes you can, that is not what I am saying. It makes budgeting your money quite difficult. A day or so ago you had enough to buy food and pay rent with enough left over to get that new 3D

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printer you were eyeing. A slight drop in the value of gold means you instantly can’t afford all these things. Planning and budgeting for your daily life becomes a near nightmare. All of this happens because gold dropped $0.5 overnight with no warning. This is easy enough to deal with when we’re considering a budget of three items. When you expand this out into a family of four this becomes even more difficult. To take it even further I would dread operating a multi-million dollar business this way. (This is a good reason why actual capitalists in the economy oppose a gold standard.)

The result of this is a daily effort trying to anticipate the value of your gold for when your bills are due at the end of the month. You’ve gone from simply paying your bills to being a gold speculator in order to pay your bills. Doing something like this is just nonsense when you compare it to a much more rational way of exchanging money like handing over a dollar bill. A currency of coins or paper money with a set value that would rarely fluctuate in comparison to the price of gold would be a much more sensible alternative. If your rent is $650 at the end of the month you know to budget $650.

Now do the same with a gold backed currency. You own $300 that is equivalent to say $300 of gold that is held in the central bank. Tomorrow the gold price oscillates as usual and now the price of gold dropped by half. Your $300 is now really only worth $150; you’ve lost half your money in a single instant via events which you had no control over. Try explaining this to the grocery store when you’re hungry or your landlord when the rent is due.

Often I get a response to this along the lines of people saying that the value of a fiat dollar changes too. I recognize this and would never claim any different. The good thing about fiat currency is that it is very stable in comparison to the price fluctuations of gold. The value of the dollar over the last 100 years has gone down (fig.1). Its devaluation has been a steady

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trend that has been easy to deal with (within the context of capitalism) as there have been few severe shocks to it. Keep in mind that the government can put out policy on money where as that’s difficult for gold.

Figure 2

The decline in the dollar has been relatively consistent leaving us with a good idea of where the dollar is going to go. Because there is so much control over the money supply (in comparison to the market value of gold) it is a far more stable means of producing a currency.

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Figure 3 - http://goldprice.org/gold-price-history.html

Compare it to the price of gold and how much it alters in merely a month. (Fig. 2) Remuneration for employment would be rather difficult to deal with. One week your pay is worth X amount and the next it is worth Y amount. One has to keep in mind that a labour contract would have been singed both in the bourgeois economic world and in the Libertarian fictional one. If the value of the dollar drops your boss isn’t going to care how difficult that is going to make your life, if he can pay you less he certainly will. This is one reason why we have minimum wage legislation, because inflation affects worker’s incomes.

I’ve heard some libertarians claim that there would be little to no price swing in the value of gold. This claim is not only completely baseless; it’s just ridiculous to think that such a valuable commodity simply won’t fluctuate with the rest of the market. No amount of “real” or “perfect” capitalism will stabilize a commodity price with no price or supply controls whatsoever. Basing a dollar on gold just isn't stable.

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Gold Does Not Prevent Price Inflation

One claim that comes out of the Austrian school is the claim that the gold standard prevents price inflation. This is one of their particularly adamant talking points. Supposedly since each dollar is backed by a certain amount of gold, inflation can never increase. The theory is sound, if you have a particular amount of gold you have only a particular amount of dollars in the money supply.

This is based on Murray Rothbard’s claim that deflation was the natural tendency in capitalism. In actuality this claim is only true in the fictional “anarcho”-capitalist world. A claim that doesn’t have anything back it up. In the real world of economics we do have substantial proof that indeed the gold standard does not prevent price inflation.

Libertarians do point to a time in history where they believe that this claim holds true. They point to the 1873–1896 period as an example because there was an almost continuous period of deflation. However upon investigation we can see that this was a historical aberration.

When we look at the data we can see that price inflation happened frequently in the late 18th and 19th centuries. In the years not listed there was a decrease in the inflation rate.

Year Inflation Year Inflation Year Inflation

1776 14.17% 1813 20.02% 1859 1.00%

1777 21.87% 1814 9.89% 1861 5.96%

1778 19.78% 1822 3.65% 1862 14.17%

1780 12.25% 1825 2.57% 1863 24.82%

1782 9.70% 1826 0.00% 1864 25.14%

1790 3.75% 1827 0.83% 1865 3.68%

1791 2.71% 1834 1.97% 1880 2.48%

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1792 1.87% 1835 2.89% 1887 1.10%

1793 3.45% 1836 5.62% 1900 1.24%

1794 10.95% 1837 2.77% 1901 1.23%

1795 14.38% 1841 0.95% 1902 1.21%

1796 5.26% 1844 1.12% 1903 2.28%

1800 2.10% 1845 1.10% 1904 1.17%

1801 1.31.% 1846 1.09% 1906 2.23%

1803 5.49% 1847 7.69% 1907 4.47%

1804 4.38% 1850 2.16% 1910 4.42%

1806 4.23% 1852 1.08% 1911 0.00%

1808 8.66% 1853 0.00% 1912 2.06%

1810 0.00% 1854 8.68% 1913 2.13%

1811 6.80% 1855 2.95% 1914 0.94%

1812 1.26% 1857 22.92% Table 1- http://www.measuringworth.com/calculators/inflation/result.php

Here it is important to keep in mind a few facts about the events that took place in history during this time. There was the American War of Independence (1775-1783), the War of 1812 (1812-1815), and the Civil War (1861-1865). Outside of these times we see many periods of price inflation. These typically occurred when there was an economic boom happening, meaning the expansion period of the industrial cycle (or business cycle in bourgeois economic terms).

When we look at the 19th century we also find that gold was inflationary, outside the anomaly 1873–1896 time period. In fact the US had price inflation during several booms 1825, 1834–1837, 1844–1847, 1841, 1852–1855, 1857, 1859, 1880, and 1896–1914. In 1896-1914 there was general price inflation across almost every Western nation.

Okay, okay I can hear the libertarians now. They’re going to claim that was because of the central bank. Unfortunately for

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them they are not going to be able to use the Fed as the ubiquitous scapegoat on this one. For much of the time period there was no central bank. Libertarians you’re not going to be able to get away with blaming the Fed for this one.

When we compare these periods of deflation with times when the US suffered from recessions in the 19th century we see a general trend.

US Recessions in the 19th Century

Years (Peak-Through)

Recession Length (years)

Years (Peak-Through)

Recession Length (years)

1796-1798 Less than 1 1860-1861

1802-1803 Less than 1 1894-1865 Less than 2

1811-1812 Less than 2 1873-1875 Less than 3

1815-1816 1883-1885 Less than 1

1822-1823 1892-1894

1828-1829 1895-1896

1833-1834 1903-1904

1836-1837 Less than 1 1895-1896

1839-1840 Less than 3 1903-1904

1856-1858 1907-1908 Table 2 - Davis, J. H. 2006. “An Improved Annual Chronology of U.S. Business Cycles since the 1790s,” Journal of Economic History 66.1: 103–121.

Clearly there is no perfect correlation, but it certainly does demonstrate that these recessions were deflationary periods as well. I think this does show that outside of the anomaly example, the view is booms are inflationary and recessions are deflationary.

I think this is more than enough to show the truth that gold doesn’t prevent inflation.

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Classical Gold Era Myth

A lot of libertarians and some conservatives have a much romanticized view of the gold standard era. They have a view of this perfect currency that made the economy function smoothly and without trouble. Unfortunately a good deal of what is believed about this time period is not true and has lead to some completely incorrect assumptions about its function. This seems to be a reoccurring problem throughout the libertarian comm.-unity; they have an unrealistic view of the past and fictitious scenarios. Being grounded in economic reality seems to be wholly rejected from their ideology.

Once you take a good look at that time period (1880 to 1914) we see that this glorified time was a total myth. It was far from an ideal situation and did not function as many believe it did. Here are the main myths:

(1) a system with a pure metallic backing, or (2) one where most money was gold, and where all credit money was backed up by gold. Throughout this time credit money was actually the principal currency people dealt with on a day to day basis. Most daily transactions occurred with money created by credit as opposed to that created by the central bank. Gold was inherently inelastic as a monetary base. The currency units were defined by a set amount of grains. The world economy was actually contrac-tionary and deflationary towards the countries that used a gold standard.

Not all economists agree with this time period, they prefer a much larger one that goes from 1821 to 1914. But this tends to leave out something important; it was not entirely a gold standard, silver played a big part in the extended time frame. In fact in the early 19th century silver was considered more important. Right up to the 19th century there was actually a

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bimetallic standard that was not primarily based on gold, it was actually on silver. This is something the gold bugs actually forget when trying to expand the time period for the classic gold era.

It's also important to note that it was not until 1880 that most nations were on a gold standard in some way. They came into it at different times, but it was recognized by a majority of nations in 1880. From 1821 on it was not a standard that was widely used, so it's questionable to argue it for 1821 to 1880.

What we need to look at when considering the classic gold era is what actually constituted the money supply for the countries using the gold standard. How much of it was actually gold? The data on the subject is quite revealing. We'll show what was primarily used by the emerging industrializing nations between 1885 and 1913.

Figure 4 Triffin, R. 1985. “Myth and Realities of the Gold Standard,” in B. Eichengreen and M. Flandreau (eds.), The Gold Standard in Theory and History. Routledge, London and New York. 140–161.

What is important to notice here is that just a few years after the beginning of the gold standard classic era did the broad

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money supply become mostly credit money. This is made up of currency and demand deposits which also include paper money. As we can see demand deposits already make up the largest portion of the money supply.

Now let us look at what happened to the same nations by the year 1913 which shows the money for the same 11 countries. (United States, Canada, the United Kingdom, France, Germany, Italy, Netherlands, Belgium, Sweden, Switzerland, and Japan.)

Figure 5 Triffin, R. 1985. “Myth and Realities of the Gold Standard,” in B. Eichengreen and M. Flandreau (eds.), The Gold Standard in Theory and History. Routledge, London and New York. 140–161.

What we see here is that gold actually decreased 10% since 1885. In addition, credit money made up an overwhelming 85% of the money supply. Bank created money was 63% of total money supply. This has increased a great deal since 1885 and now makes up an even larger majority of the total money supply.

The demand for credit money was being filled by the banking system. The money was mostly in the form of demand deposits

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and banknotes. This shows that the money supply was mostly elastic. The base money was gold and silver, while the credit money was essentially fiat.

What we have here is the inelastic nature of the gold standard restricting the creation of credit money as necessary to grow the economy. Sure, the libertarians like restricting the growth of the money supply, but have no answer on how to increase it as there is a demand for it to grow the economy. Essentially their idea just retards economic growth all for the sake of some incorrect idea about how money enters the economy to begin with. We should ask ourselves how much demand for credit and economic growth was prevented so as to maintain gold reserves for final clearing of credit money transactions. A gold standard was a hindrance to the development of the economy.

This shows that the gold standard had to be removed as a base money in favour of something else that would serve the function of the economy properly. Notes of the central bank became the base money in many of these nations.

Eventually the gold standard was destroyed in the US in the 1930s after a failed attempt to restore it was made with the gold exchange standard. By this time the relevance of gold was already dying and ceased to be able to keep up with the expansion of the world economy. The world economy just grew too fast for gold to be sustainable.

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Figure 6 Triffin, R. 1985. “Myth and Realities of the Gold Standard,” in B. Eichengreen and M. Flandreau (eds.), The Gold Standard in Theory and History. Routledge, London and New York. 140–161.

Despite the protests by libertarians and Venus Project people, there was no grand conspiracy to get rid of the gold standard. It simply out lived its own usefulness. It was disposed of because it has its limits and hinders the function of capitalism. It had no ability to stop the expansion of the money supply anyway. Nor could it stop the credit money from becoming the dominant form of the national money supply by 1913.

Gold Is Especially Vulnerable to Speculation

While writing this work a big crash in the value of gold took place almost overnight. Gold is subject to speculation the same way that all investments are subject to it. It really only has value so far as anyone believes it does. Gold has no inherent real value to regular people like construction materials, tools, shelter or food. (Yes it is used in electronics and such but that's not why non-industrial producing people collect it.) Regular people only to collect gold because they think it can be exchanged for commodities later. In Marxist terminology, people don't want gold's use-value; they want its exchange-value. If no one wants

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to trade with gold, no one wants the gold, and then its exchange-value (which is the vast majority of its value) cannot be realized.

This is not to say that gold doesn't have a use value, of course it does. The vast majority of it is used for jewellery and then to a lesser degree in many electronics and other industrial uses. But we're not talking here about its use-value, we're talking about gold as a primary-money-commodity, a gold standard. In the process of exchange the commodity takes on a different character. What we're talking about here is the value of gold based on market speculation.

Basically people want to make money, one way to do this is to buy something for a low price and then sell it for a high price, the old "buy low, sell high" adage. Gold has historically done very well and has usually gone up in value. So any purchase of gold was considered to go up in value at a near guarantee. Unfortunately this is quite foolish as another adage goes, "past performance is not a guarantee of future results".

This is a market economy, which means profits on gold are the same as an investment. It is purchased for one price as long as it can be sold for a higher price. These higher prices are determ-ined by an increase in demand for it in the future. The price of gold can only go up if there is a demand for it. If no one wants it then there is no increase, but a decrease in price.

This is exactly what happened with the gold price just recently. After the 2008 global crisis of capitalism, faith in the currency (the US dollar) was shaken. This mistrust was increased with the inability to end the recession and the quantitative easing rounds that were implemented. When this happened, "gold bugs" like Peter Schiff went out into the media making all kinds of fanciful claims that gold is a real currency that is stable and always increases in value. Those who blindly believed him tend to forget that Schiff owns a gold company Euro Pacific Precious Metals

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and thus has a serious profit motive in espousing the supposed superiority of gold. This was exacerbated even further by horribly deluded libertarians like Ron Paul. His contribution was to produce very misleading propaganda spreading falsehoods about how the Federal Reserve works and claiming secret conspiracies. His solution to it was of course to purchase gold, and advocates a gold standard. People also ignored that Ron Paul has literally millions invested in gold.

Ron Paul and Peter Schiff were very instrumental in the increase of the romanticization of gold. They've both claimed that fiat currency is a "dishonest" currency, which is a vague term and very untruthful. They both, along with others, went out into the media claiming that gold was the most valuable thing ever that anyone could ever want. They spent a few years talking up how great gold is and that it will supposedly be the only thing of value once the US economically collapses because of the supposedly fraudulent US dollar. This effort raised the demand for gold quite a lot. This no doubt brought great profits for Peter Schiff and the rest of the gold industry, as well as its investors.

What these people failed to understand is that this was a bubble, like all other bubbles that exist in investments in a market economy. The increase in the price of gold was determined by the demand for it. By going out and espousing the supposed virtues of the metal it increased the demand for it as (predominantly) libertarians ran out to purchase it thinking it was going to be the best investment ever.

Effectively they created the demand for gold by going into the media and fooling people into buying it. The price went up because these people invoked a horrible spectre of hyper-inflation that was going to destroy the country. These claims never materialized and people lost interest in buying gold as a safety measure. As people figured out how full of lies and

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ignorance these guys are, they stopped investing which dramatically decreased the demand.

The decreased demand for gold is what caused the dramatic drop in price. Gold like all commodities in capitalism are subject to this instability because of supply and demand. Libertarians think this doesn't apply to gold for some reason.

To quote a video of mine:

"In the same week the stateless currency philosophy of Bitcoin, and the primary-commodity-hoarding philosophy of the Goldbugs both collapsed, due to their inability to grasp that these means of exchange or their management do not cause crisis, but the dynamics of the system which they facilitate causes crisis."

Limiting Government Ability to Help End Recession

Making a currency be tied to a precious metal causes all kinds of problems. I think the biggest problem caused by it is that it limits a government's ability to do anything about a negative economic situation. For example, pegging the dollar to gold eliminates a government’s ability to do anything about mass unemployment. Without being able to manipulate the currency to deal with such a problem, a country would be facing an unemployment problem for quite some time, assuming it recovered at all.

Supporters of the gold standard don't take this into account because they're primarily Austrian schoolers who believe that all government intervention in the economy is wrong. Part of why they want a gold standard is so that the government can't manipulate the currency. They refuse to acknowledge that this is how countries come out of a recession. It actually requires effort in planning to fix problems. They don't acknowledge this; they insist they just magically fix themselves without any effort. This is just terrible and would lead to even greater disasters.

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Others in this line of thought have the opinion that policy makers only choose short-term gain over long-term costs. Personally I don't really see this as the case when it comes to state intervention in capitalism. The purpose of the central bank, policy makers, or whatever, is to take this into account. In reality it is the day-to-day business dealers and financial giants who think nothing of the future while trying to collect as much money as possible now. This is why those who were aware there was a problem growing before the 2008 global crisis of capitalism and didn't do anything about it. There were unknown numbers who actually did begin to see something, but at no time stopped what they were doing; they were pulling in too much in the way of profits.

Why do we need to alter monetary policy during a recession? Because any notion that capitalism doesn't have crisis built into the system has already been disproven by the fact crisis has arrived. In the context of capitalism monetary policy is the best thing a country can do to end it.

As unemployment grows in a recession it leaves the public with much less of an overall purchasing power. Unemployed people generally don't purchase a lot in terms of goods and services, certainly not enough to support an entire economy. The only thing (in capitalism) that can end to the crisis is a return to consumer spending. This is primarily achieved by simulative fiscal policy involving government spending with the focus of creating government jobs that get people out spending money again. The increased demand for goods and services stimulates private sector investment causing the capitalist class to see avenues for renewed profits. This encourages the capitalist class back into production to meet a growing demand that will bring those profits. We have to do this because the free market is already not doing this. If left on its own we could be looking at decades to see a recovery, if one happened at all.

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Another measure that is taken is an expansion of the money supply. The central bank increases the number of dollars in the system in order in order to stimulate consumer spending. They put more money out there for banks to loan to people so they can make purchases they wish to. This is combined with loaning out to people who want to start up their own businesses. Eventually they would hire employees who could then be taxed and there would also be consumer spending that would increase demand. Another big benefactor of this would be already existing large firms who would find it easier to enter into a new round of production.

There are other measures too like lowering short-term interest rates, but we're sticking to the gold standard subject here.

For the government to carry out these actions they require an expansion of the money supply. You can't expand the money supply in a recession (or ever) if every single dollar has to be back backed by a piece of gold. Actually increasing the supply would require more gold, which in itself would cost money. In the end the government would lose all ability to do the work necessary to pull a country out of recession leading to possibly decades more suffering.

What Value Does Gold Really Have?

One of the supposed benefits of gold over fiat currency is that gold is said to have an inherent value. Gold has an actual physical use as opposed to fiat money which is just "meaningless" pieces of paper. Constantly for years we heard Ron Paul and Peter Schiff go on about the "real" value it has, or how it's an "honest" currency according to Paul. These two views, indeed have attempted to prop up this perception of gold having an inherent value a fiat currency does not. In truth the situation is much more complicated than that.

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The idea is that gold has a utility, meaning it can be used in a multitude of ways and in different products. There are all kinds of things you can do with gold, my favourite thing is electronics, but it has many others. This use is what makes gold valuable. People must want it for one reason or another. How is this different from anything else?

What if I don't care about gold? Let us say that I am a producer placing his commodities on the market. You come to me with gold looking to use it as a means if payment. I personally would not take it; it has no value to me because I cannot use it for anything. I'd most likely exchange it for cash at some point in the future. This means it only has so use so far as I am exchanging it for another currency. Wouldn't this indicate that its only value was as a means of exchange, not any value inherent in itself? If this is true, then anything that is useful as a means of exchange can substitute it. There is nothing unique to gold in this way.

The idea that gold is the most useful commodity as currency relies on the premise that people will always value it. This statement is false; it is false for anything used as a currency.

This means the gold was only valuable so far as it can be exchanged for currency.

This is the same as every currency. Even a gold backed dollar is worth nothing if no one wants it. So what if I can exchange a dollar for gold? I have no use for gold. If you paid me with it I'd just exchange it for cash that I can use. Meaning the only value gold really has is its ability to be exchanged. This is the same as the currency itself. This means the gold is pointless, it's only the dollar it can obtain that had any value, not the other way around.

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Gold vs. Fiat Consumer Price Inflation

The primary reason that an-caps choose the gold standard is the belief they have that the ability of governments to print more money causes inflation. It is this ability to inflate currency on demand that causes inflation. This according to them cannot happen if we have a gold standard. Of course this is not what inflation is. The idea more generally is that an increase in the money supply causes prices to increase. The gold standard supposedly guarantees price stability. From history we can see this is not true. To see why this is we look at the consumer price index. First let us look at CPI inflation during the gold standard period of June 1919 to March 1933.

