Subtitle: What Taylor Swift, Uber, and Robots Tell Us About Money,
Credit, and Why We Should Abolish America's Central Bank, Encounter Books, NY.,
2016, 202 pgs, index, notes.
This book is one of the most frustrating I have read recently. I cannot
recommend it unless the reader already has a firm understanding of the history
of money - that is currency and credit. The author makes many excellent points,
but his theory about the nature of money, currency and credit is totally
mistaken. I devote much time and space here to commentary because Mr. Tamny's
valid theories are so important and should not be discounted just because they
appear in a sea of misunderstanding about other topics. Since the author is an
editor at Forbes and the book was recommended in Forbes, it
likely will gain a significant readership, as it should, all the more reason to
separate valid theories from misunderstanding. Seems like Mr. Tamny does not
read his boss's comments in Forbes, such as on page 14 of the August 23 issue -
"the proportion of bonds in the U.S. economy's total credit has surged
from 39% a decade ago to 53% today".
He is an ideologically motivated crusader set on abolishing the Federal Reserve
as part of a larger goal of greatly reducing the size and power of government.
(Reducing government is admirable; but not tn the FED. The book is 100% focused
on the size and role of government and on the FED as the surrogate of the
Treasury as financier of government and therefore an 100% attack on the
theories that try to justify these. I 100% agree with the goal or reducing
government and especially on disputing the establishment theories. But his many
alternate theories and attacks are only about 10% correct but about 90% worse
that what he is attacking). He devotes his attention to what he considers the
role of 'credit' in the government power he seeks to curtail, but in this he is
mistaken. For a real Description fnf explaination of the problems created by
the FED and why it should be changed read Danielle Booth's insider report FED UP.
But he does not understand the many roles of the FED nor of banking systems in
general. More basically, he apparently does not understand the nature of money
or how it is created in the modern economy. He makes many self-justified
assertions, some true and some false, without real proof. He brings in
tangential issues and frequently mixes two very different definitions of the
term 'credit'. As a financial term 'credit' is an asset structured as the
counterpart to 'debt' which is the liability in the pair created as a central
part of a financial transaction. But also, throughout history, entire systems
for exchange of assets and keeping track of values have been based on 'credit'
accounting. As a minimum he and the readers here need to study
Fragile by Design, Modern Money Theory, and
The New Lombard Street, and
The Nature of Money.
Arnold Kling writes that, "Money is one form
of financial intermediation that enables people to trade across time,"
Exactly what 'credit' enables. Credit, then becomes a significant (and at times
major) part of the money supply. A delayed payment in an exchange may be
facilitated by the seller extending 'credit' in exchange for an acknowledgment
of a 'debt' requiring a later payment. Or the reverse may occur when an owner
of an asset deposits it with a repository such as a temple and receives a
'credit' on account.
But as a term in common speech, which Mr. Tamny uses, 'credit' is an evaluation
of an individual's worth, based on honor, reliability, character, integrity or
quality - as in the common phrase, "he is a credit to the country'. or 'I
give him credit for managing to climb Mt. Everest'. In this sense, 'credit'
means worthy of trust., which of course is also the fundamental requirement for
the existence of money. His tenuous link here is that, indeed, monetary credit
in form of a loan may be granted in part on the basis of the borrower's
personal credit used in the other sense. But credit is created not only in the
course of generating a loan it also my be created by deposit of an asset. He
also misunderstands the role of interest rates and of 'fractional banking'.
(see chapters below).
One of the important misunderstandings in the public mind is the continual
discussion of 'debt' by all sides in political arguments when they should be
thinking of 'credit'. But here Mr. Tamny continually agitates about 'credit'
without ever mentioning 'debt' . The term does not even appear in his index.
But the really unfortunate result of Mr. Tamny's effort focused on the FED is
that he missed the real target. It is not only the FED but the entire financial
industry that needs massive reform. Among many others, Rana Foroohar captures
the real problem in her book., Makers and
Takers. For a much wider education into what the real world is about
Mr. Tamny should study Dr. Deirdre McCloskey's three volumes on the
The references listed below contain ideas about credit, money, debt, or
currency and related topics.
Readers can also find another list of references with a discussion of the
broader subject of the creation of the modern world at
I recommend also that Mr. Tamny study chapters XXXI, XIX, and XX in Human
In the meantime here is a quotation from Dr. McCloskey's excellent book Bourgeois Equality. Here is another
terrific insight. "Humans have always thought in terms of money. There was
no such thing as 'monetization' another of the myths of pioneering German
scholars inspired by Romance, because societies always have money, whether or
not they have coinage." For more explicit discussion of the role of money
and credit Mr. Tamny needs to study Ingham and
Forward: by Rob Arnott - Naturally, this is an effort to support Mr.
Tamny's views and as such contains a summary of some main ideas in the book.
Mr. Arnott is right to state outright that "John Tamny makes many
controversial and provacative claims that run contrary to the prevailing views
of the academic economics community and of the policy elite."
But he misunderstands the full situation by limiting his comment to that
objection will come only from those favoring the status quo. There may be even
more objections from those who are as strongly opposed to the status quo as is
He is also incorrect in writing: "There are no polemics here." The
entire tone of the book is polemical. The author repeats his application of his
theories repeatedly with use of verbal bludgeons. Mr. Arnott repeats Tamny's
concept of credit. "Tamny points out that credit is not just dollars and
cents; it is access to real resources." Of course it is - that is what
makes it a major component of money - that is dollars and cents - which Tamny
denies. But it is much more - it is access to the creation of future (currently
nonexistent) real resources. And it can be a pure book keeping exercise used in
tracking the ownership of real resources.
Mr. Arnott points also to some of Tamny's correct assertions such as the many
failures of the FED. But then writes: " Credit has its price, just like
gasoline," Of course true, but what is that price? He does not say - but
it is interest. He repeats: 'Tamny defines credit as access to real resources.
He succinctly points out that the federal government has no credit of its own:
rather, the fed is empowered to redirect credit -that is extracted from the
private economy, through its ability to tax its citizens - namely, our
This is so convoluted and mistaken that it is difficult to explain briefly.
