I have now read with pleasure, for the second time, your pamphlet, "Inflation."

I have looked for areas of agreement between your ideas and mine, because I would be particularly pleased with such concurrence. Ever since reading your The Crisis of the Free Market, published in 1945, I have regarded you as an exceptionally clear thinker.

I would say that we agree that: a) Governments can and do issue counterfeit money, and that b) such issues act as insidious taxation. We only partially agree as to the genuiness of any issue of "money" by any government.

Your designation as counterfeit (impliedly) applies to issues against deficits only. This makes the criterion of genuiness one of balancing the budget. As I see it, the professed issues of money by governments, national, state and local, cannot be genuine, because they are not the criteria of free exchange, i.e. a tax levy is not determined by free exchange, which is the only area in which money can be invoked.

I raise this distinction to lay a more fundamental objection to governments undertaking the issue function, although the distinction is really academic. Governments have no need to issue "money" where they have the courage to balance their budgets by frank taxation. Are you not saying, for all practical purposes, therefore, that all issues of professed money by governments are counterfeit?

It is not clear whether you use the word money in the sense that I do. I regard, as the primary monetary form, a draft against a drawing account established by a credit administrator of the monetary system. Thus the currency form would be but a conversion of a check, the primary form.

I read your pamphlet eagerly looking for some suggestion of a remedy for legalized counterfeiting, and found this on page 23:

A step in the right direction ... would be to compel the government to live within its income. This means limiting government expenditures, strictly and absolutely, to taxes that are openly acknowledged to be taxes. This means prohibition of the concealed and deceptive tax of inflation”.

Compel and prohibition are words of coercion that apply to fovernment measures over the citizen, but not in reverse. We cannot prevent the government from following political expediency, and it certainly is expedient in practicing paternalism to hide the taxation under deficits by means of counterfeit money issues. To do otherwise would be to let the socialist cat out of the bag.

Even if it were possible to force government to a balanced budget policy, it would not avert disaster, because of the more than $100 billion of bonds in the hands of private parties which, of course, have not yet been monetized. When the demand for cashing comes, as come it must, the government will have no place to go to get the necessary cash to "redeem" these bonds but to the banks, and this flood of counterfeit dollars will wreck not only the dollar but the government itself. Business must build its own monetary system to save both itself and government from utter chaos.

May I discuss with you the point you raised at the conference relative to the "insurance" provision in the valun plan? Perhaps you think its purpose is similar to the Federal Deposit Insurance Corporation, but it is not.

My visualization of the problem is this: Each bank in the monetary system is the mechanism of a community of money issuers, all using the same name, dollar or valun, etc. These issues pass into the common stream of money. Yet the varying credit policies of the various banks with their varying loss ratios suggests that there be introduced some compensatory factor to make them par. Or should we ignore these discrepancies, as has been done in all monetary systems to date? The tendency of defaults of money issuers is to unbalance the money supply with the values supply, producing slight inflation. But there is an offsetting factor in the loss —which may be considerable—of our currency through various natural causes. What do you think?