This is most certainly not price stability. Gold has positively demonstrated the opposite here. There are all kinds of reasons why this happens, all of them connected to the inability of gold to adapt to situations. One problem is that the physical stock of gold can't adjust to alterations in the balance of trade. Currencies don't just try to avoid inflation; they also try to avoid price deflation too. The effects of deflation in many cases are far worse than those that occur under inflation.

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Since the an-cap position is based upon the idea that just printing money causes price increases, we should compare this gold with the rounds of "quantitative easing" (or QE) that have been carried out.

This demonstrates quite perfectly that price stability is far more viable under a fiat currency. Keep in mind that while both of these charts occur around the time of a crisis, it was the fiat currency that was able to deal with the situation. The lack of an ability to expand currency during the Great Depression is a big component as to why it took so long to recover from it. Of course it is not the whole story; I'm not saying it is, rather I'm saying that it is a big part of it.

If we were to accept the an-cap belief to be true, then we would be seeing massive CPI inflation after rounds of QE. The Federal Reserve has increased the money supply to heights previously unthinkable. Yet this is clearly not the case. Prices have remained relatively stable; there have been no significant alterations thus far.

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This chart here shows just how much the Fed has increased the money supply.

As we can see that is an immense increase. Even with this massive QE, gold still caused inflation variances 23 times that of fiat. A good question one might ask here is how the Fed will be able to absorb all this liquidity it has created. The answer is as simple as the Fed increasing the interest it pays on reserves. It can also enact reverse repos, or use term deposit facilities to stop the banks from lending out too much money.

This claim about gold preventing price inflation just isn't true. There's nothing to indicate that that it is. There has been inflation over a long period of time. Such a thing is going to happen when you have an expansion of the economy over that long period of time. Is fiat currency perfect? Of course it's not. Gold is tremendously worse. It has never been a solution to a problem; it has been a cause of it.

There is no current problem with regards to price stability; it literally has not materialized as many an-caps have claimed. A return to the gold standard would certainly cause the very problem they falsely believe already exists.

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Conclusion

We've seen quite clearly that the gold standard is not the solution to the crisis faced by capitalism. Have no illusions, this is what an-caps want, a solution to capitalism's inherent failings. They want the "real" capitalism spoken about in superfluous texts and YouTube videos. No doubt that currency policy under fiat is not perfect. The solution however does not reside in going back to a currency that has already proven to be entirely unstable and disastrous. Most particularly when it comes to dealing with crisis which is what this all began with.

When reading about gold, written by the gold bugs, you never hear any criticisms of gold. There are tremendous flaws using it, yet they are never addressed. We Marxists see where things can go wrong in our system. Basically everything written by us during the last years of the Soviet Union, and years after its end was nothing but it.

These solutions by an-caps make all the promises of a utopia, yet they can never demonstrate it. Gold is, as the rest of the solutions in this book, are utopian.

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VII. False Theory of Inflation "Marx explained that under capitalist commodity production, money must be a commodity before it can become money. This means that in order to function as money, the money commodity must be produced by industrial capitalists whose only motive is profit. The idea of planning the money supply while leaving production to the anarchy of the profit system is indeed a hopeless contradiction."

- Sam Williams, Critique of Crisis Theory blog

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What about Inflation?

Most common economic thought on inflation comes from renowned economist Milton Friedman. His views are the ones most prevalent today. Interestingly his ideas spread into all walks of economic thought, accepted by many. Flip through an economics text book or read any of a billion blogs and you’ll find his ideas there no matter their leaning. Unfortunately his theory of inflation isn’t all that accurate and relies upon certain assumptions in order for it to work. This should by no means be limited to Friedman; all economists make certain assumptions about economics. The question here is to try and get the most accurate assumptions possible.

This is not always an easy task. Real life is constantly throwing endless new variables and circumstances at us. This can make it difficult to keep up to date on the latest information. This in itself is a large undertaking, unceasingly keeping up with massive amounts of data coming at us. The task of collecting data can easily turn into a full time job. More to the reason why we have a whole employment field of economists to analyze it for us. Even a great deal of knowledge in economics can lead to a poor understanding of how inflation works and the assumptions made behind it.

Since the global collapse of capitalism in 2008 the topic of inflation has been brought to the fore of economic debate, particularly on the internet. There has been much screaming from the right and the far right saying that hyper inflation is around the corner and going to strike us at any moment. For me this is like the “boy who cried wolf” story. Anytime a Democrat gets elected the right screams a lot of things like gun seizure and hyperinflation are due. When we listen to the far right they say hyperinflation will happen in two to four months. Of course they have been saying this for around fifty to forty years. So I tend

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not to listen, but it is worthwhile now and then to go back and refresh myself on their argument.

This is completely natural, anytime we face a crisis we are forced to take a second look at our prevailing ideology. It’s also a smart thing to do, we might see a flaw in our ideology somewhere that lead to the disaster we face. There are two approaches we can take to this: 1) we can stare very hard at the mechanics of our system and try to poke it to see if there is a leak anywhere in its operation. We may even return to its drawing board to see if there was something we missed. Or, 2) we can take the path of the religious and merely grip tighter to our faith when it is challenged. I’m sure we’re all familiar with the Christian in a crisis of faith praying twice as much repeating the prayer twice as fast.

In our modern society we have seen both reactions take place in America. The now famous line by Alan Greenspan comes to mind when speaking about our prevailing ideology: “Yes, I’ve found a flaw. I don’t know how significant or permanent it is. But I’ve been very distressed by that fact.”80 While I disagree with the capitalist mode of production and its corresponding social relations, I do give the man credit for acknowledging that there is a flaw and it must be looked after or the consequences will be devastating. This is the smart thing to do, question everything you think you know about the way things are run because you never-know where you don’t know something. Here I’m tempted to recall the historic line by Donald Rumsfeld: “There are known knowns; there are things we know we know. We also know there are known unknowns; that is to say, we know there are some things we do not know. But there are also unknown unknowns – the ones we don’t know we don’t know.”81 To put it plainly for you the reader, Greenspan is saying there are unknown unknowns that lead to the catastrophe we witnessed. Well, unknown to bourgeois economics anyway.

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On the other side we have a desperate cling to ideology in a time of crisis. Unfortunately the people who do this are being given far more credence than they deserve. Their reaction to the collapse is one that doesn’t analyze anything and merely grips the fundamentalist texts of capitalism even harder. Many simply resort to denial and insist that the problems can only stem from straying from the righteous path. In economic and social theory circles these people are known as libertarians (also “Anarcho”-capitalists). Their idea is that we must return to a principal that hasn’t corresponded to material reality in hundreds of years, or at all. It is from this fundamentalist view that we get the iconic libertarian phrase, “that’s not real capitalism”. The statement indicates a sincere (yet very misguided) wish to return to the economics of the Founding Fathers.

We face the situation where libertarians won’t question the economic system of capitalism to see if it isn’t perfect. Much like how the fundamentalist Christian won’t question the Bible on certain issues no matter how flimsy they are. Ron Paul is one of the most iconic of libertarians who I would think is probably quoted the most on it. (I’m not sure I’m just guessing based on my own experience.) He’s constantly insisted that the US return to a system of capitalism that prevailed in 1776. Of course for some reason he doesn’t realize that the productive forces and material reality of America have changed since that time. He sounds like an old man claiming things were better in the 50’s because there was a more proper Christian family structure (nuclear family).

These ideas by libertarians to just simply ignore the way the world is and just steadfastly demand that we return to a “simpler time” are just irrational, even dangerous. We don’t live in a country that existed like the Founding Fathers did. Capitalism has had time to progress to what it is today with all the concentration of capital that Marx predicted. At present there are about 147 companies that control the majority of the

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economy of the entire world. 82 It is impossible to simply go into a denial of Marx’s writings and claim this never happened.

This is why we need to really look twice at the basic assumptions we have about this system. More specifically we should look at our prevailing ideas about inflation and what causes it. The established counter assumptions of inflation that exist are not entirely accurate and also must be called into question. This is the very point of the work you are reading right now. It is based off of a blog post I read by John T. Harvey of the Forbes website.83

I read his post where he takes a critical look at inflation as it is laid out by Milton Friedman. He notes that Friedman’s theory of inflation is wrong because it makes certain assumptions about the variables in the equation of exchange (MV = Py). When Harvey looks at them in a different light we can see the mistakes Friedman makes. Along with this he also covers the misconceptions that everyday people have about how the Federal Reserve expands the money supply. A view that is not unique to that of the libertarians, it’s a misconception that many, many people hold. It has spread quite rapidly because of the internet. The right wing has fallen for it because of the rantings of Ron Paul. The left has fallen for it, I think, because of the popular Zeitgeist movies. They think the Fed just prints more money and it goes out into the public without question. To use Friedman’s example, a helicopter just comes along and dumps it on the country.

What Harvey does is respond by correctly showing how the Federal Reserve creates more money and gives new light on the variables in the equation. His new light makes much more sense than Friedman’s does. It also corresponds to reality in a way Friedman’s couldn’t. Harvey is taking the material conditions of our modern capitalist system into account where Friedman relied too much on Econ 101 to formulate his theory. After

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reading his blog post I noticed some things were left out that caused Harvey not tell the whole story. Of course, as a Marxist, I am going to have a different view than he does. I’m only seeing the equations and its interplay with the other variables from a Marxist perspective. I think my view certainly has something to add to the topic.

1) Milton Friedman’s idea of inflation and misconceptions that surround public ideas around money creation

2) John T. Harvey’s response to Friedman’s concept of inflation and truth behind how the Federal Reserve creates new money

3) More examples of why Harvey’s more flexible assumptions of the equation of exchange are more accurate

4) My investigation into the assumptions of Harvey’s variables from a Marxist perspective

It is my hope that this work will increase the reader’s under-standing of the nature of inflation and how it works. On top of that I hope it increases the reader’s understanding of Marxist economics.

Milton Friedman's View of Inflation

Friedman puts forth a basic concept of how inflation occurs in the economy. This concept has been almost universally taken as truth with little or no investigation by libertarians. The idea is this: printing more money causes inflation. It’s pretty simple and gets straight to the argument. It’s not surprising that it is taken so easily, it’s short and simple to understand. That’s not a criticism mind you; it’s just an explanation for the ease of its travel around opinion of non-economists. Superficially it makes a lot of sense and seems reasonable. We hear about this all the

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time, the talk of QE or Quantitative Easing has entered into our mainstream economic language. We’ve now gone through three rounds of QE which has a lot of people nervous. The question as to whether or not to be nervous is very subjective depending on your opinion of what QE will actually do. (Investigating QE is not the purpose of this work.) Personally I think that the first two QE did not accomplish what they were intended to (repair the economy). So in my view the QE3 is pretty much useless and won’t accomplish what the previous two rounds failed to. Let us disregard this for a while as it is distracting us from what we are supposed to be discussing. We should therefore begin with the “equation of exchange”:

M V = P y

The variables in this equation are defined as follows. M is equal to the supply of money in the economy at any given time. V is the velocity of money, meaning how many times the average dollar is spent in a given time period. P is the average price of goods and services, while y is the total quantity of all goods and services sold during the time period in question. With this we can create a temporary fictional economy to explain the equation. Let us say as Harvey, “Thus, if there were 100 goods and services that sold for $10 each (on average), then that means a total of $1000-worth of transactions took place. Were there 200 one-dollar bills in this economy, then it must be that each was used 5 times (hence the “velocity” of money, or how fast they were spent again).” It would be expressed in this way:

M V = P y

200 x 5 = 10 x 100

This is the standard equation that all economists use, there is nothing outrageous here. This is not some Marxist conception of

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what the equation should be or anything like that. What is before us is used by every economist in the world (or something similar). I’m sorry to have to go off track again but some people don’t understand this. They automatically assume that when a Marxist writes something, it has been changed in some way to fit another view despite the fact it has been written in plain bourgeois economic formulae. I’ve done no such thing here, when I do I will state that I am so that way no one will get confused.

From this we can now get our equation that shows what inflation is according to the commonly accepted belief of it.

Money Growth ==> Inflation Or M ==> P

The idea is that if you simply increase the money supply then the price of the goods and services will automatically rise with the drop in the value of the dollar. This devaluation of the dollar occurs because there is now more money in the system. This view is based off of certain assumptions that are made about the variables in the equation that are commonly accepted without question. The mistake is made when we assume certain things about the very nature of the variables. This can be very hard for some people because our opinion and views of them can vary according to things like life experience which can be very subjective. Friedman (and many others) for example sees them in an overly simplistic way that leaves out much of the context of society and the prevailing social forces within it. What do I mean by this? I’ll explain later on when it’s appropriate to get into it with more detail on it. For now we’ll take a look at exactly what assumptions are being made when someone holds the inflation view M ==> P. Meaning the assumptions that have to be made in order for this view point to work. I’ll be quoting directly from the Harvey article for the sake of simplicity.

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M: That which is money is easily defined and identified and only the central bank can affect it’s supply, which it can do with autonomy and precision.

V: The velocity of money is related to people’s habits and the structure of the financial system. It is, therefore, relatively constant.

P: The economy is so competitive that neither firms nor workers are free to change what they charge for their goods and services without there having been a change in the underlying forces driving supply and demand in their market.

y: The economy automatically tends towards full employment and thus y (the existing volume of goods and services) is as large as it can be at any given moment (although it grows over time).

Taking these assumptions of the variables we can now go back and look at our equation of exchange and see how it is that the “money growth ==> inflation” belief comes about.

It is theoretical here that P cannot change on its own and y is currently assumed to be as high as it can be given the current level of technological development and availability of resources. When we look at V we see that it is insisted that it is constant. So what remains? Obviously we see that P is the only variable that is assumed to have the power to change. By working on these assumptions it is only logical to immediately look at P when we see any fluctuation we observe. This is why P is automatically said to be the cause when inflation occurs.

This is what leads us to Friedman’s famous claim about the Federal Reserve just printing more money. In his book “The Optimum Quantity of Money” Friedman uses the example of a helicopter flying in and dropping new money into the money

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supply. From this we get the idea that the central bank has the power to simply double the money supply at will. This is what Friedman’s helicopter example is supposed to express. Alright, let us work under the supposition that this occurs.

M V = P y

400 x 5 > 10 x 100

If this is to be considered a problem we have three possible solutions that don’t involve simply reducing the money supply (lowering M back to 200). To quote Harvey again, “1) y could rise to 200, but of course it can’t because it’s already at its maximum; 2) V could fall to 2.5, but it is constant (something Friedman takes pains to emphasize in the original article); or 3) P could rise to 20. It is of course the third that proponents of the “money growth==>inflation” view say will occur.”

M V = P y

400 x 5 = 20 x 100

We must go back and look at why this can be the only outcome. Because we are operating under certain assumptions that only allow us to have this one conclusion. “Friedman says that y is constant at the level associated with the natural rate of unemployment, while V is indirectly related to agents’ demand for cash. When people want to hold more cash, V, the rate at which they spend cash, naturally falls, and vice versa. But, Friedman further specifies that V is relatively constant and so, therefore, is the demand for cash.” The conclusion is that when the central bank created more money it means people are now holding more money than the care to have. It’s saying that the Federal Reserve has increased the supply of money beyond the demand. It assumes that the demand remained at the original level so the Fed printed money because it felt like it. (Or that it

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was a part of an evil conspiracy to destroy America.) The only possible outcome of an increase in the money supply by people who hold this view of inflation is that people go out and spend this money on goods and services. But they don’t purchase any more or any less because they are also assuming in aggregate, more does not exist. The only result is that the suppliers of goods and services bid up their prices up. Voilà, money growth led to inflation!

As we can see there has been no investigation as to why inflation occurs in an economy. There has only been a set of assumptions that can only lead to this one conclusion. These assumptions of the variables in the equation are in reality preconceived notions of modern capitalist society. The variables are supposed to reflect truths of the system in which we live, yet their function cannot produce a scientific result. These assumptions are made about the equation because bourgeois economic theory makes certain assumptions about the social relations between individuals that spring from the productive relations between them.

Harvey does correctly point out that Friedman’s assumptions are incorrect. However what he does not do is determine why they appear the way they did. The reason is because of the notions that capitalism makes about people and their motivations that are not true, they are only repeated for the sake of preserving the capitalist economic order. Take for example the claim that people only act in their own self-interest. If this were really true, charity could not exist, but this is considered something society can rely on.

In the next section I will be discussing Harvey’s response to Friedman and these incorrect assumptions that are made, as well as giving us alternative explanations as to why inflation occurs.

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Looking at Real World Conditions

Harvey’s response to Friedman and to the commonly held belief surrounding inflation is very important. In real life much of this is completely untrue, particularly on currency creation. The problem here is that this explanation is very superficial and is usually given out at Econ 101 lessons. Harvey points out that people only seem to remember the “M ==> P” part and not the assumptions surrounding the variables that lead to it. When people do this they fail to scientifically understand why they arrive at the conclusion they do. We need to always keep in mind that our assumptions have to change over time as material conditions change. Unfortunately bourgeois economics isn’t concerned with material conditions and instead stick to such assumptions, often starting from a priori information.

On this level Harvey does acknowledge this by saying the following about the assumptions made of y: “One need only look out the window to see that it is not currently at the full-employment and therefore maximum level.” Of course, capitalism can never have full-employment, it’s literally not possible. Harvey acknowledges these flaws in the variables and proposes alternative ones. What he is saying is that there is no reason why other variables can’t change in the equation with an increase of the money supply. For example:

M V = P y

400 x 5 = 10 x 200

Harvey suggests that if you increase the money supply there is no reason that it won’t result in more consumer spending. People will go out and spend that money which businesses will gladly accept and use to invest in more products and services to meet the increased demand. The theory holds that this will stimulate job creation in order to meet that new demand. This is

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what the government is trying to do right now with deficit spending. This is the plan that those who are opposed to the current economic policy are trying to stop from happening. Whether or not it will work is another matter completely, I’m merely giving Harvey’s argument at this point.

Harvey goes on to discuss the V in the equation. He says the velocity of money is not constant. I whole heartedly agree with this statement, consumption of goods and services does not remain at a near fixed rate. It fluctuates all the time given the various material conditions the consumer and the economy find themselves in. For an example he gives the fact consumer spending tends to decline during a recession. It’s only natural that when people become concerned that the economy is going to crash they tend to begin saving more money than they normally do. When they lose their jobs they don’t have money to spend. Of course, they’re concerned about paying bills in the future because of instability that may be just around the corner. None of us really knows when we might lose our jobs, especially if we’re among the working class. We worry even more so if we’re in the minimum wage income bracket. We can definitely see for economic data that people do save during a recession.

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Now let us take these two new assumptions made of the variables as Harvey did and apply them to the equation. What we have is a combination of factors; the money supply is increased during a recession as people are also beginning to save more out of concern for future expenses. Obviously this is done to combat the effects of recession which include people saving more than usual. To quote Harvey: “Or it could be some combination of a rise in y and a fall in V–this would make perfect economic sense. Notice how the process of making the initial assumptions of this approach more realistic is making it far from certain that a rise in M leads to a rise in P, particularly during an economic downturn.“

As Harvey investigates even further he goes into the definition of M itself. Friedman assumes that all money in the system is what directly comes out of the central bank. This is demonstrated quite clearly if we return to the definition given:

M: That which is money is easily defined and identified and only the central bank can affect its supply, which it can do with autonomy and precision.

A good question that Harvey asks here is what constitutes money? What exactly in the system counts as money? It’s a very good question as even economists have differing definitions of what money is. Is it the physical currency that is in your pocket right now? Does it include the ones and zeros that exist on the digital balance sheets of the private bank? Is it the line of credit that exists on your credit card? If you make a purchase on it does that count as money? These are all questions we should ask ourselves when we’re trying to determine what the supply of money actually is, what constitutes money that is out there. This is, I say again, why economists have several possible definitions for what money is. Now because of this act, it becomes suspect how much money is actually in the economy. If we don’t know

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how much money there is, what interference does this have on the operation of the equation?

To make matters even worse for determining what the money supply is we have to take into account the private banking sector. After all, banks expand the money supply every time they create a loan. Yes this is fractional reserve banking that is creating new money out of thin air. The bank keeps only a fraction of total necessary reserves in the in bank’s vault. This goes completely against the assumption that is made about M. When we acknowledge this it completely alters the possibilities surrounding the equation of exchange and correspondingly the possible causes of inflation.