Actually all governments create credit - but so do banks and merchants and
others. It is not 'extracted' from the private economy but added to it. It is
not ONLY 'access to real resources', as I note above. Entire economies, entire
civilizations, conducted their economic activities on the basis of credit for
centuries before metallic currency was invented. And societies have based
economic activity on credit ever since. (Read Graeber)
But then we read, "When the Fed seeks to stimulate the economy, by way of
monetary policy, it renders the cost of carrying a national debt artificially
low." Precisely right and important to point out. However, the purpose may
be MORE to make carrying the national debt lower rather than to stimulating the
economy. It is indeed, as both Arnott and Tamny stress, 'an enabler of bad
behavior' and worse.
But, again, we read: "The government can't spend without taking resources
from the private economy first." Yes it can, and does, when it creates
credit out of nothing. Doing this neither adds to nor takes out resources, but
manipulates and redistributes resources (wealth). That result is what Tamny
should be stressing. Most of the many more assessments that Arnott ascribes to
Tamny are not only correct but should be the basis for action.
In these 4 1/2 pages the author summarizes the main fallacies that form his
theories through the rest of the book and which he repeats endlessly. From this
writing it appears he does not understand the source, nature or purposes of
money. He believes money is something (undefined) separate from credit. He also
does not understand the nature and purpose of interest rates.
Unfortunate, because he does understand so much else that is critical and not
understood by the public. For instance that money is not wealth.
He writes here and again: "Stated simply, credit is not money."
And, "Credit equals resource access".
And, "The interest rate is what those who have access to the economy's
resources charge others for the privilege."
And, "When people borrow, they're not borrowing dollars, they're borrowing
the real economic resources that dollars can be exchanged for."
And, the "sole purpose" of money is "as a measure of
And, "neither government nor central banks can expand the amount of credit
available in the economy."
And, "Credit is what individuals produce in the real economy when they get
up each day..."
And, "Easy credit is the clear result of personal and economic
And, "When we define 'credit' as the real resources produced by the
individuals who constitute the economy, we see that abundant credit, like
economics and economic growth, is also a simple concept."
Well, I have to admit that when one defines concepts any way one wants to one
can then build a theoretical fantasy on that. The above statements are
partially true but misconstrue the issue. But for a starter, over 95% of the US
money supply IS credit.
Moreover, he continues; to understand "why the Fed can't create credit,
readers must consider government spending. Government can spend only what it
extracts from the real economy first, and spending without market discipline,
as a rule, shrinks the total amount of economic resources available".
And further, "readers should view credit in the same way. Since the Fed
has no credit to offer other than what it extracts from the real economy first,
it can only shrink it insofar as it exerts its power to increase access to it.
And much more.
We have to presume, I believe, that Mr. Tamny believes these same concepts
about all the other central banks and the IMF which are so busy creating
credit: Not to mention the many non-bank banks ( the shadow banks) that create
He concludes that the purpose of the book is not to explain the real details of
money and banking or credit. But, instead it is "to cover the all
important subject of credit, along with the role of banking and the Fed when it
comes to accessing it." And this enlightened explanation will make the
reader's understanding easy. So the author wants to 'cover' the subject without
'explaining to details;.
Lets just insist that money IS credit and credit IS money they are the same
thing. This is simply what they are. The physical or theoretical form in which
the two versions of the same thing are expressed, be they gold coin, Talley
sticks, ledger entries or cigarettes makes no difference.
Part One - Credit
Chapter One - The Rate Setters and the Fed Should Attend More Taylor
A clever explanation of why private firms that have limited resources but
potentially very large demand for them can and should set prices according to
the basic laws of supply and demand. In the described case prices are set
higher to increase supply which is created by its price. But it can also be
that prices are set high to reduce demand. For instance variable prices for
vehicle access to city centers can be set higher to reduce demand. Governments
may set interest rates higher to reduce demand for consumption and set them
lower to increase demand for consumption. That is the Keynesian theory that
governments follow today, since they want to reduce the desire for saving and
increase it for consumption. The author should attack Keynesian theory head on.
It is unfortunate that the author's misunderstanding of interest rates and
variable pricing obscures his valid purpose which is to advocate reduction in
the size and power of government and the role of the Fed as major financier of
government spending. He presents many valid examples and arguments including in
this chapter. But the comparison between Uber demand pricing and government's
fixing of interest rates is not one of them.
Lets see. The 'law of supply and demand' - the balance between these when
supply is limited and demand is not, or at least greater, is achieved by the
price system, when prices equal what the holders of supply want equals the
prices of those with demand will accept. So Uber in his example faces a
situation in which demand is great and is much greater than the supply of
transport by other means. But Uber has no supply, itself, it must buy supply -
that is participation by independent drivers. Uber must set a price high enough
to interest drivers yet not higher than those wanting transportation will
accept. Uber achieves its result in a free market.
Now Tamny shifts to the question of interest rates and the efforts of
governments to set them. He claims that government does the opposite when it
sets inerest rates 'easy' that is low. Again we have a situation of supply and
demand. But what is being demanded and supplied? Not credit itself, as he
believes, but consumption. The government may want to increase consumption
(that is spending by individuals) and reduce saving by the same. For this
purpose it can set the interest rates people can obtain on their savings and
also for their borrowing - That is set interest rates low to increase
consumption by reducing savings. Indeed this is the opposite from what Uber
must do because the objective is the opposite. This, it hopes, will induce more
consumption and less saving. But it can fail when people don't believe they
need more consumption now but do believe they need more saving now to enable
consumption later. Whether this is 'good' or 'bad' for the society and its
economy is a different issue.
Let's see about 'interest rates'. Contrary to Mr. Tamny's concept, the natural
rate of interest that would occur in a free market economy is set by the time
value of credit=money. All market transactions are exchanges of assets. In
order to obtain (buy) a desired asset one must give up (sell) a less desired
asset. The natural desire of people is to obtain the desired asset - that is do
the exchange - NOW - rather than next year - or to NOT DO it NOW if the value
involved will be greater next year. The price of delay or of not delaying is
the natural rate of interest. If both parties, who have assets to trade
(including money), are willing, they have considered the relative value of both
sides of the trade now in relation to what they might be next year (or later)
and what they will be giving up in value by not waiting. But if one party has
no asset NOW, it relies on the other party to give it credit - that is agree to
payment next year (or later) which establishes a debt relationship. There is a
price the seller will demand and the buyer will accept to accomplish the trade
now, based on their assessments of their time value for the credit=debt, namely
the interest rate agreed to. The buyer agrees to pay interest in order to have
the asset NOW, and the seller agrees to accept this interest in order to part
with the asset NOW rather than later. But in practice the credit=debt created
by the transaction is supplied by and passed off to third parties - banks which
in tern obtain this on the open market. Or interest may be the result of an
opposite exchange. The person who now owns the asset may exchange it NOW rather
than keeping it till later and expect interest on the value of the asset until
it is redeemed later. The key concept is that TIME has or should have value.
