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S. Herbert Frankel


Subtitle: The Conflict of Trust and Authority, St. Martin's Press, NY., 1977, 163 pgs., index, bibliography, notes


Reviewer comment - This is an unusual and important analysis of current thought on the role of money in society. It was written in 1977 soon after Pres. Nixon ended the tie of the dollar to gold and the start of the massive inflation and depreciation of the dollar. That is the focus of 'conflict' between 'trust' (that is the people's trust in the stable value of their money) and 'authority' (that is the theory backed policy of government to manipulate the value of money to serve its political and social goals). Dr. Frankel considers this immoral. His is a 'voice calling out in the wilderness' and his warnings have now been ignored.

The two philosophies are the contrasting theories of Georg Simmel and Lord Keynes. Professor Frankel compares and contrasts their opposing views on the role and nature of money. He provides also an appendix with brief biography of Simmel. He writes that Simmel deplored the new, statist, concept of money and was pessimistic when predicting the loss of individual freedom that would come with government control of money. He cites Keynes as the proponent of govenment manipulation that has created our resulting disaster. With extensive quotations from several of Keynes' books and essays he claims that Keynes and his followers advocated and established a false theory of money which has been responsible for the loss of individual liberty and the encroachment of government power.

This book can be studied and its content compared with the many books on Marx, Keynes, and the development of concepts about money, several of which I reference here. The reader comes to realize that there is very much more to money and its central role in society than is described in the usual depiction only in the typical statements in economics texts about the three functions it is said to perform. A full description and positive analysis of the 'modern' role of government money that Frankel saw being expanded is in Wray who claims the result is positive.

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Jerry Z. Muller - The Mind and the Market - Capitalism in Western Thought

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G. L. S. Shackle - Epistemics and Economics: A Critique of Economic Doctrines

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Hunter Lewis - Where Keynes Went Wrong

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Geoffrey Ingham - The Nature of Money

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Felix Martin- Money, The Unauthorized Biography

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Nicholas Wapshott - Keynes - Hayek: The Clash That Defined Modern Economics

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Perry Mehrling - The New Lombard Street: How the Fed Became the Dealer of Last Resort

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L. Randall Wray - Modern Money Theory: A Primer on Macroeconomics for Sovereign Money Systems

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Stephen R. C. Hicks - Review of Leonidas Zelmanovitz book The Ontology and Function of Money

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Philip Coggan - Paper Promises: Debt, Money and the New World Order

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David Graeber - Debt: The First 5,000 Years

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Glyn Davies - History of Money: From Ancient Times to the Present Day

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Lawrence H. White - The Clash of Economic Ideas

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James Rickards - Currency wars: The Making of the next Global Crisis

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James Rickards - The Death of Money: The Coming Collapse oft he International Monetary System

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Martin Katusa - The Colder War: How the Global Energy Trade Slipped from America's Grasp

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Kwasi Kwarteng - War and Gold: A 500-year history of Empires, Adventures, and Debt


The author provides a clear summary of his belief and his program to express it.

"This book deals with the changes which have taken place in the attitude to the economic and social role of money in the free world. The present ambivalence towards the money economy rests on the ascription to money of abstract powers which it does not possess. Consequently much of what goes under the name of monetary policy arises from false or misleading analogies and from the belief that it is possible to ignore individual and social custom and convention."

Clearly this is a direct attack on the American Federal Reserve system and government fiscal-monetary policy. The author expands on this basic view in the organization of the chapters.

"In the Introduction I discuss why monetary questions are basically philosophical or moral.
In Chapters I and II he will "show the significance of the cultural attitudes towards and symbolism of money as expressed particularly in the conflicting social philosophies of Karl Marx, Georg Simmel and J. M. Keynes."
In Chapter III he discusses 'the actual foundations of trust and certainty in monetary policy and practice in the nineteenth century." He includes discussion of Carl Menger, Macleod, Bagehot and others.
In Chapter IV he stresses the importance of Georg Freidrich Knapp's, theories and their influence on Keynes.
In Chapter V he devotes more detail to study of "Keynesian and post-Keynesian morality of money and its assault on the monetary economy itself."
In Chapter VI he assesses the 'implications of these modern ideologies for the survival of a free society."


Professor Frankel establishes the current environment and his purpose in analyzing it..
"There has been a striking development in statistical and econometric analysis of monetary data, and in the clarification of logical concepts in the theory of monetary economics in the last fifty years. It has, however, obscured the fact that there are basic monetary questions which are not 'scientific' or 'technical' but depend on the particular vision of what men and women hold to be the truths, principles, or values which do, or should, govern them. The philosophy of money consists of an analysis of such questions. It forms the subject-matter of this study."


Chapter I -The Symbolism of Money
Professor Frankel begins with noting that "the Victorians' that is 19th century thinkers, saw money not only a symbol but that it also seemed to guarantee the rapid free exchange economic expansion that was taking place. And this 'enraged' their opponents. Then thinkers of the 20th century have revolted against their ideas. Today all this is nearly forgotten. Wesley Mitchell believed that the development of money was a great institutional advance and the basis of economic rationality. He notes that, "Simmel saw the likelihood of these developments more clearly than anyone else. To him money symbolized a certain form or structure but not a static one: the significance and meaning of money lie in its mobility." But he saw "it is a symbol of persistence as well as a symbol of movement."

"Social Evaluations"

Dr. Frankel describes Simmel's concepts: "He argued that economic forms are themselves the consequence of deeper social evaluations and forces whose psychological, indeed, even metaphysical, assumptions must be recognized." He faults economists for ignoring this.

"Historical Materialism"

"Simmel, at the very outset, emphasized that he wished to refute the basic doctrine of historical materialism, i.e. the insistence on explaining social change only in terms of extraneous economic or material causes." Dr. Frankel elaborates on this point, with which he agrees. He regards it a 'fundamental category mistake' and states that he "intends to show (it) also underlies much of current monetary theory and policy."

"A Category Mistake"

He considers that Simmel shows that the mistake is assigning facts 'as if they belonged to one category when they really belong to another."

