The Tao of Money:

And the Strategic Organizational Leadership Thereof

By:

Jesse Warden

November 28, 2012

Tao of Money ii

Executive Summary

The goal of this paper is to educate the reader in basic fundamentals of money, and the

strategic organizational leadership thereof. When the reader is finished with this paper, they will

be able to watch current strategies unfold today, and be able to understand the strategies, ethics,

and the implications of the actions taken by monetary leaders today. The reader can use this

paper as a reference tool when pontificating monetary strategies.

This paper explains what money is, and how this country came to use the money used

today. It explains the attitude of monetary leaders towards both money and credit by illustrating

how money and credit is treated. After that, this paper explains historical accounts of how money

and credit has been manipulated in the past, and some historical accounts of remedies. And in the

last section, the strategic treatment of money is concluded, and suggestions are made on how to

improve the current situation today. Throughout this paper the term “paper money” is more of a

historical term for what is now known as currency, because “paper money” today is not made of

paper at all, but a blend of cotton and linen.

Knowing what money is is important because it grounds the individual in a sound

understanding of why money was created. Therefore setting the individual up for understanding

how money came into use, and why money is being used. This paper gives basic examples of

what money is, and it explains a unique but complete example of how money became a useful

strategy in society.

Once the reader understands the basics of money as a strategy, this paper gives a

historical account of how banks came into use as a strategy for the use of money. And

The Tao of Money iii

understanding the history of money and banking gives a context to the attitudes and strategies

given towards money by organizations and monetary strategists. Both money and credit

strategies have had severe economic repercussions, as explained in this paper.

Then this paper explains current conditions and strategies of monetary organizational

leaders. After that, this paper explains historical examples and strategies of leaders and

organizations. Then a questionnaire is given to prominent monetary strategists and an important

organization, and then the answers are explained. At this point, the reader will understand the

severity and importance of an ethical monetary strategy.

Finally, the paper is concluded by a contextual explanation of every strategy explained in

each chapter of this paper. Then recommendations to fix the current strategies are given. And

lastly, this paper is closed with a quote from a great mind that everyone should know about and

would benefit by reading his material.

Tao of Money iv

Table of Contents

EXECUTIVE SUMMARY ............................................................................................................ ii

LIST OF TABLES ......................................................................................................................... vi

LIST OF FIGURES ...................................................................................................................... vii

CHAPTER 1 – Introduction

Overview ..............................................................................................................................8

History and Background ....................................................................................................11

Origin of Money ................................................................................................................12

Purpose of Coins ................................................................................................................14

Origin of the Dollar ............................................................................................................15

History of Bank Notes .......................................................................................................15

Central Bank History .........................................................................................................16

Current Situation ................................................................................................................18

Bernanke’s Strategy ...........................................................................................................19

Scope and Limitations of the Analysis ..............................................................................24

CHAPTER 2 – Literature Review

Background ........................................................................................................................27

Specific Studies ..................................................................................................................33

Implications........................................................................................................................39

CHAPTER 3 – Method

Assessment of Organizational Effectiveness and Leadership ...........................................42

CHAPTER 4 – Results

Neo-Classical Response .....................................................................................................43

Austrian Economist Response ...........................................................................................44

Tao of Money v

Federal Reserve Response .................................................................................................45

Responses Explained .........................................................................................................46

CHAPTER 5 – Discussion

Meaning .............................................................................................................................48

Recommendations ..............................................................................................................50

Closing Quote ....................................................................................................................54

REFERENCES ..............................................................................................................................55

Tao of Money vi

LIST OF TABLES

Table 1 - Fractional Reserve Percentages ......................................................................................23

Tao of Money vii

LIST OF FIGURES

Figure 1 - Federal Reserve Quantitative Easing ............................................................................19

Figure 2 - Interest Rates .................................................................................................................20

Figure 3 - Money Supply in the United States ...............................................................................21

Figure 4 - Bank Deposits, Reserve Requirements, and Loanable Funds .......................................24

The Tao of Money 8

CHAPTER 1 – INTRODUCTION

This chapter is an important chapter. To understand how money acts, and what strategies

monetary leaders and organizations should take, one must understand what money is. This

chapter discusses: what money is, what the history of money is, how money acts, and what

strategic organizational leaders are doing today.

Overview

“Money is the barometer of a society’s virtue.” ~ Ayn Rand

What money is eludes even the most educated minds. How it acts and reacts to economic

and human forces is not a calculation, it is an understanding of how it acted in history. Leaders

and organizations that have great decision making power over money and monetary strategies

have an important role in an economy. These people and the decisions made have definite effects

on the future of money and society.

Money is a unique commodity. It has characteristics similar to any other commodity in an

economy. Whereas, it obeys supply and demand curves, there is a definite amount of supply, and

it has a price structure; but money, specifically an irredeemable currency like the U.S. dollar, is

being treated by organizations as if it is not a commodity at all. Governments and leaders alike

have abused and treated currencies with poor strategies to the point of economic and social

demise. Leaders failed to respect the characteristics and economic limits of how currency acts to

economic forces.

The Tao of Money 9

Therefore, money lies within a scope of definite ends. It makes no difference whether

money is coinage, paper currency, or credit – it acts the same. And it has limits to how it must be

treated. The following is a list of important characteristics of the scope of money, and what each

characteristic means.

Medium of Exchange

Money acts as a medium of exchange. Instead of trading apples for an

automobile, money is used as a mutually accepted medium; therefore avoiding a double

coincidence of wants. In other words, money prevents a situation where someone who

has apples and wants a car and that person needs to find someone with a car who needs

apples. Using money as a medium of exchange opens up the market to a wider variety of

products, and makes exchange easier to facilitate. Monetary leaders should not force

exchange, and leaders need to respect the role that money plays in only facilitating trade

as a medium.

Mutually Accepted

Money is mutually accepted by all parties. As explained above, money facilitates

trade by being mutually accepted. Everyone in a market is willing to exchange a product

for money. One may not always be willing to trade a product for anything other than

money, because one may not need, say, a basket of apples or a box of plates. Therefore,

mutually accepted money is the most efficient way to facilitate trade. Also, money that is

deemed the “National Currency,” and is the only legal money, is called Fiat Money.

Monetary leaders have forced a fiat money on a society, but this is unnecessary, because

The Tao of Money 10

the most ethically treated currency will always rise to the top and be mutually accepted

by everyone.

Divisibility

Money is practical because it is divisible. A gold coin can be broken in half and

not lose its value, whereas a diamond broken in halve only holds a fraction of its value.

Instead of trying to break down a flat screen television to trade for a dozen eggs, one

could sell a television for dollars that could be traded for a dozen eggs, and then some

other commodity as one sees fit. The virtue of the divisibility of money is that it can be

gathered to make a large purchase, or it can be separated to purchase a small item without

losing its trading value. Monetary leaders need to be consistent with keeping notations

and denominations regular and consistent otherwise the trustworthiness of the currency is

diminished.

Homogeneous

Money is completely homogeneous. A U.S. dollar is the same in America as it is

in any place in the world. Similarly, gold and silver have the same characteristics around

the world and throughout time; which means that money is objectively consistent

anywhere one goes. The strategy of a fiat national currency creates issues when trading

with another country with a different fiat currency.

Durability

Money is durable. An ounce of gold a thousand years ago is the same gold that

exists today; it may wear out, but its properties don’t change and it is not consumed.

The Tao of Money 11

Likewise, a standardized fiat dollar is worth its denomination at any given point.

Monetary leaders have called in paper money and rereleased the same value of notes to

keep the integrity of the currency durable.

Private Property

Money is private property. When money is in the possession of an individual, it is

owned by the individual. One may sell some item they possess for money, or one may

trade time and effort for a wage; both are transactions of trading private property. Then,

when one deposits money, the receipt proves the property deposited, and when it is

withdrawn for purchase, it is traded for property. Every step in this process represents

private property being traded for private property. Private property rights are the ethical

standards in which a monetary strategy should be based on.

