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When Money Fails
Gary North - April 16, 2016

Money seldom fails, but occasionally, it does. It failed in Germany and Austria 1921-23. It failed in Hungary after World War II. It failed in Zimbabwe in 2008-9, when the rest of the world was in a recession.

Here is a famous case of the failure of money:

And there was no bread in all the land; for the famine was very sore, so that the land of Egypt and all the land of Canaan fainted by reason of the famine. And Joseph gathered up all the money that was found in the land of Egypt, and in the land of Canaan, for the com which they bought: and Joseph brought the money into Pharaoh's house. And when money failed in the land of Egypt, and in the land of Canaan, all the Egyptians came unto Joseph, and said, Give us bread: for why should we die in thy presence? for the money faileth. And Joseph said, Give your cattle; and I will give you for your cattle, if money fail. And they brought their cattle unto Joseph: and Joseph gave them bread in exchange for horses, and for the flocks, and for the cattle of the herds, and for the asses: and he fed them with bread for all their cattle for that year. When that year was ended, they came unto him the second year, and said unto him, We will not hide it from my lord, how that our money is spent; my lord also hath our herds of cattle; there is not ought left in the sight of my lord, but our bodies, and our lands (Gen. 47:13-18).
The old money in Egypt had failed. There was now a new money: grain. It had the characteristic features of money. It was divisible, portable, easily recognized, and had high market value in relation to volume and weight. In normal times, grain lacks this fourth feature. But in a famine, it temporarily gains it. This is why, during famines, grain is money. This is why those who possess it wind up wealthy, assuming they are not killed.

"You can't eat gold." I used to hear that one from people who ridiculed the gold standard. But this is not a good argument against gold. It is an argument in favor of food. Not only can't you eat gold, you can't eat paper money and plastic credit cards, either. When food is short, money is no longer valuable in comparison to food. Money cannot sustain life. Food can. The forecasts of the Egyptians had been incorrect. They had kept their money rather than buying up food the previous season to store it. Joseph's forecast had been correct. This put him in charge of Egypt's future.

But what if the Egyptians had heard about Joseph's dream and interpretation? What if all of them had believed the story? Their money would have failed the previous year. Had they all gone out to buy up the crop, they would have found that their competitive bids raised the price of grain. This price increase would not have been so radical as it was the following year, when there was a drastic reduction of the grain supply, but it would have been sufficient to turn grain into money.


This should warn us: not everyone can get out of a market at its top. The reason why it is at the top is because the amount offered for sale at yesterday's price today exceeds the quantity demanded at yesterday's price. If sellers want out, they must sell at less than yesterday's price. If they all want out today and nobody wants to buy, the price falls to zero. The market ceases to exist.

Because we rarely see the future in the same way at the same time, markets do not fall to zero very often. But in the text, we have a case where large numbers of people did see the future in the same way at the same time. They all tried to get out of the old market - the market for money -- at the same time. Thus, the old money failed. What had been money the previous year ceased to function as money.

When such events as these take place, unprecedented social change is close at hand. When the value of money fails, the previous social consensus has also failed. The value of money is based on consensus. The public normally predicts the future as follows: "Tomorrow will be pretty much what today is." Most of the time, such a prediction is correct. But when it isn't, the members of the society find that their dreams and schemes have turned to dust. They seek someone to blame. It they blame themselves, they are ripe for repentance. If they blame their leaders, society is ripe for a revolution.

Consider the 1920's. The "roaring twenties" roared with self-confidence in the victorious Allied nations. People turned to third-hand interpretations of Freud to justify their sexual infidelity. They dreamed of wealth for all as the stock market went ever higher after 1921. A few people watched with fascination as Germany and Austria destroyed their currencies in a wave of inflation, 1920-23. But then it was back to normal in both nations, and loans went from the booming Allied economies to the defeated ones.

