Sunday, December 21, 2008


by Bill Bonner and Lila Rajiva

It was the Chinese who invented paper "money" around the beginning of the ninth century A.D. Because it was so light it would blow out of their hands, they called it "flying money."

The ancient Chinese were right about the lack of substance of paper currency. The greenback seems to have less substance every day. But we do not wonder why the greenback seems to be dying. We wonder why it isn't dead already.

In search of an answer, we look back, to a case brought by the First National Bank of Montgomery, Minnesota, against one Jerome Daly in 1969.

The bank had lent Mr. Daly $14,000 in a mortgage loan. Then it tried to get its money back by foreclosing on Daly's house. Daly took to the courts with a defense so ingenious even a Chinese banker might wish to emulate it.

You can't enforce a mortgage contract, said he, when there was no contractual obligation. And there was no valid obligation because no "consideration" had been given by the bank. Having gotten nothing from the bank, he had nothing give back.

In support of his testimony, Mr. Daly, a lawyer, called the bank president to the stand and demanded to know if the bank had actually handed him a wad of $20 bills.

"Isn't it true," he began, or words to that effect, "that the bank did not actually give me a stack of $20 bills? In fact, the bank didn't give me any bills of any sort, right?"

"Well, yes…but…" the bank president must have replied.

"Nor did the bank convey any property to me…or give me gold coins…or any other valuable, tangible thing…right?"

"Well, yes…but…" came the next reply, also cut off by Mr. Daly's next question.

"And isn't it true that the bank did not go out and borrow extra money so it could lend it to me…nor did it draw down its depositors' accounts in order to give me money?"

"Yes, that is correct."

"In fact, the so-called mortgage loan was, from your point of view, just a bookkeeping entry. Is that not right? And is it not true that the 'money' never existed at all…at least not in the sense that most people think of money…and that this 'money' was actually 'created out of thin air' as the economist John Maynard Keynes once described it?"

"Well, yes…but…"

By this time, both judge and jury were nodding their heads, sure that they had a combination of Charles Ponzi, John Law and Kenneth Lay on the witness stand.

"Fraud!" concluded Justice Mahoney and went on to rule that the bank had given Daly no lawful consideration, had created $14,000 out of nothing, and had done so without the backing of any U.S. law or statute.

Therefore, it followed, the bank was obliged to let Mr. Daly keep his house. And, thus it was that Mr. Daly kept his house.

Whether the reasoning behind this case was right or wrong is not at issue here. Our questions are more numerous but much simpler.

We want to know why there are not more Dalys demanding to keep their houses today. And why there are not more Mahoneys around to let them.

Why did one small court adopt this argument while it left no mark otherwise on American jurisprudence? Despite Justice Mahoney, U.S. courts have rejected every other attempt to argue that the U.S. dollar is not the lawful, valuable money everyone thinks it is.

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