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John Tamny

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.


Reviewer Comments:
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 magizine, such as on page 14 of the August 23, 2016 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 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 with 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 The Theory of Money, 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. Very strange.

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 Bourgeois.

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 modern world.

I recommend also that Mr. Tamny study chapters XXXI, XIX, and XX in Human Action.
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 Martin, and especially Ludwig von Mises', The Theory of Money and Credit.


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 Mr. Tamny.

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 credit."

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 value".
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 freedom."
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 credit.
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 Swift Concerts

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 McCloskey.


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 Bank?

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 Common

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 Destroying Investor

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 sale.
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 Credit"

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 result.

"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 private money.

'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 FED'.

His point then he writes as "that presidents get the dollar they want'.

Not necessarily, but usually 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 and investment."

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 of money.

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 create.

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 of things." Professor Randall Wray Modern Money Theory, claims the opposite, that government creates all credit, equally not true but at least closer.

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.

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Mises, Ludwig von - The Theory of Money and Credit

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Conti-Brown, Peter - The Power and Independence of the Federal Reserve

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Griffin, G. Edward - The Creature from Jekyll Island: A Second Look at the Federal Reserve

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H. S. Kenan - The Federal Reserve System

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Board of Governors - The Federal Reserve System Purposes and Functions

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Mishkin, Frederic S. The Economics of Money, Banking & Financial Markets, 9th edition,

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Gilder, George - The Scandal of Money: Why Wall Street Recovers but the Economy never Does

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Gilder, George - Wealth and Poverty

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Forbes, Steve - Money: How the Destruction of the Dollar Threatens the Global Economy - and What We Can Do About it

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Graeber, David - Debt: The First 5,000 Years

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Wiggin, Addison - The demise of the dollar and why it's even better for your investments

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Weatherford, Jack - The History of Money

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Bernholz, Peter - Monetary Regimes and Inflation: History, Economic and Political Relationships

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Martin, Felix - Money: The Unauthorized Biography very good on 'credit' but totally wrong on 'value'

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von Reden, Sitta: Money in Classical Antiquity

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

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Ingham, Geoffrey - The Nature of Money

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Ingham, Geoffrey - Capitalism

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Kling, Arnold - Specialization and Trade

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King, Stephen - When the Money Runs out

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Kwarteng, Kwasi - War and Gold: A 500-Year History of Empires, Adventures, and Debt

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Rickards, James - The Death of Money: The Coming Collapse of the International Monetary System

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Rickards, James - Currency Wars: The Making of the Next Global Crisis

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Landes, David S. & Joel Mokyr & William Baumol - The Invention of Enterprise: Entrepreneurship from Ancient Mesopotamia to Modern Times

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Richards, Jay W. - Money, Greed, and God: Why Capitalism is the Solution and Not the Problem

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Wallison, Peter J - Hidden in Plain Sight: What Really Caused the World's Worst Financial Crisis and Why it Could Happen Again

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Calomiris, Charles W. & Stephen Haber - Fragile by Design: The Political Origins of Banking Crises and Scarce Credit

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Admati, Anat & Martin Hellwig - The Bankers New Clothes: What's Wrong with Banking and What to Do about It

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Reinhart, Carmen M. & Kenneth S. Rogoff - This Time is Different: Eight Centuries of Financial Folly

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Booth, Danielle, Dimartino - FEDUP

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Ferguson, Niall - The Ascent of Money

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Ferguson, Niall - The Great Degeration

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Fisher, David Hackett - The Great Wave: Price Revolutions and the Rhythm of History

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Gordon, John Steele - An Empire of Wealth - The Epic History of American Economic Power

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Gordon, Robert - The Rise and Fall of American Growth

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Whalen, R. Christopher - Inflated: How Money and Debt Built the American Dream

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Skousen, Mark - The Structure of Production

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

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

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Coogan, Philip - Paper Promises: Debt, Money and The New World Order


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