To finish off the incorrect view “money growth ==> inflation”, Harvey reminds us that this notion that the Federal Reserve simply dumps new money into the economy is completely wrong. Milton Friedman is just simply outright giving a complete falsehood here. Remember his example of the helicopter flying in and dropping new money in the money supply? It’s not a metaphor that is intended to make the process seem simpler to understand, he is claiming that is how it works. Supposedly the Federal Reserve just prints more money and drops it on the public without their consent. But there is a problem with this, it’s not true, this is not how money is created.

Harvey gives us a good explanation as to how the money supply is actually expanded:

“However, that can’t happen in the real world because the actual mechanisms available are Fed purchases of government debt from the public, Fed loans to banks through the discount window, or Fed adjustment of reserve requirements so that the banks can make more loans from the same volume of deposits. All of these can raise M, but, not a single solitary one of them can occur without the conscious and voluntary cooperation of a

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private sector agent. You cannot force anyone to sell a Treasury Bill in exchange for new cash; you cannot force a private bank to accept a loan from the Fed; and private banks cannot force their customers to accept loans. Supplying money is like supplying haircuts: you can’t do it unless a corresponding demand exists.”

This incorrect view of money creation is a part of the misguided assumptions made about the variables; particularly the M. Friedman uses the helicopter metaphor because it’s the only way for the idea that simply increasing the money supply causes inflation can work.

To make investigations into inflation more reasonable and actually allow an analysis to be conducted, Harvey gives us some new definitions of the variables in the equation:

M: A precise definition and identification of money is elusive in a modern, credit-money economy, and its volume can change either with or without direct central bank intervention. In addition, the monetary authority cannot raise the supply of money without the cooperation of the private sector. Because central banks almost always target interest rates (the price of holding cash) rather than the quantity of money, they tend to simply accommodate demands from banks. When private banks communicate that they need more reserves for loans and offer government debt to the Fed, the Fed buys it. It’s the private sector that is in the driver’s seat in this respect, not the central bank. The central bank’s impact is indirect and heavily dependent on what the rest of the economy is willing to do (which is, incidentally, why all the QE and QE II money is just sitting in bank vaults).

V: The velocity of money is, indeed, related to people’s behavior and the structure of the financial system, but

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there are discernible patterns. It is not constant even over the short run.

P: While it is true that factors like production bottlenecks can be a source of price movements, the economy is not so competitive that there are not firms or workers who find themselves able to manipulate the prices and wages they charge. The most important inflationary episode in recent history was the direct result of a cartel, i.e., OPEC, flexing its muscle. Asset price bubbles can also cause price increases (as they are now). The key here, however, is that P CAN be the initiating factor–in fact, it has to be, since M can’t.

y: The economy can and does come to rest at less-than-full employment. Hence, while it is possible for y to be at its maximum, it most certainly does not have to be.

These assumptions are far more reasonable and allow us to look at different factors in the economy that might affect the equation. He gives us an example of how this is possible with his assumptions:

“…the most important inflationary episode in post-WWII history was that during the 1970s and early 1980s. From 1968 through 1972, consumer price inflation averaged 4.6%. Over the next ten years it was 7.5%. What happened? What caused this sudden and dramatic acceleration in prices? Did the Fed accidentally print too much money? As already explained, that can’t happen–you simply can’t raise the money supply above the demand. M did rise, however, and largely proportionally to the increase in P. This is a much more realistic story of those events.

"As the price of oil skyrocketed, so costs of production rose for many, many US businesses. Because there is a

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lag between purchasing inputs and selling output, most firms have to borrow money (working capital) to bridge the gap. As the ripple effect of the OPEC price increases moved throughout the economy, the demand for cash by these businesses rose. Quite reasonably, private banks and the Fed did what they could to accommodate. These were fair requests on the part of US entrepreneurs. Loans were extended and government debt sold by the private sector to the central bank. This raised the supply of money. Therefore, the rising prices led to an increase in the supply of money and not the other way around. QE, QE II, and the federal government deficit cannot by themselves cause inflation.”

Harvey gives a very good refutation of the questionable assumptions made by Friedman concerning the variables in the equation of exchange. He’s adequately shown why they are incorrect, offered his own assumptions and shown why they are superior. In the next section I will describe the limitations of assumptions made by Harvey on the variables, and assumptions on fractional reserve banking. I am intending to look at this not only from Marxist but also a bourgeois perspective.

Real Causes of Inflation

The trouble with discussing inflation is not just getting past the false concept of it, printing more money causes inflation and so forth. The additional problem is that people don’t know how to correctly define what inflation is. Harvey gives a very good straight forward explanation: Inflation is simply a rise in the average price of goods and services in the macroeconomy. Which particular goods and services depends on the measure we are examining. This gets right to the heart of the matter. Too often people (particularly libertarians) see the increase of the

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money supply itself as inflation. No, it is the increase in prices of goods and services that is inflation. This is the main point we have to keep in mind as we look further into other causes of it.

Harvey did a blog post about two weeks later where he gives some really good examples of inflation where the cause had nothing to do with the creation of new money.84 I’ll be giving those here along with my own to give you the reader a better view of the different forces in the economy that can cause this misunderstood problem.

1973 Energy Crisis

Everyone remembers the oil shortage during the Yom Kippur War in 1973. The war began when a group of Arab states led by Egypt and Syria attacked Israel to take back land that had been stolen including the Sinai Peninsula. (In addition to attempting to stop the Israeli genocide of Palestinians.) Regardless of the cause of the war, it happened. At some point the US became involved by sending arms supplies and $2.2 billion in appropriations to Israel. In response to this Saudi Arabia declared an embargo against the US which was joined later by other OPEC countries. What they did was reduced oil supplies by 5% leading to what today we call the 1973 energy crisis. This was possible because there was a cartel and they were able to avoid competition. The increased cost in fuel had a huge effect. Transportation alone is a good chunk of the cost of products. It also plays a big part in the production of plastic goods. Businesses suddenly became faced with a shortage in funds unable to meet production costs. As a result they had to return to the banks in order to get more credit for the cycle of production. This caused the banks to go to the Federal Reserve and request more money. Thus the money supply was increased.

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M V = P y

300 x 5 = 15 x 100

As we can see the increase in the money supply resulted not from the Friedman-copter making an unrequested delivery. The increase in prices (the inflation) was not driven by the increase in the money supply, just the opposite in fact. The increase in the cost of fuel increased the cost of production leading to all kinds of businesses seeking more credit to make up for it. There were other consequences as a result of the oil shortage. Some firms actually sold assets to meet the increased cost in fuel instead of borrowing. There were even households that took out consumer credit to cover their bills during this time which also added to the money supply.

This phenomenon is called “market power”. OPEC has the ability to restrict the supply of oil because they have so much control over the supply of it. Once in a while this can happen; a firm makes a grab at extra profits because they hold so much control over the supply. Of course they can only go so far before people just stop purchasing their product, but this was impossible to do with oil as so much of the world’s economy depends on it. There are other examples of this happening in the economy but this one does the job of explaining it.

Housing Booms

Another cause of an increase in prices can be a sudden increase in demand in a sector that is not prepared for it. If there is, for example, a housing boom there can be supply problems. Take for example several years ago when oil production in Alberta, Canada began to really take off. Many, many people immediately moved there to take advantage of the new demand for labour in the energy sector from new production. When tens of thousands of people moved there housing became a more

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serious issue. Many of these jobs were well paying jobs that allowed people to purchase homes. As a result there was a housing boom in the province due to a sudden increase in the demand for homes.

So you have all these home builders suddenly having a great deal more homes under construction than before. This sudden demand can cause shortages in certain building materials such as lumber. It takes a while for the market mechanism of incentivizing others to enter into producing these same materials to begin. In the mean time there is a bottle neck in the supply. When this shortage goes on contractors who build the homes have to bid up in order to get the materials they need. These price increases have a ripple through the economy. Consumers and firms now require a larger money supply in order to operate. The Fed gets the signal for this need from the banks and accommodate accordingly. This phenomenon is called “demand pull”. Here we can see it is an increased demand in a material (or several others like brick) suddenly that can cause a rise in prices that can spread out into the rest of the economy. Because of the sudden demand for housing, including rents, Burger King for example had to raise it starting wage to $15 to $22 an hour because of the cost housing and a lack of labour. This is an example of how “demand pull” can have a further effect in the economy.

Asset Market Boom

When the market for an asset booms it can have a huge affect on price, meaning inflation can be injected from the asset market. This one is especially true today as finance capital become more and more powerful. The link between the cost of goods and services and financial assets is not always solid; sometimes there is no link at all. It’s particularly important to keep this one in mind as it takes up so much of the US economy, and can therefore exert so much influence on it. This is put well

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by Harvey here: "Witness the 1990s, with a massive increase in stock prices but very little movement in the consumer price index. However, lines of causation can exist, particularly though commodities futures."

Here is what happens; speculative money makes a guess that the price of something is going to go up in the future, anywhere from a few days to a few decades. Some speculator says that the price of oil is going to go up in a few weeks; we see this on the news all the time. In response, those who are actually selling the commodity withhold the supply in favour of the time in the future when the price will be higher. They do this because there is an incentive to do so, the supposedly higher price in the future will lead to higher profits. The rising spot price then convinces people that his speculation had been correct and increases his prestige. Often as a result the producer of the commodity takes the blame for the increase in price. The money supply does increase as agents take out loans and sell government securities. The problem here isn’t the increase in money, it actually stems from the power speculators have.

This is one truly great irony of capitalism: something that doesn’t exist (guessing what will happen in the future) has such an effect on something real and physical that exists here and now. Literally nothing has happened to the supply of any commodity, but because someone is guessing something, the price can drastically increase. What someone thinks the market is going to do can have more of an effect than what is really going on.

(I have firsthand experience with this phenomenon. For several years I worked in a gas station behind the counter working the cash register. At least twice a month people would come in to buy gas after hearing on the news that the price was going to go up in a day or a few days. I rarely saw this increase take place. Twice I had heard from customers that some talking head told

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the public that gas was going to increase to $1.50 to $1.60 a litre during the summer. This never happened the entire time I was working there. However as a result of the talking head’s claim, there were days when I had far more customers than usual even though literally nothing had changed in the supply of oil. Other times they would say the price was about to go down so people held off from buying it, only to see the price increase a few days later.)

Supply Shock

This one is pretty simple and doesn’t require much of an explanation. Harvey does it justice: If a storm rages through the Gulf of Mexico, taking out oil derricks and refineries along the way, this may well raise the price of oil and gas. As it should, for this creates incentives to build more derricks and refineries and for consumers to find alternate energy sources. Again, this is what capitalism is supposed to do. In terms of who wins with this sort of inflation, it’s obviously more complex since it depends on whose derricks were destroyed and who gets to build new ones. In any event, this, too, can lead to a rise in the money supply and there is no logical reason for the Fed to block this.

Zimbabwe

Now I would like to add my own example. Let’s take a much more complicated inflation situation and look at it closely. What I’m going to talk about here is what happened in Zimbabwe to cause their hyper-inflation situation.

First off let’s deal with the immediate accusations that are made. This is not what happened to the Weimar Republic, this is not proof government deficits will generate hyper-inflation and this is not proof that a fiat monetary system doesn’t work.

The roots of the inflation lie in the end of its colonial era when Whites owned about 70% of the country’s productive land. After

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the revolution that ousted the White-only rule, the fighters immediately began taking land that was owned by the White minority and thrust it into the hands of Black farmers. This was an absolutely correct thing to do as a measure of ending the remnants of the colonial period and create equality. (If Whites had been left to own 70% of the productive land they would have held all the economic power.) The problem is that the land reform was not so much implemented, as it was a grab from one group to another. When we view it through the lens of economics it was a disaster. Unemployment rose to 80% and most people are just scraping by on minimum wage. The land reforms represented the first big contraction in potential output. A demand contraction was needed but it was impossible to carry out because 45 per cent of the food output capacity was destroyed.

To make matters worse, much of the infrastructure in the country was being ruined and these demand constraints reverberated throughout the supply-chain. The National Railways of Zimbabwe had disintegrated to the point where much of its ability to transport minerals was drastically reduced. This resulted in a 57% decline in mineral exports. This also affected manufacturing:

"The Confederation of Zimbabwe Industries (CZI) publishes various statistics which report on manufacturing capacity and performance. Manufacturing output fell by 29 per cent in 2005, 18 per cent in 2006 and 28 per cent in 2007. In 2007, only 18.9 per cent of Zimbabwe’s industrial capacity was being used. This reflected a range of things including raw material shortages. But overall, the manufacturers blamed the central bank for stalling their access to foreign exchange which is needed to buy imported raw materials etc."

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Now, because there is a shortage of food, the central bank used its foreign reserves to purchase agricultural imports. So we can see the problem here, domestic food production was almost completely ruined so they had to rely on imported food which blocked manufacturers from access to foreign exchange. Essentially what happened was that both ended up getting ruined in the end. Much of the goods and services end up not being imported because of the high import duties. When you consider both of these factors together we get the 80% unemployment rate. Having this is destroying aggregate demand for goods and services.

Further, the response of the government to buy political favours by increasing its net spending without adding to productive capacity was always going to generate inflation and then hyperinflation.

But while the hyperinflation was almost inevitable it provides no intrinsic case against a government that is sovereign in its own currency and who runs permanent deficits to pursue full employment – under the guidelines specified above – responsible fiscal management.

When you so comprehensively mismanage the supply side of your economy as the Zimbabweans did the only way to avoid inflation is to severely contract real spending to match the new lower capacity. More people would have starved and died than already have if the Government had have cut back that severely.

But this disaster has nothing much to do with budget deficits as a means to ensure high levels of employment in a growing economy (where capacity grows over time) where the non-government sector also desires to save. A private sector investment boom would have caused the same outcome both in inflation and the political

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problems of fighting it. So will the hyperventilators also say we should not have net private investment?

The historical context is important to understand because it created the political circumstances which have made the hyperinflation inevitable. But these historical vestiges from the colonial white-rule bear very little relevance to the situation that a modern sophisticated fiat monetary system will face.

More Real Life Problems

What Harvey says about the private banks not being forced to take money from the Federal Reserve is true. I however have seen a problem that has arisen out of the 2008 Global Collapse of Capitalism. The role of banks in any recession is to lend money out so that it may be invested (or spent) in order to stimulate production which would lead to jobs being created. In turn those newly employed people will be taxed and they will spend their income on goods and services they need to survive. Unfortunately the banks don’t seem to be lending out the money they have taken from the Federal Reserve. The money that is being put out is seemingly being kept in the bank’s vaults and written in as profits. Some of it is being loaned out, but much of what is actually spent on is their own investments, not loans out for people to start businesses. Jobs have barely been created while bank and Wall Street profits have sky rocketed.

“Wall Street firms — independent companies and the securities-trading arms of banks — are doing even better. They earned more in the first 2 1/2 years of the Obama administration than they did during the eight years of the George W. Bush administration, industry data show. [...]

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"The largest banks, including Bank of America, Citigroup and Wells Fargo, earned $34 billion in profit in the first half of the year, nearly matching what they earned in the same period in 2007 and more than in the same period of any other year.

"Securities firms — the trading arms of big banks and hundreds of other independent firms — have fared even better. They’ve generated at least $83 billion in profit during the past 2 1/2 years, compared with $77 billion during the entire Bush administration, according to data from the Securities Industry and Financial Markets Association.“85

It’s clear that the money is not really being loaned out into the economy for people to start businesses or even to make consumer purchases. Despite that, banks are reaping in huge profits from trading themselves and hoarding the rest to keep up their reserves and entering it as profit. Yes, some is being turned into profits but enough to justify the huge numbers. It is also clear that it is not being loaned out to start production creating jobs if we look at the unemployment rate (Jan 2008 to Jan 2013). We must also take into consideration that there has been three rounds of QE. In Harvey’s article the third one had not taken place yet, nor do I think it was even being discussed publicly. I believe (because there is no concrete proof) that this is why multiple rounds of QE have been carried out. All we have

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to go on for sure is the reason why Federal Reserve is carrying out this policy and the fact that it is not meeting its stated objective. The banks are not loaning the money out and instead keep it as reserves. It seems (at least to me) that the Federal Reserve keeps giving the money to the private banks because that money needs to go out into the public. I supposed the government keeps hoping the banks will eventually give some of it out. (This is also a part of why some think there will be a “second dip” in the recession, but that’s not the focus here.)

The question then arises, why are the banks doing this? Despite the beliefs of some people, banks actually do harmful things for a reason. They are not merely secret evil communist organizations as Tea Partier and Libertarian organizations claim. Banks do horrible harmful things, but I as a Marxist recognize it as a part of their function. What is economically rational is not usually what is socially rational.

The Global Collapse of Capitalism in 2008 taught the banking and financial industry a very hash lesson. They found that they were not invincible and that recession can still happen. Often many claim that another one is impossible supposedly because we learned from the last one. I’m not accusing traders and whatnot of thinking this, but it was an idea that was spread around. Banks learned there are limits to how much fictional money they can create as is what happened with the housing crisis in the form of mortgages. The lesson they learned is that they need to keep a greater reserve in vaults. (Of course they should have learned not to be so risky, but they’re not going to acknowledge that. It’s tempting here to get in to the whole cause of the Global Collapse of Capitalism, but I’ll leave that for another paper.) Several banks went bankrupt and ceased to exist. This was a scary wakeup call to the financial industry. They needed something to help prevent this in the future, or at least minimize the impact.

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What they were looking for was a preventative measure(s) that doesn’t threaten profits. Having larger reserves to back up the amount of fictional money they create through a fractional reserve banking system seemed like an ideal solution. When the debt all failed they lost a massive amount of the money they had, because remember, that amount created through loans also counts in the money supply. What many may have seen as a problem is the lack of “real” or physical currency in reserve. Of course this could not have avoided the crisis, but a larger reserve could have made the difference between a bank going bust and it just barely surviving, albeit very unhealthy. The preventative measure is, keep larger reserves in the vault.

The best way to do this is to ask for it from the Federal Reserve. If a bank asks for the money and then keeps it, there is no risk for them. The money is real and it doesn’t count as a subtraction from any investments or deposits they current hold. They didn’t have to sacrifice anything in order to get it, nor did they have to raise the money by subtracting from their investments or raising banking fees. This is the perfect solution for them.

All of this perfectly fits within what Harvey said about banks taking from the Federal Reserve. “You cannot force anyone to sell a Treasury Bill in exchange for new cash; you cannot force a private bank to accept a loan from the Fed; and private banks cannot force their customers to accept loans.” This is what happened; no one forced anything on anyone else. It wasn’t necessary; the banks wanted the money so the Fed seeing the demand created the supply they asked for. The only problem with what was laid out by Harvey is not recognising that the banks can ask for money if they don’t intend to loan it out. The assumption he makes is that a bank is only going to ask for money from the Fed if they see a demand for it. This is incorrect, as we have seen the money has been granted to them in three rounds of QE, but has not been given out as demonstrated by the previously given data. It is not being loaned out.

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The problem here with repairing the economy is a contradiction within capitalism. Marx spoke of contradictions within the system that makes up what it is. The economy can only recover when production begins again and the products are profitable in sale. In Marxist terms the circuit of capital has to be restored. Money has to be loaned out into production, commodities are purchased (raw materials etc), production is done with the commodities, commodities of a greater value are made, and then those commodities are sold for a greater amount of money. Commodities of a greater value are created through the application of labour. (Most production is done by borrowing money ahead of the creation of profits, which is why money needs to be loaned out, but not always). This can be expressed in the following circuit:

M – C … P … – C’ – M’

P = [labor power + constant capital]

Essentially profitable production has to begin once again in order for the economy to recover from the recession. The money goes into production where materials have to be

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purchased; people are hired creating jobs, they produce commodities that are sold. This begins the recovery of the economy which beings with an increase of production which usually requires a loan of money ahead of that production to be paid back when profits are realized. All of this means the banks have to loan the money they took from the Federal Reserve out. So if this is all it takes to repair the economy, why aren’t they doing it?

Here comes the contradiction: Banks have to loan out in order to repair the economy, but the banks are not loaning out because the economy is bad. The very thing the banks need to do to end the recession they won’t do because there is a recession. This is one of those contradictions that I alluded to earlier. Banks are justifiably hesitant at this time to loan out money because the average household is carrying a large amount of debt. In addition they can also see that the financial industry is returning to the same risky operations that ignore the production of commodities and services for quick return trickery.

On the other hand they have to loan this money out because it is the only way for the economy to recover. As I have shown previously the banks have the money, they’re just not loaning it out. If we’re giving the banks the money and they’re not loaning it out, what do we do about it? What can we do about it? In essence, right now, there is nothing we can do. This is why I think the Fed keeps giving the banks more money; they’re hoping they will eventually start giving it out. It seems rather senseless doesn’t it, repeatedly giving the banks more money under the premise that they are going to use it for loans? Rightly, the Fed shouldn’t say no to giving money to help repair the economy. All the Federal Reserve can do to help is supply that money to the banks upon request.