"Money appears to be something additional to, or to stand outside, the individual things themselves, as if it were 'an empire of its own' This is, according to Simmel an illusion: not things but people are responsible for the activities involved." "He (Simmel) illustrates the same category mistake in the misuse of concepts like wealth, capital, and property, when they are thought of as existing apart from or outside the socially determined rights which they express, or the exercise thereof which they permit." "Money has, or appears to have, that unique potential power of being incorporated in any future use that its possessor may desire to put it to. Yet, in fact, given this power and potentiality is not one which stands outside, or is additional to, these eventual uses. If they are no longer available, or permitted, the apparent independent power of money disappears with them".

"Money and Exchanges"

Dr. Frankel continues, "Simmel makes the same point in regard to the process of exchange: outside it 'money is as little as regiments and flags without collective aggression'...."... "That is why the creation of values through exchange is as important to Simmel as it is anathema to Marx and his successors."... "The fact that money grew out of the process of exchange is of prime importance because it involves the freedom of individual valuation - without which money cannot function fully as money." "There is an intimate relationship between money and freedom, between the keeping of promises and the certainty of contracts; between social functions and the rule of law. None of these relations is regarded by Simmel as a mere link in a chain of mechanical interactions: for him money is in the last resort an abstract form."

Dr. Frankel elaborates for several pages. "One of the basic facts of our subjective world was that we express social relations through symbolic images. Money was one of these." It became a symbolic expression of economic relationships. But these symbols cannot be separated from the circumstances from which they arose. He continues by contrasting the nature of the symbolic relations for ancient Greeks , 18th century Europeans and then 19th century thinkers. The change between the 18th and 19th century conceptions is striking. He states that for Simmel the 'most paramount and beneficent aspect of the free monetary order' was its relationship to the freeing of individual citizens from feudal and national constraints.

"Ideology of Money"

Professor Frankel writes, "In my opinion this view illustrates the change which has since taken place in attitudes to, or what might be called the 'moral ideology of money."

Here he voices his central concern, that today money is not in the independent control of free individuals as a central aspect of that freedom, but rather is controlled, manipulated, and abused by governments. And, as he elaborates further on, governments even conceal this. Thus the nature and role of money in society is misunderstood and resented by much of the public.

"The fear of money lies at the root of many of our present perplexities. For the nineteenth century, however, it was not fear of money that predominated - it was faith in it: particularly faith in its power to ensure certainty for the individual. Therefore nothing should be permitted to undermine the certainty of money itself."

But of course modern governments have already undermined trust in money.

"Simmel had no illusion at to what enabled money to play this all pervading role. It was the freedom and security of the economic order on which the full potentiality of money rested."... "By the full potential of money he meant the manner in which money affected not only our actions but the fears, hopes and desires on which they were based."... "The extension of credit could itself be regarded as a dual- indeed an uncanny - process: what was a mere future claim, or indeed possibly only an ephemeral hope, in the hand of the lender, appeared at the very same time as something real in the hand of the debtor, for whom it was immediately available and expendable."

"It is because money is a sociological phenomenon, a form of social interaction among people, that its true nature emerges ever more clearly the more intimate and dependable social bonds become." "It was taken for granted that the monetary trust on which it (that is peaceful and improving European society) had been built would continue."

Thus the contemporary destruction of trust in money caused by government policy is directly related to social chaos. As he notes, "There were destructive, irrational forces at work which were, to Europe's peril, generally and dangerously ignored." (Writing about the pre- World War One era.) But continuing throughout the 20th century.


Chapter II - Money and Individuality

"The Legacy of the Eighteenth Century"

Dr. Frankel states the situation clearly, "No greater contrast can be imagined than that which separates many of our current conceptions of the nature and purpose of money from those which were dominant for most of the nineteenth century. To understand the latter one must appreciate the reverberations caused by the monetary disasters of the eighteenth century."

He is writing about the disasters that led to and culminated in the French Revolution. He cites both John Law's fiasco and the revolutionary Assignat. The danger was already spreading by the time of John Stuart Mill, who, however, could not imagine 'that society could be improved by altering the basis function, or reducing the importance, of money itself." (Shackle also discusses this change and links it to Keynes.)

"Challenge to Monetary Order"

He continues, "The difference between the accepted attitude which prevailed in the nineteenth century and that which has developed since the First World War, and particularly since the nineteen thirties, lies elsewhere: in that the very idea of the beneficence of a free monetary order was again challenged. The challenge was not only to the idea that money is 'neutral' . It went further. It raised the issue whether an economy based on a free monetary order was necessarily more desirable than a non-monetary economy. he notes that Keynes was among those who preferred the latter.

He continues, "Disapproval of money itself was, of course, nothing new. It goes back to antiquity. What was now made fashionable by Keynes was the formal rejection of the monetary orthodoxy of the nineteenth century."

Meaning the approval of government manipulation of money for political purposes. For the classical economists money was the means for individual freedom.

Dr. Frankel continues, "Historically the growth of exchange value and of the power of money are interconnected and the whole exchange relationship 'establishes itself as a force externally opposed to the producers and independent of them'". He describes Marx's view of money and the bourgeois attitude toward money and wealth. "Much more important, however, is Marx's attitude to exchange as such. It lies at the root of his condemnation of money and of individual freedom within a monetary economy." "He idealized ancient and medieval economic relations." Frankel supposes that this was because he knew so little about them. "However, Marx built his utopia on an idealized conception of the economic organization in such societies." See Muller.) His analysis is extensive. He relates Marx's famous concept of 'alienation' to Marx's claim that the 'abstract' role of money in exchange made men actually less free than they had been when settled 'safely' in the medieval manorial exchange economy.

"The Philosophy of Georg Simmel"

Dr. Frankel devotes several pages to comparing Simmel's concept of money and its influence on Keynes. "Simmel's interest in the philosophy of money rests on his view that money epitomized and illustrated his theory of culture and the tensions the latter involved for the individual." Simmel had a very different attitude toward wealth as a part of the individual's being. Frankel quotes Simmel. 'The most mobile of all kinds of properties is money. Consequently, there is a close interrelationship between the development of a money economy and the growth of the role of the individual and the recognition which is given to him.' For Marx, money creates alienation, but for Simmel it creates individual freedom.