History and Background

Since money is a medium of exchange, there can be no money without exchange. Money

rises out of exchange, and the definition of an economy is a group of exchanges within a border.

A market is a single product within an economy; therefore, an economy is a mixture of markets.

Money ties these markets together, and facilitates trade within and between markets. Monetary

leaders can help facilitate trade by doing as little as possible to interfere with the integrity and

stability of money.

Money and the strategic treatment thereof have a deep history worldwide. Carl Menger

wrote a book in 1892 called The Origins of Money where he explains how money came to be,

naturally, and how people exchange and trade goods between each other. Ludwig von Mises then

The Tao of Money 12

wrote a book called Nationalökonomie: Theorie des Handelns und Wirtschaftens in 1940 (later

translated into English in 1949 and called Human Action) compounding Menger’s work, and

using the example of Crusoe Economics. Whereas, if one was stuck on an island, like Robinson

Crusoe, how would people act. The following is an attempt to reiterate how money came to be

using Crusoe Economics and keeping the integrity of how money became naturally used to

facilitate trade.

Origin of Money

If a group of people found themselves on a large secluded plot of land, and this land was

rich in resources, but had no technology, how would the group act? One can assume that people

would first be concerned, from day one, with nutrition and shelter. The hunters and gatherers

would search for food as the people skilled in making a shelter would stay behind. This is the

origin of the division of labor, where the people with certain skills do that which those people are

skilled.

The group of hunters and gatherers search for things people could eat. Gatherers first start

with the easiest to harvest, like berries and fruit. Then someone with an interest in hunting wild

game peruses wild animals. Now the group is becoming diverse. Some pick berries all day and

some hunt game all day. At the end of each day, the hunters and gatherers trade food with each

other and with those who stayed behind.

The pickers soon find innovative ways to gather more food in a shorter period of time,

and the hunters fashion tools to make hunting more efficient. Both parties now have more free

time to expand operations. The gatherers can now spend some time improving the soil for a

The Tao of Money 13

greater yield, or find more crops to plant and gather. Likewise, the hunters are making more

efficient tools for hunting. They are spending more time either perusing other game or improving

on what is already being hunted.

The people who built the shelters became more efficient in making shelters, and once the

people did so, next was to expand into mobility. People made carts to transport materials and

food. The colony has now become self-sufficient. Moreover these people have become more

efficient, so much that people have been able to gather and store food for months on end. Now

some brave citizens of the colony have decided to search for other neighboring colonies; and the

explorers did find them.

The neighboring colony has entered into trade with the first. The colony most efficient in

crop development traded their harvest for the game that the other colony is more efficient at

obtaining. People soon find out that others in another colony a few miles away have become

efficient blacksmiths. Now that the trading markets have become more diversified, there has

become an issue of double coincidence of wants. Because these colonies are trading basic

commodities, people need to find sellers in need of what others are selling, and in the specific

quantity needed.

After some trial and error, each colony decides on a universal commodity that everyone

wants, is divisible, and is scarce. That commodity became gold. Gold was the precious metal that

was aesthetically appealing, as was a functional medium of exchange. People could use as much

or as little as each needed to get the exact amount of goods wanted.

The Tao of Money 14

A few years passed and people started minting gold bullion in standard weights and

measures. A gold coin was stamped with its exact weight, and that weight could be checked with

a scale. This was a very efficient form of trade, and the gold coins were the standard medium of

exchange for these colonies for a while.

People found out that is was impracticable to carry around heavy bags of coins or bullion

everywhere each traveled, so people decided to pay someone a small amount to hold on to the

gold. To have proof of what was deposited, the depositor was issued a paper certificate. As trade

progressed, these paper certificates were traded instead of gold coins, because these certificates

were a real representation of gold in storage, and could be redeemed at any point for those gold

coins or bullion. This example is the origin of money.

Purpose of Coins

As seen in the example above, coins were a medium of exchange homogeneous to the

market. People could use gold as a fashion statement, or one could trade gold coins. The United

States (U.S.) Constitution gave the Federal government the power to “coin Money, regulate the

Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures (Madison

Article 1 Section 8).” In order to maintain the integrity of trade with coins, the Federal

government was in charge of overseeing and making coinage regular with definite weights and

measures. Coins are also referred to as “Specie.” Banks would hold specie, and pay out specie on

demand. Currently the Federal Reserve is the organization that makes and distributes U.S.

dollars.

The Tao of Money 15

Before the civil war coins from any country were used in America as legal currency.

Weights and measures were made regular in each country, so that the amount of gold or silver

was imprinted on the coin, and the coinage was not always kept consistent. The most consistent

and trusted coin was the Spanish silver dollar called “Doubloon.”

This way of trade, one without a fiat currency, was universally accepted because an

ounce of gold or silver in America was an ounce of gold or silver in Spain. This form of trade

worked very well because any coin that wasn’t what it claimed to be was quickly discredited and

was driven from the market and circulation altogether. The strategic treatment of money was

easier to recognize back then.

Origin of the Dollar

The origin of the word dollar came from Bohemia, current Czech Republic. The

Joachimsthaler (pronounced “yo hockums toller), meaning “St. Joachim’s Valley”, was the one

ounce silver coin named after the area the silver was mined. This coin was in circulation starting

in the 1520’s and was the standard coin that mints in other countries converted each coin to be

like, in terms of size and weight. Soon after the circulation began, the coin’s name was shortened

to “thaler”, which was later pronounced “dollar,” and the Spanish dollar was the common coin

used in America after the American Revolution (Rothbard, 2008). Therefore, the “dollar” was an

actual weight of silver; it was worth on ounce of pure silver.

History of Banking Notes

Banking’s history, or deposit banking, started with the Greece and Egypt. Gold and silver

were mediums of exchange for centuries, and since people were increasingly uneasy with

The Tao of Money 16

carrying heavy metals around with them, people had to find other ways of transporting wealth.

Also, to carry a large amount, one would need a large heavy duty box to carry the coins in.

Moreover, robbers found it easy to rob coins and spend them without question. That led people

with a relatively large sum of coins to find a secure place to keep coins until needed.

The owners of large sums of gold would keep coins and bullion in storage facilities and

the King’s Mint, until the king took the coins and bullion as his own in times of need; mostly war

needs. The mint would issue a redeemable paper certificate to the depositor. These certificates

were then treated as the deposited coins, and used as money. It was these certificates that the

king would refuse to accept after he spent the people’s coins (Rothbard, 2008).

The next best place to keep coins was also the most secure place, private goldsmiths.

People did the same thing as others did in the national mint. People deposited coins, and in return

would receive a redeemable certificate. When the goldsmiths would see that the depositors

would leave coins in storage for long periods of time, the goldsmith would strategically write-up

fake certificates on depositor’s coins and loan them out. Therefore, promising the same coin to

two different people (Rothbard, 2008). This was the beginning of fractional reserve banking.

Central Bank History

A central bank is a financial institution of the government. Whether it is owned by a king

or a body of legislators, the central bank was a source of national wealth that could be drawn

against in a time of great crisis. The first case for a national bank was fought for in 1715 by the

Scotsman, John Law. His plan for a “unified bank” and a “lender of last resort” became a thorn

in the side of economies even to this day.

The Tao of Money 17

What happened was that the central bank issued unredeemable fiat money backed only by

the wealth of the land. The purpose of this fiat currency was to free up trade, increase

employment, and elevate production. It took no time at all to see the repercussions of his plan.

This fallout was first bubble and economic crash in history called The Mississippi Bubble, which

was created by easy money and credit, over consumption, inflated money, and forced use of his

currency.

America was not immune to central banks after the revolution. Alexander Hamilton

fought for a central bank, and he got one with Robert Morris in 1791, and Hamilton was then

named first Treasury Secretary under George Washington. The central bank called the first Bank

of the United States (BUS) was fought for under the auspice of nationalizing the war debt racked

up by the revolution. Speculators went around the country buying up bonds for just a fraction of

face value, just to turn around and sell them to the BUS at face value.

