Howard S. Katz

The Paper Aristocracy




A very insightful text about the paper economy, who profits from it and why we should overcome it if we want to be not only sensible but also free human beings.



Paper Money (from Chapter II)

There are two kinds of people in America today - those who have the privilege of creating money and those who have the obligation to accept it. The privilege of creating money is given to a special elite, those who own or control banks. Since it is illegal for an outsider to go into the banking business, those already in that business have a special privilege in law denied to the rest of the people. You can best understand how money operates in our modern world - how bankers profit from the system without producing any wealth, how they exploit the working people of the society, and why they have come to have special privileges in law - by examining the history of how paper money came into being.

In England, prior to about 1660, there was no paper money. Money was gold or silver coin. However, this was not honest money. The King was in the habit of taking the gold which came in to him and shaving a little bit off from each coin and passing the new coins off as equal in value to the old. Alternatively, he would melt the coins down and dilute the gold with copper and mint new coins of the same size but with less gold content. If people refused to accept these diminished coins at equal value, with the original coins, then the courts (appointed by the King) would rule that the value of money came, not from the objective value of the metal, but from the declaration of the King; i.e., that the money was worth whatever the King said it was worth.

These rulings by the kings' courts were called legal tender rulings; that is, they determined just what could legally be tendered (given) in payment. The shaved or adulterated money was called fiat money because its value came from the fiat of the king.

As a product of the Reformation there began the widespread accumulation of wealth, and, starting after 1660, some people began to look for places of safekeeping. The practice started of taking one's gold to a goldsmith and paying him a small fee to keep it safe. The goldsmith in turn would issue the owner of the gold a receipt, a small slip of paper promising to return his gold upon demand. The process was the same as baggage checking today.

But unlike baggage receipts, the gold receipts soon came to have a special use. If customer Charles wanted to make a purchase from merchant Michael, then what was the sense of Charles taking his paper receipt to the goldsmith, changing it for gold, and then coming back to make the transaction? It was easier for Charles merely to pay for the merchandise with the paper receipts. Then Michael could take these to the goldsmith and redeem them for gold, if he wished.

Of course, by the same logic, Michael found it easier to keep the paper receipts and use them to make his purchase from wholesaler William. As long as everyone knew that the receipts were redeemable in gold on demand, there was no need to actually redeem them, and it was more convenient to handle the paper receipts than the actual gold. In this way paper receipts for money began to circulate as money itself.

The trouble started when a goldsmith noticed: “Even though people have the right to redeem their receipts for gold at any time, in actual practice, very few of them do, and these are balanced off by new deposits of gold coming in. If I print up more receipts than there is gold, no one will know about it because it never happens that everyone comes in to redeem all at once. And since the receipts circulate as money, I will have extra money.”

Beautiful. And it sure beats honest work.

But the goldsmith didn't quite get away with his scheme. It was too blatantly something for nothing. It required a rather subtle refinement. People objected when the goldsmith simply printed paper receipts to add to his own wealth. But they did not know what to say when the goldsmith printed paper receipts with which to make loans. By this act of lending, the ancient goldsmith became a banker; this was the birth of modern banking.

When people objected to his printing up receipts for gold when he did not have enough gold to redeem the receipts, the goldsmith-banker would reply: “But I do not keep these receipts. I lend them out.” And the borrower would say: “And I do not keep the receipts. I employ them productively in my business. And then I pay them back.” And the goldsmith-banker would conclude: “And when he pays back the loan, I destroy the receipts.”

But what the goldsmith-banker has failed to mention is that he has profited from the interest on the loan. As William Paterson said in his plan for the creation of the Bank of England, “The Bank hath benefit of interest on all moneys which it creates out of nothing.” This profit was unearned wealth, a gain made at the expense of the rest of the community, which lost what the banker gained.