The role of government in establishing interest rates it will offer and demand
on the market is to manipulate the situation (as Mr. Tamny does understand).
But the government only sets a specific and narrow type of interest rate. When
the government wants to increase current exchanges (consumption) it will
subsidize these by setting the interest rates available to the banks low, below
its natural rate (not high). - what the seller can obtain by not selling and
what the buyer must pay to buy now. When the government thinks that too much
exchanging is going on that it will create too much inflation it will set the
market interest rate higher, above its natural rate.
Chapter Two - Jim Harbaugh, Urban Meyer, and Pete Carroll Would Never
Need an Easy Fed
A somewhat fascinating excursion into the arcane world of professional football
for fans, but not relevant to the real subject matter of this book. The author
again mixes the financial concept of 'credit' with the ethical concept of a
person being a 'credit' due to his character. Of course these gentlemen don't
'need' the FED to certify to their being worthy individuals, nor is the FED in
the business of doing so. Note also that even when it comes to evaluating their
'credit' in terms of financial reliability to obtain such 'credit' it is given
by private outfits like the FICO score, not the FED. Thus the interest rates
related to an exchange of assets between private parties depends on the
'credit' meaning trustworthiness of the party paying it, not the FED interbank
rate. There is the real term 'trust'. Trust is the critical attribute on which
societies function. And trust flows from adherence to the 7 virtues - read
Chapter Three - In Hollywood, The traffic Lights Are Almost Always Red
Yes, risky endeavors generally require higher rates of expected return versus
rate of potential failure. The risk/reward ratio for producing a single movie
is greater than the risk/reward ratio for trying to create many world-changing
new technologies because for movies it rests on a single large sum but for
Silicon Valley it rests on many smaller sums. Of course government intervention
in the form of tax offsets or subsidies will shift these ratios.
Again, in the author's discussion there is a mix of two quite different
concepts about 'credit'. The interest rate set by the FED for the loans
(credit) that banks pay each other is one important factor in the economy. But
the interest rate that movie producers must pay to receive funds on 'credit'
from investors including banks but mostly individuals depends on the assessment
of relative risk and potential reward they have in relation to the potential
profit of the movie. Mr. Tamny well understands this but still wants to mix
these facts in his diatribe against the FED.
Chapter Four - In Silicon Valley Your Failures Are Your Credit
Again Mr. Tamny mixes different situations involving different roles of
'credit'. For one thing failures there are more easily written off. For
another, the investors are largely 'playing' with other people's money that is
credit money not currency. For another the adage 'never ventured never gained'
applies. And in a fundamentally iterative development process failures are
learning experiences that can point the way to future successes. Basically, the
risk/reward ratio on innovative high technical investments is not as high as in
movie production - yes, the risk is greater, but the reward is much greater
still for individual investments. Investors in movie production in general sink
larger sums into fewer choices. The 'angels' and venture capitalists (and hedge
funds) that invest in Silicon Valley technology place smaller sums into many
more individual choices.
Chapter Five - Did You Hear the One about Donald Trump Walking into a
No, I did not. A clever title, but only tangentially related to the chapter's
main subject, which is the so-called 'junk bonds' and Michael Milliken. The
author's discussion is correct. But he does not mention the results for
Milliken or Drexel.
Among Mr. Tamny's correct comments is "the Fed can flood banks with
dollars..." Actually the Fed is 'flooding' the banks with credit, not
currency, it seems to me that the 'dollars' he mentions are indeed money, but
Tamny repeatedly asserts that credit is not money. (Or is it that money is not
credit?) Further on he correctly notes that access to this credit by
individuals and companies is not equal. Of course it is not, it depends on the
assessment by the loaner of the risk involved. But he mistakenly contrasts this
with the FED's uniform established interest rate (the FED Funds rate). He
repeats the idea, "What's important here is that while the Fed seeks to
influence credit by exchanging dollars for bonds held by banks, which can then
lend the dollars, Milliken was sourcing credit for companies that banks
traditionally passed over." Of course he was, but note that again Tamny
equates credit with dollars, that is, that credit is equivalent to currency
(money), which he continues to deny. In the above quotation from Tamny,
'exchanging dollars for bonds' the 'dollars' are not currency but credit and
the 'dollars' the banks then loan are not currency but credit.
Money is an abstract concept that is represented in two forms, currency
(dollars, Euros, cacao beans) and credit (also given in dollars, Euros and the
like plus accounts in ledger books and sometimes tally sticks.) But in essence
it is credit.
Lets be specific - currently the U.S. money supply consists of about 860
billion dollars in issued currency and over 19 Thousand billion dollars in
government credit - plus privately generated credit. But that 860 billion in
notational currency is also credit.
Chapter Six - Ben Bernanke's Crony Credit
Now we reach one of the best chapters, despite Tamny's mix of the two separate
concepts denoted by the term 'credit'. His excellent point is his contrast
between Dr. Bernanke as chairman of the FED and as private citizen giving
public lectures. As a FED director Bernanke failed, along with the FED itself,
in all its efforts at predictions of financial and economic future trends. Yet,
subsequently, as highly paid lecturer Bernanke is in high demand. Why? This is
not because he knows more now about predicting the future of the real economy,
but because he knows (or can be thought to know) the future trends in what the
FED is thinking and will do. And, indeed, what the FED will do is very
significant information for investors (whether it is right or wrong). Along the
way, Tamny also mentions the greater success at predictions of markets by
independent citizens such as John Paulson.