The strategic dilemma here was that the money paid from the BUS came from printed

certificates of demand that were pyramided on the little wealth the U.S. treasury held (which was

a loan from the BUS). The treasury held only $2 million in specie, but paid out $75 million in

paper certificates. Meaning, only 2.67 percent of the certificates issued by the BUS were backed

by specie. Therefore 97.33 percent were fake issues of fiat money (DiLorenzo, 2008). This debt

that was purchased by the BUS was to be paid off from public taxes.

The BUS lasted for 20 years, and when the charter ended in 1811 most of its stock was

bought by Stephen Girard. Shortly after that happened the U.S. was caught in the war of 1812,

and in 1816 the need for a second BUS to pay off war debt was on its way. The second BUS

lasted till 1836 and was dissolved under President Andrew Jackson, who consequentially paid off

The Tao of Money 18

the Federal debt. This lasted until the civil war whereas Salmon Chase notarized all the Federal

war bonds, and the U.S. has had a national debt and an irredeemable fiat dollar ever since.

In 1913 the Federal Reserve Act gave the U.S. the newest and longest lasting pseudo-

central bank, the Federal Reserve (Fed). This act was fought for under the new auspice that the

banking system needed a “lender of last resorts” to bail out banks in case of a bank run. These

bank runs were notorious in the years preceding the Fed.

The management of money and the strategy of bankers led to bank runs. Bankers would

issue notes based on depositors with only a fraction held in reserve, or fractional reserve

banking. That means that banks were promising the same specie to more than one person. When

creditors started to default on loans, people panicked and ran to each respective bank to withdraw

money before everyone else did, leaving people who were promised specie, empty handed.

The Federal government’s solution to bank runs was to suspend specie payment, meaning

no one was paid, but the bank was still able to issue certificates and make money on the interest.

There were many bank runs before 1913, and the grand solution was to have a lender of last

resorts to bail out banks with toxic assets, therefore relieving the banks of some risky loans.

Current Situation

The Chairman of the Board of Governors of the Federal Reserve System, aka “Chairman

of the Fed” is appointed by the President of the United States, and confirmed by congress.

Likewise, there are seven other Board of Governors members appointed by the President. The

Chairman of the Fed reports to congress twice a year on the Fed’s monetary policy. Currently,

Ben Bernanke is the Chairman of the Fed; first appointed by President Bush in 2006, and then

The Tao of Money 19

reappointed by President Obama in 2010. Bernanke is the head strategic organizational leader

behind current monetary strategies in the U.S.

Bernanke’s Strategy

Bernanke’s monetary strategy from the beginning of the current financial crisis in 2007

was simple: improve liquidity in banking, cut the Federal funds rate to increase lending, extend

currency swap agreements with 14 central banks worldwide, and implementing “stress tests” to

rate the stability of the banking world, promote maximum employment and price stability

(Bernanke). The following are Bernanke’s strategies, listed and explained.

1) When Bernanke decided to Figure 1 – Federal Reserve Quantitative Easing

improve liquidity, he did so

by buying up bad assets

from financial institutions.

The strategic problem is

that the Fed created this

money from out of thin air.

The Fed arbitrarily

increased its balance sheet

by over $1 trillion dollars

in 2009 and almost another

$1 trillion by mid-2012 (Figure 1). (“Credit easing policy,” 2012)

The Tao of Money 20

The money used to buy these bad assets was funneled directly to the U.S. Treasury, who

forced these financial institutions to take funds from the Treasury to free up lending

(Carlson, Haubrich, Cherny & Wakefield, 2009).

2) Cutting the Federal Funds Rate pushes down the price of lending money (Figure 2).

An interest rate is the price one pays to borrow money. When The Fed reduces its

funds rate, it arbitrarily makes money cheaper to borrow. This increases the demand

for money. With an Figure 2 – Interest Rate

increased demand, the

supply must also

increase/inflate, or the

interest rate must

increase. This why the

Fed had to increase its

balance sheet, as long as

financial institutions are

continuing to borrow

money - the money available (“Bank prime loan,” 2012)

must also increase. Although, (“Effective Federal funds,” 2012)

in an economic recession interest rates must increase to decrease the risk in new

loans.

The Tao of Money 21

Then Bernanke Figure 3 - Money Supply in the United States

plays a trick. He doesn’t

increase the actual physical

money supply, or “M1”,

rather, he lends credit

instead (Figure 3). This

way he can say that he is

not increasing the money

supply or monetizing the debt. (“Economic research & data M1,” 2012)

This is seen more effectively (“Economic research & data M2,” 2012)

in the “M2” statistic.

The M1 is the physical money supply, whereas the M2 is the physical money

supply and credit accounts. Credit acts like physical dollars, and abides by the same

limits. There are other sources of Fed liabilities not in the M2 money supply, and are in

the Fed’s balance sheet. As illustrated in Figure 1, M1 has $2 trillion in circulation, and

M2 has $12 trillion in circulation.

3) Bernanke and the Fed extend currency swap agreements with 14 central banks

worldwide. This initially only included 4 central banks and the agreement ended in

2010. The following is the new agreement.

“On November 30, 2011, the Federal Open Market Committee authorized foreign

currency swap arrangements between the Federal Reserve and:

The Tao of Money 22

a. the Bank of Canada

b. the Bank of England

c. the Bank of Japan

d. the European Central Bank

e. the Swiss National Bank

f. [and Others]

In addition, these foreign central banks also established bilateral swap

arrangements with one another. These swap lines were authorized as a

contingency measure, so that central banks can offer liquidity in foreign

currencies if market conditions warrant such actions (“Central bank liquidity,”

2012).”

What this is accomplishing is a world central liquidity bubble. As the banking crisis

sweeps around the world, credit markets are continuing to remain stagnant. To free up

money and credit in these countries, this agreement pushes money and credit where it is

perceived to be needed. This mimics a free floating cash reserve, only no country has a

reserve to lend, this is all fake money, and Bernanke’s leadership is bringing the world to

the precipice of global financial crash.

4) The stress tests Bernanke implemented were intended to regain confidence in the

banking system. The test rates each banking institution on how likely each would

survive a financial crisis (“Bank stress test”). The implications here are the regulatory

The Tao of Money 23

arm of the Fed forces these test to be administered annually, at the cost of the banks,

and eventually the customers.

5) Promoting maximum employment and price stability is not the role of the Fed, but

Bernanke insisted that it is the Fed’s role (Bernanke). Moreover, maximum

employment is not a number it is simply a subjective qualitative evaluation. And price

stability only creates surpluses and shortages. These types of Fed controls are not the

role of the Fed, and should not be attempted. As one can see, the attempts are not

working by any rational measure.

The Fed helps to set the rules and regulations for the banking industry. The banks engage

in fractional reserve banking, and the Federal government insures deposits under the Federal

Deposit Insurance Corporation (FDIC). This Table 1 – Fractional Reserve Percentages

agency freely insures customer’s deposits in

banks for any single deposit account for up to

$250,000.

Fractional reserve banking allows banks

to lend a maximum amount of funds. The

“loanable funds” that a bank holds as

outstanding must be backed by a certain

percentage of fungible liabilities. The

mainstream amount in reserve is 10 percent, but

it breaks down into more specific categories

(Table 1). (“Reserve requirements,” 2012)

The Tao of Money 24

Moreover, in 2008 bank deposits and loanable funds skyrocketed, and continues to rise due to

quantitative easing (Figure 4).

Figure 4 – Bank Deposits, Reserve Requirements, and Loanable Funds

And according to some

accounts, banks are just sitting

on these funds and are not

willing or able to make such

loans to revive the economy

(Barr, 2011).