In the late 18th century it was common practice for a banker to print four times as many paper receipts as he had gold. This means that if a commercial banker received $1,000 in deposits, he was likely to print $4,000 in receipts. If his interest rate on loans was 7%, then he did not get 7% x $1,000 = $70; he received 7% x $4,000 = $280. His real rate of interest was 28%!

One of the real big-time bankers was William Paterson. Paterson got some friends together and raised £72,000 in gold and silver to lend to the King of England, who needed the money to fight a war. But instead of lending him the money directly, Paterson formed a bank and printed up paper receipts to the tune of 16-2/3 times his gold and silver. He thus lent £1,200,000 to the King, and at an interest rate of 8-1/3% per year, received interest payments of £100,000 per year. Here was a man whose total capital amounted to £72,000, and his annual interest payments were £ 100,000. This was a real rate of interest of almost 140% per year.

But Paterson had gone too far. It was true that most of the people would circulate the receipts and not demand gold. But there were always a few people who would. And since Paterson had only 6% as much gold as he needed, rumors began to circulate that he could not make redemption. Thus, two years after his bank was opened people came to him in large numbers and demanded redemption of their paper receipts. Paterson could not pay. He did not have enough gold.

But Paterson had had the political foresight to lend his paper receipts to the government. Since the paper receipts were needed to fight the war, the government could not allow them to fail (as happened to other goldsmith-bankers of the day). Paterson's paper receipts were declared to be legal tender. They were held by law to be just the same as the gold for which they had stood. Thus was born a new kind of fiat money - paper money.

The old fiat money had been adulterated metal, for example, 50% gold and 50% copper which was declared by legal tender enactments to have the value of 100% gold. It, at least, had the virtue of having partial value. But paper money has no objective value. Its total worth is declared by fiat and enforced by the power of the state. When people are left free to choose their own money, they choose a commodity of objective value. For reasons pertaining to the chemical characteristics of these metals, the most common choices are gold and silver. In order to get people to accept paper money government must force them to accept it by legal tender laws.

The first bankers had operated on the basis of fraud. They promised to redeem in gold more paper notes than they could actually redeem. They remained in business only so long as people did not ask them to keep their promises. But with William Paterson, we can see the basic elements which constitute our present aristocracy. The banker is constituted a special elite person; he is given the privilege in law of having his paper receipts declared to be legal tender money; and by this means, he acquires an un-earned wealth.

This is the origin and basic essence of bank created paper money. However, the system has undergone a considerable evolution to arrive at its modern form. You have not been taught this in history class, but the major political issue which has occupied this country since its inception has been the issue of hard money, of objective value, versus bank-created paper money.



Who Gains And Who Loses? (from Chapter III)

If banks profit from paper money, you may be asking: Who loses? This is an important question because some economists go so far as to contend that no one loses. This is absurd on the face of it. If one segment of the population is receiving values without producing anything in exchange, then it follows that someone else must be producing without getting the product of his labor.

But if one analyzes the situation purely in terms of flows of money, it seems as though these economists are right. The banker, of course, has more money; it is he who has issued it. The businessman to whom he has made the loan benefits; the existence of more loanable funds through this process has meant that he is able to get his loan at a lower rate of interest. In addition, when the businessman starts his project, he employs more workers; so these workers benefit. As the additional money gets spent and flows into the economy of the surrounding area, the people of this area accumulate more money. Everyone gains; no one loses.

This essential theory, in various forms, has continually resurfaced again and again in history. Shortly after our country was established, there was a revolution in the state of Massachusetts called Shays' Rebellion which advocated general prosperity by paper money. The idea was that government should run a large budget deficit, which would be financed by printing paper money. To increase the deficit, it was advocated to abolish taxes and to spend money on public works.

The fallacy involved in this argument consists of analyzing what happens only in terms of money. Since the essence of the paper money scheme is to create more money, then when measured in terms of money, everyone has more. What must be remembered is that money is not wealth. Money is just a means to facilitate exchange. King Midas had all the money he wanted, but it did him no good because he could not even eat an apple.

