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



“A brilliant treatise on the fundamentals of sound money and the destructive deviations of contemporary Keynesian central banking. Sophisticated, readable, thorough, and persuasive.”
—David Stockman

Paper Money Collapse was essential reading when the first edition appeared in 2011 and it is even more essential reading now. Not only has the underlying degree of global monetary instability continued to increase; Detlev Schlichter has now updated his original, excellent tome to incorporate contemporary developments, including the introduction of so-called ‘cryptocurrencies’ such as bitcoin, and he explores several plausible scenarios for the future of the faltering global monetary order. Readers will benefit from these insights, presented as they are in a highly readable, cogent style.”
—John K. Butler, author of The Golden Revolution and publisher of the Amphora Report investment newsletter

“A passionate, engaging, and depressing analysis of the approaching fiat money endgame.”
—Kevin Dowd, Durham University

“Detlev Schlichter’s book Paper Money Collapse, Second Edition develops a concise, clear, and at the same time deep economic analysis on the current elastic monetary system and why it is essentially incompatible with a free market economy. I strongly recommend this book to anyone interested in financial crises, economic recessions, and the future of capitalism.”
—Jesús Huerta de Soto, Professor of Political Economy, King Juan Carlos University (Madrid); author of Money, Bank Credit, and Economic Cycles

“Stumbling forward under the baleful influence of wishful thinking, the world’s politicians and central bankers are blundering down just the path Detlev set out in his first edition. With the Austrian measure of the UK money supply now increasing by over 12% year on year, I expect Detlev’s masterpiece to be increasingly relevant.”
—Steve Baker, Conservative MP for Wycombe, Member of the House of Commons Treasury Select Committee, and a co-founder of the Cobden Centre

“Detlev’s understanding and insight into central bank policy propelled him to being one of the world’s preeminent global bond managers. He cuts through the fog of central bank mystery by providing a clear description of their apparatus and methods. Going beyond the requisite professional skepticism, Detlev has trained his scholarly attention to highlighting the enormity of the potential further damage they may yet wreak on us.”
—Ken Leech, CIO, Western Asset Management Company

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 Detlev lives with his wife and three children in Hampstead, London.

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