In the United States, Darwin reigned triumphant after the humiliation of fundamentalism at the 1925 Scopes' trial and the death, five days later, of William Jennings Bryan. There seemed to be a new era at hand, an era of secular enlightenment, miraculous technology, and economic growth. Freed from the "old superstition," men ate, drank, and made merry. "Come ye, say they, l will fetch wine, and we will fill ourselves with strong drink; and to morrow shall be as this day, and much more abundant" (Isa. 56:12).

The dream ended miserably: the Great Depression, the rise of Hitler, the rise of the welfare state, and World War II. A new god was proclaimed: the god of central planning. This god had been worshiped by a handful of disciples from the 1880's, but now it was placed on the throne, all over the world. Men proclaimed the wisdom of the scientific elite, who would use force to redistribute the world's wealth. There would be wealth for all.

In 1929, everyone could not get out of the stock market all at once. A lot of them tried in October. The market had been booming since the end of the recession in 1921 . By 1929, men had forgotten that there are business cycles in life. In 1931, Viking published a little anthology of the optimistic forecasts regarding the economy and the market. The book had a typical American title, Oh, Yeah? In 1931 , the worst was yet to come.

In 1929, it was the top of the market: for stocks and for the older American tradition of rugged individualism. Of course, that tradition had been under assault ever since the Civil War (1861-65). In Great Britain, it had been under assault since at least the mid-1870's. In Germany, rugged individualism had no tradition. The welfare state in 1929 was about to become the new ideology. The state would soon use coercion on an unprecedented scale in order to "save capitalism from itself," as the slogan went.

When men of acknowledged intelligence universally proclaim that autonomous man's latest way of salvation is permanently enthroned, start looking for a convenient exit. You are close to the top of another market.


In 1694, the British government chartered a privately owned bank to serve the nation as a central bank: the Bank of England. This privately owned institution would henceforth possess an attribute of political sovereignty normally reserved to civil government: the right to create money. This institution was unique in western history. It would possess the right to issue currency and credit based on reserves of government debt. The Bank of England became the model for all future central banks.

At first, it was the only one. It had gained its authority over money by means of a promise: to buy the British government's debt. The bank promised to make a market for British securities. In return, the bank would possess authority over the issuing of credit. It was a cozy arrangement and very profitable to the bank's closed group of investors.

In this century, the Bank of England's model has spread to every industrial nation and most of the others. Every nation has its supposedly politically independent central bank. The justification of this independence is that central bankers will not be tempted to heed the politicians' call for inflated money. There is a major problem with this argument: central banks and commercial banks profit from issuing fiat money. The twentieth century was the age of inflation. It was the century of central banking.


The New World Order jas always wanted a central currency. It is basic to a central state.

The euro is the best they could get. This does not bode well for the NWO.

The eurozone has a single currency. The eurozone nations have agreed to collect taxes in the euro.

In theory, the euro could be tied to gold. The European Central Bank would then establish complete convertibility of the euro into gold at a fixed legal ratio. "Bring x number of euros units to your local bank, and you will be given a stated amount of gold." Other central banks could do the same.

But central bankers don't want this. Neither do civil governments. A gold coin standard reduces the authority of bankers and politicians to create money and spend it into circulation without gaining new deposits (banks) or raising taxes. A gold coin standard forces them all to get out of the money-creation business. They can no longer manipulate the economy by creating fiat money. This reduces their power, or, as they prefer to put it, their flexibility. It places a golden chain on bankers and governments, and they deeply resent this restriction.

What central bankers want is flexibility and permanence at the same time. They want control over the domestic money supply, yet they want their currencies to stay in circulation at a fixed ratio with the others. They always prefer to inflate, but they can't all agree on the proper rate of inflation. They want to be as God, creating wealth by the fiat power of their collective word. But central bankers have a problem: they do not trust other central bankers. Also, they do not trust the politicians. And the politicians do not trust them.

In order to prepare for the Maastrict Treaty-mandated changeover to the Euro, the commercial banks' teams of mainframe computer programmers were assigned a monumental task: to create an exchange rate program that will enable banks to operate as if there were only one currency when there were 17.