The question before us now must be asked: What would it take to solve this problem? Well one primary thing in my view: A

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mechanism with which to force the banks to lend it out the money they have been given.

This may be a bit tricky, private banks are not too fond of regulators or government telling them how to run their business. But then again thanks to that same attitude the world went into a major recession primarily because of their inability to regulate themselves. Clearly we are in a situation where the money needs to be loaned out and the banks are not doing it. Since the recession won’t recover without it we’ll need to brute force it (the lending) with state regulation.

I’m not advocating very much here. We could have something simple like determining how much would have to be loaned out in order to get the economy going once again. Let’s say we set a particular percentage rate for the loan that is attractive to people looking to enter production, or begin another round of production. The rate, I don’t think, would have to be very low, I’m pretty sure there is a decent amount of people looking to get started. Perhaps not all that would be preferable, but enough at least to get things moving.

The Federal Reserve could dictate how much of the money given to them must be put out in loans only if the application for the loan met certain minimal requirements. The Fed could do this quite easily and hand a paper to each bank making it flexible enough for them. This mandatory loaning would be a condition of the money given to the banks, meaning they could take the money back if the banks refused to carry out the loans. Once the loan has been made, the bank could be left relatively free to do as they saw fit with their relationship with the customer. Of course there would be massive resistance to such a policy, but since we’re talking about saving the economy I think the banks can shut up while we save the economy from their actions.

Americans particularly hate to hear this, but the only solution I see in this situation is government control. The banks and

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financial sector are doing what is not in the interests of the economy in keeping it sustainable. What they are doing is only in their own best interests, and that is eventually going to cause another drip in the ongoing recession. This is another contradiction of capitalism; the self-interest motive is inherently driving the destruction of the system of self-interest. Many haven’t managed to get this through their heads yet. They’re still thinking that the free market will solve problems for them; it’s an assumption that still lingers in even the most educated of minds.

I think it is this assumption by Harvey that leads us into the dead end we face. Banks can ask for money without intending to loan it out. They can do it with the purpose of only protecting themselves and not thinking about the health or even sustainability of the economy. This is what I mean when we have to keep re-thinking our assumptions when it comes to economics. To my knowledge this problem of banks refusing to loan out money has not happened before, thus we don’t see this possibility in our assumption. We have to learn from the changes in material conditions in order to keep up-to-date assumptions. If not, we all risk ending up like libertarians, still thinking this is 1776 and world works according to that time period.

Class Perspective

The Marxist understanding of inflation is quite different from the incorrect mainstream one that both Harvey and I have attempted to push into the back ground hoping to never see again. For example our understanding doesn’t include things like assuming perfect competition or full employment. Instead when we analyze it we seek to also understand who is benefitting from the inflation taking place. Inflation and deflation have real serious social costs like increased unemployment, lower real wages and an increase in exploitation. It often shifts income

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distribution towards the capitalist class along the balance of social forces towards capital and, particularly financial interests. Even more accurate ideas about inflation such as those espoused by Harvey don’t take these latter points into analysis. He does acknowledge that inflation is beneficial to one group over another.

What this means is that workers and capitalists fight over the share of profits generated by production.

"Inflation never affects everyone equally. It shifts buying power from one group to another (even though the winners may still complain because they see themselves as hurt by the overall price increases–what they don’t understand is their role in causing the latter!). In fact, it is the very attempt to capture more income that is at the heart of the inflationary process under these circumstances. Money supply growth did not cause prices to rise, OPEC’s attempt to grab a larger income share did."86

The difference here with us Marxists is that we see social forces behind the distribution of wealth in an analysis of inflation. Modern economists tend to see social forces as separate from economics, where as Marx saw how they flow together. Marxist analysis begins with an understanding of the social forces in society to see how they relate to the economic system.

Obviously this brings us to the question of how Marx saw inflation. The problem is that we don’t really know how he saw inflation all that well. He didn’t write very much on it and as a result his view on it isn’t clear or even relatively clear. So we have to be careful when dealing with it because it’s not too specific.

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Distributive Conflict Inflation

People, like Marxists, who see the world through class struggle tend to support it because it seems to vindicate it. It sees inflationary episodes as something that appears as a result of actions taken by key agents, particularly monopoly capitalists and unionized workers. It implies that these key agents have the ability to set prices of goods and services (mostly) independent of demand for them. Inflation happens because the central bank collaborates with the struggle for control over the ownership of the national income through monetary accommodation. This happens in conjunction with support of the financial system in order to protect financial stability and the continuance of production.

"The inflation rate is usually a positive function of the size of the overlapping claims, the frequency of price and wage changes and the degree of capacity utilisation, and a negative function of the rate of productivity growth (the basic model can be refined endlessly by incorporating target income levels, expectations, reaction functions, and limits on the wage claims because of unemployment, or on the mark up because of competition)."87

The problem with this view of inflation is that it is very vague. There isn’t a clear view of the internal structure. As a result this theory can viewed as correct from different economic standpoints. When it is not grounded by a broader structure it conflates cause and effect since inflation has distributive implications, income disputes cause the process.

A further blow to the quantity theory is that, in very high inflation countries, inflation rates exceed the growth rates of the money supply, because the velocity of circulation of money increases with high inflation rates (De Grauwe and Polan 2005: 257). This instability in the velocity of circulation is contrary to

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the quantity theory, which posits a stable velocity of circulation, as we will see below. Finally, De Grauwe and Polan reach the conclusion:

“Our results have some implications for the question regarding the use of the money stock as an intermediate target in monetary policy …. The ECB bases this strategy on the view that ‘‘inflation is always and everywhere a monetary phenomenon.’’ This may be true for high-inflation countries. Our results, however, indicate that there is no evidence for this statement in relatively low-inflation environments … In these environments, money growth is not a useful signal of inflationary conditions, because it is dominated by ‘‘noise’’ originating from velocity shocks. It also follows that the use of the money stock as a guide for steering policies towards price stability is not likely to be useful for countries with a history of low inflation."88

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VIII. Digital Currency

"Money does not determine the economic system and its functioning. The inverse is actually true."

- Jason Unruhe

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Introduction to Digital Currency

Financial capital by its very nature must sink its hands into everything. In every step of the circulation of capital it seeks to suck out value while giving nothing in return. It begins by issuing credit with interest at the beginning of the production cycle, it makes bets on commercial capital as it attempts to distribute commodities, it provides credit to consumers to purchase those commodities and it even financializes their pensions via private plans. Both Marx and Lenin call it a parasite that seeks to suck the blood of value creation. Finance has existed even before capitalism. It has evolved from money lending and usury to the great power it is today. During the evolution of economy, finance has played a supporting role, made subservient to the mode of production. In capitalism it has come into its own and proceeded to dominate. For the first time in history financial capital has come to dominate the mode of production. Along with it has come all the benefits and pitfalls that would manifest. This, inadvertently, is what digital currencies (or in this case Bitcoin) seek to liberate the user from. From the outset its creator Satoshi says as much:

"Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust based model. Completely non-reversible transactions are not really possible, since financial institutions cannot avoid mediating disputes. The cost of mediation increases transaction costs, limiting the minimum practical transaction size and cutting off the possibility for small casual transactions, and there is a broader cost in the loss of ability to make non-reversible payments for nonreversible services. With the possibility of reversal, the need for trust spreads. Merchants must be wary of

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their customers, hassling them for more information than they would otherwise need. A certain percentage of fraud is accepted as unavoidable. These costs and payment uncertainties can be avoided in person by using physical currency, but no mechanism exists to make payments over a communications channel with-out a trusted party."89

What Satoshi is actually advocating is removing financial capital and its institutions from monetary transactions by creating, not just an alternative currency, but an alternative means of exchange. His complaints are the same that any consumer and industrial capitalist has. The transaction fees, interest on credit are too great and in their view hinder the movement of money and capital which facilitates the movement of the economy. Financial institutions have played a dominating part in online transactions because they must be done electronically. Any money that moves between buyer and seller online must be electronic or it won't move at all. Banks and other financial institutions have a monopoly on the means by which to carry out these transactions. It requires a good deal of networking and infrastructure to facilitates these transactions. They also require a great deal of trust. A transaction from a financial institution has a vested interest in preserving its reputation (to a degree). Those with liability tend to be more trust worthy than some anonymous entity on the internet. Because of this the banks and financial institutions have had a monopolistic hold on those transactions from which they can use to charge a service fee. Obviously they have to if there is to be a service, but it's questionable how much they should be charging. Regardless, financial capital will dig its claws in anywhere it can and scrape out as much for itself as it can get away with. Satoshi's goal, like most users of the digital currency, is to cut out that middle man who demands "their cut of the action." This has very valuable applications as it can facilitate smaller transactions that might not be worth the fees and paperwork for a bank involved.

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Personally I'd just use a credit card but I digress. I think even though he may not be intending it, Satoshi's desire is to eliminate the financial capitalist's claws.

In some places the digital currency Bitcoin doesn't solve the problems it claims to. Right in his very own introduction Satoshi says the problem is that the currency "suffers from the inherent weaknesses of the trust based model. Completely non-reversible transactions are not really possible, since financial institutions cannot."90 Yet in the next paragraph as to why Bitcoin will combat this he says, "What is needed is an electronic payment system based on cryptographic proof instead of trust [...] The system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes."91 Essentially we have to trust that these nodes are honest when we have no ideal really where they are or who controls them. I just noted this as a bit of irony.

The idea of Bitcoin was to remove the state regulation and financial nexus for transactions. Of course when you do this you need some kind of system to transfer the "money". Satoshi was brilliant in coming up with the exchange system it has. I truly believe that this is a revolutionary idea. So in order to do it justice I will allow a brief explanation of how it works best put by Satoshi himself in his work Bitcoin: A Peer-to-Peer Electronic Cash System:

"We define an electronic coin as a chain of digital signatures. Each owner transfers the coin to the next by digitally signing a hash of the previous transaction and the public key of the next owner and adding these to the end of the coin. A payee can verify the signatures to verify the chain of ownership.

"The problem of course is the payee can't verify that one of the owners did not double-spend the coin. A common solution is to introduce a trusted central

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authority, or mint, that checks every transaction for double spending. After each transaction, the coin must be returned to the mint to issue a new coin, and only coins issued directly from the mint are trusted not to be double-spent. The problem with this solution is that the fate of the entire money system depends on the company running the mint, with every transaction having to go through them, just like a bank.

"We need a way for the payee to know that the previous owners did not sign any earlier transactions. For our purposes, the earliest transaction is the one that counts, so we don't care about later attempts to double-spend. The only way to confirm the absence of a transaction is to be aware of all transactions. In the mint based model, the mint was aware of all transactions and decided which arrived first. To accomplish this without a trusted party, transactions must be publicly announced92, and we need a system for participants to agree on a single history of the order in which they were received. The payee needs proof that

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at the time of each transaction, the majority of nodes agreed it was the first received."

In June of 2006 the world was shown that Bitcoin is far from being as secure as its defenders claim. During that time a single power player in the Bitcoin world managed to collect 51%, more than half of the total computational power required to mine new digital coins. It was researchers at Cornell University who determined that at several points the contributor GHash93 managed 51% of that total power. With that kind of concentration it makes it possible to spend the same coin twice and even block the transactions of rival miners' transactions. Theoretically they could even extort higher fees from people with large holdings. In the most extreme case they could perform a denial-of-service attack against the entire Bitcoin network.

Ittay Eyal, a post-doctorate researcher in Cornell's Department of Computer Science spoke to a journalist at ARStechnica about this very incident:

"But having a single entity in GHash's position, of holding 51 percent of the mining power, of being in a monopoly position, of being able to launch any of these attacks at will, completely violates the spirit and intent of Bitcoin as a currency.

"Bitcoin's value proposition stems from its technological foundation, which in turn is based on building distributed trust. People flock to Bitcoin because they do not trust the fiat infrastructure, they hold Bitcoin because they are worried that the people in charge of USD can inflate it at will or usurp money from their accounts. But now, with a monopoly miner, they are suddenly in a position where they have to, once again, trust a single entity to remain benign.

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"This completely collapses the Bitcoin narrative that the Bitcoin community has been using to draw in new users. If we are to trust GHash's good will and ongoing benign behaviors, we might as well do away with the entire Bitcoin protocol and replace the system with a simple database server kept on GHash's premises.

"Worse, no one knows who exactly is behind GHash/CEX.io. They have had an episode where they did a double-spend attack against a gambling site in the past. But even if GHash could be trusted right now, a single entity in command of the currency represents a single point of failure for the Bitcoin economy."94

The claim of a secure system to avoid the terror of the Federal Reserve's control over the money supply is already debunked. It is not only centralized by the very program itself (see later in this chapter for that) but it's possible for someone to monopolize its computing power.

The actual mechanics of how the system works is very technical and involves some heavy mathematics. I don't see much need to go into it here because we're dealing with the ideological and philosophical aspect of it. I highly suggest reading the original document for a detailed understanding of how a crypto currency system works.

This document however can only speak for Satoshi and not for the users themselves. They have their own ideological reasons for why they chose to use Bitcoin. The crypto currency has its biggest fan base in the U.S. right wing libertarian and "anarcho"-capitalist community. Since these groups have taken it on so completely, many of them engaging in outright fetishizm , I think it's important to look at what it is they view ideologically. To them it is all about avoiding government intervention. Their

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primary concern is with the application of a currency online that can't be traced by government. By this point in this book we should be familiar with their ideology and their hyper-individualism bordering on paranoid conspiracy theory.

What these people really want is a way to make purchases online that will avoid all monitoring by law enforcement due to the illegal nature of a good many of their purchases. This is far from some simple concept of underground market, they vehemently oppose government regulation of the market, it is a moral position in their eyes that they should be able to purchase whatever they want. It is over simplistic to simply say that any user of it is just a criminal or organized crime. The use of the currency for them is far more of an ideological stance. It should be noted that most crime uses regular government issued currency anyway, so really Bitcoin is no different in this regard. The only difference is that it can be used online anonymously and does not require that transactions take place in person, which adds a great deal of personal security.

The other major ideological reason why proponents so heavily support it is their concern over government fiat currency and what they perceive to be a socialist conspiracy to rob the public of wealth. In their view the very set up of the fractional reserve banking system enforced by the government inherently creates a currency designed to steal from people by infinitely expanding. This is a very sacred belief of Bitcoin users regardless of how false their belief is. There is no need for us to go into it here because we've already dealt with it in a previous chapter of this book.

I just think it's important that we understand that the big proponents of the currency don't do so out of some desire to commit crime (unless you count tax evasion as a crime). Their support for it is ideological, however misguided.

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In this chapter on digital currency I will be referring to, and using Bitcoin as an example a lot. There are many digital currencies, but Bitcoin is the dominant form of it, and it's the originator.

Now we'll dig deeper into the currency itself and what its users expect from it, and why it won't work.

Centralization or Decentralization?

A big part of an-cap theory is the whole escape from the state philosophy. The main goal of the ideology is to live state free. A key part of it is decentralization. In their view the collective and single source of power and authority in the country is antithesis to how they wish to live. Thus any attempt to take power away from the state and its concentration of it is a good thing. There's much more I can go into here like pointing out the fallacy behind decentralizing the power results in pretty much the same society. This is however beyond the scope of the topic at hand.

The reason they give for decentralizing power is based on the belief that it will create choice. This choice is the free market in action; this is to them the greatest of freedom. In their minds the ability to choose between "things" is what freedom is. Freedom is defined by what options you have available to you. These options are within a particular framework. That is to say that those options exist within the context of ownership, more specifically private ownership. This makes certain assumptions, like assuming those options are available to you. For example, in poverty you have very limited or no choice at all. The ability to choose the one thing you can or the extremely narrow choice is freedom. Massive hindrance to choice or it even being blocked by poverty is not considered to be a lack of choice. Circumstances that force you to make particular choices in their minds is still a choice. As example, a person must take the only

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job available or starve to death. This is still a choice and they are blind to the act of coercion that poverty is.

What does this have to do with Bitcoin? I bring this up because it demonstrates their lack of ability to see a blatant contradiction in their thinking. This can be applied to many other areas in their ideology, and it is quite prevalent in Austrian economics.

Decentralization of currency is a popular an-cap idea. To them the tyranny of the Federal Reserve comes from its "dictatorial" control over the currency system. This regulation of currency to promote as much stability as possibly is a terrible crime according to an-caps. They see it as state enforced inflation with the specific goal of robbing the population of all their wealth. This "stolen" wealth is supposedly transferred to the Fed where it is kept to do all the evil things the state is plotting against us.

Of course this centralization is necessary to carry out a stabilization of the currency. Capitalists like having a currency that is stable as it makes the economy function much more smoothly. Business planning is much easier as it allows for a generally correct estimation of costs of production and expected profits. An-caps don't believe this is the function of the Fed. Instead they see the Fed as a conspiracy by the state. These conspiracies (at least surrounding currency) cannot exist if control over money is decentralized, away from one government body that can create regulation.

Pretty much every country in the world has a central bank that runs off of a fractional reserve baking system. To keep it short, basically it means a bank only has to keep a fraction of total deposits on hand at any given time. The rest of the currency is created upon bookkeeping entry whenever a loan is made or a credit card purchase is made (essentially the same thing). The money supply can theoretically expand to infinity as if that was an actual goal. This is true; the Zeitgeist Movie that we all saw was not lying. The movie does however make it out to be some

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gigantic conspiracy when in reality all the information they gave is spelled out in the Fed document Modern Money Mechanics. The point here is to acknowledge that not all the money creation comes from the Fed itself, much of it comes from private banks. This is to say that indeed money creation is relatively centralized.

This is the philosophy behind Bitcoin, it is a currency that has a predictable finite supply and is free from government central control. It also affords a (false) sense of anonymity when conducting transactions because they are not done through a bank which has strict records that can be requested by the Fed or law enforcement agencies. This leaves the users of the currency to do as they please and operate how they wish to without particular oversight. This decentralized character gives the freedom to its users that would not be experienced by government issued fiat.

The problem with this belief is that it's not decentralized. Bitcoin actually has more centralization than fiat currency does. What controls the fiat currency? It is controlled by a central bank that can partially determine the money's supply, because private banks can expand it themselves too. This means that the central bank doesn't have complete 100% control. Now compare this to Bitcoin, what controls it? Well, a computer program. Bitcoin is controlled by a single central program. Sure it's open source, and that program resides on many computers. But it all relies on one single machine code which determines its operation. The fact that it exists on multiple computers makes no difference. This code determines how much currency can exist and how quickly it can be mined.

Yes, I realize that it's not supposed to be able to expand outside of the program. That is not my point; my point is that it is controlled by a central authority, one that is more central than the Federal Reserve. This is an autonomy that private banks

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have that "Bitcoiners" do not. The central authority is that machine code, multiple copies of it doesn't make it decentralized. Any claim of experimentation in the decentralization of banking authority here is false.

One of the great things about Bitcoin is that anyone can mine them, as opposed to the Federal Reserve or a private bank. This would seem on the surface a decentralization of sorts. In fact we can see some people or businesses, in a way, taking the place of private banks in Bitcoin creation. The more Bitcoin is mined the more difficult it is to create, this is of course intentional. After all these years it is now excruciatingly difficult to mine even a single one. What we have are people and businesses with huge resources dedicated to creating them. These resources far outstrip any single regular person to do it. Indeed as we can see today one (collectivized) mining pool now control %51 of the total computing power of Bitcoin. This is greater than the concentration of money creation power that we see with all the banks in the US.

What is the solution that many people have turned to in this situation? They've created mining pools where many people get together and combine their resources to be more efficient then they would dong it on their own. A bunch of smaller users knowing they have no chance group together to take on a larger power. In other words, the solution to the concentration of forces is collectivization. The very thing an-caps see as an immortal all encompassing evil and the very antithesis of their ideology. The irony in this is hilarious.

Basically if you're not of these people, you're not mining anything anymore. Even when the people have the ability to create the coins in a decentralized manner, they end up being centralized again because only a few have the power to really create them given how difficult it is. Once again we see how Bitcoin is not decentralized.

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Let us look at regulation inside the currency itself. This is after all what is supposed to be what gives the currency more freedom than fiat government currency does. Bitcoin operations like all such systems have things like protocol updates and incident resolutions. These by their very nature must be regulated and must be centralized. There are Bitcoin administrators who are unelected and possibly unaccountable to the users in a similar manner to which the federal reserve board members are to the public. Except in reality the board members can be called before Congress to speak publicly about what they did. This you will not find with Bitcoin. Users of the currency cannot appoint or vote on these people, yet they handle the conflicts that come up and keep the currency in line by making sure the system works. This is very much like how the government oversees its issued fiat currency. It does function to a greater degree, meaning there is more control, but the function of centralized power remains even in Bitcoin. Rather ironic when you think about it.

