Lawful Money Explained

be listened to. So we shall listen to Miss Coogan at length. I hasten to point out, however, that Miss Coogan’s work, both academically and professionally, has not been along theoretical lines primarily, but rather along statistical lines. This statistical orientation reflects itself in the two

Coogan volumes under consideration, as I shall point out later.

Lawful Money Explained

T  book to be examined, appropriately enough, is her attempt at a theoretical explanation of the nature of money, Lawful Money Explained , first published in 193⒐ It was a supplement to her larger book, Money Creators (1935), which I analyze in the next section.

The reader can judge om her statement of “first principles” just how accurate her practical recommendations are likely to be. If her theories should prove to be unsound, then the reader is advised to proceed very cautiously into her other book, Money Creators, carefully examining each of her proposals for monetary reform.

Her opening statement in Lawful Money Explained is correct historically: “Those who would destroy eedom know the surest and quickest method is first to pervert and then manipulate the money system” (Lecture No. 1; the book has no page numbering, so I can only list the number of the particular lecture).

What, then, is money? Her definition:

Owning money is legal evidence that the owner has given upsomething, goods (property) or services (work) and has not yetclaimed an equivalent amount of the goods and services of others. . . . Money is a legal demand claim on all goods for sale (No. 3).[In any direct quote where emphasis occurs, that emphasis is hers,not mine.]

Here is her first important error. She begins with a totally fallacious definition of money and money’s legal prerogatives.

First, the owner of the money may not have given up anything at all. He may have found the money, or perhaps he inherited it; someone may once have worked for it, but the present owner need not concern himself with that fact, nor does any prospective seller.

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Second, money is not a legal demand claim on all goods offered for sale. The possession of money, by itself, does not give its possessor either a moral or a legal claim to all goods available. For example, someone who is drunk has no legal claim on another drink in a public tavern, in spite of the fact that he holds money as a “demand claim.” The sellers have some discretion in the matter of sales, and any economic system that calls itself capitalist must see to it that the rights of the sellers be preserved.

We must not begin with the idea of money as a legal “demand claim on all goods for sale.”

If Coogan’s definition of money is incorrect, then what is money? In this essay, the primary authority in the question of money is Ludwig von Mises, whose book, The Theory of Money and Credit, has been a standard ee enterprise text since it was first published in 19⒓5

In Mises’s view, money was originally a commodity, i.e., an economic good, which became widely used as a medium of exchange. Originally, any object that presently circulates as a medium of exchange had another use, usually artistic or ornamental or even religious. Occasionally, as in the case of salt, it may even have been a consumption good. The main point is that the particular good was once valued for some service other than its exchangeability. Mises said specifically that “no good can be employed for the function of a medium of exchange which at the very beginning of its use for this purpose did not have exchange value on account of other employments.”6

Certain goods had definite properties—durability, easy divisibility, portability, and especially scarcity —that other goods lack to the same degree. These goods became easier to exchange than other goods. The more that people realized how easy it was to exchange these goods, the more these goods became desired purely as exchange media rather than as ornaments. This type of exchange media is known as “commodity money.” Its chief mark of distinction is that it, unlike all other goods, is not valued for its ultimate use in consumption, but primarily as a means of exchange that many people trust and similarly value. These goods can also be used for ornament or industry, as they were originally, but then

5Ludwig von Mises,The Theory of Money and Credit(Foundation for Economic

Education, [1912] 1971). Downloaded it for ee here:http://mises.org/books/tmc.pdf

6Mises,Human Action, 3rd ed. (Chicago: Regnery, 1966), p. 4⒑

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they are no longer money. 7

Money is not a legal demand claim to all goods, nor a storehouse of labor, but merely a useful commodity that is usually, but not necessarily always, accepted by others in exchange for consumption goods or production goods. Money is merely the most marketable good available, due to the special physical properties it has, and also to the historically developed acceptance of it as a medium of exchange. It is really quite simple.

Paper Money’s Value

Paper money derives its value om the fact that it originally represented certain quantities of the money commodities, normally gold and silver.

A paper bill was originally a demand claim, not to all goods offered for sale, but only to specific weight and fineness of a specific money metal. Very simply, it was an IOU for specie (money metal). These paper claims operated in exactly the same way as did the metals they represented, for the owner of the paper knew that he could present the paper claim to the Treasury or to a bank or to a warehouse and receive the stated quantity of metal. If for some reason the metal should lose its popularity as a medium of exchange, then the paper IOU notes would also lose popularity, because the notes are representatives of the metal. This is the “mystery”

of paper money. There is nothing mysterious about it. The paper bills are demand claims on past goods (goods being stored somewhere), and not, as Miss Coogan argued, to future goods (goods to be offered for sale by some seller). The paper note initially is valued only because the metal it represents is valued. The owner of the bill legally owns the warehoused metal. If someone else wants to own some metal, he may decide to trade something he owns for the bill. The arrangement is strictly voluntary.