(“Reserves of depository total,” 2012)

(“Reserves of depository required,” 2012)

Scope and Limitations of the Analysis

Both coin and paper money can come to rule and facilitate trade naturally. It frees up the

awkward bonds of bartering because of the double coincidence principle. Money is made by

those who work, and is plundered by those who don’t.

The Fed is the arbiter of money and credit in the United States. The green money that is

carried around today is a “Reserve Note” from the Federal Reserve. The Fed sets the pace for the

amount of money and credit in circulation, and it also facilitates the prime and subprime interest

rate.

The Tao of Money 25

Ben Bernanke, chairman of the Fed, is the face of the Fed’s monetary strategy. He and

the board of governors are not under the scrutiny of congress. Each is appointed by the U.S.

President, approved by congress, and after confirmation each Chairman’s monetary policies are

not subject to congressional approval.

Therefore, when the Fed acts on economic conditions, it can act fast; just as was seen in

the doubling of reserves in 2008. And the actions of the Fed have definite consequences in the

economy. So far, under the leadership of Bernanke, the Fed strategy has been to help free up

credit. It does so by buying debt and expanding the supply of credit.

Due to the natural rules that a commodity like money must exist by, the actions taken by

the Fed have predictable effects. When money and credit is inflated, the price of goods also must

inflate. When the cost of borrowing money is lower than market value, then the rate of

borrowing automatically increases. Furthermore, since Nixon completely severed the dollar from

any kind of connection with gold, the value of the dollar is based on the scarcity of supply.

When the strategy of money is created ethically, it has something of value that it

represents. And when an unethical strategy of money is implemented, there is nothing of value to

back it up by. The fractional reserve system allows banks to loan the vast majority of deposits,

therefore creating warehouse receipts for the depositor and the borrower, giving two claims to

the same money. Likewise, the Fed’s arbitrary monetary inflation creates money without any

source of actual value to back it up.

What the Fed has been doing is creating money with an unethical strategy. It has

expanded the money supply and artificially kept interest rates low without increasing any kind of

The Tao of Money 26

value in the economy, which it has no power to do in any sustainable way. If the money in

people’s pockets doubled overnight, the cost of goods would necessarily double over time. If the

number of goods in the market doubled overnight, then the cost of goods would necessarily

deflate over time. Meaning, more money doesn’t equal more wealth, it just drives up the cost of

goods.

And what the Fed has adopted as a monetary strategy is similar to what is known as

debasing currency. Before there was paper money, kings and emperors have reminted coins with

less precious metal (value), but have kept the denomination the same. This manipulation and

debasement was more overt and recognizable. Today, with paper money, more is printed, but

people only recognize a slight raise in the price of commodities over time. This is due to the

value of money, and the lack of widespread understanding thereof.

The Tao of Money 27

CHAPTER 2 – LITERATURE REVIEW

This chapter goes through the history of thought over monetary strategy and the

leadership with regards to the strategic treatment of money by major organizations.

Highlighted works from John Law, Adam Smith, and Ludwig von Mises is an academic

historical view of monetary leadership and strategy. Also, specific studies on the

Mississippi Bubble, The Great Depression, and The Suffolk Banking System are examples

of organizational leadership in monetary strategies.

Background

This section starts with the first historical account of monetary inflation using

paper money and the strategic use of a central bank with John Law. Then it reflects on

one of the first big monetary leaders of thought, utilizing specialized labor and production

as a strategy to create a stable money by Adam Smith. Lastly, it edifies strategic and

ethical treatment of money by people and organizations from Luwig von Mises.

John Law

“There are several Proposals offer’d to Remedy the Difficulties the Nation is

under from the great Scarcity of Money…

Goods have a Value from the Uses they are apply’d to; And their Value is Greater

or Lesser, not so much from their more or less valuable, or necessary Uses: As from the

The Tao of Money 28

greater or lesser Quantity of them in proportion to the Demand for them. Example. Water

is of great use, yet of little Value; Because the Quantity of Water is much greater than the

Demand for it. Diamonds are of little use, yet of great Value, because the Demand for

Diamonds is much greater, than the Quantity of them…

Silver as a Metal had a value in Barter, as other Goods; from the Uses it was then

apply’d to…

Silver being capable of a Stamp, Princes, for the greater Convenience of the

People, set up Mints to bring it to a Standard, and Stamp it; Whereby its Weight and

Fineness was known, without the Trouble of Weighing or Fyning; but the Stamp added

nothing to the Value.

For these Reasons Silver was used as Money; Its being Coin’d was only a

Consequence of its being applied to that use in Bullion, tho’ not with the same

Convenience…

Trade depends on the Money. A greater Quantity employes more People than a

lesser Quantity. A limited Sum can only set a number of People to Work proportion’d to

it, and ‘tis with little success Laws are made, for Employing the Poor or Idle in Countries

where Money is scarce; good Laws many bring the Money to the full Circulation ‘tis

capable of, and force it to those Employments that are most profitable to the Country: But

no Laws can make it go furder, nor can more People be set to Work, without more

Money to circulate so, as to pay the Wages of a greater number. They may be brought to

Work on Credit, and that is not practicable, unless the Credit have a Circulation, so as to

The Tao of Money 29

supply the Workman with necessaries; If that’s uppose’d, then that Credit is Money,

and will have the same effects, on Home, and Forreign Trade.

An addition to the Money adds to the Value of the Country. So long as Money

gives Interest, it is imployed; and Money imployed brings Profite, tho’ the Imployer loses

(Law, 1705).”

Adam Smith

“Thirdly, and lastly, the machines and instruments of trade, etc. which compose

the fixed capital, bear this further resemblance to that part of the circulating capital which

consists in money; that as every saving in the expense of erecting and supporting those

machines, which does not diminish the introductive powers of labour, is an improvement

of the neat revenue of the society; so every saving in the expense of collecting and

supporting that part of the circulating capital which consists in money is an improvement

of exactly the same kind.

It is sufficiently obvious, and it has partly, too, been explained already, in what

manner every saving in the expense of supporting the fixed capital is an improvement of

the neat revenue of the society. The whole capital of the undertaker of every work is

necessarily divided between his fixed and his circulating capital.

While his whole capital remains the same, the smaller the one part, the greater

must necessarily be the other. It is the circulating capital which furnishes the materials

and wages of labour, and puts industry into motion. Every saving, therefore, in the

expense of maintaining the fixed capital, which does not diminish the productive powers

The Tao of Money 30

of labour, must increase the fund which puts industry into motion, and consequently the

annual produce of land and labour, the real revenue of every society.

The substitution of paper in the room of gold and silver money, replaces a very

expensive instrument of commerce with one much less costly, and sometimes equally

convenient. Circulation comes to be carried on by a new wheel, which it costs less both to

erect and to maintain than the old one. But in what manner this operation is performed,

and in what manner it tends to increase either the gross or the neat revenue of the society,

is not altogether so obvious, and may therefore require some further explication. There

are several different sorts of paper money; but the circulating notes of banks and bankers

are the species which is best known, and which seems best adapted for this purpose.

When the people of any particular country have such confidence in the fortune,

probity and prudence of a particular banker, as to believe that he is always ready to pay

upon demand such of his promissory notes as are likely to be at any time presented to

him, those notes come to have the same currency as gold and silver money, from the

confidence that such money can at any time be had for them (Smith, 2005).”

Ludwig von Mises

“A medium of exchange which is commonly used as such is called money. The

notion of money is vague, as its definition refers to the vague term “commonly used.”

There are borderline cases in which it cannot be decided whether a medium of exchange

is or is not “commonly” used and should be called money. But this vagueness in the

denotation of money in no way affects the exactitude and precision required by

The Tao of Money 31

praxeological theory. For all that is to be predicated of money is valid for every medium

of exchange. It is therefore immaterial whether one preserves the traditional term theory

of money or substitutes for it another term. The theory of money was and is always the

theory of indirect exchange and of the medial of exchange…

The fateful errors of popular monetary doctrines which have led astray the

monetary policies of almost all governments would hardly have come into existence if

many economists had not themselves committed blunders

in dealing with monetary issues and did not stubbornly cling to them. There is first of all

the spurious idea of the supposed neutrality of money rises or falls proportionately with

the increase or decrease in the quantity of money in circulation.