Looking into this even more we see that there are Bitcoin developers who exercise a great deal of control over the currency itself. Here is how it is described in Is Bitcoin a Decentralized Currency?:

"The Bitcoin core developers have the authority to make all the necessary modifications to the Bitcoin protocol; according to the Bitcoin Github repository, all “radical” decisions require consensus amongst all the developers. For example, in the Bitcoin client version 0.8.2 the developers unilaterally introduced a fee policy change and decided to lower the default fee for low-priority transactions from 0.0005 BTC to 0.0001 BTC. This empowers the Bitcoin developers to regulate the entire Bitcoin economy. [...]"95

These developers act very much like a regulatory body and Fed board of directors all in one. They have regulatory power and

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decide how Bitcoin operates. They're also charged with resolving any problems that occur with the currency.

Transactions in Bitcoin are not outside the regulation of the program itself. Free and fair exchange without hindrance is the cornerstone of an-cap ideology. This to them is the very definition of freedom. In fact, decisions in Bitcoin have to be approved by the majority of the computing power in the network (which is assumed to be honest) in order to be effective in practice. Again we return to Is Bitcoin a Decentralized Currency?:

"In Bitcoin, electronic payments are performed by generating transactions that transfer Bitcoin coins (BTCs) among Bitcoin users. Users are referenced in each transaction by means of virtual pseudonyms—referred to as Bitcoin addresses. Each address corresponds to a unique public/private key pair. These keys are used to transfer the ownership of BTCs among addresses.

Users transfer coins to each other by issuing a transaction. A transaction is formed by digitally signing a hash of the previous transaction where this coin was last spent along with the public key of the future owner and incorporating this signature in the transaction. Any peer can verify the authenticity of a BTC by checking the chain of signatures.

Transactions are included in Bitcoin blocks that are broadcasted in the entire network. To prevent double-spending of the same BTC, Bitcoin relies on a hash-based proof-of-work (PoW) scheme to generate blocks. More specifically, Bitcoin users must find a nonce value that, when hashed with additional fields (i.e., the Merkle hash of all valid and received transactions which the user wants to include in a block, the hash of the

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previous block, and a timestamp), the result is below a given target value. If such a nonce is found, users then include it (as well as the additional fields) in a new block thus allowing any entity to publicly verify the PoW. This process is referred to as block mining. Upon successfully generating a block, a peer is currently granted a fixed amount of BTCs plus the fees of the transactions included in the block. This provides an incentive for users to continuously support Bitcoin. The resulting block is forwarded to all users in the network to check its correctness by verifying the hash computation. If the block is deemed to be “valid”, the users append it to their previously accepted blocks. Since each block links to the previously generated block, the Bitcoin block chain grows upon the generation of a new block in the network. Bitcoin relies on this mechanism to resist double-spending attacks. For malicious users to double-spend a BTC, they would not only have to redo all the work required to compute the block where that BTC was spent, but also recompute all the subsequent blocks in the chain."

True, the federal government has substantial control over the money, and that this is incomparable to the level of regulation in Bitcoin. My point here is that it is not decentralized. It is merely centralized to a lesser degree. The idea that it is free from control outside the holder of the coins themselves is incorrect. Even with a digital currency you need some form of regulation even if it isn't to the degree the government regulates fiat money. The creator of Bitcoin ihimself knew this was a fantasy and saw the necessity of it.

* * *

When dealing with an-cap ideas about something we have to consider what their redefining of that thing is. If we were to look

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at the general definition of centralization, we would agree that the Fed is a central bank which with a certain ability regulate the money supply. Thus we can say that fiat government issued US dollars is centralized. How is Bitcoin any different in this regard?

It isn't, and that's the point. It is merely to a different degree.

An-caps would no doubt, as with other phenomenon, just redefine centralization in order to avoid a blatant contradiction in their position. This possibly greater centralization of money is probably explained away by saying that since the centralization is not government it does not count. The fraud in this should be quite obvious.

Even the most holy of Holy Grails in an-cap ideology, the free and fair exchange is not to be obstructed. It too is not immune from regulation. They would no doubt argue that this regulation is necessary in order to keep the currency "honesty", yet we can easily see that the point of government control over the fiat is for the very same purpose. Because the use of Bitcoin requires the entire system to verify and accept transactions, it essentially requires the users of Bitcoin to act in "good faith". It is here we would normally throw in a quote about human nature and how greedy and untrustworthy people are. Again here we see much less a contradiction as we do an irony.

For all the fantastic claims that are made by an-caps about the potential of Bitcoin, we see the reality is much different. In order for the currency to even work, they have to continually resort to similar or the same functions of the system they reject. This more than anything should show that the use of Bitcoin in this regard is wholly utopian.

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Value and Utility

If Bitcoin is to operate as a currency it must be held to the laws that govern currency. The most iron of those laws is that it must have a utility; people must want to use it. Obviously, if there is no interest in using it as a means of exchange the currency will lay meaningless in digital walls immemorial. So what utility does it really have? Well, in the most obvious we simply look at what it is being used for and how it is being used.

Bitcoin really only has two uses at this point, meaning it is only being used in two ways. First it is used as a means of payment for online transactions that bypass financial institutions and theoretically government oversight. Second it acts as a stock which is invested in and sold at a later date. Pretty much all transactions made with Bticoin are made online and not "in real life". There are of course a few exceptions that An-caps would be happy to point too, but these are small to nil. A small exception to the rule does not mean that the rule doesn't exist.

There are two notable exceptions. I'm actually going to use Dogecoin as an example because I prefer Dogecoin to Bitcoin. No reason really, merely subjective preference:

The two man Jamaican bobsled team qualified for the Sochi 2014 Olympics, but it still lacked an additional $40,000 to afford the trip there with all the necessary equipment. In just about two days the Dogecoin Foundation raised $30,000 in donations of their own digital currency to pay for their trip.

As of early Monday, some 26 million dogecoins had been donated - approximating around $33,000 in actual worth once converted. According to the Redditors running the donations, that's about $30,000 after switching to stable currencies that won't ruin the value of the drive."96

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In another interesting incident, an Australian porn star went to Reddit to ask for help setting up a payment system for customer to pay in Dogecoin.97 For what reason she did this I have no idea.

It's very limited in its use in exchange, as these exchanges don't happen out in the real world in everyday commerce. They take place in a small minority of online transactions. Bitcoin will remain in this position, it will not move into mainstream acceptance. (As history would show, I was correct.)

The currency only has value so long as people believe it does because it's not backed by anything, any authority or alternate utility like gold is. This is displayed quite adequately when we see that it is only a minority of people who use the currency for its moral and philosophical aspects. They want to avoid government oversight; they want to oppose the "evil financial institutions" that ruin their lives with fiat currency. The value of the currency, its utility lies solely in its "appearance of being rebellious", its moral and philosophical foundation. Meaning it's not really founded in anything but people's attitudes.

Is this really any different than government issued fiat currency? I'd argue that it's not really all that different in several regards. Money is only a social construct. Bitcoin is no more real than fiat government currency or even Dogecoin. The value of any currency lies in how much people trust it to operate as a means of exchange. In this regard we see that people don't generally trust crypto-currencies. Stores don't take them as a means of payment, neither small businesses nor large big box store. Some financial institutions take them, but they do not take them as a form of payment for a commodity or service. They take them as an investment banking on them increasing in value over time.

The question lies in why people don't trust it. The currency is unaccountable and has nothing guaranteeing its value. This is why the US dollar and other government issued currencies have a determined value. Regulated currencies are not made subject

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to the sudden and reoccurring bouts of instability. As is spoken about elsewhere in this book, actually existing capitalism demands a stable currency for the easy of the function of the markets and exchange. Parties don't want a currency that isn't backed by anything. People want a currency that is going to retain its value. This is why gold is a better means of payment and store of value than Bitcoin is. Even though it is still subject to fluctuation, it is nowhere near as bad as Bitcoin. Gold does however have a utility outside its use as a currency. It is used in the manufacturing of electronics, jewelry etc.

Fiat government issued currency is back by the power of the US Empire. If something were to present a threat to its value the government can step in and do something about it. If there's a bank run the government can print more money. The government declares it to be legal tender, it cannot be rejected as an acceptable form of payment. If economic events appear that challenge the global power of the US dollar it can do something about it. If Saddam Hussein stops selling Iraqi oil in US dollars in favour of the Euro, say around November 2000,98 it could always invade the country. It wouldn't be that hard to invade, destroy the country, kill a million and a half people and take the oil fields and put the sale of their oil back on the US dollar. Or if say someone like Mummar Gaddafi devised a plan for a single gold African currency that would end the US dollar's power in Africa for trade,99 the US could always invade under the pretext of "protecting civilian lives" and put a stop to it. Both of these actions would undermine the power of the US dollar.

Bitcoin, nor any other digital currency can provide this. Thus Bitcoin will not break into the mainstream. This belief that it will or that it even can is based on a lack of knowledge of currency. It is based on Milton Friedman and Austrian school type theories. These theories have already proven not to be accurate in the operation of currencies in reality. The problem, the ultimate flaw is that its users (less its creators) place Austrian economic theory

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behind the explanations and expectations of its function. If we already know these theories to be false with money in the real world, then the digital world can be expected to be no different.

What we do see is that this currency flourishes where its "moral and philosophical aspects" are made paramount over that of an efficient and effective functioning. In certain markets and certain exchanges, the key aspect of its supposed "anonymity" and moral avoidance of fiat is what drives its use. Where? In An-cap communities smaller exchanges are made in Bitcoin, but not that many. These people are choosing it over cash because of their political and philosophical orientation. It's not an efficient or effective means of exchange but it does fill the moral demands of its users. The online community relatively likes it because of its ability to bypass financial institutions without having to pay fees to them. This drives its use there, not any supposed idea of value.

The same can be said for where it is used the most, the black market. By this of course I am referring to places like Silk Road, where the site has just recently gone back up. Using the program Tor, it's like a kind of alternative method of accessing the internet. I say kind if because the Tor network really isn't the internet. (I don't want to get too technical about the operation of Tor because it's not what we're discussing here.) There are other online underground black markets. I had seen places that offer fake passports, documents and contract killing services. These places are very attracted to the "anonymous" function of Bitcoin. This "anonymous" function is of far greater importance than the stability of traditional currency. This tradeoff serves their interests. Thus we see digital currency flourishes where its secondary characteristics are valued over the primary characteristics of an effective currency. It's this phenomenon that will leave the Bitcoin primarily in the darker corners of the internet.

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Does this mean that Bitcoin and the people who use it are inherently criminal? No of course not. This is no truer than that of hard cash. It is the life blood of crime. Using cash has a lack of paper trail which is why illegal transactions prefer it. Bitcoin can be used in this way as well, the bypassing of financial institutions which would keep records. I'm only demonstrating an aspect of the currency that has value to people in spite of its flaws.

The only mainstream area of economy that accepts Bitcoin is various financial institutions that want to hold onto it as an investment. Because the value of a digital currency can fluctuate so greatly and because people want it, it fits right in with investing in stocks. This is the very nature of the stock market itself. It's something of value that people want, where its ownership can be bet on to increase in value over time. Again here we see the same phenomenon, it's not desired as a means of exchange as a currency, it's held for its secondary characteristic, its ability to vary greatly in value.

What this definitely shows us is that Bitcoin is not desired as a currency alternative to government fiat. It is desired in how it operates differently than a mainstream currency. This is why Bitcoin will never make mainstream. It cannot do the job of a mainstream currency; its only value is in how it doesn't operate in the way a currency needs to. It can only be used for novelty and speculative purposes.

We've seen how these secondary characteristics are what keep Bitcoin going. It cannot function properly as a traditional currency that is sustainable. From this we can deduce that if Bitcoin ceased to have these aspects to it, the currency would no longer be used. If Bitcoin got traced the same way PayPal or wire funds transfers, people would stop using it. If the government really wanted to destroy it, they would simply regulate it and take away it secondary characteristics.

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With all these applications for it, there remains one aspect that makes the currency usable. That is, the fact it can be converted into US dollars. Without this ability to be converted into actual currency, US dollars, Bitcoin would be absolutely worthless. You can't buy anything substantial with it, you can't engage in day-today economic activity with it. If you want to eat you have to use government fiat currency. Financial institutions who bet on it by holding them only do so because it can increase in value, that value is measured by how many US dollars it can be sold for just like a regular stock. When An-caps talk about how Bitcoin is "deflationary" meaning it only can increase in value, that value is measured in its ability to be sold for US dollars. If Bitcoin could not be converted in this way no one would use it. Bitcoin exists only so long as any government issued money does.

From Currency to Exchange Mechanism

There are aspects of online transactions that can cause people to be wary of making them. They can also add to the cost of simply engaging in them. As it stands, a third party must intervene to provide that service. PayPal for instance takes your money, and then transfers it to another person or institution. This is one example, there are many such financial services. Inherently there are fees associated with providing such a service. What both parties have to do is trust that the third party will act in good faith. Not many people really trust such services, and why not, capitalism is a system predicated on people getting over on each other. They use them because they don't have a choice, the non-physical interaction that is the online market place requires their use. (This is another one of those contradictions of capitalism, albeit a small one. People want a service but don't want to pay for it.) The idea of removing that third party and its associated costs is excellent both for the

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purchaser and the buyer. Why pay for a service when you don't have to, right?

From this we can see what Bitcoin is really doing. It is not functioning as currency so much as it is a service. It streamlines, it increases the efficiency of the process of exchange. The process is streamlined by avoiding a third party financial institution. The true genius of Bitcoin is its efficiency in exchange and the elimination of associated costs. The large financial institutions that dominate the capitalist system are well, too large. They're inherently bureaucratic and a mess for facilitating these mostly smaller transactions. Bitcoin cuts through this inadequacy of traditional banking to focus on the intent of the transaction, to actually make an exchange.

In these existing digital transactions there is an expectation of some degree of fraud. Buyers are always wary of sellers and expect at some point to be ripped off by them. In the inverse this is also true. A particular degree of these transactions will end in fraud. It is a given and must be accepted as a hazard of doing business. These incidents add to the cost and risk of doing

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business online. All sellers must be prepared in their business plan to account for fraud. Obviously this increases the cost of simply doing business. Exchange in Bitcoin helps to alleviate much of that fraud. A deposit of Bitcoin can be more reliable than a traditional financial transaction. To what degree this has eliminated potential and actual fraud I do not know. However I do think we can say that it is significant.

This risk can often serve as barriers to many people's entry into the digital market place. Instability in transactions can de-incentivize people from placing a product or service online. I think this helps tremendously in overcoming that problem by creating a more stable and reliable way of conducing transactions.

Here's what it is doing: It is filling the demand for a digital service that people want, which financial institutions have not provided. What we have seen is the free market not fulfilling people's wants. This even goes beyond want into need, yet the market has still failed to provide. Only by devising a strategy outside of banking was this need fulfilled. The businesses in the market failed to provide a service that was in demand. Yet we are told, particularly by an-caps, that the market cannot fail to do so. What we do see is technically skilled people filling the gap left by the market. The free market failed in its most basic intended function; to provide people with something they want.

This fills the gap of where government regulation and banking services have failed to provide for customers. People outside of the market created a service that was in demand because the market failed to do so. Can the creator be called a capitalist? No, I hardly think so. The creation of Bitcoin was not an entrepreneurial act. The intent was never to create a business, a source of revenue. It was intended to produce an alternative currency to what he felt was an inadequate and possibly corrupt system. (I don't know if Satoshi Nakamoto thought it was

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corrupt or not.) The effect intended or not, was the production of a more efficient method of financial exchange.

Of course it should be noted that Bitcoin is not immune to fraud. Many people have been scammed out of their Bitcoins. What is different about these is that they usually did not occur during the act of exchange. Meaning, mostly a seller and a buyer were not cheated. These kinds of incidents only happen for three reasons. The first one is straight up theft, which you will have with every currency, and frankly everything else that has value. Bitcoin is not immune to theft in anyway shape or form. True it is much harder to hack a digital wallet than it is to mug someone, but it does happen. The second is when fraud has been committed through companies acting as traditional banks. The third is when a market place itself is attacked.

Generally from observations, since Bitcoin doesn't have any intrinsic value, and can't really be used for anything but speculation and exchange, it's only logical that it would end up like this. The truly revolutionary aspect of it is its ability to make the act of online exchange more efficient. In some way shape or form this was going to happen, not necessarily Bitcoin. The global marketplace is becoming more online. There should be a mechanism that facilitates the act of exchange in a new way as digital commerce expands and evolves. Traditional banks have not kept pace with this change. There is no doubt in my mind they will find a way to compete; it is only a matter of time.

Digital Currency as a Stock

The most useful thing, if not the only thing, Bitcoin can be used for is to act as a stock. Isn't this what an-caps like to remind us of, the fact that its value will overall increase? Isn't this the basis for owning a stock? You purchase it when its cost is low and then sell it when it is high. Of course stock traders are well

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aware of the fact that a stock is NEVER guaranteed to go up or even remain up. This seems to the difference, the awareness that something doesn't always increase in value over time. There isn't some overall trend of increase in value. I don't think we have to look any further than the crashes of Bitcoin and the crash of Dogecoin.

We've already gone through the fact that Bitcoin doesn't seem to be of any significant use outside its value in future trading for greater value. Its utility is extremely limited in purchasing.

What does it mean to be trading or speculating on Bitcoin for profits like a stock? Well, when you trade stocks on say gas, coal, oil or gold, you're trading in the hopes of receiving a greater value in the future. These seem like really good things to trade on when you consider these commodities also always increase in purchase price. Manufacturing methods can most certainly become more efficient, but regardless of this the price increases. Fuel is always a good thing to bet on increasing in price.

So how does Bitcoin differ from other stocks? Well the primary problem is that Bitcoin inherently isn't productive at all. Bitcoin doesn't actually do anything to create wealth. Mining gold does, oil and gas produces tremendous revenues. But Bitcoin doesn't do anything productive, there's no reason to see any material increase in value, it is purely speculation. People only believe there will be an increase in value. Bitcoin has no ability to provide greater revenues in the future the way natural resource production can. Oil has an extremely valuable use that will not be disappearing anytime soon.

When you purchase stock in oil or gas production you're purchasing the power to produce something that is valuable. That ability to produce is what makes those stocks have value. When you purchase Bitcoin with the intent of holding onto it until it increases in value is different. In doing this you are only betting on whether or not someone will want that stock (Bitcoin)

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for more money in the future. These are two totally different things.

You can bet on owning stocks in oil and gas because they will produce greater values in the future. Bitcoin will not. It is not useful in any significant way, nor does it create any value. Something needs to be productive; a way of being able to claim it will produce greater value in the future.

Betting on Bitcoin to go up in value and using it as a stock is a terrible investment as it has no productive capacity, it only relies on people wanting Bitcoin. Right now as I type these words Bitcoin has dropped to an incredible low of $300 US dollars. As I began writing this chapter it was $800. Clearly the currency is unstable, much more so than traditional stocks which promise future values.

Competition among Digital Currencies

One of the beliefs of many libertarians/"anarcho"-capitalists is that the Federal Reserve should be dismantled and multiple currencies be allowed to flourish. The idea is that the market will choose what currency will be the most valuable and therefore better. In their view currencies should be allowed to compete with each other for dominance of the currency market. This freedom to choose in their minds will prevent a lot of the real and imagined negative effects of a money system. Traditionally this has to do with the rejection of a monolithic fiat dollar. Some are quite well aware that there is not enough gold in the world to serve as money, thus a digital currency is a legitimate choice as an alternative. With such technology you can create a new currency nearly at will. This freedom of choice in their eyes brings the best possible world of money.

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Right now there are many crypto currencies in circulation. I must stress that I'm using the term circulation loosely. If you visit the website coinmarketcap.com you will find a hundred different crypto currencies and their market capitalizations. (I was pleased to see that DogeCoin was still in the top ten.) The only currency to have any significant value is still Bitcoin. While all these currencies exist they are not being moved in any way. No one is using them, even as I write these words the price of Bitcoin has dropped from around $800 to $249. The fad of Bitcoin was already over even before I finished this book. These currencies are weak because they are not being used for transactions despite some retailers actually setting up methods of receiving them as payment, particularly around New Hampshire. Despite this let's return to the subject at hand.