Dr. Frankel continues, "The same occurred in regard to the relation between the owner and his property. Money alone made possible the complete separation of the first from the second." .. "Only in the modern sophisticated money economy were both property and its owners completely differentiated - and liberated - from each other."

This is a critical concept. Understanding this, one can understand the overwhelming desire of the intelligentsia - elite - to regain power over the money supply and its availability to the common man. Lenin, of course, well understood this.

"Scientific Objectivity and Abstract Freedom"

Dr. Frankel writes, "Simmel drew a parallel between the increasing scientific objectivity with which modern man conceived of the universe and his attempt to express individual freedom in similar abstract terms." But in modern society freedom is a process rather than event. The money economy enhances individual freedom in one sense but also makes the individual dependent on the activities of millions of other individuals.

"The World of Measure"

The author describes modern man as a mathematician and accountant. Everything now is measured, calculated, weighted in quantities. "The money economy is merely the sublimation of economic life. Money expresses the purely economic aspects of objects just as logic expresses their intellectual or conceptual ones. Money is a mirror which pictures all elements with complete indifference to non-monetary values."... "The calculating intellect which operates through the money economy receives back from that same money economy some of the mental characteristics in terms of which it dominates modern life."

"Two Forms of Individualism"

The author contrasts the 18th century concept of individuals being homogeneous and basically undifferentiated with the 19th century concept of qualitative individualism and uniqueness. These different conceptions were reflected in the social conception of money.

"The Significance of Moses Hess"

Dr. Frankel describes the influence of Hess on Marx's concept of the abstract nature of money. Both philosophers despised the "evil of economic exchange and especially exchange in terms of money.." But Hess recognized that it had 'resulted in much unanticipated good." - Note, 'unanticipated'. So while Marx "built his Utopia on the return to primitive non-monetary forms of social organization, Hess labored under the Utopian illusion that mankind's productive problems were already mainly solved."


Chapter III - The Nineteenth Century Ideology

"The Miracle of Credit"

Dr. Frankel cites Walter Bagehot's description of the British society and economy and the amazing role of banking, money, and above all credit. Bagehot described Britain as the greatest moneyed power in the world, not because of some vast store of cash but to its 'borrowable money'. "The concentration of funds in the London Money Market which greatly exceeded that of all of Europe put together." "On this rested the miracle of new credit creation". (This is well described by Martin.)


He cites Bagehot again, "Lombard Street was 'a luxury which no country has ever enjoyed with even comparable equality before.' - which he explains means that the British banking system rests on an exceptional heritage that engenders 'trust'. Credit rests on trust. Frankel again, "No wonder that for Simmel it was that faith and belief in the public centrality of the monetary order on which rested money's potential: its power of promise and performance.." ..."That additional ingredient was nothing other than the faith, belief and trust which the coin symbolizes.".. ."It was a unique, notional and abstract guarantee by society to the holder of money that he would be able to continue to turn it to account and to dispose of it without loss.".. .'the fulcrum of erstwhile relationships between the two parties to the barter agreement had been shifted."

I wonder if this where Felix Martin found his metaphor of a fulcrum? Contrast this description of the veracity of Victorian banking and money with the universal lack of faith in government money today.


Dr. Frankel turns to Carl Menger for another concept. "Menger regarded custom as the most decisive factor in the development of money. ..For Menger money was a social institution. It was the result of an evolutionary process." It was similar to the evolution of law.

"Intuitive Wisdom"

Dr. Frankel stresses that Menger believed strongly that social institutions, including money, resulted from the gradual adoption of custom by common consent by the people in evolutionary processes. And F. A. Hayek agreed. What concerned them is the modern 'constructive rationalism' or 'intentionalist' or pragmatic account of history. This is the prevailing establishment concept used to justify government (rulers) today that all these "resulted from the propensity to ascribe the origin of all institutions of culture to intention or design. Morals, religion, and law, language and writing, money and the market were thought of as having been deliberately constructed by somebody.'

In other words, if all existing social institutions are the result of some ones deliberate design and creation, we (elite) can now redesign everything to correct obvious flaws.

"But the basic assumption underlying this belief is factually false. "

"Thus for Simmel and for Menger, as also for most liberal economists of the nineteenth century, the monetary order was not something to be left to the whim of the Government or the State. Indeed, Menger pointed out that Governments had so often and so greatly misused their power that it was forgotten that a coin is nothing but a piece of metal the fineness and full weight of which was guaranteed by the mint."

"Social Commitment"

He continues, "If then money neither arises from the edicts of the Sate nor can be left to its whims, on what 'something' does it depend? There can, in my opinion, be no doubt that what they both had in mind was a certain disposition, willingness and aptitude in society which could be counted upon to ensure, as a matter of justice, the maintenance of the monetary order (and in normal circumstances the value of money) through law or custom." ..."I would say that in the last resort the monetary order depends on the moral ideology of society."

It is no wonder we are in such monetary chaos today.

Dr. Frankel continues with discussion of morality, justice and societies's responsibility to maintain trust in the money of the realm. "The classical economists generally took this for granted as part of the reaction to the excesses of the French experiences."

"A Credit Theory of Money"

He continues, "There were many others who stressed the importance of monetary order." One "foresaw the continually growing significance which debts would assume in economically sophisticated communities and that debt could be used as if it were money.".. ."Henry Macleod suggested that money is the highest and most general form of credit." Macleod quoted Bastiat and Frankel cites the quotation. The question is 'what brings about the general acceptability of money?"

"Trust and Character"

Frankel asks, "What meaning can be ascribed to trust? What is its social significance?" ..."Personal trust can be said to be based on the belief that the person will honor an obligation, and he will keep a promise, under all circumstances over which he has control."... "Trust rests on our idea of the character or nature of the person confronting us."

"Trust and Social Communication"

When it comes to societies, it 'is impossible to attempt to control all social action on the basis of expectations which can be calculated with certainty. There are always uncertainties." But the individual perforce has to base his actions on some element of trust. This brings up money.