Chapter Seven - What the Supply Siders and Hilary Clinton Sadly have in
Score a plus for the preceding chapter and negative for this one. The author
starts out again with his vendetta. "At this point, readers hopefully have
a somewhat new or modified view about what credit is. It bears repeating that
credit is not "money' per se. If it were, the Federal Reserve and other
central banks could simply decree it abundant by virtue of creating lots of
dollars, euros, yen, yuan, ringgits, and so on. Credit is what individuals
create in the real economy."
Well, banks (central or others) HAVE been creating lots of dollars, et. cetra
for centuries, but not unlimited amounts "abundant' for good reason. The
initial Pilgrims and Puritans were financed for their voyage with credit.
Hamilton's whole policy purpose was to establish the new U.S. with good credit
based on a national debt similar to Great Britain. Prior to the U.S. Civil War
the 'wildcat' banks created most of the money (through credit=debt) that
financed the expansion of American economy. The Bank of England financed (via
credit money) the British to fight the Napoleonic Wars. And centuries before
that the Italian bankers created the credit-money that financed even English
kings. No, credit (in one of its forms) is what individuals use TO CREATE the
real economy. Mr. Tamny has it backwards. The reason the creation is not
'abundant' is because the use of money (of any sort) depends on trust and if
the public decides to with hold trust then money collapses. For the essential
political basis for banking systems read Calormiris
But after this Mr. Tamny launches into another diatribe, based on another
misunderstanding. This is his polemical attack on 'supply siders' over the
discussion of the Laffer curve and federal tax reductions. The Reagan
administration launched on a policy of tax reduction. The progressives
(Democrats) shouted that this would reduce the total Federal income thus
generating a greater budget deficit. The 'supply-siders' replied that 'no it
would not, a tax reduction would increase actual government income'. But the
'supply siders' DID NOT write that they Wanted an increase in government
spending. The result was that the 'supply siders' were right, in that
government revenue DID increase. They wanted and expected that President Reagan
would be able to use this increase to reduce the existing government debt; Just
as President Jackson had virtually eliminated government debt. But what
actually happened is that the progressives not only spent ALL that increased
revenue but spent even more, thereby increasing the total debt.
So, with several asides and complex meandering Tamny denounces the
'supply-siders' for showing that the decreased taxes would generate increased
revenue. But, if they had not done that, they would never have accomplished a
tax cut. The problem he should denounce is the spending of the revenue rather
than reducing the debt. He goes on at length about this, finally ending with:
"It's time to cut taxes to a rate that actually pushes revenues well below
the Laffer curve" meaning below expenditures thus increasing the debt.
Chapter Eight - Why "Senator Warren Buffet" Would Be a Credit
Back to a plus chapter. Between other tangential remarks, Tamny hits a home run
here. He presents a 'thought piece' considering what the so-called investment
genius, Warren Buffet, achieves an increasing wealth as a private investor
allocating capital and what the same individual would and could achieve if he
were a U.S. Senator (read any government official). He correctly notes that
Buffet types don't become senators for valid reasons, but that is beside the
point. His point is that even if an equivalent financial genius were to become
a congressperson, he could not achieve the same results because of the very
nature of government itself as in institution. Bingo. And he well explains why.
We can overlook that Tamny does not explain on the way that Buffett has
generated so much wealth by manipulating tax rates, using other people's money,
and using access to government favoritism.
Chapter Nine - The Credit Implications of the Fracking Boom
Mr. Tamny does a good job with his advocacy of 'free trade'. But he again goes
off track with its connection to 'credit'. The main topic is the relation of
credit and the fracking industry.
The entrepreneurs who developed and used the fracking methods to produce oil
and gas needed money (that is credit) to buy equipment, hire workers, and above
all lease suitable land before someone else did. The risk/reward seemed low, so
banks and investors supplied large quantities of credit. In the early 19th
century that would be in the form of bank notes, of which there were hundreds
of varieties in circulation then. But now banks are prohibited from printing
notes. So credit is created by a simple electronic account.
But Tamny misunderstands. He writes, "Instead, the nature of my argument
about why the fracking boom has been anti-credit is monetary. Specifically,
it's about the value of the dollar. For some simple background, we turn to Adam
Smith, who made the critical observation in The Wealth of Nations: 'The sole
use of money is to circulate consumable goods.'
But Adam Smith was thinking of only one of several uses of money. But note also
that here Tamny is equating credit and money, which elsewhere he denies. Money
is also used as a 'store of value' and as a 'measure of account'. In which both
uses it does not circulate.
While credit is essential for business to fund their expenses in producing new
products during the time required before the products become available for
Tamny continues, 'But money is not wealth. Money is a measure of wealth'.
Wonderful, so right. This point is vital and one of those that Mr. Tamny should
proclaim loudly, without confusing issues. But he immediately digresses into
the issue of the use of gold.
And then he double digresses into the 'value' of the dollar and price of oil on
world markets. Lets skip the mistaken ideas about the role and 'value' of
dollar for now.
He does correctly write, 'The dollar is a measure, like a ruler: when it
shrinks, the price of oil rises, and when it expands, the price of oil
declines." Right and again, should be proclaimed. But what does he mean by
'shrinks'? Well, that is not clear. But what is the actual case is 'shrinks' or
'expands' means only relatively in supply with respect to what is being
measured. Plus of course, a real ruler does not expand or contract. Again, note
that the 'measurement' is of one continually changing assets with another
continually changing 'ruler'.
If the length of the inch decreases, there are more of them against the brick
so it's length appears to increase. But if the size of the brick increases
there will also be more inches compared against it, so its length also appears
to increase if the number of inches increases.
He continues, "A rising dollar value has reduced the dollar cost of
oil." But it is the huge increase in the supply of oil versus current
demand that the fracking industry created that has its impact reducing the cost
of oil. It is that there exists on the market relatively MORE oil related to
demand for oil that pushes its 'value' down. But 'value' is itself
misunderstood in this discussion. And the value of the dollar in terms of gold
has also decreased, not increased. Returning to the fracking industry, at the
time the entrepreneurs wanted to invest and needed a large supply of money -
for which they obtained credit, the credit was cheap in relation to land, labor
and equipment and especially the expected value of the new oil supply, so they
were able to obtain much credit in exchange for debt (which is the promise to
exchange back into assets - the future oil). Apparently no one thought about
the future impact of a huge increase in the supply of oil on its price in
relation to credit=money. Mr. Tamny understands and explains this correctly. He
correctly notes that. "the resources to extract what was only expensive
insofar as the dollar was cheap." But while, as he notes, oil was already
in sufficient supply, he does not include that not only was the resources cheap
in terms of the dollar, but also with the massive increase in supply it would
get even cheaper, especially in terms of the increase in number of future
dollars needed to repay due to interest costs.