The advocates of bank paper praise it because, they say, it gives the businessman more capital, and capital is productive. Capital creates additional wealth. But it is important to distinguish between money capital and real capital. Money capital are pieces paper in a vault or notations on a ledger. Real capital are steam shovels, which can help dig the foundation for a building; trucks which help carry goods to market; and labor saving machine which increases the productivity of workers. Real capital is productive. Real capital increases the quantity of wealth in the world.

But the increased issue of bank paper does not increase real capital. It only increases money capital. When the banks create money to loan to businessmen, these businessmen use the additional money to bid capital away from other members of community. Let us consider a simple example: There is a small community with ten farmers and one bank. The bank wants extra profits from paper money so it persuades one of the farmers more “enterprising” and “forward looking” than the others to take a loan to expand his farm. There are ten harvesting machines in this community of which the “enterprising” farmer has one. He uses his loan to buy an additional harvesting machine.

The banker, of course, has gained. He has the interest payments on the loan. In addition, the “enterprising” farmer has gained. Because the banker had additional money to loan, he lowered the rate of interest in order to induce borrowing. Before the issue of paper money the productivity of a harvesting machine was 7% of its value, and the cost of a loan was 8% interest. But now the banker has reduced the interest rate to 6%. Thus the “enterprising” farmer stands to make a gain.

In addition, by buying the additional harvester, the “enterprising” farmer has bid up the market price of harvesters. Thus all of the other farmers in the community think they are richer because their harvesters are worth more. Even the conservative farmer who sold his harvester is happy. He, after all, has sold his harvester for more than he reasonably could have expected to get for it.

But while everyone is happy, it is clear that not everyone could have gained. In real terms the community has exactly as much capital as it had before. There are still ten harvesters in that community. Since there is now more money in circulation but no additional goods, it will take more money to buy the same quantity of goods. The law of supply and demand has been operating on this community. Since the supply of money has increased, the value of money has gone down. This is expressed in the fact that it now takes more money to buy the same harvesting machine. The value of the currency has depreciated.

So the conservative farmer is not as smart as he thinks. He has sold his harvester for more money, but it is money of depreciated value. The eight other farmers think their harvesters are worth more; but they are only worth more in terms of depreciated money. As the extra money circulates through the community into all the channels of trade, it gradually raises the average price of goods. When the conservative farmer and the other farmers go to spend their money, they will find that they can buy less. Although in money terms they are richer, their money has depreciated; in real terms they are poorer. And the amount of their loss is (approximately) equal to the gain of the banker and the “enterprising” farmer.

As Jefferson said: “capital may be produced by industry, and accumulated by economy; but jugglers only will propose to create it by legerdemain tricks with paper.”



Modern Theology (from Chapter IV)

We have thus established that a special elite exists in this country which is given the special privilege in law of creating money. And you have seen how this privilege enables them, and a larger group who benefit from their actions, to gain wealth at the expense of the vast majority of Americans.

But the elite faces a problem common to all aristocracies. How does a small minority exploit a large majority? If the exploiters were a majority, their portion would not be large enough to be of much value. But if physical force is the criterion, then the majority can easily overwhelm a small minority.

The way aristocracies have solved this problem in the past is by deception. They create a set of myths which justify their superior position and convince the majority to accept its own exploitation. The aristocracies of the Middle Ages preached the doctrine that some men were by birth superior to others and that God had established this as a natural order. Resistance to the aristocracy was resistance to God. Submission, even to unjust rulers, was required by the teachings of religion and would be rewarded in the afterlife.

So, too, our modem banker elite and its associated vested interests in big business preach a set of myths, a set of myths which is unquestioned in the social controversy of our time and which rationalizes and justifies their special position.

These are:

(1) A paper money expansion is not merely the good of a special interest. It is a general good which benefits everyone. Conversely, a contraction is an unmitigated evil with no good to anyone.

(2) The real reason policies of paper money expansion are advocated is out of a sense of altruism. This is done for the benefit of the poor and unfortunate.