"Money, in terms of modern functional analysis, has come to be regarded as a symbol of communication by means of which social complexity is reduced.".... 'the belief that the money -mechanism ensures decentralized freedom of individual decision-making rests on the postulate that money really does enjoy trust."... "Without trust the monetary system would break down."

"Personal and Generalized Trust"

"The rational pursuit of advantage through round-about methods of production, postponement of consumption, saving etc. can only be motivated when the disturbing influences of the incalculable actions of others can be eliminated through trust."... "The who believes in the stability of the value of money, and in the continuance of a multiplicity of uses for it, is basically assuming the existence of a functioning system."... "But as Simmel warned, in the last resort it is not the systems, but the individuals who operate them that have to be trusted."

Can we say that about the governors of the FED today? Or of our presidents and politicians generally?

"Trust and the Monetary Economy"

"The trust in money - i.e., in who does the defining - therefore implies trust in the maintenance of the monetary order.".. "What is at issue here is a much more basic question: how can a trustworthy society, with stability of character be maintained and continue to be relied upon.... "If laws generally are not justly applied then the system of law has broken down: law itself has been abrogated.... Similarly, a monetary economy implies the maintenance of a monetary order: one in which trade is conducted, in which debts and obligations are freely entered upon and discharged and services remunerated by money, the maintenance of the value of which is accepted by society in its customs and laws, as its responsibility."

"Whenever and wherever the use of money is restricted in relation to any existing or potential purpose, there is retrogression to a non-monetary economy in which political, authoritarian or barter transactions take the place of money. If money increasingly becomes an instrument of sectional political or economic action then it ceases to that extent to be inviolate in the sense of being guaranteed by society through its laws or customs."

"In a free money economy individuals have to act on expectations as to how they will be permitted to consume or invest or hold money. However, such expectations are based on the twin assumptions that there will be a system of money contracts and a monetary system which bears an ordered relation to them. ... But the maintenance of a free monetary order implies that contracts freely made in money do, as such, carry society's guarantee that the measuring-rod of money in terms of which they are made will not be deliberately tampered with by anyone, not even the Government itself."

Here Dr. Frankel is deploring the post-Bretton Woods government manipulation and debasement of the money. He is right, the situation is worse now. But, unfortunately, there never was a 'measuring-rod' against which the 'value' of money was maintained constant.

He is again right to cite Keynes "The individualistic capitalism of to-day, precisely because it entrusts saving to the individual investor and production to the individual employer, presumes a stable measuring -rod of value, and cannot be efficient - perhaps can not survive -without one." But what Keynes wanted and proposed was "'regulation of the standard of value to be the subject of deliberate decision'. So what Keynes was claiming is not that there cannot be a stable measuring-rod of value, but that the government should establish one. Of course, what for Keynes was government creation of a 'stable measurement' was for Frankel the government manipulation of and shifting any such standard.

But Frankel continues," In my opinion, therefore, when private individuals or institutions have, as now, to buy gold, commodities or foreign currency, to ensure greater security for themselves in the face of monetary and currency uncertainties, this is a sign of retrogression of and deterioration in the domestic monetary system." No question that after Nixon the domestic monetary system deteriorated, but it seems to me that it was fragile all along and so were the misconceptions.

"The Miser and the Spendthrift"

"It was this abstract characteristic that Simmel saw the Achilles heel of any functionally advanced monetary system. A high degree of abstraction was very likely to engender profound misconceptions concerning the nature of money."

"Simmel illustrates the most extreme misconceptions concerning the power of money by the respective attitudes of the miser and the spendthrift. Both reject the valuation of the utility of money in terms of other things than itself. Both attempt to escape from the reality that money itself is nothing: That it has ultimately always to be translated into specific ends and into concrete objects of services."

A very interesting point. But it flows from the more general division of human action into separate categories of which economic activities come to be considered ends rather than means.


Chapter IV - The Nominalist Dissent

"A Dictionary of Money"

Dr. Frankel quotes Keynes who wrote that 'civilized money' today conforms to the Chartalist theory of State Money. This theory rests on the idea that 'money' is created by the sovereign - now the 'state' and is therefore also defined as to its 'value' by the 'state' which claims this prerogative as a 'right'.

Dr. Frankel disputes the 'state's right.

"Double Talk about Debt"

"It is necessary, however, to pursue this matter a little further. It will be remembered that Keynes defined Money-Proper as that the delivery of which will discharge a contract or a debt and Bank-Money as simply an acknowledgment of a private debt used alternatively with Money-Proper to settle a transaction."

This leads Frankel into a discussion of debt - specifically government debt - and Keynes' proposition that governments can 'settle' their debts by declaring them money. He considers this no discharge of debt at all and immoral. But this is in essence what the government issuing credit in exchange for goods and services it acquires is all about.

"The Moral Situation"

"In my opinion, the fact that a debt represents a promise from the debtor to the creditor, or his successors in title, is crucial." Dr. Frankel devotes several pages to discussion of this situation, quoting various authorities including Keynes again. He considers the whole situation to be immoral.

"Not withstanding Keynes's frequent appeals to morality, his claim that all 'civilized money' is Chartalist and is 'a creation' of the 'state' is in effect a claim to place discussion of the nature, meaning and significance of money outside moral discourse and beyond the moral structure of a free community." And Keynes view of chatalism stems from the concept proposed by Georg Fredrich Knapp. (Abridged edition translated from German is The State Theory of Money, London, 1924)

"Monetary Nominalism"

"Knapp's main contention was that money is essentially the creation of law and wholly a State affair. Money was to be regulated by the State entirely in its own interest. The value of money is secondary: what is important is its validity, by which he meant its power to discharge debt. In his opinion this power was given to money solely by the State."

Dr. Frankel strongly disputes this concept. For a full discussion of the conflict between Knapp and Menger and the 'Austrian School' please read Ingham. (Frankel cites many works of Carl Menger and F. A. Hayek)

He continues, "The monetary unit is, according to Knapp, purely 'nominal'"... Once a money has been established, it can only be changed by an admission of the nominal character of the monetary unit; this character consists in the possibility of the State changing the means of payment, while the relative magnitude of different debts remains unchanged." ... "Whatever else one may think of these definitions of money one thing is certain - they are not based on any particular moral conception." ... "Keynes appealed to history in precisely the same manner in the quotation I have given." .... "I believe that this conception of money is fallacious and that it has had an continues to have a very deleterious influence on monetary thought and policy."