But his theory, repeated at the conclusion is that this episode was a 'credit
destroyer'. Rather, I believe it was a 'credit misallocation' from a purely
economics viewpoint. The issue of whether or not the U.S. should be a world
leader in oil production and have less dependence on importing oil from foreign
sources is a political issue .
Chapter Ten - Conclusion: Sorry Keynesians and Supply Siders,
Government Is Always a Credit Shrinking Tax
Another mixed bag. The author is correct about Keynes and Keynesianism, but
might fault it more.
But again, he mixes concepts about money and credit. What is the reader to make
of the following?
"For those who still believe that credit is money as opposed to real
resources - that people work for dollars, yen, and euros, as opposed to what
all three can command - they need only consider the former Soviet Union. It
will relieve them of a false understanding of money and credit. Credit is
always and everywhere real resources. When we borrow or work for dollars, it's
resources ... that we're seeking."
Now here in one paragraph he writes that credit is not money, but then equates
the two in relation to 'real resources.'
But he is correct about the fact that money (whether in the form of currency or
credit) is only a surrogate for real resources in the context of buying and
selling - that is exchange of real assets. But this use of money is but one of
its principle uses - it can also be a measure of account in which no money
(either currency or credit) changes hands - and it can be a 'store of value'
(albeit not a good one because 'value' cannot be stored).
So it is true that - we work for real resources and money (in both currency and
credit forms) in this transaction (exchange of our labor asset for another
asset) is only an intermediate between real resources - Neither currency nor
credit is wealth.
He is wrong to write that In the U.S. S. R 'minimal wealth was being created' -
lots of wealth was created but it was all owned by the state.
He is also wrong to write that "Governments have no resources other than
what they tax or borrow from the private economy,"
For instance, in both Tsarist Russia and the Soviet Union the government owned
ALL the resources - everyone worked for the government in one way or another
and all wealth created was also owned by the government. And those are not the
only examples. In most European countries (from medieval times) the state owns
mineral rights to underground assets as well as buried treasure, private owners
only own the surface. Even in the United States, the colonies when they became
states, allowed the Federal government to own all the yet territorial land and
to require individuals to pay to buy it throughout the 19th century. The U.S.
government still 'owns' many resources and demands payment for them.
Unfortunately Mr. Tamny's examples are not those that would achieve his
worthwhile goal of showing the falsity of Keynesian economics. But he
continues, "The old Soviet Union was evidence of Keynesianism in the
extreme." Right on. But further, "The result was a society almost
totally bereft of credit." NO no. The daily transactions - exchange of
assets - between 'businesses' all of course government departments, were based
on credit shown in account books. Unfortunately, in his mixed up descriptions
the 'Austrian School' of economists that he apparently likes, would simply
'scratch their heads'. He then switched to another attack on 'supply side'
supporters, even though they are the principal opponents of Keynes since the
time of von Mises and Hayek. They did not 'cheer' government revenue nor did
they fail to oppose big government. Actually they hoped for and tried to
achieve reduction in government by using revenue to reduce the debt. It is not
their fault, then or now, that progressives manage to get elected to increase
government expenditures, debt, and size.
Another switch to road construction follows. Actually in colonial and immediate
post-colonial times roads were built by private parties or local jurisdictions
- the turn pikes and toll roads. And more and more highways today are being
built by private enterprise. We will see if this reduces 'gridlock'.
Back to the diatribe about credit. But no sense repeating it.
Part Two: Banking
Chapter Eleven - Netjets Doesn't Multiply Airplanes, and Banks Don't
Multiply Money and Credit
The author tries to equate and use Netjets and banks in his confusion about
credit. Businesses like Netjets are not comparable to banks. In fact financial
companies as a whole are placed in a separate industrial category for analysis
and investment because they are much different from other businesses. He
describes (in part) how banks function. He correctly describes the central
concept of banks (fractional banking) - he returns to this later. But he still
misunderstands. He thinks that the banks loan out ' the majority of the
deposits they take in'. How much they 'loan' depends on many economic
variables. But this is his fundamental error. Their 'reserve' requirement is
10% of their deposits meaning they can make loans equal to 90% of the sum
deposits, but they also can create loans on the basis of other sources of
funds. Thus he castigates a real expert of the Austrian school, Murray
Rothbard, when Rothbard writes, "Fractional reserve banks... create money
out of thin air." (Read Rothbard Vol
1- and Rothbard Vol 2.)
The do indeed, that is what they have done since the creation of banks
thousands of years ago. (See Davies)
But our Mr. Tamny does not believe it. He writes, "Underlying Rothbard's
assertion is the fanciful belief that the alleged 'money multiplier' is fact.
It's fiction. Wise minds quickly understand that there's no such thing as a
'money multiplier'. Well first off, the Keynesian concept of 'money multiplier'
has no relation to 'fractional banking." We can ignore the thought that
Murray Rothbard does not have a 'wise mind'.
Mr. Tamny proceeds with a completely misunderstood description of how loaned
money (credit of course) can pass through various hands. Actually and example
of the concept of 'velocity of money' not 'fractional banking'. More
specifically, Mr. Tamny might read Mark Skousen's excellent
The Structure of Production in which he
describes the results of 'fractional banking'. Or Fred Mishkin on banking, or
Felix Martin on Money.
His total misunderstanding is revealed in his conclusion that "$1 million
does not multiply into $10 million, if it changes hands enough times. "
Well the million has been multiplied when the banks create loans (credit,
sorry) of ten million total on the basis of their cumulative deposits.
Again the paragraphs mix the usage of terms 'money' and 'credit' as the are
interchangeable while still denying that 'credit' is one form of 'money'. Next
he remarks that "Well run banks have widespread access to credit, and of
great importance, they NEVER go out of business owning to a lack of
money." Reassure the Greek and Italian banks about this, please.