(3) Paper money has the magical effect of creating something out of nothing. This is why we are all better off from its use.



Robbing the poor to give to the rich (from Chapter VII)

In the 19th century there were bitter political battles over hard money versus soft money, but the soft money forces of the time have the character of a vested interest. It is not until the 20th century that they begin to take on the characteristics of an aristocracy. This occurred with their adoption of a liberal guise.

Paper money is inherently antliberal. It robs from the poor to give to the rich; it is conducive to war; it leads to the centralizaton of economic power in the hands of a few big corporations; it leads to restrictions on individual freeaom. But starting with Wilson, the paper money forces in America have gone to great lengths to portray themselves as of the left. It is the “pro-labor” measures of Marx and Keynes which have been the key element in the masquerade.

In all public and highly visible areas the Wilson and FDR administrations and their successors adopted leftist measures. But in terms of real effect, their administrations were highly reactionary. (Gabriel Kolko's excellent book The Triumph of Conservatism unmasks the real pro-business aspect of the Wilson administration.) Take, for example, the social welfare programs of the New Deal.

The social welfare programs gave the New Deal an extreme left wing image. Such slogans as "Rob from the rich to give to the poor" convinced people that FDR was willing to go to extreme lengths, even in violation of simple justice, to favor the laboring class. The highly public decisions of the National Labor Relation Board were extremely biased in favor of labor and served, quite properly, to outrage the business community. FDR was delighted when his enemies called him “a traitor to his class.”

But FDR was not a traitor to his class. Let us do a little economic calculation. It was the social programs which won liberal support for the Roosevelt budget deficits. Important elements of the liberal community started supporting budget deficits in the 1930s on the (correct) political observation that it was easier to put across some additional social programs when spending could exceed income.

These liberals should go back and do their economic homework. The original American liberals, men such as Thomas Jefferson and Andrew Jackson, took the exact opposite position. Jefferson an, Jackson were hard money men and against paper money whether it was legal tender or a central bank promoting the smaller bank in their lending of money which does not exist. Jefferson an, Jackson understood that the transfer of wealth from poor to rich which occurs from the factors described in Chapter III far dwarfs the transfer from rich to poor from any social programs. They took the side of the common man by supporting hard money and opposing the paper money issued by the Bank of the United States. The next time that modern liberals toast these men at a annual dinner they should stop and do a little calculation.

Assume a budget deficit of $20 billion which leads to a currency depreciation of 6%. This is in reasonable conformity wit recent experience. Of this $20 billion, perhaps $10 billion may go to social programs, the rest going to things like a space shuttle or aid to Lockheed, etc. Of the $10 billion perhaps $2 to $3 billion work its way down through the bureaucracy and actually get to the poor.

Total debt in the U.S. is now [1976] about $2.trillion. (That is, $2thousand billion.) [It is currently over $18,195,886,000,000 - May 2015]. If the currency depreciated by 6% and the rate of interest did not rise to discount the depreciation, this would result in a transfer of wealth from creditor to debtor amounting to $120 billion.

More realistically let us assume that the rate of interest has risen 3% above what it otherwise would have been to discount the depreciation. That is, of the 6% currency depreciation, 3% is compensated for by an increase in interest rates and 3% represents a transfer of wealth from creditor to debtor. (The fact that interest rates do not rise fully to compensate for the currency depreciation is due to the intervention of the Federal Reserve.) If we 3% times $2 trillion, we get $60 billion transferred from creditors to debtors by the depreciation of the currency.

The major debtors in the U.S. today (as in all countries in all times) are the big corporations. It is they who have the lines of credit from the banks. The major creditors are the thrifty middle class who save small amounts for a rainy day; this especially applies to the elderly who are now living off their savings, many of whom have been reduced to poverty by the recent currency depreciation.