It was not realized that changes in the quantity of money can never affect the

prices of all goods and services at the same time and to the same extent. Nor was it

realized that changes in the purchasing power of the monetary unit are necessarily linked

with changes in the mutual relations between those buying and selling. In order to prove

the doctrine that the quantity of money and prices rise and fall proportionately, recourse

was had in dealing with the theory of money to a procedure entirely different from that

modern economics applies in dealing with all its other problems.

Instead of starting from the actions of individuals, as catallactics must do without

exception, formulas were constructed designed to comprehend the whole of the market

economy…

In analyzing the equation of exchange one assumes that one of its elements—total

supply of money, volume of trade, velocity of circulation—changes, without asking how

such changes occur. It is not recognized that changes in these magnitudes do not

The Tao of Money 32

emerge…as such, but in the individual actors’ conditions, and that it is the interplay of

the reactions of these actors that results in alterations of the price structure. The

mathematical economists refuse to start from the various individuals’ demand for and

supply of money. They introduce instead the spurious notion of velocity of circulation

fashioned according to the patterns of mechanics…

A medium of exchange is a good which people acquire neither for their own

consumption nor for employment in their own production activities, but with the

intention of exchanging it at a later date against those goods which they want to use either

for consumption or for production. Money is a medium of exchange. It is the most

marketable good which people acquire because they want to offer it in later acts of

interpersonal exchange. Money is the thing which serves as the generally accepted and

commonly used medium of exchange. This is its only function. All the other functions

which people ascribe to money are merely particular aspects of its primary and sole

function, that of a medium of exchange. Media of exchange are economic goods. They

are scarce; there is a demand for them. There are on the market people who desire to

acquire them and are ready to exchange goods and services against them. Media of

exchange have value in exchange. People make sacrifices for their acquisition; they pay

“prices” for them. The peculiarity of these prices lies merely in the fact that they cannot

be expressed in terms of money. In reference to the vendible goods and services [one

speaks] of prices or of money prices. In reference to money [is spoken] of its purchasing

power with regard to various vendible goods. There exists a demand for media of

exchange because people want to keep a store of them. Every member of a market society

wants to have a definite amount of money in his pocket or box, a cash holding or cash

The Tao of Money 33

balance of a definite height. Sometimes he wants to keep a larger cash holding,

sometimes a smaller; in exceptional cases he may even renounce any cash holding. At

any rate, the immense majority of people aim not only to own various vendible goods;

they want no less to hold money. Their cash holding is not merely a residuum, an unspent

margin of their wealth. It is not an unintentional remainder left over after all intentional

acts of buying and selling have been consummated. Its amount is determined by a

deliberate demand for cash…

It is unsound to distinguish between circulating and idle money. It is no less faulty

to distinguish between circulating money and hoarded money. What is called hoarding is

a height of cash holding which—according to the personal opinion of an observer—

exceeds what is deemed normal and adequate. However, hoarding is cash holding.

Hoarded money is still money and it serves in the hoards the same purposes which it

serves in cash holdings called normal. He who hoards money believes that some special

conditions make it expedient to accumulate a cash holding which exceeds the amount he

himself would keep under different conditions, or other people keep, or an economist

censuring his action considers appropriate (Mises, 1996).”

Specific Studies

This section points out three important historical accounts whereas strategic

organizational leaders have either manipulated money or have been responsible. The first

example explains the first failure of organizational leaders who have dealt with a central bank

and paper money with the Mississippi Bubble. Then this section explains what strategic

monetary organizations and leaders did to create the stock market crash which led to the Great

Depression. Lastly, this section gives hope with an account of when strategic organizational

The Tao of Money 34

leaders have led this country with a sound and ethical hard money strategy; with the Suffolk

Bank.

The Mississippi Bubble

“Mississippi Bubble, a financial scheme in 18th

-century France that triggered a

speculative frenzy and ended in financial collapse. The scheme was engineered by John

Law a Scottish adventurer, economic theorist, and financial wizard who was a friend of

the regent, the Duke d’Orléans. In 1716 Law established the Banque Generale with the

authority to issue notes. A year later he established the Compagnie d’Occident

(“Company of the West”) and obtained for it exclusive privileges to develop the vast

French territories in the Mississippi River valley of North America. Law’s company also

soon monopolized the French tobacco and African slave trades, and by 1719 the

Compagnie des Indes (“Company of the Indies”), as it had been renamed, held a

complete monopoly of France’s colonial trade. Law also took over the collection of

French taxes and the minting of money; in effect, he controlled both the country’s foreign

trade and its finances.

Given the potential for profits involved, public demand for shares in the

Compagnie des Indes increased sharply, sending the price for a share from 500 to 18,000

livres, which was out of all proportion to earnings. By 1719 Law had issued

approximately 625,000 stock shares, and he soon afterward merged the Banque Générale

with the Compagnie des Indes. Law hoped to retire the vast public debt accumulated

during the later years of Louis XIV’s reign by selling his company’s shares to the public

in exchange for state-issued public securities, or billets d’état, which consequently also

The Tao of Money 35

rose sharply in value. A frenzy of wild speculation ensued that led to a general stock-

market boom across Europe. The French government took advantage of this situation by

printing increased amounts of paper money, which was readily accepted by the state’s

creditors because it could be used to buy more shares of the Compagnie. This went on

until the excessive issue of paper money stimulated galloping inflation, and both the

paper money and the billets d’état began to lose their value. Meanwhile the expected

profits from the company’s colonial ventures were slow to materialize, and the intricate

linking of the company’s stock with the state’s finances ended in complete disaster in

1720, when the value of the shares plummeted, causing a general stock market crash in

France and other countries…The enormous debts of his company and bank were soon

afterward consolidated and taken over by the state, which raised taxes in order to retire it

(Mississippi Bubble, 2012).”

The Great Depression

“Benjamin Strong’s (The first New York Fed Governor) monetary [strategy],

throughout his reign, was essentially a Morgan strategy. The Morgans, through their

subsidiary, Morgan, Grenfell in London, had long been intimately associated with the

British government and with the Bank of England. Before World War I, the House of

Morgan had been named a fiscal agent of the British Treasury and of the Bank of

England. After the war began, the Morgans became the sole purchaser of all goods and

supplies for the British and French war effort in the United States, as well as the

monopoly underwriter in the United States of all British and French bonds.

The Tao of Money 36

The Morgans played a substantial role in bringing the United States into the war

on Britain’s side, and, as head of the Fed, Benjamin Strong obligingly doubled the money

supply to finance America’s role in the war effort. After the end of the war, Strong’s

monetary [strategy] was deliberately guided by the prime objective of helping Great

Britain establish, and impose upon Europe, a new and disastrous gold exchange standard.

The idea was to restore “England”—which really meant the Morgans’ English associates

and allies—to her old position of financial dominance by helping her establish a phony

gold standard. Ostensibly this was a return to the prewar “classical” gold standard. But

the return, in the spring of 1925, was at the prewar par, a rate that hopelessly overvalued

the pound sterling, which Britain had inflated and depreciated during the fiat money era

after 1914. Britain insisted on returning to gold at an overvalued par, a [strategy]

guaranteed to hobble British exports, and yet was determined to indulge in continued

cheap money and inflation, instead of contracting its money supply to make the prewar

par viable. To help Britain get away with this peculiar and contradictory [strategy], the

United States helped to pretend that the post-1925 standard in Europe—this gold bullion-

pound standard—was really a genuine gold-coin standard.