But I thought he believes credit is not money. But they frequently do, ask the
Pazzi bankers's about this. The bank access to credit depends on trust as of
course does money itself. When trust in money falls, people are afraid to grant
credit, they will not loan to banks, so the liquidity of banks falls. They
still have long-term assets likely in monetary terms greater than their short-
term liabilities (the deposits) but cannot exchange their assets in time to
eliminate the liabilities.
The rest of the chapter elaborates on the misconception about banks. Not
content to disparage Murray Rothbard, Mr. Tamny turns his sights on Ludwig von
Mises over the above concepts while admiring him over his disagreement with
Keynes. He simply writes that. "Yet that's what is so puzzling about the
Austrians when it comes to credit."
Of course he is puzzled since he doesn't understand. He continues along the
same line by criticizing Congressman Ron Paul also for his correct description
of credit. Likewise Eric Margolis. It is sad that Mr. Tamny stands so
vehemently against the world.
Chapter Twelve - Good Businesses Never Run Out of Money, and Neither Do
Well Run Banks
We learn something about Amazon company. The reason is because the author uses
it in his discussion about banks and banking. After much discussion, Mr.
Tamny's conclusion is that the banking system should not have government
mandated reserve requirements nor be insured by the FDIC. Instead the deposits
should be insured by private insurance companies. This is a reasonable
libertarian view that can be argued on its merits. He also disagrees with
re-instituting Glass Steagall but without much evidence. The chapter is worth
considering. But he needs to study Felix Martin
to learn about the relationship between banks and government.
Chapter Thirteen - Do We Even Need Banks?
The author answers this question by a description of the many sources of credit
provided by businesses that are not defined as banks. (Of course he does not
mention that this credit is used in the same way as other forms of money, or
that it itself is money ( we thought he claimed it was not money) nor that it
simultaneously generates debt. No problems here. Interestingly, he does not
mention that for centuries economic activities, exchange of assets, functioned
well with systems in which credit was issued by market participants that were
not banks to facilitate exchange. He gives several specific examples in which
an individual received credit (like on a credit card) and spent it as money.
(But he still denies that credit is money.)
So his point is valid, that we don't 'need' what we call banks today- but as he
then describes, we would create institutions that performed the very same
functions as those we call banks - so call them something else, there is
nothing in a name - but he does not mention that such institutions did exist an
earlier eras. And especially, he does not describe the inherent fragility of
such 'banking' institutions as shown by their record of repeated crises.
Chapter Fourteen - The Housing Boom Was Not a Consequence of "Easy
True, it was a consequence of political objectives of 'progressives' to greatly
expand ownership of homes for favored inerest groups mostly comprised of poor
families who could not afford them. The 'boom' was created by use of a number
of political rules and regulations. But government programs to set 'easy
credit' via interest rates on home mortgages were part of the package. There
are many books that describe what happened, including several listed below. But
this is not Mr. Tamny's purpose.
But for Mr. Tamny this episode is but another in his attack on the FED. Reading
this chapter my mind is reeling around even more than before, as he jumps from
one thought to another and my reaction to sentences as they flow is 'Yes' -
"No' - "Yes' - "No'. What to make of this phrase? We are in a
"Looking Glass" world. He is mixing the political requirment demanded
by government and the response by finanical industry to achieve the demanded
"Some will reply that the Fed can create money out of thin air. While this
is true, the creation of money is in no way the creation of credit. The two are
entirely different. While the Fed's ability to control or direct the supply of
dollars is vastly overstated, the Fed could drop trillions of dollars from the
sky and no new credit would be created."
They are NOT different, he is confused by the belief that 'money' - 'dollars'
are the only currency. But money existed before currencies were invented and
continued to exist when and where currencies did not exist. Currently the
American currency component of the money supply consists of about 860 billion
dollars in currency, but the credit component consists of many trillions of
credit instruments. And these were created by many financial entities but
largely by the FED. Actually there are two kinds of money - sovereign money and
'Money' is an abstract concept that can stand for several functions. Again, it
is generally defined for the following functions -can be a medium of exchange,
or a measure of account, or a means to store 'value'. (Although that last idea
is not exactly true since 'value' cannot be stored.) Different societies give
different names to their money, such as, dollars, euros, yen, yuan. Pieces of
silver or gold, pieces of green paper, debt instruments, notations in an
account book, invoices, tally sticks, commercial paper, and more can all be
defined as money called dollars or Euros, or yuan, and used as such. Their key
property is the trust in their 'value' by all users that enables them to be
exchanged or stored for future exchange. And that trust is established by
governments that issue the edict that this 'credit' may be returned to the
government in payment of taxes. But, again, read Ingham.
The rest of the chapter is a reprise on the same fallacy.
Chapter Fifteen - Conclusion: Why Washington and Wall Street Are Better
Off Living Apart
Now we jump to discussion of high technology, venture funding, companies like
Apple, Amazon, and Microsoft, and executive pay plus the 'Internet boom' itself
and housing and 'junk bonds'. Brady Hoke, Mike Shula, Robert Smith, Japan, and
Jim Harbaugh are cited as well. I am spinning more rapidly. Apparently all
these are related to the author's point that government intervention,
manipulation, and regulation of financial intermediaries are bad because they
actually are based on political favoritism. Of course they are, the structure
of the entire banking system depends on politics - read again
Calormiris ). I can loudly acclaim that idea.
But Washington and Wall Street can't 'live apart' - the government delegated to
the FED, which actually means the Reserve Bank of New York, its Constitutional
authority to create the nation's money supply. And Wall Street depends on
government legal backing for all it does.
Part Three - The FED
Chapter Sixteen - Baltimore and the Money Supply Myth
Unfortunately, we are back again to Mr. Tamny's confusing discussion of money
and credit. Unfortunate because he is so right in his critique of Keynesianism
and monetarism and their theories about money. But he gets the 'supply siders'
into the mix as well. His objections to tariffs, and government interventions
or all sorts are valid and should be acted upon. His thought about changing the
very act of creating money from government to the private sector should be
discussed more fully. There have been many times in history including right now
when money was (and is) created by private sectors. But the ultimate trust in
money rests on the coercive power of the sovereign. In our USA today that
sovereign is the tax payer.