How did Miss Coogan view gold and silver? She saw them as commodities which are the same as any other goods, but which bear the seal of the national government.

If the Common Authority swept away the regulations, gold wouldimmediately sink to the rank of a commodity. No one would

7The value of gold or silver as a medium of exchange increases its respective valueover what it would have been worth for ornamental or industrial purposes alone. Mises,Money and Credit, pp. 105–106, especially the citation om John Law, of which Misesapproves, p. 106 n.

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accept the gold but those who needed it for use as a commodity.

No one would be obliged to accept gold in payment of debts andcontracts. . . . Gold could then be used only to barter. Gold wouldno longer be money! (No. 3)

That is precisely the point! Gold is used for barter in the strict sense of the word. Gold is used in trade, in exchange. It is indirect exchange, however; a man trades in order to obtain gold, not because he can eat the gold, but because he can trade it for a consumption good at a later date. And in a ee market no one is obliged to accept gold in payment, as Coogan implied. She argued that it is only because governments have declared gold to be legal tender—acceptable in every exchange by law— that people accept gold as money. But, for all practical purposes, gold’s legal tender status is the result of a law added aer the fact of gold’s widespread acceptance in exchange. People already accepted gold and silver voluntarily. The danger came when the State began to mint the coins, and later began to debase them. Then the legal tender laws were passed.

People were thereaer coerced by the State to accept debased currency at its old, pre-debasement, value. This was a form of price control: a denial of economic liberty.

Coogan then made this statement: “Because barter is so rude and inexact, any one can see its logical outcome. It is economic slavery” (No. 3). I can see no logic here at all. Only on the assumption that upon the withdrawal of the government stamp, gold would lose its character as a medium of exchange, could such chaos, such “slavery,” take place. But gold was used as an exchange item before the State stamped it (as in the gold rush days in California when bags of gold dust served as money).

Why should gold suddenly revert to its old value as a mere ornamental or industrial good? There is, obviously, no answer. Gold is used as money because people voluntarily choose to use it, not because the State originally stamped it. To say that it is money because the State stamps it is a complete reversal of the truth. The State only certifies that the coins are truly the weight and fineness that they claim to be. This may aid certain coins, the stamped ones, in gaining public acceptance, but it is hardly the sole reason why the coins are accepted as money, as exchange goods.

Coogan’s erroneous assumption that gold and silver coins are used as money only because the State stamps them led her to her next false conclusion. She then argued that the reason why otherwise cheap paper

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has value as money is because the State also stamps the paper. The bills are not “as good as gold” because they are legal IOU notes for gold; they are as good as gold because both gold and paper are said to be money by the State. Paper can be money because “it is the declaration by the

Common Authority ‘ This is Money’ that makes it money.” For this reason, she concluded, the State must monopolize the coinage, or even better, monopolize the printing of money. In short, the State has become God, creating money by fiat, endowing its citizens with all the wealth that money can buy, merely by stamping an otherwise worthless bill with some official State ink. With this mystical power, which she never bothered to explain, the State is able to create money. How the State has been endowed with this mysterious power she never said. Yet somehow it is there. Apparently magic is the basis of her economic explanations; it is certain that logical analysis plays little part.

A State Monopoly

She admitted that money manipulation is the chief cause of economic slavery, yet she would have turned the power of money manipulation and money creation over to the State, to be used only by the State, as a legalmonopoly! She had exceedingly great confidence in the reliability of the State bureaucracy—a tenet of faith that is not generally recognized as part of a conservative credo.

Why a State monopoly? Because if gold mines could alter the supply of money, if “gold were declared to be money and any private entity who owned gold could, at will, order it imprinted with the Sovereign Seal and thus declared to be money,” then private persons could control the supply of money. “What legitimate right have a privileged few to alter the total volume of U.S. money either up or down?” This third lecture is a confused piece of logic.

In the first place, gold does not have to be declared to be money. It is already money by usage and private custom alone. Secondly, the

“Sovereign Seal” is not needed to make it money. Third, gold miners do add money to the nation’s supply, for all the gold not going for industry and ornament will wind up in the money supply.8 Finally, there is nothing morally or economically wrong with gold miners being permitted to sell

8Gary North, “Gold’s Dust.”The Freeman(October 1969).http://bit.ly/DustyGold

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a produced good on the open market if they so desire. The question of the State seal is superfluous for monetary theory. The seal only certifies that the coin really is of the weight and fineness that its bearer declares it to be.