Dr. Frankel continues with several examples of the way in which 'nominalist conception of money' and caused great harm. He quotes Gail Person ("The Role of Money in Economic Growth", Quarterly Journal of Economics, p. 387, vol. 86, 1972) and describes her description of 'modern money' as an example of current fallacy. He writes that the unlimited expansion of credit-debt is immoral and will lead to destructive inflation. Then he quotes at length L. M. Lachmann (The Legacy of Max Weber: Three Essays, London, 1970) to denounce the concept expressed about modern money including claims against banks and government.

Dr. Frankel writes, "Unfortunately money does not consist of claims but is the means of settling them by what it will purchase, and that cannot be 'created' by monetary institutions or by the State 'at will' but only - to repeat - by society's successful production of the things which money can buy."

Unfortunately, or fortunately, governments and Central Banks since 1977 have proven him wrong - see Wray and Mehrling and Ingham again. Or read Bernanke's comments about 'helicopter money'. Since Frankel wrote the money supply has become mostly credit created by the banking system.

But continuing his discussion (above) Dr. Frankel returns to Knapp, "Knapp's definition of money as purely Chartalist, i.e. and being only the creation and creature of the State, rests on a category mistake similar to that to which I have already referred." He continues along this line in describing both money and capital.

"What, I suggest, Knapp's and all similar Chartalist or nominalist theories of money have in common is that they are finally self-defeating. For if we grant the basic assumptions on which they all rest: that the State is all-powerful in monetary affairs, that it can and should decree what money is and is to be, how it shall be used and who many and who many not use it, then we have in assumed away a free monetary order. "

And so we have.

He continues, "The abolition of a free monetary order has, of course, been advocated by opponents of a free society for a very long time."
Exactly. And he continues with his exposition in theory of the problems, which by now have been created in reality. He cites again Carl Menger, who pointed out both the causes and results, but as with most of the "Austrian School" has been ignored. And then he expresses his disappointment that even an eminent economist, Milton Friedman, has acquiesced in the expanded role of government to control money. All of this change has accompanied a change in the character of society itself and the loss of trust by everyone in everyone.


Chapter V - The Keynesian Morality of Money

"Monetary Theology and Gold"

In this chapter Dr. Frankel elaborates on his description of Lord Keynes' theories and also his personal objectives in promoting the power and role of government - that is the intelligentsia - to rule on the basis of their superior 'scientific' knowledge in the best interests of the ignorant masses.

He begins, "J. M. Keynes reflected both consciously and unconsciously an ambivalent attitude to money which has been deeply embedded in European thought since the Middle Ages. This chapter examines the nature of this dichotomy in Keynes's writings and those of many of his successors." Dr. Frankel notes that Keynes considered gold a 'barbaric' thing and thought 'gold - hoarding' was 'barren' and insane. But then he thought any 'hoarding' of money was 'barren' as well.

"From Barrenness of Gold to Barrenness of Money"

Dr. Frankel believes that this concept originated in ancient Athens of Plato and Aristotle and continued through the Middle Ages because the philosophers did not understand the 'value' creating activity that takes place during exchange of assets. Thus, "Keynes came to extend the idea of the barrenness of gold to that of the barrenness of money." He thought the whole neoclassical view of the nature of money was foolish. Money retained as a 'store of wealth' was barren because , "our desire to hold money is a barometer of the degree of our distrust of our calculations and conventions concerning the future."

"Keynes's Enigma"

Dr. Frankel continues, "Uncertainty, however, is unfortunately not merely a state of mind. It is the human condition". In this he refers to Shackle for commentary on Keynes.

"The Replacement of Individual Choice"

"But it is worth pointing out that already in the early twenties Keynes was concerned with the possibility of bringing about another and very different world of thought and action." Namely, Keynes believed puny individuals could not assess the unknown future to make 'rational 'decisions even for their own benefit; hence, must be replaced by the 'scientific' decisions of government savants. Dr. Frankel includes extensive quotations from Keynes on this point.

"Vision and Technique"

Dr. Frankel here quotes Schumpeter's observations of the meaning of Keynes' theories.

"Symbolism and the Institutional Order" Here, Frankel discusses Keynes' divergence from the 19th century trust and confidence in the 'maintenance of a symbolic universe' as a foundation of the trust in money.

"Consumed by terror of the night-side of Europe's culture, Keynes appears to have discounted completely the possible future effectiveness of the very factors which had made Europe the cultural and financial power-house of the world. This Europe he now described in words not of hope but of despair; suitable only as its epitaph."

"The Age of Faith"

Here Dr. Frankel again quotes Keynes at length in describing the Europe prior to World War One. And he considers that Keynes admired that culture in which currencies had a stable basis in both gold and each other.

"The Capitalist Bluff"

"The serpent in this Garden of Eden which apparently accounted for Keynes pessimism was nothing other than the capitalist system itself." Dr. Frankel quotes Keynes again at length in which Keynes wrote, that the system 'depended for its growth on a double bluff or deception.' Keynes claims the laboring classes were being deceived into accepting their situation. While the capitalist classes were 'allowed to call the best part of the cake theirs and were theoretically free to consume it." And Keynes alleged that 'non-consumption of the cake' was detrimental. Frankel writes that Keynes' idea was 'misleading' and arose from his idea of an 'abstraction of a neutral money economy'. He continues with disagreement of more of Keynes's concepts.

"Psychological Motivations"

"Keynes's assessment of general psychological motivations in a money economy was even more erroneous". Keynes, he writes, considered the capitalist propaganda to the working class to be a bluff, and by the end of the war it had been discovered. Frankel writes that it was not a bluff, nor discovered, but the economic situation 'was due to political defeat which brought with it economic and monetary disorder". Plus it was "due to government weakness and malpractices". Keynes blamed "the capitalist class because they allowed themselves to be ruined and undone by governments of their own making and by a Press which they owned."... "He projected on to the capitalists the final responsibility for failing to prevent Governments from making scapegoats of them".