The United States inflated its money and credit in order to prevent inflationary

Britain from losing gold to the United States, a loss which would endanger the new,

jerry-built “gold standard” structure. The result, however, was eventual collapse of

money and credit in the U.S. and abroad, and a worldwide depression. Benjamin Strong

was the Morgans’ architect of a disastrous [strategy] of inflationary boom that led

inevitably to bust…

The Tao of Money 37

While secretary of commerce, Herbert Hoover had been a severe critic of Strong’s

inflationary policies. Unfortunately, however, Hoover was in favor of a different form of

easy money and cheap credit. When he became president, he tried, like King Canute, to

hold back the tides by continuing to generate cheap bank credit, and then using “moral

suasion” to exhort banks and other lenders not to lend money for the purchase of stock…

Roy Young, Hoover’s new appointee as governor of the Federal Reserve Board,

suffered from the same fallacious view. Partly responsible for the Hoover

administration’s adopting this [strategy] was the wily manipulator Montagu Norman,

head of the Bank of England, and close friend of the late Benjamin Strong, who had

persuaded Strong to inflate credit in order to help England’s disastrous gold-exchange

[strategy]. Norman, it might be added, was very close to the Morgan, Grenfell bank.

By June 1929, it was clear that the absurd [strategy] of moral suasion had failed.

Seeing the handwriting on the wall, Norman switched, and persuaded the Fed to resume

its old [strategy] of inflating reserves through subsidizing the acceptance market by

purchasing all acceptances offered at a subsidized rate—a [strategy] the Fed had

abandoned in the spring of 1928. Despite this attempt to keep the boom going, however,

the money supply in the United States leveled off by the end of 1928, and remained more

or less constant from then on. This ending of the massive credit expansion boom made a

recession inevitable, and sure enough, the American economy began to turn down in July

1929. Feverish attempts to keep the stock market boom going, however, managed to

boost stock prices while the economic fundamentals were turning sour, leading to the

famous stock market crash of October 24 (Rothbard, 2002).

The Tao of Money 38

Suffolk Banking System

“Country banks were simply issuing far more notes in proportion to their capital

(that is, gold and silver) than were the Boston banks. Concerned about this influx of

paper money of lesser worth, both Suffolk Bank and New England Bank began again in

1824 to purchase country notes. But this time they did so not to make a profit on

redemption, but simply to reduce the number of country notes in circulation in Boston.

They had the foolish hope that this would increase the use of their (better) notes, thus

increasing their own loans and profits. But the more they purchased country notes, the

more notes of even worse quality (particularly from faraway Maine banks) would replace

them. Buying these latter involved more risk, so the Suffolk proposed to six other city

banks a joint fund to purchase and send these notes back to the issuing bank for

redemption. These seven banks, known as the Associated Banks, raised $300,000 for this

purpose. With the Suffolk acting as agent and buying country notes from the other six,

operations began March 24, 1824. The volume of country notes bought in this way

increased greatly, to $2 million per month by the end of 1825. By then, Suffolk felt

strong enough to go it alone. Further, it now had the leverage to pressure country banks

into depositing gold and silver with the Suffolk, to make note redemption easier. By

1838, almost all banks in New England did so, and were redeeming their notes through

the Suffolk Bank.

The Suffolk ground rules from beginning (1825) to end (1858) were as follows:

Each country bank had to maintain a permanent deposit of specie of at least $2,000 for

the smallest bank, plus enough to redeem all its notes that Suffolk received. These gold

and silver deposits did not have to be at Suffolk, as long as they were at some place

The Tao of Money 39

convenient to Suffolk, so that the notes would not have to be sent home for redemption.

But in practice, nearly all reserves were at Suffolk. (City banks had only to deposit a

fixed amount, which decreased to $5,000 by 1835.) No interest was paid on any of these

deposits. But, in exchange, the Suffolk began performing an invaluable service: It agreed

to accept at par all the notes it received as deposits from other New England banks in the

system, and credit the depositor banks’ accounts on the following day.

With the Suffolk acting as a “clearing bank,” accepting, sorting, and crediting

bank notes, it was now possible for any New England bank to accept the notes of any

other bank, however far away, and at face value. This drastically cut down on the time

and inconvenience of applying to each bank separately for specie redemption. Moreover,

the certainty spread that the notes of the Suffolk member banks would be valued at par: It

spread at first among other bankers and then to the general public (Rothbard, 2008).”

Implications

John Law is the father of paper money, and issuance of paper money from a central bank.

As one would see, he was a strong proponent of inflating currency to increase production,

employment, wages, and trade. And from the first experiment in the Mississippi bubble, it

explained what inflation did to the central bank, and the cost of trading stock. Under his

leadership, many people lost jobs and wealth.

Then Adam Smith wrote about how money, specifically savings, represents the

improvement of existing capital (or goods). The implications of money being capital, is limited

to the stability of a money supply. If the supply is stable i.e. no inflation, then the future trading

of moneys for capital goods are stable. Smith also explains how the emergence of paper money

as a stable coinage substitute is only for the convenience of the public. Moreover, this implies

The Tao of Money 40

that money, again, is only a symbol of a valued good. Money must be backed by something of

value.

Ludwig von Mises, wrote about money being a medium of exchange. Similar to Smith,

he proved that money is a representation of something valuable. Money has no value, unless it

can be traded for something of value. No one wants money for any other reason but for trade.

And people hold, or hoard money as a time preference strategy. Instead of consuming right away

and then holding a line of credit, people save money and purchase an item outright, eliminating

the risk of default.

From the Mississippi bubble to the Great Depression, and scores of examples not

expressed in this paper, one sees that when monetary leaders debase currency by reissuing

debased coins or inflating money supplies, economies crashed. France and Europe crashed

because of inflation in the early 18th

century, just like America and the world crashed in the early

20th

century. Money, in excess of an absolute connection to something of value drives down the

value of that money.

Likewise, in these examples, the low cost of money drove up the demand for money. This

strategy should’ve raised the interest rate, but when these central banks had printing presses,

these banks just printed more money to satisfy the high demand. This led to over issuance of

money and credit, which drove up the cost of living, then led to mass defaulting of obligations,

and finally collapsing altogether.

The Suffolk bank was an example of a sound hard money banking strategy. It was a

central bank, but every issuance of a bank note was backed by specie, and redeemable on

demand. This bank revolutionized, and ruled, banking in America for almost three decades, until

inflationists, with the help of the U.S. government, forced the Suffolk bank to break up and

The Tao of Money 41

liquidate its stock. With Suffolk’s hard money [strategy], the value of currency in the U.S.

increased, as bad notes were pushed out of circulation. This was the only time in history when a

monetary strategy was done right.

The Fed began as a central bank disguised as a decentralized bank, with the head bank in

New York. The two top financiers were the Rockefellers and the Morgans. After the Federal

Reserve Act of 1913, the New York Fed was run by the house of Morgan. That is until the

Banking Act of 1933, an act pushed by the Rockefeller camp, diverted the central power from

New York to the Federal Government (Rothbard, 2008). This is done through the appointments

of the board of governors by the U.S. President. The appointing president’s monetary strategy is

pushed by who is appointed as chairmen. And this is how the Fed works today.

The Tao of Money 42

CHAPTER 3 - METHOD

A survey was conducted for this chapter. The survey consisted of five questions, and each

was asked to three important categories of strategic monetary leaders and an organizational

leader: Neo-Classical Economist, Austrian Economist, and a Federal Reserve employee and

Economist. The neo-classical economist is an affiliate professor at a regional university. The

Austrian economist is a PhD, endowed chair at a university, and is an Economics Professor. And

the Federal Reserve economist is an economist, analyst, and journal writer.

Assessment of Organizational Effectiveness and Leadership

The names are omitted because these names are irrelevant to the integrity of this paper.

The views of these leaders and the organization are important to understanding what is

happening in the U.S. economy today. The views expressed are common to the areas of expertise

exhorted by the ones who graciously took the time to answer these questions. The following are

the five questions.

