Below we review Detlev Schlichter’s debut book, Paper Money Collapse. Mr Schlichter is a German born author who has spent over 20 years working in finance. We will be interviewing him shortly.
It is remarkable that those who advocate commodity money today are either marginalized as slightly eccentric or made to extensively explain their strange and atavistic-sounding proposals while the public readily accepts a system of book entry money to which the state can create money without limit. – Detlev Schlichter, Paper Money Collapse
Paper Money Collapse exposes the fallacies of the modern economic system and the theory which supposedly supports it. It outlines why the current paper money system is headed for collapse, which Mr Schlichter sees as inevitable.
Whilst the book is clearly about ‘fiat’ money, not once (to my recollection) is the term used. I found this interesting and insightful of Mr Schlichter. Using the more colloquial term ‘paper’ money, the sheer worthlessness of our current monetary system sticks in the reader’s mind. It also adds more value to the saying ‘money doesn’t grow on trees’.
You do not need to be an economist in order to appreciate this book. If you are new to this area then we would urge you to read it. Whilst there is some economic theory and some formula it is kept to a minimum. It provides an excellent introduction to the dangers of our current monetary system. Each new topic is clearly outlined and discussed in manageable chapters.
The arguments against the paper system and why it will inevitably collapse are well defended and reasoned. Schlichter uses Austrian economic theory, human behaviour and history to explain the failings of the paper money and the success of commodity money. As an Austrian economist I appreciated the frequent references to von Mises which go far to demonstrate how relevant his theories are for today.
The book is split into five parts.
- The Basics of Money
- The Effect of Money Injections
- Fallacies about the Price Level and Price Level Stabilization
- History of Paper Money: A Legacy of Failure
- Beyond the Cycle: Paper Money Collapse
The first 3 sections call into question many elements of our monetary system which we readily accept without question, whilst the penultimate section provides an extremely brief but satisfactory explanation of ‘paper money experiments’. The final section is the most insightful and interesting, giving the reader an understanding of the powers that be behind this system before looking at ‘The final end game’.
The book begins by defining and explaining the issue which has either been forgotten or just not considered by most of us: ‘The Basics of Money’. For many amongst us we believe money is in existence due to authorities issuing it. However as Mr Schlichter demonstrates, money is just a medium of exchange which is chosen by the people. It has, up until very recently, always been chosen by the people and for the great majority of history they always chose a commodity. The ability of society to choose their medium of exchange removes a huge amount of power from various parties.
He returns to this issue frequently throughout the book, but it is no more relevant than in the final section of the book when Mr Schlichter looks at the beneficiaries of the fiat system.
He states:
It is a simple fact that a return to a system of inflexible commodity money, such as a proper gold standard, would deprive not only the state and banking industry of a source of power and profit but also the economics profession of positions of influence and income.
Repeatedly throughout the book, it is clear that the paper money system is to the benefit of the state, whilst we meanwhile are told it is for the benefit of the economy. Schlichter makes it clear that he does not agree with government involvement, on any level, in the currency systems. He also believes, and justifies, the need for a universal and sound monetary system.
It would be wrong to assume that central banks and state fiat monies exist merely as a response to fractional reserve banking. Throughout history, states have imposed their own paper monies on their populations and have run privileged state banks, clearly with the intent to fund state spending. – Detlev Schlichter, Paper Money Collapse
Whilst the author does very well to look at the paper money system under the most ideal of situations, he still concludes that ‘even under such idealized conditions, the goal of superior stability of the price level is unattainable.’ I found the examination of the Price Level very interesting. For those of us who were taught economics from a Keynesian mind set, this chapter is particularly enlightening.
For the author the focus on the price level over recent years has been, ‘…the source of new and dangerous fallacies…the notion that the price level is an accurate and reliable indicator of monetary stability and therefore economic stability is wrong.’ The author completely trounces the Keynesian tactic for justifying economic theory with ‘ceteris parabus’. At university this also always made me lose respect for the subject, as the author says, this is ‘an impossible precondition for successful price level stabilization.’
By looking at the historical perspective on price level stability Mr Schlichter explains the extreme inflationary tendencies of the paper money system and the price level. This easily leads both the author and the reader to conclude that the most stable form of money is commodity money.
There is no reason on the basis of fundamental economic analysis to assume that paper money could ever provide a more stable or otherwise advantageous medium of exchange to inflexible commodity money. The historical record in fact provides an even more devastating verdict on paper money. Commodity money has, through the ages, consistently provided a medium of exchange of reasonable stability…All paper money systems have resulted in high and accelerating inflation and ended in a return to commodity money or total currency collapse…To suggest that our present paper money system is a superior guarantor of monetary and therefore economic stability is nonsense.
Whilst the analysis of money, history, governments and so on is incredibly insightful, and invaluable in its knowledge, the section which I appreciated the most was an extremely short section which looks at the economic paradigm in which we operate, and the alternative view, the ‘Individualism and Laissez Faire view’.
This alternative view is what the majority of the book is based on. It is an economy which focuses on the individual and their coordination with others to improve the supply of goods and services. What is so brilliant about Mr Schlichter’s analysis is he reminds us that the market economy is ‘just a tool, a framework, albeit the most important framework man has ever discovered, that allows everyone to better realize their own plans, and it is their own plans that matter.’ This is obviously quite different from the economic paradigm in which we currently live. But this unfortunately, as the author points out, appeals to those in politics.
I particularly appreciated how timeless the book is. It is not until the very end that the current crisis is mentioned. This works very well as it leads the reader up the paper money path in order for them to make their own connection and draw their own parallels between Mr Schlichter’s analysis and the crisis of our time. As the author says, the preceding chapters validate the statement that the ‘present monetary system is no only suboptimal but unsustainable.’ There is no evidence or logic to ‘artificially prolong this system’s lifespan.’
To outline the whole book would distract from the impact one gets when reading the whole effort from the author. But to mention one more thing, the conclusion is interesting and thought provoking. For Mr Schlichter the impending collapse is inevitable, but he works hard to reassure us that this does not mean the end of capitalism or civilisation.
As stated throughout the book, Mr Schlichter sees a return to commodity money as a necessity. He does not, however, see it being done through choice, the chances are miniscule.
The state derives substantial benefits from the money franchise, and so does the financial industry…a timely return to hard money can almost be ruled out. Sadly, the monetary system seems inevitable.
For someone who has ready many books which stand on either side of the paper money versus gold money argument, I can soundly say that rarely do they look at the situation in an objective manner. Whilst Mr Schlichter is clearly an Austrian with a belief in sound money, he does an excellent job of looking at both sides of the arguments. He takes many of the justifications for a paper money system and asks what would happen under a commodity system, i.e. ‘Why would commodity money be unstable’. I think he very easily puts the naysayers to rest.
This book has arrived at absolutely the right time and not a moment too soon. There are many books out there which fail to really dig into what has gone wrong. It is actually very easy to blame the crisis on the paper money system, but Paper Money Collapse goes a lot deeper than this. It looks at rarely discussed elements such as the measure of GDP, the price level. The author analyses these economic phenomenon which many of us take for granted. He strips the economic system as we know it, right back.
Mr Schlichter’s book is an excellent introduction to the world of paper money and the economic theories which both justify and condemn its existence. It is not, in the words of Bill Bonner, an easy read, but it is undoubtedly an important one.