Sounds familiar today.

"A Simple Hypothesis"

"In any case there is so far no evidence that it is owing to the actions of the owners of capital, as lenders or financiers, that the occurrence of booms and depressions, of inflation or deflation is really due." He notes that Friedman rejected Keynes because the former thought that the latter had been contradicted by evidence."

"Deceit in Monetary Policy"

"Keynes was involved - and the Neo-Keynesians are no less so - in a particular moral issue. That moral issue is whether it is defensible deliberately to use public deceit in monetary policy." Frankel again quotes Keynes, "'A preference for truth or for sincerity as a method may be a prejudice based on some aesthetic or personal standard, inconsistent in politics with practical good'".

In other words it is fine to lie when it is for the common good.

"Its application in practical affairs, in my view, rests on a morality which is even simpler; the morality of initiating monetary policies the consequences of which will appear to others to be different from what they are known or expected to be to those responsible for them."

We hear this every time a Chairperson of the FED testifies in Congress. "The essence of the Keynesian prescription is to change the value of money, in the 'short period' in order to change (mostly in practice to reduce) the real wage rate - while appearing to do nothing of the kind. So also with changes affecting the 'burden' of debt."

I have read long ago the Keynes remarked about workers and people in general that they would much rather receive a higher nominal income even during a large inflation in prices than to have their income reduced during a period of declining prices. This is the essence of why economists today claim deflation is bad and inflation is OK, whereas in earlier centuries deflation caused both labor rates and asset values and commodity prices all to fall together. Of course inflation favors governments while deflation does the opposite.

"'Justice' and 'Flexibility'"

Dr. Frankel explains that Keynes explained why he preferred this 'flexible' money policy, as he called it, to a 'flexible' wage policy. The 'flexible/ money policy can be accomplished be a gradual and irregular change made justifiable as a matter of 'social justice' or economic expediency. And outside socialist dictatorships a 'flexible' wage policy would require official decrees and, moreover, would be difficult to accomplish uniformly for each of the many different types of wages and salaries. Keynes noted that the policy of increasing the quantity of money rather than directly decreeing wage rates was simpler and more obscure.

"by such alterations in the value of money, the wage-earners, the investors and the entrepreneurs are to be induced to adopt courses of action which, if they could immediately discern the full consequences of the monetary devices which were being used, they would not enter upon."

Frankel quotes Keynes again, "I expect to see the State, which is in a position to calculate the marginal efficiency of capital-goods on long views and on the basis of the general social advantage, taking an ever greater responsibility for directly organizing investment; since it seems likely that the fluctuations in the market estimation of the marginal efficiency of different types of capital... will be too great to be offset by any practicable changes in the rate of interest,"

And so it has come to pass.

"Money and Morality"

Dr. Frankel again, "There were even deeper drives below the surface which accounted for the direction of Keynes's psychological 'laws' ... "What Keynes had in mind was what he regarded as the moral problem of our age. This was concerned with the love of money, with universal striving after individual economic security, with social approbation of money as a measure of constructive success and with the social appeal to the hoarding instinct as the foundation of the necessary provision for the family and for the future." Frankel notes that Keynes thought there was much to approve of and admire in Soviet Communism, apart from violence.

"The Distrust of Money"

Dr. Frankel continues to examine Keynes' fundamental beliefs that were then expressed in his written theories.
He quotes Keynes, "I think in the United States of America - there is a latent reaction, somewhat widespread, against basing society to the extent that we do upon fostering, encouraging, and protecting the money motives of individuals."

Of course Keynes was strongly opposed to this situation, but the presumption that it is wide spread stems from the economist's conception that economic activity is an end in itself and should be treated separately from political, social and psychological aspects of human behavior. Yet, his and other economists who propose solutions to this perceived problem advocate political action by government.

Dr. Frankel continues, noting, "But his (Keynes) own distrust of the money-motive goes even further. Keynes was primarily concerned with the Theory of Monetary Economy. The evils he wished to correct were regarded by him as arising out of the very fact that we were living in a money economy. This even caused hi to consider whether abolition of money would be possible.

(Something the Communists did attempt in Russia.)

"The Belief in Public Wisdom"

Dr. Frankel cites Keynes, "What he advocated was to use the monetary order, by means of what he called 'public wisdom', to influence the business man 'steeped in the narrow arts of commercial calculation', whom he accused of not being able to calculate from a social point of view."

This is the essential concept of the intelligentsia generally, that only they posses the 'wisdom' knowledge and skill to lead society along the right path.

Dr. Frankel hits the basic fallacy. "This view, however reasonable it looks at first sight, is really based on a mistaken assumption: that public wisdom is something apart from or outside private wisdom."

All 'wisdom' or lack of it is possessed by individuals who have just as much of the same personal desires and interests as everyone else. This is obvious to any student of history. What is amazing to me that this natural condition has only recently been conceived of and published by noted economists as a theory of 'public choice.' Keynes and his followers explicitly (but mostly in relative privacy) noted that the government of intelligentsia must conceal from the public the true motives and expected outcomes of their manipulations lest the public get wise to them. And this is a central theme that Dr. Frankel exposes.

"The fact is that the deliberate creation of Money Illusion is a form of social deceit. If persisted in, it must, finally, subject the monetary order... "It does this for two reasons, The first is technical and, in a free society, inevitable: it is because, once the 'bluff has been discovered' to use Keynes's own words, individuals will soon take counter vailing action. The second is less obvious but more fundamental. It is because to use the monetary system as a means of creating illusions concerning the future in order thereby to influence individual intentions and actions, in accordance with the beliefs of those who propagate them, is to destroy the moral authority of the monetary order."

And this is exactly the nature and role of government money described and advocated by Wray.

To continue, "To give the impression that the value of money will not be adversely affected by particular policies, which those responsible for them well know will be the case, is to deliberately propagate a false belief."