Chapter Seventeen - Quantitative Easing Didn't Stimulate the Economy,
Nor Did It Create a Stock Market Boom
Again, true enough that QE didn't stimulate the economy - because it was not
invested or even spent on anything that could expand the economy. It was spent
on union workers and bank bond holders. Whether it and other government
manipulation created the stock market boom is another issue. Mr. Tamny writes
that 'recessions are a sign of economic health.' And that they are good. I
prefer to believe that it is 'deflations' that are 'good' as they break the
waves of increasing prices. They are well described by David Hackett Fischer in
his excellent economic history, The Great
Wave. The Enlightenment, Renaissance, and Victorian eras were all
deflationary periods during which society advanced without the disruptions
created by inflation. But the author still sticks to misunderstanding about
money and credit.
Chapter Eighteen - The Fed Has a Theory, and It Is 100 percent Bogus
Well, indeed, the Fed's theories and the models they create based on theories
are bogus. Clear explanation and widespread publication of this point is one of
the strong points that makes the book important reading, if it can be read
without confusion over money and credit in the bogus theories of this author.
The author rightly faults the FED but largely for the wrong reasons. There are
many other books and articles that show the errors of the FED, and errors of
the entire Keynesian economic theories upon which FED actions are based, but
without the distortions found in this book. Again, read Modern Money Theory, The Nature of Money, and
The New Lombard Street.
Chapter Nineteen - Do We Really Need the Fed?
The obvious answer is 'of course not' since the U.S. achieved remarkable
economic/political expansion for over 100 years without a central bank prior to
1913. (Except for the two brief appearance of the two U.S. Banks.) And there
was no central bank in the world for thousands of years. But that does not mean
the FED does not perform critical actions in today's economy. But here we meet
Taylor Swift again. Mr. Tamny uses her for his example of a person having
'credit' in the sense of being of good character and reliability and 'credit'
in the sense of a monetary asset a bank might provide in exchange for a debt .
So she can walk into a bank and according to Mr. Tamny walk out with an asset
provided by the bank - a line of credit - he does not note, however, that in
the exchange she has agreed to a debt. So what could she do with this bank
credit? Well, spend it, that is exchange it for goods and services, she wants.
So, is it money? Yes, contrary to his concept. Did the bank create it? Yes.
Does her ability to obtain this money depend on the FED? No. Is the interest
rate she will have to pay to obtain this credit (which of course Mr. Tamny
fails to mention) depend on the interest rates the FED sets? Yes and no, and
indirectly - That depends on many things, such as the time set for repayment,
the interest rates the FED does set for inter- bank borrowing and other
factors. Also missing is a discussion about where the bank obtained the money
it loaned to Ms. Swift or did it create this money itself. Of course Mr. Tamny
repeatedly denies this credit even is money, despite his own example, here, of
its use to buy stuff. Does this transaction depend on the existence of the FED?
No, banks and many other creditors were lending money on credit for thousands
of years before the existence of the FED or the USA and charging interest as
well. The whole story is irrelevant to the author's pitch about whether we need
the FED or not. He goes on to point out that the USG can borrow
("sadly" of course) at lower interest rates than Ms., Swift. What is
the point? Naturally people are willing to receive less interest from the
government than from individuals because they believe government is less risky.
And also in reverse, individuals are willing to accept less interest on a
government loan 'bond' (issued by non-risky government of course) than on a
loan to other individuals.
He throws in a quote from the excellent author Henry Hazlitt's book,
Economics in One Lesson in which that author uses the term 'credit' in
both different connotations in one paragraph.
He continues "What a shame this is, (government borrowing). Governments
can spend only what they've taken from people first, and the Fed can't allocate
credit that represents access to real economic resources without extracting
those resources from the U.S. economy first".
Both assertions -are frequent in these chapters and both are false. Since
ancient, preclassical, times governments have been creating money (credit) and
spending it. And 'credit' not only can be used to access real (that is
existing) economic resources, but more importantly can be used in the process
of creating NEW, future resources. Actually Mr. Tamny mentions this in his
example of 'Silicon Valley' activities.
Then the author switches to the issue of the FED function of protecting banks.
Again, a switch to being correct. But he quickly shifts again to the subject of
bank solvency itself. Here he again is mistaken, hundreds of well-run banks
have failed during past centuries as well as recently due to various external
factors or to the time sequence inherent in their 'credit' - 'debt' structure.
A 'well-run' bank can fail due to its borrowers defaulting on their loans. Or
it can fail due to the inherent purpose and structure of banks - namely to
match carefully the time sequence of its short term liabilities and long term
assets. - its 'liquidity'.
Again a switch to the Humphrey-Hawkins act, about which his comment is valid.
Still another switch back to the nature of interest rates, and again mistakes.
He writes, "An interest rate is the price like any other." NO. But
the price of what? He is right about the current fallacy of thinking that the
FED can know what the real interest rate should or would be. As he should know
from reading von Mises, the natural interest rate is the cost the individual
should be willing to receive for deferring his consumption from the present to
stated future periods. Or conversely it is the cost that the person should be
willing to pay extra for the opportunity to have an asset now rather than
waiting for the future.
Natural interest is the time value of money which is a surrogate for the cost
of having a real asset now versus at some future time.
The chapter ends with more repeated exhortations to 'end the Fed'. What needs
to be done is remove the Fed's power to manipulate interest rates - that is set
'monetary policy'. But the FED does perform other useful functions.
Chapter Twenty - End the Fed? For Sure, But Don't Expect Nirvana
Mr. Tamny opens with the description given by the excellent Amity Shlas in
The Forgotten Man of FDR devaluing the dollar in 1933. I give him
'credit' (but not money) for having read so many excellent references. No doubt
FDR did cause a default with serious bad consequences and in many ways did
prolong the Depression. Mr. Tamny then jumps to the Bretton Woods agrement and
Ben Steil's The Battle of Bretton Woods,
another excellent book. He jumps then to Richard Nixon's simply and
unilaterally abandoning the provisions of that accord, which set the value of
the dollar at $35 an ounce of gold (or 1/35th of an ounce). He correctly wants
to point out that the huge depreciation of the dollar since 1913 and even more
since 1971 is not directly the wish of the FED. In this case 'don't blame the
His point then he writes as "that presidents get the dollar they want'.