Money is a highly marketable good because individuals find it useful in trade. The question of money, therefore, is intimately linked to the problem of economic value. So far, I have presented the origin of money in terms of people’s subjective decisions to use specific commodities in exchange. What was Miss Coogan’s view on the subject?

Economic Value

“Value,” she wrote, “is not intrinsic to commodities and services” (No. 3).

This is correct; there is no “value substance” residing in a material good.9 Yet we know that some things are valuable, so om whence does this value stem? Here Coogan offered a befuddled attempt to explain economic value, one of the most confused explanations in all of economic literature. It is completely meaningless: “There is no source of value any more than there is a source of distance.” But if value is neither inherent in commodities nor derived om somewhere else, how can it exist? She did not even see the contradiction, let alone try to answer it. “Value can be measured only by comparison. Comparison cannot be between two or more objects, but must be between two or more Values.” This is sheer gibberish. She apparently thought that by capitalizing the word she had somehow unlocked some mystical door to truth.

The question immediately arises: How can we measure these Values

(capitalized) if we cannot locate them? They are not in the goods physically. They are also not from some outside source, for “there is no source of value,” she affirmed. We cannot measure the goods or compare the goods themselves. Then what is value, why is it, where is it, and how is it found in order to measure it? No answers om Miss Coogan, just this statement:

“the only unit of measure of value is the whole sum of the circulating money. . . .” This is equivalent, using her own illustration, to the statement that the only measure of distance is the sum total of all yardsticks. The question of value is the most fundamental question in economic science,

9Gary North, “The Fallacy of ‘Intrinsic Value’ ”The Freeman(June 1969).

http:/bit.ly/FallacyValue

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yet Coogan dismissed it with this meaningless verbosity. In doing so, she declared to the world that she had no economic theory. As far as she was concerned, economic theory is not a matter of importance. It has no Value.

Here is what Mises taught. Economic value stems om the fact that individuals have varying individual desires, and they are able to satis some of these needs through the employment of certain means. Mises’ teacher, Böhm-Bawerk, wrote that the value of goods “is determined by that gain in a subject’s well-being which is dependent on his power of disposal over these goods . . . the difference between the degree of well-being attainable with and the degree attainable without the goods to be valued.”10 Value is subjectively determined by acting, calculating, economizing man, according to his own personal desires and needs. Because value is subjective, “Acts of valuation are not susceptible of any kind of measurement.” 11We can only say that “subjective valuation, which is the pivot of all economic activity, only arranges commodities in order of their significance; it does not measure that significance.”12 The only things that are measurable are prices, which are the exchange ratios between commodities, and these exchange ratios are not founded upon any inherent value of the commodities themselves, but instead they “are based upon the value-scales of individuals dealing in the market.”13

This means, first, that the State is not the creator of economic value.

Second, it means that money cannot measure values, because all economic values are subjectively determined. Economic values are based on the desires of individuals who have individual talents and individual callings.

All that we can say is that if an exchange takes place between two people, with the first person giving up commodity A to receive commodity B, and the other person giving up commodity B to obtain commodity A, the first person desires commodity B more than he desires commodity A, and the reverse is true of the second person. We cannot say how much one person values a good over another, but only that he values it enough to make the exchange. Thus, Coogan’s statement that “it is the total number of coins (denominations) which measures value” (No. 5) is false. It is as impossible to measure subjective economic value as it is to measure subjective iendship. 14 We can say that we like one person

10Eugen von Böhm-Bawerk,The Positive Theory of Capital, 4th ed. (South Holland,

Illinois: Libertarian Press, [1921] 1959), p. 18⒈

11121314Mises,Money and Credit, p. 3⒐Ibid.Ibid., p. 40.Ibid., p. 4⒈

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more than we like another, but the difference in that preference cannot be quantitatively determined. Another example: I value Mises’s economic analysis far more than I value Coogan’s—way, way more. But I cannot measure the difference.

Coogan, quite obviously, did not see things this way: “In a country whose Constitution guarantees eedom of enterprise, if the money system is allowed to function properly, coinage prices are due to the numerical relation between all things offered for sale and the total money” (No. 3). For this reason, she concluded, “The total volume (numbers of money)

should always be proportional to all wealth on sale” (No. 3). This is an important statement, and I will discuss it in detail later. Mises recognized this line of reasoning for what it is, the basic fallacy of all socialism: holism.