The main complaint with government issued fiat currency these people have is that they believe the money supply will infinitely increase and eventually be worth nothing. Of course they are making the mistake of confusing the value of a currency with is supply, and that an increase in its supply automatically means it has decreased. This is the Milton Freedman Quantity Theory of Money which has already been proven false. (See chapter 7 for more on this subject.) Their view is that if we allow currencies (not just digital ones) this problem can be avoided. However, I disagree with their claim.

The real value any currency has is its ability to carry out transactions, if the currency isn't being used, no one accepts it, it is essentially worthless. Supply has very little to do with it. Now let propose a hypothetical situation. Let us say that Bitcoin has been a success and that other digital currencies have also been a success. Say the currency market has dozens of digital currencies to pick from. Let us even assume the best possible scenario that all retailers take all currencies. The abundance of these currencies would actually cause the value of them to drop. There literally would be hyperinflation as none of these currencies

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actually had any idea of the demand for its supply. This alone would cause there to be too much money in the system causing them to decrease in value. There would be an overabundance of money. We've can already see that these currencies don't shrink. A digital currency doesn't just disappear, someone would have to lose their money in that case. This claim that it would avoid an excess of currency is just not true.

Going back in this book we can see another problem that would arise. Remember what happened in the U.S. past where there was a dual gold and silver standard? Having more than one currency serving as a measure of value is a hopeless contra-diction. Whenever there has been more than one form of money, one of them has emerged as the measure of value by which the other was judged. When there was a gold and silver standard the value of gold climbed and the value of silver was based according to what the value of gold was. I think we have a bit of an example of this happening now. Bitcoin is already valued according to the U.S. dollar. It already is not a measure of value because a more valuable commodity already occupies that position. If there were competing digital currencies and not government fiat it seems clear to me that Bitcoin would come to dominate and all currencies would judge their value by Bitcoin's. Bitcoin would eventually take over and the other currencies would lose their value. The currencies would, in the end lose their ability to compete.

Competition in currencies is an idea that has been touted by many, including Ron Paul. The idea seems good until we look at the history of the competing currencies that existed in the US during colonies. We have that now in digital currency, there are about 100 main ones that are being traded. Guess what? They're as equally worthless in terms of use as a means of exchange.

Will more people chasing after a currency increase its value? Yes it will, no different than any real currency or stock. This is

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however meaningless as there's no inherent use for BitCoin because no one takes it. It's essentially inflating a stock that can't pay anything out. It creates in the end, a valueless bubble.

Taking a quick look on how the site measures the prices of these coins, "All prices based on BTC/USD exchange rate." This means we're still judging the value of BitCoin and all the others by what the US dollar is worth. Sure, some of the currencies can compare to BitCoin, but it in turn relies on the US dollar.

Even then, when you have many, many crypto-currencies, you spread the number of potential users over several currencies. Dogecoin was rising fast, it was possible for it to reach the popularity of Bitcoin in the future drawing users away from Bitcoin. How many away? Who knows? The competing currencies will just cause a mess in exchange, because now you have several unstable currencies to deal with. It's hard to compare this with the experience of multiple currencies during the colonies given the different historical context.

The Fatal Flaws

I think it's important before we get to too much substance on the matter of Bitcoin that we visit the initial fatal flaws in it. Once we understand these we will be able to understand the deeper criticisms that come after it and more importantly how they weave all together to paint a real picture of the crypto-currency. Bitcoin like all currencies has its flaws, things that can lead to its ultimate destruction. These flaws however run much deeper because of its attempts at anonymity and its lack of regulation and safety controls. Sure there are safe guards put in place, but there is however no FDIC to protect against any losses. You have no real recourse for action if you're ripped off. You can't verify who actually received your Bitcoins in the case

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of theft or having promised product and not delivering it. It is in a sense a digital frontier.

These flaws have become very stark as I type these words. The currency came close to a total collapse after the huge theft from Bitcoin bank Mt.Gox. About 740,000 went missing after a hacker managed to make its way into the back online.100 This caused an extraordinary drop in the value, one we would not have seen with a regulated state fiat currency. As I type this, the future of the currency is hanging in the balance. The currency may even finally pass away by the time this book is published. We'll have to see when the time comes.

Any currency can be stolen, regardless of how much of a non-physical existence it has. Bitcoin is no more an "honest currency" than government fiat as Ron Paul likes to put it. In the function of money there is nothing particularly new or unique about it. It doesn't in any significant manner alter the way in which money operates. Money is not some universal operational mode devoid of historical context. Money operates according to what the prevailing mode of production requires of it. Were there huge complex financial instruments in primitive accumulation or in feudal society? No, because there was no requirement for them, it was not a part of their currency. Today we see that the prevailing mode of capitalist production requires all these complex schemes to achieve the goalsthey were intended for. Fractional Reserve banking system, derivatives, collateralized debt obligations, all these phenomena require money to act in a way that was not previously required of it. Money reacts and its function is shaped by the demands placed upon it by society. Bitcoin is not immune to this reality of money.

When we read Marx we see that the movement of commodities isn't determined by money. We in fact see the opposite; money is moved according to the distribution of commodities. In feudal society people rarely had any money, the vast majority was held

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by feudal elite who controlled the primary food commodity. Money flowed from this exchange of food and some small necessary commodities. People generally worked their own land creating their own food and handed over the rest to the feudal lord. Thus money didn't move food to the peasants because they already, for the most part, produced their own. Once capitalism came into place and people no longer owned any of the products of their own labour, people were paid wages instead. Without these wages they would not be able to obtain the commodities they needed in order to survive (perpetuate the reproduction of the worker). Thus it was necessary for money to flow from the capitalist to the worker then to the market in order to facilitate this necessity. The movement of money (its use and behaviour) was altered from the feudal era because of the movement of commodities. Money didn't make these commodities come into existence, the advent of capitalism, a system of commodity production did.

A peasant could have come up with an idea for a commodity and tried to sell it. This however would not have happened because he was the property of the landlord and tied to that land by law. He had no profit motive in that regard. Capitalism freed the peasant form the land and allowed him to own some productive forces of his own. Once a system of commodity exchange came into existence the ability to produce that commodity and then exchange it for money did. Money was no motivating factor for the peasant as he literally could have entered into production himself due to the very nature of feudalism. Money did not facilitate the exchange of the commodity; the exchange of the commodity facilitated the exchange of money.

(This explanation of commodities moving money is a simplistic one. Marx gives a much better explanation of this theory than I have provided here.)

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An-caps (and people who support capitalism in general) don't see this. They see money ahistorically existing without the context in which it exists. In their theories and views of money, the complex financial instruments could exist in feudal Russia. If asked they would certainly say that it wouldn't, but in their theories and writings the differentiation in historical context is not made. Bitcoin does not challenge this; it does not fundamentally alter the production thus exchange of commodities. This remains a product of the prevailing mode of production: capitalism.

With this reality that Bitcoin doesn't fundamentally alter the way a currency functions, we must acknowledge what Bitcoin really offers. What it offers is an ideological/moral argument. That's right, Bitcoin can only claim to be morally superior to fiat currency by some lofty notion that it is honest because it can't inflate the way fiat does. Listen to what An-caps say and compare it to what actually happens with it. An-caps only make the claim it will change things based off of some ill defined idea that fiat currency is inherently corrupt. Even this stems from a failure to understand how money functions, and the necessities that modern capitalism places upon it.

An-caps always claim that the creation of new money upon bookkeeping entry is wrong and "naturally" goes against a free society. The claim is bound up with a larger argument that fiat money is slavery as it reduces the value of the dollar. This claim is partially correct, but that decrease in value is only relevant as long as it is combined with other phenomena. The necessity of modern capitalism of expanding the money supply to relieve economic crisis is very real. Thus we need a currency that can perform that function. Again this is a historical necessity that is ignored because the Austrian view of money and its function is ahistorical. They literally ignore the demands of capitalism, a particular mode of production and distribution, which are placed on money.

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Some of the weaknesses of Bitcoin that we see here in this work can be applied to the regular government fiat currency we use every day. These flaws have a unique position in that they do not have the protections that are normally afforded. It's important to understand this as we proceed to look further at the currency.

Easily Losable

The biggest flaw that I see in this regard is the ability of Bitcoins to be lost in circumstances that would be considered laughable for physical money. The secretive nature of the currency allows for a lack of oversight which makes vulnerable. There are a few notable instances that come to mind when looking at this problem. One individual lost about $600 worth of coins because he reset his phone without backing up his wallet. Two or three button pushes of a cell phone destroyed $600. This would be easily fixable with money held in a bank. There would almost always be a way to undo such an action, at the very least have the bank or the FDIC compensate you for any losses. People often respond with the criticism that you can lose your wallet just as easily. I reply with, "How often do you have $600 in your wallet"? Besides people lose their cell phones much more often than they lose their wallets.

Here's another example, one man lost $90,000 because he hit "delete" at the wrong time. Simply pushing one button at the wrong time like we all do often enough he lost all that potential money. You can't do that without some kind of recuperative function at a bank. Actually I'm pretty sure a bank can't do that at all. In an extreme episode a man threw away an old hard drive that contained what he said to be $6.5 million. These are all nonsense events wouldn't happen with traditional banks.

Let us return to the incident with Mt.Gox. Just recently the Bitcoin bank says that it found 20,000 Bitcoins that it had "forgotten" about previously just one week after it had filed for

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bankruptcy. They said they had misplaced the coin in an old format wallet that is worth about $116,600,000 USD. If we accept this claim at face value we must acknowledge the absurdity of losing that many Bitcoins. I've never heard of a financial institution losing that much in stocks by misplacing them.101

Bitcoin is Ridiculously Unstable

A serious flaw in the currency is its constantly fluctuating value. This runs antithesis to what a stable functioning economy needs. When a currency's value changes constantly, or even infreq-uently, it causes disturbances in the planning and functioning of capitalist enterprises. Businesspeople like to form plans, mean-ing they like to map out where they want their business to go and how to plan to get there. This includes forming budgets and the allocation of resources. A sudden change in the value of a currency will ruin this entire plan, which in the corporate world is about five years.

Let us take an example of a single alteration in a currency that massively affects an entire economy. We need look no further than the gas shortage of the 1970s. A shortage of fuel caused the price of the commodity to increase. This is not the same as an increasing or decreasing currency value, but it inherently has the same effect.

Everyone remembers the oil shortage during the Yom Kippur War in 1973. The war began when a group of Arab states led by Egypt and Syria attacked Israel to take back land that had been stolen including the Sinai Peninsula. (In addition to attempting to stop the Israeli genocide of Palestinians.) Regardless of the cause of the war, it happened. At some point the US became involved by sending arms supplies and $2.2 billion in appropriations to Israel. In response to this Saudi Arabia declared an embargo against the US which was joined later by other OPEC countries. What they did was reduced oil supplies by 5% leading to what

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today we call the 1973 energy crisis. This was possible because there was a cartel and they were able to avoid competition. The increased cost in fuel had a huge effect. Transportation alone is a good chunk of the cost of products. It also plays a big part in the production of plastic goods. Businesses suddenly became faced with a shortage in funds unable to meet production costs. As a result they had to return to the banks in order to get more credit for the cycle of production. This caused the banks to go to the Federal Reserve and request more money.

Again we recognize that inflation isn't the same thing as changing the value of a currency, but it does have a very similar effect in some regards. More money was required than what the plan called for because there was an alteration in the value of a single commodity. Now imagine this happens with all commodities and services because the value of the currency changed. In fact this did kind of happen. The cost of fuel is connected to everything because transportation is connected to everything. This caused a disturbance in the plan of countless companies trying to do business. A large fluctuation in the value of currency would have a much greater effect than this.

Okay we've determined that a fluctuating currency is bad news. But is Bitcoin really that unstable?

Yes it really is that unstable. Even more so when we see what happened with Mt.Gox and the sudden catastrophic shock to its

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value. If we took this chart back even further we would see a relative pattern of instability. By this I mean the further back we go the less incidents of fluctuation there is. This is easily attributed to the fact less people were using it. The more activity there is on a digital currency there more instability there is. The value movements of it are determined by an aggregate of the actions of individuals engaging in its use. The more people using it, the more variables there are in the actions that make up its value.

So you can imagine what hellish instability would exist with the US. After all there are literally billions who use or are connected to the use of the currency given that it is a huge portion of the word's reserve currency.

When we look at the purchasing power of the US dollar we see a straight clear trend. It declines in a generally straight line over time with one major exception, that being the Great Depression.

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In fact if we look to the small period before then we see a greater pattern of instability.

(While not relevant to the argument here, the slop downward is the result of the expansion of the economy requiring more money. It slower decent represents not only an increased stability but also capitalism reaching its limits of expansion.)

We can see to a limited degree what happens to a currency once it becomes regulated as opposed to being allowed to fluctuate at will.

Why would small businesses want to use an unstable currency? They wouldn't.

It's true, when trying to calculate the cost of operation you need a stable currency in order to charge what is necessary to turn a profit. Now in fairness, the Bitcoin wiki102 actually addresses this problem. However, their explanation for it is false.

"The assumption is that bitcoins must be sold immediately to cover operating expenses. If the shopkeeper's back-end expenses were transacted in bitcoins as well, then the exchange rate would be irrelevant. Larger adoption of Bitcoin would make prices sticky. Future volatility is expected to decrease, as the size and depth of the market grows."

Well we've already seen that this future stability is false. The stability of any currency largely rests on regulation which Bitcoin doesn't have. In addition it rests on the premise that Bitcoin becomes the dominant currency. This would be the same for any currency. Bitcoin is not the dominant currency. That is why the problem exists. If you think Bitcoin can over take the US dollar you're mistaken. Even if there was some scenario where it could, it would be flooded with competing currencies preventing it

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from being the majority. Bitcoin will never challenge the US dollar for hegemony.

"In the meantime, many merchants simply regularly pull the latest market rates from the exchanges and automatically update the prices on their websites. Also you might be able to buy a put option in order to sell at a fixed rate for a given amount of time. This would protect you from drops in price and simplify your operations for that time period."103

Merchants absolutely do not automatically 'update their websites' from prices on 'exchanges'. Merchants in the real world, constrained by geography and credit, can purchase only from those suppliers who are the most affordable. They cannot by and large travel to more competitive suppliers, as with increasing distance geographically, shipping cost increases. Those suppliers, in turn, can only make so much profit as they too are constrained by labor costs, production costs, shipping and raw materials prices set by various exchange forces in the market. How could Bitcoin protect you from market commodity-price fluctuation? Does Bitcoin now ensure infinite supply of raw materials, cheap labor and free shipping? No, it obviously can't, but this argument is essentially based on that hidden assum-ption.

How would this affect regular every day people? Well one prime example due to the fact it was well documented was the effects inflation had on Germany. At the worst moments the fluctuation in value were so great that people were given part of their pay during the middle of the work day so their wives could run to the store to buy food before the value changed. It is a rather extreme example, but it's one that could happen and has happened in the past. We could probably dig up much more that occurred during inflation in Zimbabwe, but this will suffice to get the point across.

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Bitcoin has no ability to prevent instability in price. As we've seen here instability can have disastrous effects.

Bitcoin and Taxes

A huge misconception surrounding the use of Bitcoins is that they are not subject to taxes. The logic behind it is not unreasonable, if however misguided. Taxes primarily relate only to the official state currency. Supposedly if you were using a currency outside the officialdom of the government this would no longer apply. Never forget the purpose Bitcoin has for the dedicated users of it: To build an alternative to the government issued currency and the economy surrounding it. The theory is, if you're not longer using US dollars you can no longer be taxed. The problem is that no one is engaging in daily economic activity exclusively in it. No one has detached themselves from the US dollar entirely in favour of Bitcoin. This idea of evading taxes using Bitcoin is based, and can only be based, on the belief that the formal economy and currency can be evaded altogether.

Here we see the main driving force behind the an-cap ideology. It is based on a rejection of certain formal institutions of society, as opposed to the desire to create "better" institutions to take their place. They do no begin from a position of having a preferred order. They begin from a rejection of the one in which they currently exist. Thus they haphazardly throw together some alternative without thinking them through first. Once they are combined we can often see how they often are incomplete an even contradict each other.

The point is the purpose of using Bitcoins is to evade paying taxes. This cannot be accomplished in an economic life that involves the use of both government fiat and Bitcoin. The reason for this is the fact that Bitcoins are constantly being traded for US dollars. Bitcoin does not and cannot exist in exclusion of

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government currency. Bitcoin is not being used for the entirety of a person's economic life. They must either constantly exchange Bitcoins for US currency, or use US currency alongside Bitcoins. Let me be clear: Bitcoins are still used in legal transactions. According to the law, Bitcoins are not currency, this is why they are legal to use. They are, in a strange legal limbo, a form of property. Property in some specific cases are subject to taxes. This stems from a failure to understand how and in what circumstances taxes are applied. Bitcoin itself is not taxable, just as government issued money itself is not taxable. Particular economic events that which take place in an economy are taxable. To put it simply, "Bitcoin is taxable, whenever a taxable event occurs."

For all intents and purposes the government, who decides what is and what is not taxable doesn't see Bitcoin as a currency. It does not fall under the legal definition of what a currency is. This is why it is (in a grey area) not illegal to use it as a means of exchange. Thus the legal standing of Bitcoin is that it is property. I don't think any an-caps would disagree with this, they would most certainly consider their Bitcoins property. Once we understand the legal position of Bitcoins as property, we can begin to see how they can be taxed.

What is really done with Bitcoin here? Essentially since the use of it as a currency is next to non-existent, it thus acts as something you hold while it increases in value to be sold at a later date. When you own property to be exchanged for an amount of money, you no longer "simply own something". What you are holding at that point is an asset. An asset is, "A resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit."104 When you take that asset and you sell it for an amount of money you are engaging in a taxable event. This is equally true if you exchange them for another commodity, meaning bartering. Even if you exchange a quantity of Bitcoins

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for something online you have still engaged in an act of bartering.

Can you be taxed for bartering? It's an important question that is not immediately clear:

"[...]many barter situations may not be taxable (the lawn mowing scenario, for example), especially if you are acting independently of a business. When goods, in particular, are exchanged, it may not be considered bartering at all. If two parties trade computers of equal value, for example, this may not be taxable – especially if neither party is in the business of selling computers."105

As you can see it can become quite hazy. Here is what we do know for sure when it comes to taxation. Don't expect to be taxed if you're just exchanging some Bitcoins with your neighbor for planting a garden. A simple small exchange of goods and services doesn't warrant being taxed. However this becomes completely different when you start engaging in business, in other words engaging in daily economic life.

In one is planning to run an actual business using Bitcoins instead of government issued currency, and then yes they would have to pay taxes on them. I think this is a realistic scenario given that many an-cap have stated that this is what they plan to do. There are types on Reddit who talk about they were going to find a piece of land somewhere and get a 3D printer and start making commodities, selling them in only Bitcoins to evade the government and become "independent" of it. Others have talked about how they plan to do this; the combination of these two an-cap utopian tools would bring down the US government by simply not participating in the formal economy. They feel they have a legal ground to stand on by refusing to use government money. They think as long as they don't use it they can't be taxed. They are sorely mistaken in this regard. Money is

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not taxed, economic activity is taxed. You don't simply stand outside the economy just because you don't use money.

This is even true if you use it as a form of remuneration for employment. Being paid in Bitcoins is also taxable because it is classified as employment income. It is consideration for an exchange of goods or services, even labour power. What you are given as pay is still taxed even if it be gold coins or livestock. The act of being employed and receiving pay for it is a taxable event. As a real life example I point to the company FoxyCart. As a Christmas bonus one year they gave their employees Bitcoins because they would supposedly increase in value. What happened was they obtained a taxable capital gain which counted as an asset and then sold it to their employees. It counts as selling it because labour power/services were exchanged for it. Even for having received it the employees would have to pay taxes on it.

How Would Bitcoins be Taxed?

Primarily, not counting any future legislation that appears in the future, Bitcoins would be taxed as “capital gains.” This is considered to be the same as if you held stock investments and received money from them. Both the stocks and the Bitcoins are "assets". Obtaining them selling them, or receiving money from them are all taxable events. Should the time come when you need to pay taxes on them, you've got some work to do. You would have to keep track of when you got them, when you sold them, and how much you bought and sold them for. This kind of record keeping would be a pain; stocks usually have someone watching over this information, not Bitcoin.

How Much Tax would be Paid for Bitcoins?

