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Paper Money Collapse: The Folly of Elastic Money, 2nd Edition

ISBN: 978-1-118-87732-6
336 pages
July 2014
Paper Money Collapse: The Folly of Elastic Money, 2nd Edition (1118877322) cover image


Explore the inevitable collapse of the fiat monetary system

Paper Money Collapse: The Folly of Elastic Money, Second Edition challenges the mainstream consensus on money and monetary policy. While it is today generally believed that the transition from 'hard' and inflexible commodity money (such as a gold standard) to entirely flexible and potentially unlimited fiat money under national central banks allows for superior economic stability, Paper Money Collapse shows that the opposite is true. Systems of highly elastic and constantly expanding money are not only unnecessary, even for growing economies, they are always extremely destabilizing. Over time, they must lead to substantial imbalances, including excessive levels of debt and distorted asset prices, that will require ever faster money production to sustain. Ultimately, however, there is no alternative to a complete liquidation of these distortions. Based on insights of many renowned economists and in particular of the Austrian School of Economics, the book explains through rigorous logic and in precise language why our system of flexible fiat money is incompatible with a market economy and therefore unsustainable. Paper money systems have always led to economic disintegration—without exception—throughout history. It will not be different for our system and we may be closer to the endgame than many think.

The updated second edition incorporates:

  • A new introduction and an extended outlook section that discusses various "endgames"
  • Responses to criticisms, alternative views, and a critical assessment of 'solutions'
  • Comments on recent policy trends, including attempts to exit the 'easy money' policy mode
  • An evaluation of new crypto-currency Bitcoin

Paper Money Collapse: The Folly of Elastic Money, Second Edition clarifies the problem of paper money clearly and eloquently, and proposes multiple routes to a solution.

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Table of Contents

Foreword xiii

Acknowledgments xvii

Prologue Contra the Mainstream Consensus—What This Book Is About 1

The Ruling Mainstream Consensus on Money 2

The Growth-versus-Inflation Trade-Off  7

What This Book Shows 8

Understanding Our Fiat Money System 11

What Is Different from the First Edition? 14

Support from Eminent Economists 19

A Note on Pronouns in the Text 20

Notes 21

Part One The Basics of Money

Chapter 1 The Fundamentals of Money and Money Demand 25

The Origin and Purpose of Money 26

An Anthropologist’s Challenge 29

What Gives Money Value? 34

(Almost) Any Quantity of Money Will Do 36

The Demand for Money 38

Are “Sticky” Prices a Problem? 42

Other Functions of Money 46

The Unique Position of the Paper Money Producer 51

The Monetary Asset versus Other Goods 54

Notes 61

Chapter 2 The Fundamentals of Fractional-Reserve Banking 65

The Origin and Basics of Fractional-Reserve Banking 69

Who Owns “Deposited” Money? 74

Exposing Misconceptions about Fractional-Reserve Banking 77

“Free Banking” Is Limited Banking 83

Summary of Part One 87

Notes 89

Part Two The Effects of Money Injections

Chapter 3 Money Injections without Credit Markets 95

Even, Instant, and Transparent Money Injection 95

Even and Nontransparent Money Injection 98

Uneven and Nontransparent Money Injection 102

Notes 107

Chapter 4 Money Injections via Credit Markets 109

Consumption, Saving, and Investing 110

Interest 111

Interest Rates Are Not Determined by Factor Productivity 113

Money Injection via the Loan Market 119

The Process in More Detail 120

Policy Implications of the Austrian Theory 130

Addendum: Gordon Tullock’s Critique of the Austrian Business Cycle Theory and Some Words on “Forced Saving” 133

An Example: U.S. Housing Boom and Bust 143

Summary of Part Two 150

Notes 154

Part Three Fallacies about the Price Level and Price-Level Stabilization

Chapter 5 Common Misconceptions Regarding the Price Level 159

The Fallacy That a Stable Price Level Means “Neutral” Money 160

The Fallacy That Hard Money Is Unstable Money, Part 1—History 164

The Fallacy That Hard Money Is Unstable Money, Part 2—Theory 170

Notes 179

Chapter 6 The Policy of Stabilization 181

Problems with Price Index Stabilization 181

Addendum: The “Free Bankers” and the Theory of Immaculate Fractional-Reserve Banking 187

Summary of Part Three 193

Notes 195

Part Four A History of Paper Money and How We Got to Where We Are Now

Chapter 7 A Legacy of Failure 199

Paper Money Experiments 201

1914–2014: A Century of Monetary Decay 206

Notes 215

Part Five Beyond the Cycle: Paper Money’s Endgame and the Future of Money

Chapter 8 The Beneficiaries of the Paper Money System 221

Paper Money and the Banks 223

Paper Money and the State 225

Paper Money and the Professional Economist 231

Notes 234

Chapter 9 The Intellectual Superstructure of the Present System 235

The Alternative View: Individualism and Laissez-Faire 237

The Mainstream View: Collectivism and Interventionism 241

The Political Appeal of Mainstream Macroeconomics 244

The Myth That Everybody Benefits from “Stimulus” 247

Monetarism as Monetary Interventionism 250

The Savings Glut Theory and the Myth of Underconsumption and Underinvestment 253

Inflationism and International Policy Coordination 259

Notes 265

Chapter 10 Endgames—Inflationary Meltdown or Return to Hard Money? 269

Paper Money Collapse 270

Alternatives: Return to Hard Money 277

A Return to a Gold Standard 278

The Separation of Money and State 284

Bitcoin—Money of No Authority 288

Notes 300

Epilogue Money, Freedom, and Capitalism 303

About the Author 309

Index 311

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Author Information

DETLEV S. SCHLICHTER is an independent economist and investment strategist. He spent 19 years as a trader and portfolio manager in international financial markets, including stints at J.P. Morgan, Merrill Lynch, and Western Asset Management. In his career, Detlev has overseen billions in assets for institutional clients around the globe. He is a frequent commentator on economics and financial markets via his website detlevschlichter.com. Detlev lives with his wife and three children in Hampstead, London.

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Press Release

July 24, 2014
Explore the inevitable collapse of the fiat monetary system

Now in its second edition, Detlev S. Schlichter’s bestselling Paper Money Collapse: The Folly of Elastic Money challenges the mainstream thinking on money and monetary policy. This revised and updated edition draws on solid research and clearly demonstrates that the present monetary system, based as it is on essentially limitless fiat money and unconstrained central banking, is inherently unstable and ultimately unsustainable.

By the standards of history and theory, our present paper money system is a peculiar political creation. For centuries, the money of the free market was gold or silver, commodities whose supply was fairly inelastic and outside of the control of politicians, bureaucrats, and bankers. Capitalist money was hard and apolitical, and although banks have always added to the money supply by issuing banknotes and bank deposits, the free market kept strict limits on overall money production. This changed throughout the 20th century, as money became increasingly politicized and “elastic,” a process that culminated in the closing of the “gold window” in 1971 and the beginning of the era of limitless paper money and uninhibited central banking.

Most modern economists tell us that elastic money is a boon. If handled correctly, it can allow for faster growth and a more stable economy. In a brilliant analysis that captivates through rigorous logic and accessible language, Detlev Schlichter explains why the consensus is wrong. Elastic money is a source of instability and the ultimate cause of the growing deformations in all developed economies: ever growing debt levels, periodic asset bubbles, overextended and weak banks, and an intensifying dependency on cheap credit. Like all paper money systems in history, our system too will face the choice between a voluntary return to hard and apolitical money or accelerated money printing that will ultimately end in hyperinflation. The time to choose is now!

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