The European governments have an agenda: the creation of the first stage of a one world order. They will not be thwarted, they insist. A unified currency system is the mark of the new inter-European political sovereignty. Nothing is going to be allowed to delay the arrival of this new sovereign agent. If computer code will not permit this, then too bad for computer code.

The arrogance of man is in the stratosphere. Not since the Tower of Babel have we seen such an overestimation of man's abilities. The results will be similar. The Tower of Brussels will not be finished. (I wrote this section in 1997.)


We have arrived at a uniquely vulnerable point in history. I believe that it is the most vulnerable point in man's history. Man today believes in man. While representatives in the West acknowledge the importance of religion as social cement that keeps citizens obedient, they do not acknowledge the authority of God's law. There is no agreed-upon moral framework because there is no agreed-upon theological framework. There is no acknowledged god who issues his law by fiat.

Society has adopted certain economic rules of the game, but these are pragmatic. They are not grounded in either theology or metaphysics. Darwinism has spray painted the supernatural realm with red paint and then has issued red sunglasses to everyone attending the public schools, the entertainment complexes, and almost all accredited institutions of higher learning. "You don't see anything, do you? Of course not."

This has led society into a trap. We have relied on experts to frame the moral questions, but they have done so in terms of Darwinism. We have believed that economics is morally neutral -- a matter of pragmatism ~ yet the only morality accepted by secular free market economists is the gospel of market efficiency. Efficiency is the triumphant god of our age, especially now that the god of socialist ownership has gone through bankruptcy.

But, to paraphrase Forrest Gump's mother, efficiency is as efficiency does. Efficiency under one set of conditions may not be efficiency in another set of conditions. What worked yesterday may not work tomorrow. This is the law of Darwinism -- the only law of Darwinism. There is always the possibility of a random mutant gene or a shift in the environment. Change the environment, and you change the balance of nature. A new species may prove uniquely equipped to survive in this new environment.

Are social Darwinists looking for a random, mutant factor? One has been scheduled: the Millennium Bug. Do they seek evidence of a changed environment? One seems to be imminent: the collapse of fractional reserve banking. The rules of the game -- competition -- are about to change. As surely as the rules of grammar changed at the Tower of Babel, so are the rules of economic efficiency about to change in the near future.


Wilhelm Röpke was not the most technically competent free market economist of our time, but he was the most accurate one. He was the one economist in the free market tradition who has forthrightly acknowledged that social theory is broader than economic theory. Economics is a subset of social theory, not the other way around. Röpke spent a great deal of time thinking about the moral foundations of the modem social order.

Adam Smith's Wealth of Nations (1776) began with a description of the output of a skilled pin maker, a traditional craftsman. Such a man could produce a dozen pins a day. But with machinery, a group of men could turn out thousands of pins. The difference is the division of labor.

The division of labor has made the West the wealthiest society in man's history. But to achieve this wealth, Röpke warned, we have surrendered our lives to the good judgment of others. He wrote this warning in 1942. He was living in Switzerland. He was a marked man. His books had been suppressed by the Nazis. If the Nazis invaded and defeated the Swiss defensive forces, he might not survive. Meanwhile, the pre-war division of labor had been disrupted by the advent of the war. The division of labor had contracted. This put men's way of life at risk.

He began his analysis with society. "We saw that an intensive economic intercourse, which involves a wide scale of division of labour and a high degree of mutual dependence of individuals, is possible only under a number of conditions, which all fall under the head of 'socio-political' integration. It is this latter which, in the last resort, sets the limits to the extent and degree of economic integration. There must be a framework of institutions and of a strong legal order, and behind them, there must be a generally observed and undisputed code of moral norms and principles of behaviour." This is not a technical issue; it is a moral issue. The division of labor did not increase in the West apart from the West's social and moral order.

It is the moral and legal order that protects us. "In this way, it is possible to have a society in which all its members may feel sheltered in an atmosphere of mutual confidence, security and continuity. Only in this way is it possible to reduce and make bearable the enormous risks involved in the high degree of dependence, which is inevitably connected with the division of labour" (p. 72). What did he mean, "enormous risks"? These are the risks of interdependence. If the legal framework that supports the free market should fail, men's lives would be placed at risk.