Thus to secure a $2 to $3 billion transfer of wealth from the rich to the poor, modern liberals help create a $60 billion transfer wealth, most of which is from the poor and middle classes to the rich. This $60 billion figure, large as it is, does not even begin to measure the transfer of wealth from poor to rich due to a depreciation of the currency because it does not include the loss in real wages due to the fact that wages do not rise as rapidly as prices nor does it include the money coaxed from the gullible by Wall Street promoters.

It is instructive to compare the past 35 years in American economic history, which have been a period of continually rising prices, with the period from 1865 to 1900, a period of continually falling prices. In the past 35 years, we are taught, the country has been extremely pro-labor. Unions have grown in size and power.

The dominant political party identifies itself as the party of the working man. Politicians swear their allegiance to labor. During this period the gain in real wages has been about 50%. In the period from 1865 to 1900, we are taught, the country was extremely anti-labor. Business was ruled by the Robber Barons. There were only tiny unions with little power, and even these were often suppressed by the police or National Guard. Yet during this period the gain in real wages was over 100%.

The reason is, of course, that a currency depreciation lowers wages and a currency appreciation raises wages. Keynes understood this and devised an economic theory which on the surface was pro-labor but which opened the door for paper money. Taken as an economic theory with a long record of failure, Keynesianism is very unimpressive. One is led to wonder what an intelligent man like Keynes was doing espousing such foolish theory. But taken as dogma for a modem priesthood - as a set of myths to enable modern economists to fool the public into accepting their own exploitation - Keynesian economics is a work of art.

Like any good confidence man Keynes had a sharp ear for the prejudices and biases of the people of his time. By the early 20th century, liberalism was dominant. Science, progress and humanism were the values which were esteemed. By dressing his economic theories up in a scientific and liberal guise Keynes was able to convince people of their validity.

Keynesian economics is in fact a return to 17th century mercantilism. It comes to conclusions long since refuted by the 18th and 19th century economic greats - Adam Smith, Jean Baptiste Say, Frederic Bastiat and others. It is an economic theory which belongs in the age of dukes and kings. Yet Keynes took these ideas, old in the year 1800, and presented them as the "New Economics." He took a set of beliefs which rationalize an aristocracy and presented it as the latest in liberal thought. He defended a system which robs from the poor and gives to the rich and yet postured as a friend of the poor. He advocated the theory that something can be created from nothing, yet he posed as a believer in science and an opponent of mysticism.

Although Keynes' conclusions are very close to the economic conclusions of fascism, he always maintained his image as a liberal.

This was necessary as Keynes needed liberal support to put his ideas across. Yet there was one occasion when he was willing to lift the mask a little. In his introduction to the German (but not the English) edition of his book General Theory of Employment, Interest and Money, Keynes wrote: “The theory of aggregate production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire.”

Laissez-faire means let alone. If the aristocracy were to let the common people alone, it could not steal their wealth. You would be able to keep for yourself the product of your own labor. As New York Times economic writer Leonard Silk recently commented, the Keynesian revolution “.. .could be called the Hitlerian economic revolution, since the policy was first put into effect in Nazi Germany in the nineteen-thirties.”

In the nations of black Africa, reports appear of leaders reaching political decisions by means of voodoo or witchcraft. We in our scientific, Western society feel smugly superior when we hear such stories. But in fact, in the realm of money, we are just as mystical as the practitioner of voodoo, and our heads of state make decisions which are just as irrational and superstitious as those of the nations of black Africa.

In the realm of economics there is a virtual unanimity with regard to the following propositions:

Which might be restated by the witch doctor as:

It is possible to get something for nothing.

Economic growth is greatly affected by what people think it will be.

That is, if people think there will be prosperity, then there will be; if people think there will be blight, then that will occur.

Nothing is real

Thus the most important element necessary for prosperity is confidence.

Appearance is reality

Value can be created by the waving of a wand by the head of the state (fiat money).


There is no excuse for these beliefs. They are rank superstition out of the Middle Ages. The men who hold them are not scientists and can not help us to deal with reality.


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