1) How important is ethical leadership in monetary policy?

2) Is the leadership in Washington effective in treating money ethically?

3) Has Ben Bernanke been an effective leader of the Federal Reserve Board of Governors?

4) Has the Federal Reserve been an effective organization within the scope of its purpose?

5) Should money and monetary policy be taught more in the education system?

The Tao of Money 43

CHAPTER 4 – RESULTS

This chapter explains the answers given by the strategic monetary organization and

leaders in the different fields of monetary leadership and strategies. The strategies are explained

and contrasted against the organizational leadership in monetary strategies explained in the

previous chapters. This chapter contains the answers of very different schools of thought in

regards to how the Fed and congress should strategically lead this country.

Neo-Classical Response

Q) How important is ethical leadership in monetary policy?

A) Very important. And the more important question is to whom is congress loyal too, the

country or the big bank members? That would be the question of how each are ethically

acting. Some might even ask if the power of the Fed is even ethical in the first place, since its

leaders are either non-elected or unaccountable after appointment.

Q) Is the leadership in Washington effective in treating money ethically?

A) Certain actions taken by congress to stimulate the economy, like pushing to print money,

can be called “unethical” by some. What is, and who chooses the greater good?

Q) Has Ben Bernanke been an effective leader of the Federal Reserve Board of Governors?

A) Since Bernanke has been appointed by both Republicans and Democrats, he must be

doing something right. He has been more open than other Fed Chairs. His policy of

purchasing public debt seems to be stabilizing for now.

Q) Has the Federal Reserve been an effective organization within the scope of its purpose?

The Tao of Money 44

A) Some victories and some defeats. Some of what the Fed has done has helped, but some of

what the Fed has done hasn’t worked so well.

Q) Should money and monetary policy be taught more in the education system?

A) The Fed has an excellent educational outreach program. It is free to the public. In this

respect, the Fed is trying to help educate the public on monetary policy.

(Norris, 2012)

Austrian Economist Response

Q) How important is ethics leadership in monetary policy?

A) Very important, to learn more read Jorg Guido Hulsmann’s book The Ethics of Printing

Money.

Q) Is the leadership in Washington effective in treating money ethically?

A) No.

Q) Has Ben Bernanke been an effective leader of the Federal Reserve Board of Governors?

A) No.

Q) Has the Federal Reserve been an effective organization within the scope of its purpose?

A) No.

Q) Should money and monetary policy be taught more in the education system?

A) Probably not, since most professors don’t know much about Austrian economics, and this

is a very important issue. To find more on the Austrian view read Murray N. Rothbard’s

What Has Government Done to Our Money, and In Search of a Monetary Constitution

(Block, 2012).

The Tao of Money 45

Federal Reserve Response

Q) How important is ethical leadership in monetary policy?

A) Extremely. The Fed has ethical breech standards, and the perception of the public is very

important as well. The Fed has a code of conduct. It also performs self-audits called

“Operation Twist” as well as doing congressional reports.

Q) Is the leadership in Washington effective in treating money ethically?

A) Yes, to the extent of the ethos of dealing with central banking. Congressional acts help

with transparency within the Fed, as well as in banking in general. The 1977 Humphrey-

Hawkins Act defined the role of the Fed as a facilitator of “full employment” and “price

stability.”

Q) Has Ben Bernanke been an effective leader of the Federal Reserve Board of Governors?

A) Yes, within the scope of duties and responsibilities of the Federal Reserve as explained

by congress. The Bernanke’s policies have helped to stabilize prices and keep unemployment

lower than what it has been in other recessions.

Q) Has the Federal Reserve been an effective organization within the scope of its purpose?

A) Yes, again within the scope of responsibilities, it has been effective at doing what is

necessary to prevent economic conditions from getting worse.

Q) Should money and monetary policy be taught more in the education system?

A) Absolutely.

(Mahon, 2012)

The Tao of Money 46

Responses Explained

The responses are what one would expect given the knowledge of theories and

responsibilities of each school of thought. The Neo-Classical is a mixture of Laissez-fair

Capitalism and Keynesian Economics. These leaders know that the market is most efficient when

left alone, and in areas where the free-market “fails”, the government is there to correct

misallocations of capital. When dealing with monetary leadership, as seen above, the Neo

Classical believes that a central bank is a necessary evil. And do not like legitimizing what the

Fed does, but still has hope that the Fed can take corrective measures to keep employment up and

stabilize money.

The Fed Economist is similar to the Neo-Classical view on the economy, but is more

hawkish when it comes to the virtue of the actions of the Fed. These leaders see the central bank

as an integral part of bank security, as well as being obligated to maintaining the general welfare

of the economy. As seen above, the Fed Economist sees the Fed as an appendage of congress,

and acts within strict rules and regulations set out by congress. Although congress has little

power over how the Fed acts, congress does work with the Fed to set priorities and benchmarks,

and then follow-up with self-audits.

Austrian economics is the study of praxeology, and in regards to the economy the

subsection called catallactics. Praxeology explains the value scale of acting man, and catallactics

explains the cause and effect of acting forces on the economy. The study of these two disciplines

clearly explains the Austrian Economist’s answers to these questions. Although, the answers

were short, the books recommended give details to the questions answered.

Here is a summary of the answers given: Monetary strategy must be grounded in rational

ethical standards. Congress shouldn’t even have a monetary strategy, because the market corrects

The Tao of Money 47

itself without outside interference. Meaning that the bad investments get liquidated, and the

strong investments survive.

The Federal Reserve is unnecessary as a lender of last resorts, because it’s only role is to

manipulate money and credit, which creates business cycles and bubbles, from which the market

must correct. What always happens from a congressional monetary strategy is that, after the

bubble bursts, is further manipulation of money and credit. This strategy delays the inevitable

market correction and prolongs the recession, which then delays the recovery.

The Fed Chair, who is appointed by congress, is the facilitator of these manipulative

strategies. And since the creation of the Fed in 1913, the strategy has not been grounded in

sound, rational, or ethical strategic standards. The lack of mainstream understanding of these

economic facts makes the Austrian economist hesitate when pushing the education system to

make ethical monetary strategy a priority.

The Tao of Money 48

CHAPTER 5 – DISCUSSION

This chapter recounts and explains the findings of this paper. It puts the chapters

discussed above in a more contextual view. For instance, it discusses strategic organizational

leader’s plans to revive an economy and creating stability with money, and the effects of each

decision. Then some recommendations are made for strategic organizational leaders to adhere to

for an optimal outcome in the future. Lastly, a closing quote wraps up the integrity of this whole

paper in one poignant paragraph.

Meaning

In the beginning of this paper what was seen was the origin and history of money and

banking. And from this one can see that money and banking can exist without government

edicts. The ethical view on a money strategy is a realization that money has boundaries that must

be respected. Whenever there is a strategic violation of these boundaries, the average person

holding money suffers.

Coinage was a useful medium of exchange, because the weight was directly accounted

for on the coin, and weighing straight bullion was inconvenient. Monetary leaders have debased

coins by removing what made it desirable to have, just as there are some instances of gold bars

being debased by drilling the core out and filling the center with tungsten today (Ritz, 2012). The

ethical strategies of both the examples are equal, because each are destroying wealth and

property of the ones holding the new bars and coins.

Paper money is nothing without a direct link to something of value. Money is property,

and trades for some kind of property in the future. When money and credit is manipulated, it is a

The Tao of Money 49

direct violation of property rights, because the wealth of the owners of money is directly

diminished when the value of currency is lowered by monetary inflation.

When a monetary organizations strategy was to promise money certificates to deposits

that didn’t exist, these organizational leaders violated ethical standards, and caused numerous

bank runs. And these depositors suffered with the loss of wealth. Likewise, when a central bank,

like the Fed, created money certificates and credit with no backing people suffered with a loss of

purchasing power. The people who suffer the most are the ones on fixed incomes, like pensions,

and Social Security among other social programs.