The error in this argument is to be found in its regarding the utilityof money om the point of view of the community instead of omthe individual. . . . If we start with valuations om the point of viewof society as a whole, we tacitly assume the existence of a socializedeconomic organization in which there is no exchange and in whichthe only valuations are those of the responsible official body. . . .

But in such a society there would be no room at all for money.

Under such conditions, a common medium of exchange wouldhave no utility and consequently no value either. It is thereforeillegitimate to adopt the point of view of the community as awhole when dealing with the value of money. All considerationof the value of money must obviously presuppose a state of societyin which exchange takes place and must take as its starting pointindividuals acting as independent economic agents within such asociety, that is to say, individuals engaged in valuing things.15

Coogan said that she was a capitalist, yet her discussion of money tacitly assumed, as Mises said, “the existence of a socialized economic organization.” Her outlook was holistic, collectivistic, and not in terms of the individual citizen. She did not admit that economic value arises om the valuations of individual men and women. She insisted that economic value is some mystical, undefinable thing that is measurable only by the total money supply. Thus did she progress, step by step, to the basic outlook of all socialist economics: the State is to have a monopoly

15Ibid., pp. 122–2⒊

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on the control of that measuring device. She made the final concession to the socialist monetary theory, and introduced a recommendation which, if established, would introduce the possibility of the most vicious kind of statist economic tyranny.

Viewing society om this communal perspective, she discovered an interesting “fact.” This is the relation between the social quantity of money and the total demand for goods: “More money increases the effective demand, and less money decreases the effective demand for goods” (No. 4). This is a very brief, terse summary of this more technical statement:

There will be a determinate amount of increase in the quantityof effective demand which, aer taking everything into account,will correspond to, and be in equilibrium with, the increase in thequantity of money.

This more elaborate phrasing is found on page 299 of the American edition of Lord Keynes’s The General Theory of Employment, Interest, and Money, published by Harcourt, Brace & World, 193⒍ The idea behind his statement, and the idea behind Coogan’s, is the same: let the government inflate the currency in order to keep demand increasing and to keep production stimulated. Henry Hazlitt refuted this idea quite nicely in his book, 16The Failure of the “New Economics.” The interested reader can avail himself of Hazlitt’s scholarship, relieving me of the necessity of going over his rather lengthy rebuttal. His basic criticism is that the new fiat money misdirects investment and production om the most publicly beneficial pursuits. Counterfeit money produces “counterfeit industries,” and these can be profitably sustained only through the continuation of monetary inflation.

We now come to Coogan’s conception of “Lawful Money”:

Lawful money is created at theorderanddirectionof the Congress ofthe U.S.A., and PAID into use; not a private corporation’s promise—to-pay money.It is moneycreated and paid out by the only authorityin the United States that actually can create money (No. 7).

Money supposedly did not come into use through the voluntary trad-ing of ee men with each other, but only at the beck and call of the new

16Henry Hazlitt,The Failure of the “New Economics”(Princeton: Van Nostrand, 1959),ch. 21: “Prices and Money.” This book is ee to download:http://bit.ly/FailureNewEcon

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God, the creative State. The State now has the power of wealth creation, once reserved only to an almighty God. Previously, a ee citizen had been permitted to store his goods, whether metals, bricks, furniture, or any other goods, and to receive a receipt for these goods. He had to pay storage costs, of course, but it was his right to do so if he chose to. Now, however, the State is to forbid him to store money metals or to receive receipts for the stored goods. He can no longer voluntarily transfer that receipt to someone else in exchange for something that he desires more than the ownership of the metals. He must lose one of the basic freedoms of men, the right to own, store, and exchange property. The “miracle” of lawful money, so-called, is the denial of the right of private property. Naturally, it is advocated in the name of eedom, as are most totalitarian schemes.

This, unfortunately for the ee society, is only the beginning. Congress, she wrote, has a goal to accomplish with this state created money: thegoal of full employment. “Congress has the power and mandate to create, and provide at all times a volume of money sufficient to maintain full employment, production and trade” (No. 9). Those familiar with the

Keynesian system will recognize this goal, as well as the means to this goal, as being one of his most famous economic doctrines. In fact, he ended The General Theory in a plea for the idea of full employment directed by state monetary and fiscal controls. It is an idea that Hazlitt disposed of very easily.17 The whole idea is utterly absurd. As Prof. G. C. Wiegand writes, “No group of economists can at present predict sufficiently closely the level of economic activities to keep the economy on the extremely narrow path between inflation and unemployment, and there are no precision tools to correct deviations om the expected norm.”18 Hazlitt demonstrated that full employment must come through the ee market’s arrangements of prices—prices that are to be lowered by would-be sellers until the previously unsaleable goods are purchased. The same applies to