Since we're dealing with capital gains, it would be chiefly determined by how long you held them. You would follow the traditional route, if you've held it for less than a year then it

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would be a short-term capital gain. Longer than this it counts as a long-term one. A short-term capital gain is taxed around the same as a person normally would for regular income, which is about 0% to 39.6%. The long-term tax rate is 0% or 15% depending on if the amount is greater than or less than $36,900 for an individual. This becomes much more complicated once you receive more than $125,000 which requires an entire different set of rules. For a quick example, say you purchase a Bitcoin for $100 and now it is worth $1,100. This would mean you have a taxable capital gain of $1,000. Now if you held that Bitcoin for less than a year you would be expected to pay about $250 in taxes, which can be modified according to your personal income tax rate. If you had held the Bitcoin for more than a year you'd be paying about $150. This would also be applicable to people who traded Bitcoins professionally, but it would be far more complicated.

You could argue that they are given as gifts, but then you're subjected to the United States Gift Tax. The person you send them to do not pay the tax, you do. If you receive a gift with a value over $14,000 then you do have to pay taxes on it.

A difficulty that arises is, when you own a Bitcoin or any asset, it matters where that asset is. If an asset is held overseas then it is subjected to different taxes. More specifically the IRS can say that it falls under FBAR (foreign bank account reporting). It's interesting because you can't really tell where a Bitcoin is actually held. I'm not sure if it's even possible to ever tell. The reason this is so is because it's not held in an actual bank which has a physical location. The IRS can merely claim the asset is held overseas and it is up to the holder to prove where it is. You can see what kind of problem this would present. These rules state that a U.S. citizen that posses at least one financial account outside the country that has more than $10,000 in aggregate value must pay taxes in it. The penalties for misreporting it can

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be pretty steep. The IRS can pretty much just claim they are held overseas as you can't prove where they are actually held.

Another scenario is a professional Bitcoin miner. Recently it's become pretty much impossible to mine enough coins regularly to make a straight up living off of it without having an additional source of income. Regardless there are still a significant number of people mining coins as a portion of their income to warrant an investigation. At one time this was easy enough to do and provided a decent living for people. There recorded cases where people have made millions of dollars off of this kind of trading, I'd be interested to see if any of them had any experience surrounding the taxes behind that kind of wealth.

Bitcoin trading is pretty simple, not any different than investing in stocks: Buy low, sell high. So really if you understand that and are already doing it this would be a cake walk to add into your economic activity. The only thing you would have to remember is to add any gains from Bitcoin trading into your taxes. These traders are trying to achieve one or both of two possible goals. They are either trying to make more money from Bitcoins, or they are trying to get more Bitcoins. Regardless, taxes still have to be paid in both cases. Just as with the stock trading itself, taking these taxes into consideration is the same. It pretty much works the same way with Bitcoin as it does with stocks. Here's a good example:

"An example, Bob starts with 1 bitcoin and makes a million day trades in 2013. Bob is a bitcoin stud and turns 1 bitcoin into 1,000 bitcoins. Bob earned 999 bitcoins or $999,000 dollars (assuming each bitcoin is worth $1,000 dollars). Bob owes $381.314 dollars in federal income taxes, not including state and local taxes. Thus, Bob needs to cash out enough bitcoins (about 381 bitcoins) to pay his taxes."106

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The bottom line here is this, if you've cash out Bitcoins to make a profit you have to cash out enough of them to cover the taxes for doing so as well.

There are also some benefits to using the tax code which can allow you to avoid paying some taxes if handled properly. For example, a company mines Bitcoins and sells them. For tax purposes, this is no different than company producing a product and selling it. This selling of it on the open market is "ordinary income". Since this is true and it counts as doing business regularly, meaning pay taxes on profits, then it's possible to have certain business related deductions made. Deductions can be made that are pretty standard, like internet service, electricity and hardware purchased to do the mining etc.

Now here's where it can get pretty advantageous for professional Bitcoin miners. Because Bitcoin is not recognized as legal tender, but it is a partially accepted unit of currency, it has certain flexibility. Once a Bitcoin is mined, the revenue cycle is not considered to be over. For this to happen it must (a) be converted into a legal currency recognized by the Internal Revenue Code, or (b) the coin is bartered for a product or service causing a taxable event to occur. If you had a seasoned tax professional you could probably dig up a bunch of advantageous scenarios and actions given enough time.

Here's one that should be immediately obvious to any businessman: if the Bitcoins are never sold then a taxable event never occurs. What a professional miner can do, even if you never made a profit (never sold them) you can still make business expense deductions. Here we can see the benefit, generate no taxable revenue, yet at the same time make all the tax deductions, this is totally legal and still leaves the business as legitimate under the law. You could even sell them, only enough to cover expenses and still avoid paying taxes on them. This

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means a miner could potentially avoid paying taxes on them for as long as he wants so long as he delays the sale of them.

This unique flexibility of Bitcoins leaves you with a number of possibilities that go beyond the scope of this book. If you're interested in mining and trading digital currency as a profession (or already do so) it is definitely worth speaking to a tax professional to see the most you can get out of it.

Bitcoin Anonymity in Tax Evasion

Alright I can already hear the Bitcoin advocates now, aside from denying what I've said so far without providing any refutation of it, they're going to declare their intention to just simply not report the earnings. I've had this discussion with an-caps more than once over the period of research on this subject. The fact is, yes you can just not declare any earnings from the sale of or trade of Bitcoins. Doing so is just plain straight up illegal, but you could go ahead and do it. Just for legal purposes I'm not advocating anyone go out and violate the law. There are however plenty of an-caps who do declare their intention to do so. Let's take a minute to go into the subject of tax evasion with Bitcoin and see what's there.

Okay first off Bitcoin is not anonymous, it is pseudonymous at best. You are NEVER 100% anonymous on the internet. The government has nearly a completely dictatorial control over the internet. Even Tor admits there is no complete and absolute anonymity with their service. Your Smart Phone doesn't make you hidden. No matter what an-caps keep claiming, you are not ever 100% safe digitally. There is a record of everything somewhere, if not; there is a way to make one. With that having been said, there is always a risk when not properly reporting your income you're going to get caught. When you deliberately, knowingly refuse to report earnings on your taxes, you are committing tax fraud.

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Whether or not you get caught is a different matter. Essentially it is a gamble; the IRS can't be everywhere at once and cannot have perfect knowledge. This is no different then gambling, the larger the amount you are betting (hiding) the larger the pay off when you win, and the larger the penalty when you lose. That being said, know what you're getting into, know what the penalties are if you get caught.

The false invulnerability that Bitcoin users feel in evading taxes stems from the belief that the IRS is ignorant of ownership. They believe that since the Bitcoin is anonymous, the wealth that exists (supposedly) entirely in the Bitcoin is also anonymous. This belief of invincibility is entirely false. It relies on the perception that the IRS can only track and then tax when income is earned. They have others was of achieving their duties. They don't need to request an audit on whether or not they know you've earned an income (individual or business). All they have to do is notice that you're spending far more than you are declaring in taxes. If they notice this they are going to audit you, especially if you are already known as a Bitcoin trader or miner. The government has all kinds of ways of tracking your spending even with Bitcoin. You have to be getting government issued currency from somewhere; you cannot live off Bitcoin as you cannot purchase all of your needs with it. There are ways of tracking this. Some might argue that they'll sell their Bitcoins for hard cash, but this has two flaws in it. It ignores the fact that the IRS already sees your spending exceeds your income. Second, if you think that enough income is going to be collected by physical currency transactions alone, then you're deluded. You would have to be so well known and travel so much it wouldn't be possible to operate.

Organized crime gets caught this way all the time. Most discoveries and prosecution of organized crime leaders rely on paper trails and bank transactions, not just some snitch alone. While the mob may be experts at moving money, they are not

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dumb. They know that you have to pay taxes in order to keep a large degree of heat off you. If any records are preserved, investigated and poured over by the government, its tax records. The IRS gets all kinds of information from credit card companies and payment processors via 1099s. The ownership of property is a matter of public record via titles easily accessed. The IRS also has innumerable staff that works on evolving their Discriminant Function (DIF system). It's basically infrastructure and algorithms that allow them to discover and select tax audit targets. As the ability to evade taxes grows, so does the ability to catch those that do it. This is why the capitalist class invents legal ways of doing it, also known as "tax avoidance".

You can evade taxes if you're willing to take the risks doing so. Some very wealthy people do and get caught. If you're a small regular Joe who doesn't live off of Bitcoin sales you're probably going to be fine. If you do it too much, or you get known as a Bitcoin trader, you will eventually attract some attention. The question is if it's worth possibly spending 10 years in prison for a particular amount of money. It's up to you. Frankly I don't think it's worth it. If I'm going to risk incarceration it's going to have to be for something much more important than feeling oppressed for having to contribute to the society you live in.

In the end, the idea that Bitcoin is not taxable is technically correct. The government doesn't tax Bitcoin, it taxes taxable events that occur via Bitcoin use. The mistake an-caps make here is that they're assuming taxes are based on money. They are not, they are based on particular economic activities. Evading taxes is just a useless liberal way of fighting the government. It's quick, easy, and doesn't work... utopian.

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Can Bitcoin Save the World's Poor?

One of the most baffling claims I've come across with regards to the digital currency is the claim by some an-caps is that Bitcoin has the potential to save the world's poor. I must make clear that this belief is not held by the creator, it is a belief a friend found circulating the various an-cap discussions on Reddit. Given that this does come from a collection of Anonymous internet posters my initial reaction was not to take it too seriously. However I think this opinion is wrong when we see how the users of the currency generally view it. They do see it as a means by which to challenge the existing financial (public and private) systems. Obviously an alternative currency couldn't solve the problems of systemic global poverty, no more than the official currency of each nation can. Poverty does not arise from "bad money" or conspiratorial money manipulations. Certainly we can see that crisis and sabotage can, but not institutionalized poverty. This poverty arises from the functioning of the economic system of capitalism itself. Simply changing the currency used will not change the functioning of capitalism. Capitalism determines money, money does not determine capitalism.

If history has shown us anything it is that the key aspect to cure poverty is industrialization. It is the rapid development and availability of the commodities necessary for the reproduction of daily life that has lead to an increase in living standards and lowered poverty. By this I mean an economy that is wealthy and developed enough to provide housing, medication, education, and the rest of the necessary products for a country to be dragged from poverty. It must contain the mass productive capabilities to produce those commodities. This is the process of industrialization. As Marx said in Capital, "The wealth of those societies in which the capitalist mode of production prevails, presents itself as “an immense accumulation of commodities,” its unit being a single commodity."107 The process of

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industrialization is absolutely paramount in the reduction and claimed eradication of poverty. Thus any investigation into Bitcoin's supposed ability to cure poverty must be seen from the objective of achieving the goal of industrialization.

In this investigation I will be using the same scenario that is usually given for the argument that Bitcoin can cure poverty. The people who propound such an idea propose this process taking place in a Third World shanty town, or barrio. In these locations there is at least some minute chance of Bitcoin actually being able to function. Barrios are an obvious choice for the an-cap fictional scenario as the vast countrysides of Asia would prove impossible for it to operate. In this we can already begin to see the flaw in the belief that Bitcoin can cure poverty. Here there is a minimal development of infrastructure as opposed to those countrysides which have none. Meaning, for Bitcoin to even operate it must require at least some level of industrialization to have already taken place.

It has been noted by these an-caps that even some barrios contain people that have cellular phones. These cellular phones are the primary means by which Bitcoins would be exchanged or transferred. Of course an immediate hole appears in their logic: for an alternative economy based on this digital currency to exist, it presupposes everyone has a phone by which to transfer said currency. This presupposition is unrealistic; it relies on people being able to pay for cell phones which would require employment. If everyone has cell phones, everyone has employment. If they have that, what do they need Bitcoin for? There are a lot of holes left in this theory of digital currency being used in a poor barrio neighborhood.

The main problem with this is the false equivalency. Many of the an-caps who claimed this compared the barrios to de-industrialized Detroit. The difference is earth shattering; a city like Detroit has crumbling infrastructure whereas a barrio has

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none. Electricity, internet, and all other manner of services are available in Detroit that are not available in their hypothetical barrio. In order for a digital currency to function in the manner in which these an-caps present, it requires the barrio to already have the infrastructure of a First World nation. The same too would be needed for the simple act of mining Bitcoins as well.

How does a person obtain Bitcoins? Well we're looking at needing Bitcoins on a massive scale so we're going to have to mine them. The act of mining requires several things. First it requires a decent power computer. Actually it would require hundreds (if not thousands) of extremely powerful computers. (Bitcoins have already been mined to a point where it's very difficult to get new ones.) I don't think I need to point out what the problem with this is. Okay, I do because an-caps think this will work. Well mass poverty is what causes barrios shanty towns to exist usually doesn't facilitate a wealth level large enough to afford computers at all, let alone ones powerful enough to efficiently mine Bitcoins. Now consider we're talking about a Third World country where computers cost a lot more than they do for First World people on Reddit.

Let's add on top of this two more requirements for their mining. We'll require internet and electricity. Again we return to the problem of infrastructure. Sure we can argue that some people have cell phones in a poverty stricken area. We do know that the majority of these areas don't have electricity. No electricity, no operating of a computer can take place. (If you even mention a gas powered generator you clearly don't know how long it takes to mine Bitcoins, to say nothing of how expensive the gas would be. Then consider that it is completely unprofitable to use such a generator. The Bitcoins mined will be less than what is spent on fuel. Never mind once again we return to the problem of needing capital to invest in order to generate the "capital" to invest.) As if this wasn't enough, there isn't any internet in barrios at all. You cannot make the claim that these corrugated

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iron shacks have an internet connection. You must have one in order to mine the coins.

It is done, it is finished, and already we can see that Bitcoins cannot even come into existence in the barrio. If this is the very means by which the poor are supposed to drag themselves out of poverty with, it's clearly not going to happen. Some have argued that wealthier people could "donate" Bitcoins to such communities and that could get them up and running. This claim I find entirely fallacious given the contradictory stance an-caps have. Charity can cure problems versus people respond only to their rational self-interest. These Bitcoins are not going to be donated; even claiming they will be is simply laughable.

Give that an-caps have a propensity to make claims that really abstract from the reality of the world, one has already been presented to me personally. One person pointed to the fact that there are barrios with electricity in Venezuela. This is most certainly true. However I'd like to add that Venezuela is already in the process of dragging their country out of poverty as it is. Meaning the problem is already being dealt with. The supposed possible achievements of Bitcoin can only take place once a largely socialist system has already begun doing the job that capitalism (the system in which Bitcoin exists and propounds) has already failed to accomplish. In reality, Bitcoin can only piggyback off the accomplishments already made by society engaging in its antithesis.

The claim of adequate infrastructure being available is simply nonsense. It all stems from the perception of First Worlders who advocate the currency, applying the conditions of their "poor" onto the conditions of the Third World. In addition to this we can already see it will require an investment in machinery. A collection of money must be made somehow in order to obtain the machines necessary to create the "capital" necessary to enter into production. In other words we need some form of

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capital get "capital" in order to "do the investment", as a friend would say. Where exactly is this capital coming from? We already have mass poverty in this barrio, the money isn't there, and that's why we're using Bitcoins to begin with. In order to get the necessary Bitcoins we need official currency which we already don't have. The entire attempt at the industrialization of the barrio has been stalled by this obvious problem.

The argument that Bitcoin can cure Third World poverty has been proven false. However, for the sake of argument we will put this glaring truth aside and return to it periodically as we take a further look into the possibilities of poverty reduction. Let us return to the issue of industrialization presupposing that the necessary Bitcoins have been collected to engage in industrial investment, or even just small proprietor business.

The first obstacle that presents itself to us is the same faced by anyone anywhere in the world engaging in capitalist production. They must first obtain capital in order to being their journey into capitalism. We've already covered this issue and found that it is not possible for the poor barrio people to obtain the necessary Bitcoins to invest. Again we will ignore that and assume somehow they've obtained them.

The next step is to obtain the raw materials, means of production, and labour necessary to being production. In plain English it means we have to obtain the material that these commodities will be made out of. It could be any number of things, cloth, iron ore, plastic or whatever. Second we need the "means of production", meaning we require tools even machinery that will facilitate the transformation of the raw materials into commodities. Finally, we require human labour. This would be necessary if there is to be industrialization. The means of production must be concentrated in a firm enough to require the labour of many before it can truly be considered industrialization. To assume an economy of only small producers

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is to revert back to near pre-industrial times. Anything less would be to consider the Founding Fathers members of the industrial revolution108. However, for the sake of argument let us investigate each of these industrial requisites one-by-one.

Assuming the necessary Bitcoins for capital investment have been obtained, we encounter the next necessity of purchasing the needed raw materials. In this investigation I'm going to go with steel as the material. If we are going to talk about industrialization we're talking about heavy industry. We do need it in order to provide employment for people to have income to purchase consumer products, stimulating more employment and production. Meaning, you have to have a pool of people with income in order to stimulate a local economy. In Marxist economics we know this as department I and department II goods.109 We run into another problem here, where is this steel coming from? I don't know of any steel producing firm that is currently accepting Bitcoin. Why would they? They can't do anything with Bitcoin other than to bet on it and wait for it to increase in value. That might work well and good if you're sitting at home "investing" in it, but this is no good for a firm trying to do business. Manufacturers don't want promises of payment that might increase in the future; they want money now to pay their costs of production. Any money collected must be used to pay for the costs of production undertaken, and any profits must be reinvested immediately. Manufacturing firms cannot out of the very nature of their operation become holders of investments in lieu of payment. In other words I don't see any supplier of raw materials actually accepting Bitcoin as a form of payment. It's of no use to them. Personally I don't see U.S. Steel making an exception for some poor barrio person in the Third World. Using Bitcoins to purchase raw materials is not going to work. Any claim that they would is essentially pre-supposing wide spread industrial use of it, which is false.

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Well, now we've eliminated the possibility of obtaining the raw materials necessary to enter into production. Let us move on to the acquisition of the means of production. Find me a store in the Third World that will sell you a drill press, sheet metal cutters, or a forklift for Bitcoins and maybe you've got a chance. Let us face it; outside of some abstract Silk Road type market you're not getting these tools. The idea that you can even obtain the means of production is now debunked.

Finally and the most important factor in production, because it creates more value than it costs to purchase, is labour. The main aspect of capitalism, more specifically industrialization, is the concentration of productive forces and labour into a single facility. It is taking the small craftsmen and their labour and making it part of a production machine. The first and foremost need is to pay these employees. Again we are going to assume that the sufficient amount of Bitcoins has been obtained to pay the workers. The problem then arises, who is willing to accept Bitcoins? I mean if I'm looking for employment I'm looking for hard cash to go and use to feed my family. This employment presupposes that I have a cell phone with which to get paid. But if I already have no money, how do I have a cell phone? Someone who is hungry would rather be paid in food, or be paid in some kind of goods which they can barter away than Bitcoins. The store isn't taking them, neither is the peasant farmer who brings what little goods he can spare to the market. The problem with getting Bitcoins to the peasant farmer alone presents a whole new series of problems. If the barrios barely have people with cell phones, the countryside full of farmers that are not going to. The farmer is not going to accept them in exchange for the produce he has provided. If this worker can't eat what he is given, nor can he exchange it for something he can eat, he is not going to accept it as a form of payment.

An economy of Bitcoins in the barrio implies that people will buy and sell products in Bitcoin. Once production is complete and

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the commodities are ready for sale, who has the Bitcoins to buy them? I mean if were supposing an economy of the currency then we're assuming consumers using them. They don't exist in the barrio; no one is using them because no one has them. Theoretically the producer could sell the commodities for regular currency, but then that would defeat the purpose of building the alternative economy to begin with.

This claim that the digital currency can work in building an alternative to the formal economy presupposes an already existing economy running on it. (They're presupposing the very thing it is they're trying to prove.) In other words, the idea only works if it is already working. Creating the alternative is impossible as it has no power to come into being. It is a utopian solution to a very real problem. Bitcoin cannot simply appear in an economy and suddenly disrupt the balance between rich and poor; this arises from a failure to understand why there are rich and poor to begin with. Imbalance in the use of resources and wealth is the very essence of what rich and poor are. If you cannot challenge this, you have no hope for defeating it.

Poverty doesn't exist because "not enough money is available"; it exists because of imbalances in the ownership of money. Not everyone can be rich, if everyone was, then no one would be. The whole meaning of being rich is to have substantially more money than others who don't. The real power of money comes from having more of it than someone else. Simply using a second currency in an economy doesn't challenge that. Resources and their production are finite, a steel producer isn't going to sell his steel to the people with the (for argument's sake) 10% most money and the 10% most Bitcoins. This is assuming an instant doubling of steel available. Assuming they were equal in value (which wouldn't happen because they not accepting Bitcoins) the top 5% of both would receive the steel. This theoretically could stimulate new demand for steel incentivizing the production of it. This would be false, because

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the same amount of customers in the end would be the same. If say, you have 1,000 people buying commodities made of steel, a portion of them using Bitcoins instead of national currency doesn't increase the number of people buying, it doesn't stimulate demand.