Men have delegated to others the task of producing the goods that sustain life. These others have in turn delegated much of their assignments to mysterious machines. Very few people can understand the languages that run computers.

Autonomous man now regards himself as a colossus striding across history. But he is dependent. He is totally dependent on information- above all, information regarding prices. If the pricing information of a generation disappears in one night, what then? He is blind. And the noise that will arise when man is blind will deafen him, too.

Noise. We cannot imagine the noise. When checks no longer are made out properly, when bank wire transfers cannot be trusted, when commands no longer can be followed as issued, everyone will pick up his telephone to call someone in charge of his account.

Everything you buy is denominated in terms of money. A price is the product of billions of competitive bids overtime. These bids have given us information on the value of almost everything. The array of prices for all the components of an entire civilization is based on the fractional reserve banking system. What happens if there is a run on the banks?

The price of every item you buy will change dramatically. It will fall like a stone, possibly to zero, it the government refuses to intervene. But if neither the government or the central bank creates paper money to meet demand for cash, then prices will skyrocket, at least for a time. Paper money is no answer. How can you buy anything with paper money if you must mail the money? You can't trust the recipient. We are back to Röpke's warning about moral order and the division of labor. You can buy across borders or even across the state only because the recipient trusts your bank's promise to pay money. What if your bank is empty?

If this takes place, if you can't buy an item on a face-to-face basis, you can't buy at all. Neither can anyone else. The house of cards collapses. The base of this house of cards is the moral and legal order. The second floor is the price system and all the information that it conveys. This house of cards supports the entire social order. It has been building up since 1913 (the Federal Reserve System).

"What's it worth to you?" This seemingly innocuous question keeps the world alive today. We can normally provide fast answers. We look at the price tag, consider our financial situation, and we tell him: "Not as much as you're asking." We make decisions, day by day, because we have a good idea of what anything that might be offered for sale to us is worth to us. This will end in the Alzheimer's economy.

"What's it worth to you?" That is what Joseph asked the people of Egypt. Their answer was simple: their very lives. It was therefore worth their freedom. They sold themselves into bondage to the Pharaoh.


Back in 1957, Leonard E. Read wrote what became a classic essay, "I, Pencil." What a wonderful tool a pencil is. It struck Read that he had no idea how a pencil is made. He called a man who was in charge of pencil manufacturing. That man did not know, either. His company bought all the components, but he had no idea how those components were made. Read pushed it out even father. How does anyone know how to make the machines that make the components? And the machines that make the machines? On and on it went. Conclusion: nobody knows how to make a pencil. No one knows how to make a pencil, yet a pencil is so common as to be cheap - hardly worth thinking about.

Then how can such a miracle as a pencil be? Because of the, division of labor and the freedom we have to make contracts with each other. Multiply Read's example across the array of foods we buy and tools we use to remain productive. Some four decades ago, I had to take a required class in electric shop. I remember a question that some would-be clever student asked the teacher. "How does a TV work?" The man's answer matched the seriousness of the question: "You flip a switch."

What would happen if all the switches failed to work as predicted? A collapse of the West. What if only 1% failed to work as predicted? How many switches do we rely on to keep us alive and our systems operating'! The cascade of failures created by a mere 1% failure could be enough to shut down system after system, at which time, none of the switches will work.

What would a pencil be worth to you if you could never buy another one?


The free market can keep money from failing in most scenarios. But in a true disaster -- nuclear war or a pandemic caused by biological warfare -- our money could fail. The division of labor could collapse. This is why maintaining peace is crucial.

Our money really could fail. Our goal should be to have that kind of money which will not fail. But maintain peace is basic to maintaining money. We tend to forget this. We assume that peace is somehow free of charge. It isn't. There is no such thing as a free peace.



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We assume that peace is somehow free of charge. It isn't. There is no such thing as a free peace.
I thought there was but she gave me a rash.