17Ibid., chap. 26: “ ‘Full Employment’ as the Goal.” It may come as a shock that the

United States Government is legally required to maintain conditions of full employment,according to the Employment Act of 194⒍ This was exactly what another Greenbackpromoter, Congressman Jerry Voorhis, had proposed publicly in 1944:Beyond Victory(New York: Farrar & Rinehart, 1944), pp. 106 ff. (Voorhis, it should be pointed out,was a le-wing political figure, a member of the League for Industrial Democracy andAmericans for Democratic Action. See Rose Martin,Fabian Freeway[Boston: WesternIslands, 1966], pp. 493, 52⒋ He was defeated by Richard Nixon in 194⒍)

18Wiegand, “Economics in a Changing World.” inToward Liberty, II, pp. 400–40⒈

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wages. They must be voluntarily lowered until all people are employed who desire employment at a market-determined wage. Coogan never even mentioned this function of the price system, ignoring it as a possible solution to the unemployment problem.19 Once again, Coogan fell into line with the trend of the “New Economics” of John Maynard Keynes and his disciples.

Consider the implications, politically, of this economic reasoning: “Lawful money should be a non-interest bearing non-repayable debt owed by the nation as a whole to those individuals who hold any money. As long as a nation is a going concern, that debt relationship should be maintained” (No. 9). The hostility of fiat money’s advocates toward central banking is not that it adds to the money supply, but that it allows individuals to get rich by loaning the government fiat money. In fact, Greenbackers hate this means of monetary inflation precisely because it is not inflationary enough! As Voorhis wrote: “So long as the money supply of America is tied to our debt, the fear of debt will always operate to preventeffective action being taken against unemployment.20 ”

Coogan said that the person who owns currency is owed a debt by the nation at large. This does not mean that he has a claim on some money metals by the State’s Treasury as legal backing for the piece of paper. It means rather that he is owed all those goods that are for sale and which he can pay for. I suppose that the idea of perpetual debt means that someone always owns the bills, and therefore everyone always owes someone any goods he offers for sale. Whatever it means, this much is clear, “the nation as a whole,” owes the bearer of a State Treasury note all the goods that the note will buy. Thus, if a private owner should decide to sell a good, but refuse to sell it to the bearer of a bill, the potential buyer should be able to demand and receive that article as a debt owed to him. It is a legal debt relationship. If the seller should refuse to make the sale, it would be the legal right of the “offended” buyer to demand federal marshals or troops to enforce his claim, for these are the representatives of “the nation as a whole.” The nation must protect the buyer’s rights against the evil seller who is refusing to pay off a legal debt. The seller is at the mercy of the buyer once he offers the good for sale. This is the

19North, “Downward Price Flexibility and Economic Growth,”The Freeman(May

1971).http://bit.ly/DownwardPrices

20Voorhis,Beyond Victory, p. 1⒒ (Italics in original)

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meaning of all legal tender laws. Coogan advanced this concept of money in the name of “eedom” and “legality.” She had not given much thought to the implications of her economic pronouncements.

In her theoretical discussion of money, Coogan failed to heed the clear warning which Mises gave to all economists in 19⒓

Economic discussion about money must be based solely on economic considerations and may take legal considerations into account only in so far as they are significant om the economic pointof view also. Such discussion consequently must proceed om aconcept of money based, not on legal definitions and discrimina—tions, but on the economic nature of things.21

Coogan’s “lawful money” idea has led her into advocating a money controlled and managed by law, that is, by the lawmakers of the State bureaucracy. Thus, she argued:

Rightfully, only the seal or stamp of authority and not any substance constitutes Money. The fiat meaning “so be it!—This is

Money” on any substance, and on thepower to determinethe totalvolume in existence and the foreign exchangeratiosis theSovereign

Power(No. 12).

There was once a time when the words “sovereign power” were only capitalized when referring to the Deity; now it refers to the new God of the State, the bureaucracy of the State’s money creators.

Mises outlined the limitations of State powers in the matter of money, and it is one of the clearest statements that one might desire.

. . . all that the law can do is to regulate the issue of the coins andthat it is beyond the power of the State to insure in addition thatthey shall actually become money, that is, that they shall actuallybe employed as a common medium of exchange. . . . It can also takevarious steps with the object of encouraging the actual employmentof these qualified commodities as the common media of exchange.

But these commodities can never become money just because the

State commands it; money can be created only by the usage ofthose who take part in commercial transactions.22

This does not mean that Mises advocated State controls on the issuing of money and metals, but only that this is as far as a State can go in terms

2122Mises,Money and Credit, p. 5⒋Ibid., pp. 60–6⒈

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