No matter what, the resources are going to go to those who have the most money to buy them, Bitcoin or formal currency. Simply adding in more money to an economy doesn't create more wealth. That is my point, resources and wealth concentrate towards those who have the most money, not those who simply have money. This is my point here.

Some have suggested that poor people could simply (somehow) obtain Bitcoins and sit on them waiting for them to increase in value. That's one of the benefits of using the digital currency, they will over time increase in value as it becomes more difficult to mine them. If we simply ignore the problem of how the poor obtain them, we're faced with another problem. The problem being that poor people don't sit on money because they're poor. A man who is hungry, or has a family that is hungry isn't going to sit around looking at his cell phone checking the price of the currency he holds. He is going to go out and buy food, he is going to pay rent, and he is going to go get needed medical care. Poor people don't hoard money; they spend it as soon as they get it because they don't have enough money. People who hold piles of money waiting for it to increase in value already have enough to live on, which is why they're not spending it. This idea that poor (desperately Third World poor) people will simply sit on a pile of a currency (digital or not) is simply ridiculous.

This is one of those an-cap praxeological moments. It relies on predetermined beliefs regarding value and human action. If something is will increase in value over time a person will hold on to it because it is in their rational economic interest. However this is interrupted by the fact that poor people have real

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immediate material needs that must be fulfilled regardless of any potential future gains. This belief ignores the fact that eating comes before investing.

This view that Bitcoin can cure Third World poverty relies on two false premises. First, it implies that the root of poverty is relatable entirely to monetary policy. While monetary policy is a factor which can have a strong effect, it is most certainly not the determining one. Currency will act according to the needs placed upon it; the nature of a currency cannot alter this need. It can only hinder and disrupt the need causing crisis, not change. It does not have the power to transform the mode of production which places certain needs upon currency.

Second, it regards "real" capitalism as a system in which all participants can be rich and successful. It relies on the belief that capitalism doesn't have internal contradictions or inherent flaws that tend it towards poverty, inequality or crisis. In other words, "real" capitalism, through Bitcoin, is presented to us as a utopian system than can cure all ails of our current global economy, if only we would get out of its way and allow it to work on its own. This is supposedly the point of Bitcoin, it is not hindered by interference through regulation and state manipulations. The utopian character of Bitcoin is derived from the utopian view of "real" capitalism held by an-caps. The false belief in capitalism is what drives the false belief in Bitcoin.

The digital currency can in no way alter the functioning of capitalism itself. The system requires a currency to operate in a certain way in order to facilitate its function. Bitcoin has no power to alter that; it can't make a "new" or "real" capitalism. Money did not change over time of its own volition, it was altered according to the historically determined necessity of the various economic orders it was involved in the operation of. We didn't move from lumps of gold for spears, to fiat fractional reserve currency for complex financial instruments, out of

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conspiracy, but out of necessity. Money alters according to the needs of it placed upon it by prevailing modes of production.

This validates a lot of what Marx believes in terms of money. Monetary movements and uses are determined by commodity movements. Money is a medium of exchange. That medium transmits, but does not create movements of its use that come from outside itself. Commodity movements are largely determined by the mode of production under which they are produced. The reason why an-caps, even Keynesians, can't understand this is because they see it the other way around. The ebbs and flows of money determine the movements of commodities, to them the mode of production is irrelevant, and money is a force onto itself.

In this we see the fundamental flaw in view expressed in Bitcoin by its dogmatist users. The idea that Bitcoin can save the poor is simply preposterous.

Proof of Concept: Bitcoin's Failure

During the course of writing this book I took a break of over a year. Somewhere along the way I got burnt out and couldn't write anymore. Since then have returned to complete it. In the summer of 2013 I stopped and then in January 2015 I began again. During that absence in writing a lot of what I said came true. Bitcoin has proceeded to be a complete failure on the exact grounds I said it would. Unfortunately I didn't get the book done in time to look really smart.

At its apex in 2013 the currency was worth over $900usd110 a "coin". It had a consistent high of $800usd that same year. Today in early 2015 the value of the currency is $249usd. Many believe that the life of Bitcoin is now over with the craze having washed away. It suffered from high volatility as it became a

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heavily traded "stock". Many businesses who once accepted it as payment have since stopped. The currency, as I and many others said, was just a fad.

Since its inception the FBI has shut down the Silk Road trading post and now holds more Bitcoins than anyone else. How was Bitcoin going to bring down the U.S. government again?

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END NOTES

Chapter 1: Introduction 1Greenspan Concedes Error on Regulation , New York Times, OCT 23-2008

http://www.nytimes.com/2008/10/24/business/economy/24panel.html?_r=0 2 Results of the Immediate Process of Production”, Capital, vol. 1

3 http://www.propublica.org/special/government-bailouts

4 Misconceptions of Obama fuel Republican campaign - 13 Oct 08, Al Jazeera

5 http://www.opensecrets.org/pres08/contrib.php?cid=N00009638

6 http://projects.propublica.org/bailout/list

Chapter 2: Anarcho-Capitalist Methodology

7 Werner Sombart: “Zur, Kritik des ökonomischen Systems von Karl Marx”

8 Karl Marx: Capital, vol. I

9 Böhm-Bawerk: “Grundzüge der Theorie des wirtschaftlichen Güterwerts”

10

Nikolai Bukharin: "Economic Theory of the Leisure Class" 11

Frederic Bastiat, Harmonies économiques 12

W. Stanley Jevons: The Theory of Political Economy 13

Nikolai Bukharin: "Economic Theory of the Leisure Class" 14

Böhm-Bawerk: Marx and the Close of His System 15

The quote is taken from a review by Kaufmann, cited by Marx in the preface to the second edition of Capital vol. I. 16

Nikolai Bukharin: "Economic Theory of the Leisure Class" 17

Karl Marx, Capital Vol.1, Chapter One: Commodities 18

Karl Marx, Capital Vol.1, Chapter One: Commodities

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19 Capital, vol. III, part VII

20

Böhm-Bawerk: Kapital und Kapitalzins, 1909, vol. II, part I 21

R. Stolzmann: Der Zweck in der Volkswirtschaftslehre 22

Preface to the third edition of Kapital und Kapitalzins, vol. II 23

R. Stolzmann: Der Zweck in der Volkswirtschaftslehre 24

Karl Marx: An Introduction to a Critique of Political Economy 25

Karl Marx, Capital, vol. III 26

George Charasoff: Das System des Marxismus 27

Josef Schumpeter: Des Wesen und der Hauptinhalt der theoretischen National-ökonomie 28

Ibid 29

Ibid

Chapter 4: Wrong Ideas About the Federal Reserve and Fiat Money 30

Federal Reserve Bank of New York, Board of Directors http://www.newyorkfed.org/aboutthefed/org_nydirectors.html 31

Federal Reserve FAQ: Does the Federal Reserve ever get audited? http://www.federalreserve.gov/faqs/about_12784.htm 32

Paul Warburg's Crusade to Establish a Central Bank in the United States Michael A. Whitehouse, 1989. In attendance at the meeting were Aldrich; Paul Warburg; Frank Vanderlip, president of National City Bank; Henry P. Davison, a J.P. Morgan partner; Benjamin Strong, vice president of Banker's Trust Co.; and A. Piatt Andrew, former secretary of the National Monetary Commission and then assistant secretary of the Treasury. http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=3815 33

Report of the National Monetary Commission. January 9, 1912, letter from the Secretary of the Commission and a draft bill to incorporate the National Reserve Association of the United States, and for other purposes. Sen. Doc. No. 243. 62d Congress. U.S. Government Printing Office. 1912. http://llsdc.org/attachments/files/124/FRA-LH_S-Doc-62-243.pdf

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34 Money Trust Investigation - Investigations of Financial and Monetary Conditions in

the United States under House Resolutions Nos. 429 and 504 before a subcommittee of the House Committee on Banking and Currency. 27 Parts. U.S. Government Printing Office. 1913. https://fraser.stlouisfed.org/title/?id=80 35

Parthemos, James. "The Federal Reserve Act of 1913 in the Stream of U.S. Economic History", Federal Reserve of Richmond Economic Review, Richmond, July 1987. Retrieved on 11 November 2013. http://www.richmondfed.org/publications/research/economic_review/1988/pdf/er740403.pdf 36

McCulloch v. Maryland, 17 U.S. 316 (1819) https://supreme.justia.com/cases/federal/us/17/316/case.html 37

Second Bank of the United States, Wikipedia “A private corporation with public duties, the bank handled all fiscal

transactions for the U.S. Government, and was accountable to Congress and the U.S. Treasury. Twenty percent of its capital was owned by the federal government, the Bank's single largest stockholder. Four thousand private investors held 80% of the Bank's capital, including one thousand Europeans. The bulk of the stocks were held by a few hundred wealthy Americans. In its time, the institution was the largest monied corporation in the world.

“The essential function of the Bank was to regulate the public credit issued by private banking institutions through the fiscal duties it performed for the U.S. Treasury, and to establish a sound and stable national currency. The federal deposits endowed the BUS with its regulatory capacity.”

38

Both are from the Wikipedia entries for McCulloch v. Maryland http://en.wikipedia.org/wiki/McCulloch_v._Maryland 39

17. U.S. at 401 40

17. U.S. at 402 41

Chemerinsky, Erwin (2006). Constitutional Law Principles and Policies (3rd ed.). New York: Aspen Publishers. ISBN 978-0-7355-5787-1. 42

17. U.S. at 408 43

Quoted from the Wikipedia article McCulloch v. Maryland. Also, Kurland, Philip B.; Lerner, Ralph, eds. (1987). "Article 1, Section 8, Clause 18". The Founders' Constitution. ISBN 978-0-226-46387-2. Retrieved October 20, 2011. http://press-pubs.uchicago.edu/founders/documents/a1_8_18s11.html 44

Quoted from the Wikipedia article McCulloch v. Maryland

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45

U.S. Supreme Court Osborn v. Bank of the United States, 22 U.S. 9 Wheat. 738 738 (1824), Osborn v. Bank of the United States, 22 U.S. (9 Wheat.) 738, APPEAL FROM THE CIRCUIT COURT OF OHIO https://supreme.justia.com/cases/federal/us/22/738/case.html 46

http://foofus.net/goons/foofus/lawSchool/federalJurisdiction/Osborn_v_Bank_of_the_United_States.html 47

Ashbrook v. Hoffman, 617 F.2d 474 (7th Cir.1980) 48

U.S.C. § 5103 49

Milam v. U.S., 524 F.2d 629. C.A.Cal. 1974. The statute which delegates to the Federal Reserve System the power to issue circulating notes for money borrowed and the power to define the quality and force of those notes as currency is valid ... Although golden eagles, double eagles, and silver dollars were lovely to look at and delightful to hold, the holder of a $50 Federal Reserve Bank Note, although entitled to redeem his note, was not entitled to do so in precious metal. Federal Reserve Act, 16, 12 USCA 411; Coinage Act of 1965, 102, 31 USCA 392 50

Put simply: In the Marxist view money is a representation of the value produced in society realized in the marketplace as profits (or surplus value). Everything generated in society has a monetary cost because it represents a certain amount of value creating labour. The more money you have the more social value you can obtain through purchasing. For a much more in depth explanation I suggest reading the first chapter of Marx’s Kapital. 51

Keynes, JM. (1914), The Royal Economic Journal, vol. XXIV 52

Clinton, K. (1997), Implementation of Monetary Policy in a Regime with Zero Reserve Requirements http://www.bankofcanada.ca/wp-content/uploads/2010/05/wp97-8.pdf 53

Carpenter & Demiralp (2010), Money, Reserves and the Transmission of Monetary Policy: Does the Money Multiplier Exist? http://www.federalreserve.gov/pubs/feds/2010/201041/201041pap.pdf 54

Edward N. Wolff, Recent Trends in Household Wealth in the United States: Rising Debt and the Middle-Class Squeeze—an Update to 2007, pg. 46 http://www.levyinstitute.org/pubs/wp_589.pdf

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Chapter 5: The Gold Standard

55 Alan Greenspan, Gold and Economic Freedom, Objectivist newsletter, 1966

56

http://www.europac.net/press_release/expansion_continues 57

Reinhart, Carmen M.; Rogoff, Kenneth S. (2009). This Time Is Different: Eight Centuries of Financial Folly 58

http://www.wsws.org/en/articles/2004/02/gpan-f16.html 59

https://www.youtube.com/watch?v=sWRrXg9JQ4A 60

De Grauwe, P. and Polan, M. 2005. “Is Inflation Always and Everywhere a Monetary Phenomenon?,” Scandinavian Journal of Economics 107: 239–259 61

Mises, The Theory of Money and Credit; Human Action 62

Mises, The Theory of Money and Credit; Nation, State and Economy; "Stabilization of the Monetary Unit—from the Viewpoint of Theory" [1923] in On the Manipulation of Money and Credit. 63

Mises, The Gold Problem 64

http://en.wikipedia.org/wiki/Inflation#Austrian_theory 65

F. A. Hayek, The Denationalisation of Money (London: The Institute of Economic Affairs) 66

Collected Works, vol. 4 67

Ibid 68

Congressional Research Service, Brief History of the Gold Standard in the United States 69

Ibid 70

Ibid. 71

Ibid. 72

Ibid.

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Chapter 6: Why The Gold Standard Doesn't Work

73 Here's What $1.2 Quadrillion Looks Like, Money Morning

74

Emerging market funds lose $9 billion in past week: Data, Reuters 75

http://www.usdebtclock.org/ 76

http://articles.marketwatch.com/2013-02-08/economy/36982226_1_trade-deficit-lower-deficit-crude-imports 77

http://www.economywatch.com/world_economy/world-economic-indicators/world-gdp.html 78

http://www.eastasiaforum.org/2009/10/28/global-imbalances-demand-global-fiscal-system/ 79

http://www.numbersleuth.org/worlds-gold/

Chapter 7: False Ideas of Inflation 80

Greenspan Concedes Error on Regulation, New York Times http://www.nytimes.com/2008/10/24/business/economy/24panel.html?_r=0 81

There are known knowns, Wikiedia http://en.wikipedia.org/wiki/There_are_known_knowns 82

The 147 Companies that control everything, Forbes http://www.forbes.com/sites/bruceupbin/2011/10/22/the-147-companies-that-control-everything/ 83

Money Growth Does Not Cause Inflation!, Forbes http://www.forbes.com/sites/johntharvey/2011/05/14/money-growth-does-not-cause-inflation/ 84

What Actually Causes Inflation (and who gains from it), Forbes http://www.forbes.com/sites/johntharvey/2011/05/30/what-actually-causes-inflation/ 85

Wall Street Traders Have Profited More Under Obama Than In Eight Years Under Bush, Think Progress http://thinkprogress.org/economy/2011/11/07/362488/wall-street-profit-obama-bush/ 86

What Actually Causes Inflation (and who gains from it), Forbes

305

http://www.forbes.com/sites/johntharvey/2011/05/30/what-actually-causes-inflation/ 87

The Value of Marx, Alfredo Saad Filho 88

De Grauwe and Polan 2005: 258

Chapter 8: Digital Currency 89

Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, Introduction 90

ibid. 91

ibid. 92

W. Dai, "b-money," http://www.weidai.com/bmoney.txt, 1998. (This is the same foot note that appears in Satoshi's work.) 93

https://ghash.io/ 94

Bitcoin security guarantee shattered by anonymous miner with 51% network power, ARStechnica http://arstechnica.com/security/2014/06/bitcoin-security-guarantee-shattered-by-anonymous-miner-with-51-network-power/ 95

Is Bitcoin a Decentralized Currency?, Arthur Gervais, Ghassan O. Karame, Srdjan Capkun and Vedran Capkun 96

Dogecoin Just Helped Pay For the Jamaican Bobsled Team to Get to Sochi. Here's How., PolicyMic http://www.policymic.com/articles/79513/dogecoin-just-helped-pay-for-the-jamaican-bobsled-team-to-get-to-sochi-here-s-how 97

Porn star asks for payment in Dogecoin, Yahoo Finance http://in.finance.yahoo.com/news/porn-star-asks-payment-dogecoin-103600104.html 98

Iraq: Baghdad Moves To Euro, Radio Free Europe Radio Liberty http://www.rferl.org/content/article/1095057.html 99

99

The Gold Dinar: Saving the world economy from Gaddafi, Global Rsearch http://www.globalresearch.ca/the-gold-dinar-saving-the-world-economy-from-gaddafi/24639 100

Bitcoin Is as Good as Gold. That’s Bad., Slate.com

306

http://www.slate.com/blogs/future_tense/2014/03/03/mt_gox_collapse_bitcoin_is_as_good_as_gold_and_that_s_bad.html 101

Mt. Gox claims to have found over $100 mn in 'forgotten' bitcoins, Russia Today http://rt.com/business/mt-gox-found-bitcoins-221/ 102

https://bitcoin.it/ 103

Ibid. 104

Investopedia 105

http://www.investopedia.com/financial-edge/0312/the-tax-implications-of-bartering.aspx 106

Cameron Keng, Forbes 107

This is the opening line of Capital in chapter 1. 108

It is important to differentiate between an economy of small producers and industrialization. "The process in which a society or country (or world) transforms itself from a primarily agricultural society into one based on the manufacturing of goods and services. Individual manual labor is often replaced by mechanized mass production and craftsmen are replaced by assembly lines." Investopedia.com 109

Marx basically distinguishes department I, producing means of production, and department II,

producing means of consumption; other authors add a department III producing non-reproductive goods – luxury goods and arms – to that list. 110

Bitcoin surges to all-time high of $900, then drops below $650 in 30 minutes, Geek Wire http://www.geekwire.com/2013/bitcoin-surges-alltime-high-800-government-discusses-legitimacy-digital-currency/

Other Books by Jason Unruhe

Trevor Loudon’s Challenge Defeated

The author of several books, Trevor Loudon has laid “A Challenge to All Liberals, Progressives, and RINOs, Who STILL Believe Obama is NOT a Communist”. Loudon compiled a stack of evidence that is supposed to prove that Barack Obama is in fact a communist. His challenge is to anyone to disprove what he gives.

Some Marxist Economic Thoughts A collection of several works discussing Marxist economics from the Maoist Rebel News blog. A variety of subjects are covered here, including a Marxist perspective of the 2008 global collapse of capitalism and a Marxist look at income inequality increases since 1774. It also handles the prevailing Libertarian ideas surrounding the 3D printing phenomenon.

Memoir of a Minimum Wage Security Guard

In 2006 I served as a security guard in various positions which gave me unbelievable life experience. Here I lay out my experiences as they happened and how they affected me. During this time I got a good view of the variety of human nature. I hope this serves as a window into a world you may not know anything about, nor understand.

Understanding Maoist Dialectics A little while ago a viewer asked me to explain Maoist dialectics to him. After doing so he then suggested that I write something to help people understand it. So I set out and did some explaining on a few important works by Mao that contain dialectics. The result was this book which I hope helps beginners understand the subject.

Exposing Larken Rose’s Nonsense This book “The Most Dangerous Superstition” by Larken Rose was given to me by a friend as we stood in the lobby of the Provincial Offenses court of Ontario. I had only a moment to glace at it but it seemed very libertarian-ish to me. The interesting part was when my friend told me Rose calls himself an Anarchist while supporting capitalism.

Marxism and Financial Crisis

After the Dot Com Bubble just after the new millennium and the recent Great Recession of 2008 it’s becoming obvious that future crises will likely be financial in nature. In this work I hope to make understanding financial crisis in capitalism from a Marxist perspective easier to understand.

A Marxist Critique of Songun After the theoretical development of Juche which became the basis of North Korean society by Kim Il Sung, came Songun. It is the “Military First” policy put forward by Kim Jong Il in reaction to the loss of the socialist block which comprised 70% of its trade. As the DPRK entered the Arduous March the threat of military invasion increased.

The Economics of Fallout Society

From the resource wars to the post post-apocalyptic wastelands of D.C. and the Mojave, poli-econ continues to be important. As a big fan of the Fallout games I analyzed the political econ of the various Fallout societies. This book contains an investigation into the economies of the pre-war and post-war world. This book teaches Marxist economics and social theory by using Fallout as a tool.

The Bloody Feet of the RCP Canada The RCP-Canada is an “underground” communist organ-ization out of Montreal. The group professes to be doing revolution and being Marxist-Leninist-Maoist. In this book I critique their political line and activities. There is a good deal wrong with the organization that requires some correction and self-criticism.