Hard Money Is Based on the Rule of Law; Soft Money Is Monopoly Money and Is Based on the Rule of Man

Hard money is intended to be as stable and reliable as possible. It is represented as a definite, inviolable, mutually agreed-upon contract, such as the definition of the currency as a specified amount of gold. It is thus said that hard money is based on the rule of law, although any naturally occurring commodity money, such as cowrie shells, are also hard monies.

Soft money is usually intended to be adaptable to short-term policy goals, and because it is subject to the changing whims of its managers, soft money is said to be based on the rule of man. Soft money has no definition. Soft money is really only possible when the monetary system has been monopolized, since, if given the choice, citizens will naturally conduct their business in terms that are definite, inviolable, and mutually agreed upon. The only entities that have been able to monopolize the monetary system are governments and private entities in collusion with governments. (Most central banks today are privately owned.) Soft money is, literally, monopoly money. History has produced a natural cycle between hard and soft money, which has also typically been a cycle between government and private market control over the monetary system. The world is now in a soft money cycle; there are no hard currencies today.

--Nathan Lewis, Gold: The Once and Future Money (Hoboken, NJ: John Wiley and Sons, 2007), 19-20.

The Principles of Good Economic Management Can Be Expressed in Precisely Four Words: Low Taxes, Stable Money

Arthur Laffer went so far as to claim there are only four major reasons for a country to suffer major economic decline: monetary instability (probably devaluation), high or rising taxes, high or rising tariffs, and excessive regulation, particularly wage and price controls. Since tariffs are simply a form of taxation, the list reduces to only three. And since wage and price controls are usually imposed in reaction to the problems created by monetary instability or destructive tax policy, the list reduces further to two points—low taxes, stable money. The principles of good economic management can be expressed in those four words. If there is some sort of major economic difficulty or disaster in the world, it can usually be traced to some government whose taxes were not low enough (and probably rose sharply) or whose money was not stable enough (and whose value probably fell sharply).

--Nathan Lewis, Gold: The Once and Future Money (Hoboken, NJ: John Wiley and Sons, 2007), 139.

Much of the History of Monetary Theory Reduces to a Struggle between Opposing Mercantilist and Classical Camps

Much of the history of monetary theory reduces to a struggle between opposing mercantilist and classical camps. Mercantilists, with their fears of hoarding and scarcity of money together with their prescription of cheap (low interest rate) and plentiful cash as a stimulus to real activity, tend to gain the upper hand when unemployment is the dominant problem. Classicals, chanting their mantra that inflation is always and everywhere a monetary phenomenon, tend to prevail when price stability is the chief policy concern.

Currently, the classical view is in the driver’s seat. By all rights it should remain there since it long ago exposed the mercantilist view as fundamentally flawed. It is by no means certain, however, that the classical view’s reign is secure. For history reveals that, whenever one view holds center stage, the other, fallacious or not, is waiting in the wings to take over when the time is ripe.

 --Thomas M. Humphrey, Federal Reserve Bank of Richmond annual report, 1998

--Nathan Lewis, Gold: The Once and Future Money (Hoboken, NJ: John Wiley and Sons, 2007), 211.

The Term "Base Money" Is Used because upon the Base of Base Money Sits a much Larger Pyramid of Credit; It Is Incorrect to say that “Banks Create Money”; Only the Federal Reserve Creates Base Money; Banks Can Only Create Credit

The money that is created by the Fed’s magic checking account is known as base money and consists primarily of Federal Reserve Notes (i.e., paper currency, dollar bills) and bank reserves, which are deposits of commercial banks with the central bank and are recorded electronically at the central bank. Only the Fed can create base money, and the Fed can create no other type of money except for base money. Paper bills make up the majority of base money. . . .

The term base money is used because upon the base of base money sits a much larger pyramid of credit. A bank deposit is not money, but is actually a kind of debt instrument, a bond that must be repaid at the request of the lender, called the depositor. As a bond, it pays interest. While the amount of base money available is determined to the dollar by the central bank (at least insofar as bills are not destroyed or lost by their holders or created by counterfeiters), the amount of existing credit can change according to a nearly infinite number of factors.

Thus it is incorrect to say that “banks create money.” Only the Federal Reserve creates base money. Banks can only create credit, which does not alter the supply of base money, but which may have an effect on the demand for base money. Actually, anyone can create credit, simply by making a loan. Credit is not money.

--Nathan Lewis, Gold: The Once and Future Money (Hoboken, NJ: John Wiley and Sons, 2007), 49-50.