He is thinking here about the planned use of 'financial engineering' after World War II in which the interest rates available to individual savers were kept by law lower than the inflation rate in order for the federal government to reduce its debt. And he also was living in the midst of another era of massive inflation greater than government prescribed interest rates but during which the public was reacting.

Dr. Frankel continues with his analysis of Keynes' beliefs.

"Speculative and 'Real' Investment"

He writes, "Keynes had an almost obsessive fear that speculation or gambling would predominate over investment based on 'the best genuine long-term expectations.'"

This is especially rich considering that Keynes, himself, was an avid gambler in the stock market and lost and remade fortunes while doing it, not only for himself but as agent for his Cambridge University.

But Frankel continues by commenting, "Keynes's remedy is worse than the disease." And describes this in some detail. Fundamentally this was all about instituting government controls over money to prevent individuals from making their own mistakes. He simply did not believe typical individuals were capable of making correct decisions.

"The Monetary System as 'Illusion'"

Frankel writes, "Once again we find ourselves face to face with the basic Keynesian diagnosis. True to the spirit of his time it associated the failure of the businessman and he entrepreneur with money motivations and money calculations. These, it is alleged, are inadequate because they are not scientific and they are not scientific because they are based on wealth (i.e. money-getting motives) which are in his view incapable of dealing with uncertainty." He continues, "The contrast with Simmel's philosophy of money could not be more striking." Dr. Frankel writes that for Keynes the entire money system is a 'contrived system', an illusion that deceives everyone, but for Simmel the monetary system 'was not one which had been contrived to lull individuals into a false sense of security." .. "But it 'represented social interaction and mutual trust on the face of and as a means of combating insecurity."

This goes back to a more fundamental issue- the struggle between society and government over who really 'owns' the money system. And Wray writes that it is the government.

Frankel writes that, "The dilemma arises out of a category mistake similar to that we have previously encountered. it results from regarding a money economy as essentially different from a presumed real-exchange economy. Keynes as we have seen, thought of a real-exchange economy as one in which one did not enter into 'motives and decisions'. .. Keynes criticized the classical and neoclassical economists, such as Marshall and Pigou, because, as he put it, in their view, though money is made use of for convenience, it may be considered 'to cancel out' for most purposes. This is a misleading criticism. Money does not cancel out anything." .. "The ' motives and decisions' of people are not altered through the presence or absence of money." ... "The category mistake which I have been discussing is one to which others besides Keynes have fallen victim." .. "In my opinion this criticism makes confusion worse confounded. The category mistake that both Keynes and Weber made, and which their followers make today, is to suggest that to express the goals of society or to calculate them in terms of money is one thing, whereas goals or values which cannot be so measured or expressed are another: that there is a real or ultimate rationality which necessarily transcends the pursuit of goals expressed in money terms."... "But as I have shown, the money- oriented activities of society are just as part of its activities."

Again, I point out that the problem for economists is due to their on-purpose divorcing their subject matter from the entirety of real world activity, reducing it to study of means rather than ends and thereby forcing themselves to consider such issues as the role of money in a false context.

As Frankel writes, "A monetary economy depends on a vast number of circumstances arising out of the history, mores, beliefs and political and economic experience of society as a whole. It cannot be separated from them. That is why a dependable and free monetary order is a relatively rare phenomenon in the history of nations."


Chapter VI - Freedom and Monetary Order

In this chapter we find the essence of Dr. Frankel's opposition to the development of the money system he saw all around him.

"Contrasting Philosophies"

If, one wished to characterize the present monetary situation of the free world in one word, that word would be 'mistrust'. .. "Not one country now enjoys the confidence which the money of the main European countries commanded before the First World War." .. "It is my contention that the current world monetary mistrust is due not only to an ambivalent attitude to money but reflects also a deliberate attack on the monetary economy." .. "It arises out of the conflict between money as a tool of state action and money as a symbol of social trust. .. "The two conceptions are incompatible. I go so far as to contend that for several decades we have been witnessing an intense re-action against traditional concepts of the monetary order: it is not far removed from a revolt against it."

And we have in Wray's book, Modern Money Theory, the full description of the manner in which governments use their control of the money supply for political objectives - ends, to which economies and their money are subordinated. And the author treats this not only as a given reality but also justifies its objectives. He dismisses the entire philosophy that Frankel deems not only fundamental, but also critical, to the functioning of the economy based on trust. Wray simply ignores the social and moral basis of money,

Geoffrey Ingham traces the controversy over the nature of money back to the Methodenstreit- the wider conflict between economists of the German Historical and Austrian 'Schools' over the proper methods to be used in the study of economics. But he accepts Wray's explanation of how the government creates money now. And he also focuses on the role of Keynes in developing the modern theory of money.

Frankel describes the differences between the conceptions of Simmel and Keynes. He writes that both were pessimistic but for different reasons and with different results. Simmel 'was pessimistic because he saw an inherent tendency for the progressive development of an advanced money economy to lead to its own destruction." .. Simmel's "doubts can be summarized in two questions - 'Weather people would continue to accept the increasingly abstract ways of thinking involved in the growing complexity of monetary relations' - and "weather the abstractions, in which monetary relations are necessarily increasingly expressed, would not give rise to serious misconceptions concerning the unlimited power of money itself and lead to the ultimate destruction of the free monetary order." ..."These doubts are the obverse and reverse of the same coin."... They characterize the feeling of helplessness of the individual over against what appear to him as the inscrutable powers of money. ... but also "They express the feeling that the mere possession of money confers on the owner infinite, god-like power itself."

Further, he continues, "The ever-increasing demand for direct government action to replace the market economy illustrates the over-estimation both of the power of abstract reason (as public 'wisdom') and of the power of abstract money. It rests on the belief that both can bring about the achievement of any and every set of goals." This is exactly the essence of Wray's conception described as a given in in his Modern Money Theory.

"Reason and Money"

Frankel continues, "In the over-estimation of the powers both of reason and of money the error is always the same. It consists in over-looking that in practical affairs both reason and money, considered in the abstract, are only like rules of formal behavior." This, he believes, is why rulers with political power seek to monopolize money.