Not necessarily true indeed. But he does not explain How - by what means? He
then reviews the 'strength' of the dollar during the reigns of presidents since
Nixon. It became 'stronger' or 'weaker' (What does that mean? In relation to
what?) He correctly and importantly repeats that 'Money is just a
measure." But he does not clearly define what 'stronger' or 'weaker'
actually means beyond stating that 'markets never price in the present'. Nor
does he explain how these shifts in the 'strength' of the dollar are
accomplished by the presidents who want them.
Then another shift, to the comment "What needs to be stressed here, as
Popular Economics (his book) does at length, is that the dollar should
be neither strong or weak." It should be unchanging in value. A floating
dollar robs money of its sole purpose as a measure meant to facilitate trade
Here is one of his fundamental misconceptions. As noted in prior chapters. A
'means of exchange' is only one of the fundamental roles of money. But a full
discussion about his mistaken concept requires a discussion of the nature of
money and 'value' itself. It would be 'nice' if the dollar and yen, and pound
sterling and Euro all never changed in 'value' but that would prevent their
governments from exercising political policies.
Then on to the next fundamental misconception. "But lets' not forget what
this book is about : Credit, as readers well know by now, isn't money. If it
were, we'd all have credit in abundance."
Indeed, we well know that he has beaten this horse near dead throughout the
book. But it is still a mistake. As he, himself, has shown, repeatedly, for
instance in discussion of Taylor Swift obtaining credit - credit is money.
Among other functions it serves as the 'means of exchange' he cites as a role
Then another one, "And lest we forget, our federal government has no
resources. Its ability to redistribute credit is solely a function of what it
takes from us first."
Well, true enough some governments have no resources and do take resources from
their people via taxes. Some governments are by their laws the owner of ALL
resources, but we can overlook that. But all governments do create money and in
both forms of currency and credit. Although governments are not the sole
creators of credit. Yet, in the chapter's concluding paragraphs Mr. Tamny
switches again to valid rage about government expenditures but notes that the
government does create credit.
Chapter Twenty One - Conclusion: The Robot Will Be the Biggest Job
Creator in World History
This chapter is mostly a paean to the creation of robots due to their role in
creating new jobs. An excellent conclusion much opposed those regressive
'progressives' (Luddites) who fear that robots will destroy more jobs than they
Unfortunately he soon returns to form stating, "The Fed, by definition,
can't create credit, but more exciting is the fact that the credit surge the
robot promises will render the Fed even more irrelevant in the economic scheme
One has to wonder which 'definition' he means, that of the Fed or that of
'credit'. Neither is true. Then what can one make of this. "If Congress
doesn't end the Fed, the robot will."
How? But then,
"This book has aimed to correct the silly views that credit is money and
that absent the Fed we would have no money and no credit: the rise of the robot
signals an abundant future of both."
What can I say? Well, transferable (negotiable) credit created by government
and banks IS money and money IS credit, in fact now the explicit form of credit
forms by far most of the money supply. But no one thinks that 'absent the Fed'
we would have no money and no credit'. After all both were created and existed
for centuries before there were any central banks.
Robots are certainly expanding productivity and relieving mankind of much human
work, but I see no connection between creating of robots and the book's subject
of the role of the FED in the economy.
Some alternate views on money, currency, credit and the financial
industry including the FED.
Conti-Brown, Peter - The Power and Independence of the Federal
Griffin, G. Edward - The Creature from Jekyll Island: A Second Look
at the Federal Reserve
H. S. Kenan - The Federal Reserve System
Board of Governors - The Federal Reserve System Purposes and
Mishkin, Frederic S. The Economics of Money, Banking & Financial
Markets, 9th edition,
Gilder, George - The Scandal of Money: Why Wall Street Recovers but
the Economy never Does
Gilder, George - Wealth and Poverty
Forbes, Steve - Money: How the Destruction of the Dollar Threatens
the Global Economy - and What We Can Do About it
Graeber, David - Debt: The First 5,000 Years
Wiggin, Addison - The demise of the dollar and why it's even better
for your investments
Weatherford, Jack - The History of Money
Bernholz, Peter - Monetary Regimes and Inflation: History, Economic
and Political Relationships
Martin, Felix - Money: The Unauthorized Biography very good on
'credit' but totally wrong on 'value'
von Reden, Sitta: Money in Classical Antiquity
Davies, Glyn -History of Money: From Ancient Times to the Present
Ingham, Geoffrey - The Nature of Money
Ingham, Geoffrey - Capitalism
Kling, Arnold - Specialization and Trade
King, Stephen - When the Money Runs out
Kwarteng Kwasi - War and Gold: A 500-Year History of Empires,
Adventures, and Debt
Rickards, James - The Death of Money: The Coming Collapse of the
International Monetary System
Rickards, James - Currency Wars: The Making of the Next Global
Landes, David S. & Joel Mokyr & William Baumol - The
Invention of Enterprise: Entrepreneurship from Ancient Mesopotamia to Modern
Richards, Jay W. - Money, Greed, and God: Why Capitalism is the
Solution and Not the Problem
Wallison, Peter J - Hidden in Plain Sight: What Really Caused the
World's Worst Financial Crisis and Why it Could Happen Again
Calomiris, Charles W. & Stephen Haber - Fragile by Design: The
Political Origins of Banking Crises and Scarce Credit
Admati, Anat & Martin Hellwig - The Bankers New Clothes: What's
Wrong with Banking and What to Do about It
Reinhart, Carmen M. & Kenneth S. Rogoff - This Time is
Different: Eight Centuries of Financial Folly
Fisher, David Hackett - The Great Wave: Price Revolutions and the
Rhythm of History
Gordon, John Steele - An Empire of Wealth - The Epic History of
American Economic Power
Gordon, Robert - The Rise and Fall of American Growth
Whalen, R. Christopher - Inflated: How Money and Debt Built the
Skousen, Mark - The Structure of Production
Mehrling, Perry - The New Lombard Street: How the Fed Became the
Dealer of Last Resort
Wray, L. Randall - Modern Money Theory - A Primer on Macroeconomics
for Sovereign Monetary Systems
Coogan, Philip - Paper Promises: Debt, Money and The New World
Charles W. Calomiris and Stephen Haber - Fragile by Design: The
Political Origins of Banking Crises and Scarce Credit
Anat Admiati & Martin Hellwig - The Banker's New Clothes: What's
Wrong with Banking and What to Do about It