Leaders effecting monetary strategies have a responsibility to institutions and mankind.

The U.S. government has a responsibility to protect the property and persons in the U.S. from

force and fraud. Federal Reserve notes are forced on citizens to be used as currency and inflating

money and credit is the strategy of the Fed and congress, therefore each manipulative monetary

strategy has been nothing less than legal counterfeiting. This makes the ethical strategy question

even harder to ask; especially when the ethics and consequences of these strategies have been

misunderstood for centuries.

In the historical literary review, what was explained was that money has been misused

and abused by central planners. From John Law to the first and second USB, and then on to the

Federal Reserve, money and credit was manipulated. These manipulations led to economic

scares and recessions. People lost faith in banking, and then hoarded money. In this historical

account one can see that many different attempts to create wealth without producing or saving

has led to economic malaise after economic malaise.

Probably the most misunderstood depression was the great depression caused by the

stock market crash in 1929. Most people can look to what Presidents Hoover and Roosevelt did

The Tao of Money 50

to combat the crash, but very few can see what actually caused the bubble in the first place. The

cause is the same story every time: Easy money and credit, and an over issuance of money and

credit. And the same sequence of events led to this crash.

Alongside these disasters there has always been a rational intellectual guiding the way

out. These giants of rational and strategic economic thought have taught that there is a rational

and ethical way to treat money, and how a government’s monetary strategy should be carried

out. Smith explained that money in holdings was a future repair of a corporation’s capital, or that

it is a future machine altogether.

Ludwig von Mises explained that saving money was a time preference. There is not a

definition of how much savings is to be considered “hoarding”, but one knows a “hoarding”

when “hoarding” is seen. People choose to hold money to spend it later. And the amount of

money in circulation directly affects these holdings. The more over-issuance of paper money

there is in circulation the higher the price of a good becomes, but the value stays the same.

Meaning, when the value of the paper money is diminished, and the trading value of an

apple is equal to an orange, then no matter if both cost one dollar or a hundred dollars one apple

will always trade for one orange. The value is perceived and is projected onto both the money

and the good independently. The more paper money there is, the more it takes to purchase these

items; and the fewer dollars there are, the fewer dollars it takes to purchase these items.

Recommendations

The recommendations sought for in this section are real, dire, and attainable. When

people put claims as to what got the U.S. out of different scares and recessions, people are not

seeing the whole picture. Some say that war brought the economy out of the depression, but

destruction of wealth cannot create wealth. Some point to an influx of paper money, and say that

The Tao of Money 51

it could’ve been worse; but even if the amount of money in circulations doubled overnight, the

only thing that would happen is a skyrocketing of staple goods. Likewise when there is monetary

inflation, the only people who gain are the ones who get the money before price inflation hits.

These institutions have historically been: banks, other financial institutions, and large

corporations. Actions taken by the Fed and legislators have been to substitute down markets with

money and then prolonging the eventual recession from the fake economy.

The government can only create a fake economy and it cannot create a sustainable one.

When a government acts, it must first take. Government takes wealth through taxes, fees, and

regulations which diverts money from desired goods and services. Then the government spend

the money on it’s own desired goods and services, which diverts raw materials and labor that

harms the institutions offering goods and services in a natural market. These actions retard

economies, and prop-up unnatural goods and services that can’t survive without a government

subsidy.

Likewise when money and credit is manipulated, and people and corporations take on

more risk, there emerges a similar fake economy. This is the bubble that must burst because it

was manufactured by unethical strategic manipulations. When the bubble bursts and when

people default on financial obligations, the market is getting its way by correcting and

liquidating toxic investments that must take place for an economy to thrive.

Therefore there are a number of recommendations that will not only fix a broken

economy, but will restore an ethical strategy of money treatment by monetary leaders and

organizations. These are:

The Tao of Money 52

1) Stop expanding the supply of money and credit. This will stabilize the supply of money

and credit, and then the law supply and demand will restore the equilibrium of the proper

price and interest rate for money and credit.

2) Restore a free floating interest rate across the board. The loanable funds rate, the rate of

demand satisfaction in the free market, and the risk of the borrowers will dictate the rate

of interest naturally. There is no need to force lenders to lend at any lower standard, nor

is it an ethical strategy to coax people into borrowing money each can’t afford or don’t

even have the credit for.

3) Return the dollar to a commodity standard, like gold or silver. Gold and silver backed

certificates will restore a measurable value to the dollar. As of right now the dollar has no

attachment to gold or silver, therefore the value is based on scarcity.

4) Return the dollar to an issuance of weight, and not just a denomination. Since the value of

the dollar is based on the scarcity of supply in the market. Moving back to a weight will

give absolute value to each piece of paper. This will make each note redeemable for

whatever the commodity to which it is attached.

5) Make the dollar redeemable in the commodity to which the dollars are attached. Unless

the notes are redeemable, the notes are worthless. One cannot eat paper money, nor can

paper money be used for anything other than facilitating trade.

6) Increase the fractional reserve percentage until there is one hundred percent backing of

and loans and other investments.

7) Change the U.S. Treasury and the Federal Reserve to real banks that take real deposits,

and only issue redeemable notes.

The Tao of Money 53

8) End all wars and change tactics when dealing with a country’s enemies. Wars destroy a

countries wealth. War diverts scarce resources and bid up prices of raw materials.

Likewise war takes productive people out of the workforce and place them in deathly

situations. America alone has borrowed and spent $1.3 trillion on the war efforts in Iraq

and Afghanistan ("Cost of war," 2012). This is wealth and income the U.S. has yet to

pay, including interest.

9) Divorce the government from any strategic monetary policy. Before there was

government, there was trade. Even without government interference there is trade, i.e. the

“Black Market.” Then trade will be unhampered, and there will be no depressions.

Government can still levy taxes, create fees, and regulate for safety, but legislators will

not be able to harm the economy by destroying the value of trade through money and

credit manipulations. So far the Federal Reserve has increased the number of dollars and

amount of credit in circulation by three times since 2008. Likewise, the U.S. public debt

obligations have reached over $16 trillion ("U.S. national debt," 2012).

10) Promote more savings and less consumption. Saving money is merely a time preference,

and with certain agreements with the bank, savings accounts can be loaned out at a

premium. Long-term savings promotes long-term investments, which leads to higher

quality goods that the saver can purchase at a later date. If the investment turns out bad,

the capital is liquidated, and the money is returned to the savings account. This is ethical

monetary strategy on the individual level. If one can’t survive for without an income for

at least a short time, then people are consuming too much and saving too little.

11) Elect legislators that understand the role of money, and how to ethically treat money as a

sound strategy. As this economy progresses to a solid currency, one must continue to

The Tao of Money 54

elect people that will defend a solid currency. Until now, legislators have used paper and

ink to debase the currency which was forced on citizens to trade, in the favor of lobbyists

and special interests, at the reduction of people’s wealth and to the increase of each

monetary leader’s own wealth. This must stop if this economy is going to survive another

200+ years.

These recommendations will come at a price. People will have to save more and live within a

means of productive capacity. People will have to produce before people can consume. And

governments will have to take alternative actions rather than commit to long expensive wars, like

Switzerland. Also, subsidies will diminish. Likewise, both protective tariffs and taxes will

disappear, forcing people and corporations to be more competitive. Lastly, prices will drop as the

purchasing power of the ethically strategic treated paper dollar will rise.

Closing Quote

“The body of economic knowledge is an essential element in the structure of human

civilization; it is the foundation upon which modern industrialism and all the moral, intellectual,

technological, and [therapeutic] achievements of the last centuries have been built. It rests with

men whether they will make the proper use of the rich treasure with which this knowledge

provides them or whether they will leave it unused. But if they fail to take the best advantage of

it and disregard its teachings and warnings, they will not annul economics; they will stamp out

society and the human race (Mises, 1996).”

The Tao of Money 55

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