"The Monetary order as Tool or Rule"

He writes, "The basic difference between the two philosophies of money which I have been considering is that the one endeavors to incorporate the view that the monetary system should be regarded as a means for the achievement of specific and immediate goals of public policy, while the other regards this view as incompatible with a monetary order"

The former is the conception that Wray and other materialist economists want the public to believe is simply reality. "The rightness of an act is fixed by the utility of its consequences." And only the intelligentsia empowered by being the government is capable of determining the 'rightness' and 'utility' of public policy.

"My Fellow Americans"

This section is a quotation and summary of a satirical essay by Art Buchwald in which the humorist pretends to publish a 'speech' by President Nixon justifying his ending the dollar link to gold and to creating wage and price controls to combat inflation. As Dr. Frankel notes, "The element of the absurd in this parody consists first in blaming the problems on the public rather than government itself." And second is the idea that the relationship between money and assets can restored by simple government action. Frankel writes, "But, of course, that was the exact opposite of the truth. The people's belief in money, which they could trust, had just been shattered."
And it is still shattered. Which is the point of Wray's and similar economists' (such as in the FED) creation of the theory that claims that government creation and control of money is simply normal reality. But time has moved on and we now live in a reality far changed from even that in which Frankel was already prophesying disaster.

"Uncertainties of the People"

Dr. Frankel explains, "The confusion in current monetary debates frequently arises from regarding money in philosophical abstract terms as if it could be considered as being apart from the complex, many-sided social and economic factors in which in reality it is embedded." ... "It is, therefore, not surprising that monetary manipulation intended to reduce uncertainty has, by destroying faith in the monetary order, actually increased it. A monetary policy which is directed to shifting goals - as, for example, full employment, economic growth, economic equality or the attempt to satisfy conflicting demands of capital and labour - cannot but vary with the goals adopted. It is significant that the inflation which has resulted from attempts to meet these conflicting demands has even been regarded by some as providing an escape valve from the excess claims of competing income groups which will keep their income conflicts from directly destroying the capitalist free-enterprise system"

This was written at the height of the inflationary spiral set off in the 1970s by the LBJ and Nixon policy agenda of a 'welfare state' in action. Now in the face of world-wide deflation the monetary policy agenda being enacted is to create 'a little' inflation. Again, it is precisely these very goals for government monetary policy that Wray explicitly advocates and claims can be achieved by the monetary policies he advocates while cloaking them in an abstract theory he claims is simply what is reality.

Professor Frankel describes his current situation, while the opposite conditions now apply, but the same type of monetary policies (intervention and manipulation) continue.

"The growing chaos in monetary policy at home is paralleled abroad. Never before has so much public ink been split to proclaim the need for a new international monetary order and machinery to ensure better national policies. But how this is to be achieved, and to what purpose, has not been made apparent.... Since no goals can be agreed on to please all nations, the trustworthiness of money is likely to be greater abroad than at home."

Well, now it is the opposite as far as 'trustworthiness' goes but not in the amount of 'ink' being split, that has greatly increased.

Dr. Frankel then hits another home run. "It is hardly necessary to remind the reader that one of the prime causes of inflation has always been war and the preparation for it or the attempt by one nation to appease another by monetary gifts and transfers."

But in the 21st century even war has not generated enough inflation to offset the impact of the causes for deflation. Nevertheless the public has still been induced by fear into the panicked buying of gold that Dr. Frankel notes had begun in the 1970's.

He describes the situation thusly, "To them, (public) the world of money often appears to resemble a nightmare; in it representatives of many nations are seated around a table. They are playing a game which only they can comprehend. The essence of it appears to be that each player has the right to pay his losses in tokens which he prints as he likes and to receive his winnings from others in tokens which they have printed as they like." He expands on this idea.

The even more greatly expanded situation today is described by such authors as James Rickards and again, Martin Katusa, Kwasi Kwarteng, and many others.

"An Intellectual Contest?"

"The language of monetary policy today makes it appear as if nations were engaged in an intellectual contest. Each is imagined to be assessing the costs and beliefs of altering its domestic monetary policies to outwit the others."

Well, the above mentioned authors and many others today claim this is no 'intellectual contest' but a fundamental war of all against all in the real, financial world.

Dr. Frankel sums his view, "The debate is basically not about inflation or deflation, fixed or flexible exchange rates, gold or paper standards and so forth, it is about the kind of society in which money is to operate."

"Public Debts"

"From whatever angle we approach the problem, we are always brought back to the question of what society really wants the role of money to be and to the schismatic conflicts concerning it". .. "Perhaps nothing is more revealing of them than the new view of public debts and the diminished interest in money's role as a standard of deferred payments or standard of value. I believe that it is implicit also in money's function as a standard of deferred payments. Fifty years ago it was still considered of prime importance for the savings and investments on which the highly developed monetary economies of the world were built. It is no longer so considered." He elaborates on the developing situation and its causes and results. A major change has been the reversed position of creditors and debtors, both domestically in countries and in their international relations.

"The Moral Issue"

"The causes and consequences of these changes in the debt structure are complex. It is the belief that it does not really matter who creates debt as long as it is created; and that the government can always be relied upon to do so. Moreover it can always 'repay' it by increasing the money supply. According to this view the creation of public debt does not involve a moral issue in relation to the purposes for which it is created, the methods by which it is repaid or the rights and legitimate expectations of individuals whom it may affect."

This is exactly the position that Wray and other economists hold. "Such a view is untenable in a free society. It rests on the mistaken idea that there can exist side by side in it two principles governing the making and keeping of promises". The private sector must conform while the public sector does not. "In this book I have rejected the nominalist conception of public monetary obligations according to which they can be abrogated at the dictates of convenience and expediency".

"The Civil Condition"

In this final section Dr. Frankel discusses the impact of nominalist monetary policy on society in general -in civil affairs. "What I am concerned to emphasize is that any free monetary order is a way of civic life." ... "Perhaps this final negation of the free monetary order may serve best to illustrate what it really is: a condition of civility, a code of civil monetary behviour, and idea - the pursuit of trust."


Appendix - Bibliographical Note on Georg Simmel


Return to Xenophon.