Monetary Myths

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Perhaps the
key failing of those who despise the market in favor of government
control is their misunderstanding of what wealth is and how it is
produced. In a way, the prosperity resulting from the industrial
revolution has impaired our ability to appreciate the complex system
that produces the myriad of products and services we consume. Before
the advent of industrial production most people lived in fairly
autarkic circumstances. They produced what they consumed and vice
versa. The ever-increasing division of labor and the widespread
use of a common medium of exchange have radically increased man's
ability to create wealth, while at the same time fundamentally altering
the common person's understanding of what wealth is.

Most people
I know have surprisingly childish views about wealth and money.
Government schools have no doubt had a hand in this phenomenon,
but it was facilitated by the seemingly spontaneous processes of
modern production that we have come to take for granted. I'm sure
we all remember being young and wanting things our parents couldn't
afford. The stores always seemed to have an endless supply of stuff
just sitting around. Why couldn't we have some? Our friends all
seemed to have as much as they wanted. So what's the problem?

At one time
or another we became acquainted with the cliché, "money
doesn't grow on trees," or some similar derivative. Now, for
most people reading this (except the really ancient ones), this
statement was an outright lie. Ok, perhaps lie is the wrong word
since there was no intent to deceive on our parents' part, but it
was false nonetheless. Money does grow on trees, and in trees, and
out of trees. It's made of paper. But notwithstanding this sophomoric
observation, what they probably meant to say is, wealth doesn't
grow on trees. It is this distinction many parents fail to make
clear to their children, probably because they don't grasp it themselves.

The function
of money is exchange, although as a by-product it also makes possible
the calculation necessary for complex economic activity. It is not
wealth in and of itself. It is neither a production nor a consumption
good. Its function is merely to facilitate the exchange of goods
and services in a way bartering never could. From a logical standpoint,
there is little difference between barter and money transactions.
In both cases it is the actual, physical goods that are being exchanged.
The money just serves as a helpful medium.

Money is not
a store of value as some claim. Value is subjective and can't reside
in an inanimate object. But in a figurative sense, money represents
production. Money carries with it an expectation. We see it as the
symbol of our productive effort, which can be traded for the things
we desire. That's why we accept it. We expect that others will do
the same. In our minds, money becomes the physical embodiment of
our sweat, our hard effort, our ideas, our achievements, and our
labor. It is these things, and the material goods they produce,
that do not grow on trees. The money we currently use does.

But money didn't
always grow on trees. It used to be hidden deep underground and
it took a lot of time and hard work to dig it up and make it usable.
It used to last indefinitely. It used to be extremely difficult
to counterfeit. This was why it became money in the first place.
But now we've done away with all those ancient superstitions and
foolish notions of security. The gods of democracy have brought
us a new kind of money. We were told that the old money was just
too rigid to work in a complex economy such as ours. This new money
is much more “flexible.” H.L. Mencken once wrote, “Democracy is
the theory that the common people know what they want and deserve
to get it good and hard.” Well, apparently we want flexible money,
and as Gary
North has observed
, “The public is going to get flexible money,
good and hard.”

The switch
from commodity to paper money is a product of the same mentality
that causes children (and adults) to wish for a money tree. It is
the desire to be a non-producing consumer, or in other words, a
parasite. A person in possession of a money tree could consume indefinitely
without giving any productive output in exchange. The goods he consumes
must be produced by other men and yet he adds nothing to the supply
of goods for consumption. He is not trading his production for that
of his neighbors. He has expropriated what would otherwise be consumed
by other people and in this sense he is a thief. That which he steals
seems to be given up freely, but this is not the case.

The fact that
I have money says to others, look, I have produced something valuable.
Now let me trade that production (in the form of money) for what
you have produced. The owner of a money tree has not produced and
in that sense he is not only a thief but a liar also. Every dollar
he picks from the tree is a lie that is used to enslave other men.
Theft is a form of slavery. Stealing the production of another man
after it is produced is hardly different than enslaving him and
forcing him to produce for your benefit in the first place. In this
case the theft is performed through an insidious deception that
is all the more dangerous for its subtlety. The fraud does not fall
directly on the first recipients but is passed on unawares and only
gradually does it make itself evident.

It was precisely
the "inflexible” nature of purely commodity money that kept
it from becoming a tool of slavery and theft (in any significant
sense.) But man's ingenuity knows no bounds and his deviousness
is often formidable. The money tree mentality is as old as time.
The Romans
fell prey to its hypnotic spell and it proved their undoing. In
the medieval ages it was known as alchemy and many wealthy men squandered
their inheritance in search of the philosopher's
and it's siren song of unearned gold. But it wasn't until
more sophisticated markets began to emerge, and people started using
paper money substitutes that we became susceptible to fraud on such
a grand scale.

reserve banking was the root system from which the money tree sprang.
People began to forget what money was. Not only did they confuse
money with wealth, they also lost sight of the difference between
money and money substitutes. Exchange and consumption replaced capital
accumulation and production as the perceived foundation of economic
activity. It was only a matter of time before someone came along
who could convince people that trees really did produce money, and
that they would all be better off because of it.

The second
part was not much harder than the first. One need only play on the
ignorance of the common people and on the greed of the rest. Before
long this new money was being showered down on the world like autumn
leaves in the forest. The public thought that they had found in
the state a magical money tree that would shower them with prosperity
in their youth and security in their old age. But it was those in
power who had found the real cash cow in the form of a sheepish
public willing to be fleeced ad libitum through use of the state's
funny money. They are a very exclusive clique and they don't take
kindly to competition. Counterfeiters beware!

his new book Money,
Bank Credit and Economic Cycles
, Jesus Huerta De Soto does
a masterful job of explaining the origins and pitfalls of fiat money.
He makes the observation that “We could liken banks' creation of
money through credit expansion to the opening of Pandora's box.”
This is the dangerous
from Greek mythology that once opened, unleashed plague,
sorrow and poverty on mankind. This is a particularly fitting metaphor
since most of the statist plagues that currently inflict us are
only made possible by the massive amounts of wealth our rulers siphon
unseen from the private sector by simply shaking the money tree.

It is wealth,
or in other words production, which does not grow on trees despite
all the statist attempts to make us believe otherwise. There is
no philosopher's stone and even if there were it could not produce
wealth. Paper is not wealth. Gold is not wealth. Nature does not
accept either. She accepts only that which conforms to her laws.
Nowhere in the halls of power will ever be found the ability to
repeal the law of scarcity or to cause the earth to yield its bounty
without constant effort on our part. Nature will not be cheated,
and if it seems that we have succeeded in doing so it is only because
the consequences are lying in wait, just out of sight.

In his essay
entitled Compensation,
Ralph Waldo Emerson wrote the following. “Life invests itself with
inevitable conditions, which the unwise seek to dodge… If he escapes
them in one part, they attack him in another more vital part. If
he has escaped them in form, and in the appearance, it is because
he has resisted his life, and fled from himself, and the retribution
is so much death. …It would seem, there is always this vindictive
circumstance stealing in at unawares, even into the wild poesy in
which the human fancy attempted to make bold holiday, and to shake
itself free of the old laws, –this back-stroke, this kick of the
gun, certifying that the law is fatal; that in nature nothing can
be given, all things are sold… If [the] price is not paid, not that
thing but something else is obtained… it is impossible to get any
thing without its price.”

The world has
been sold the idea of government-managed fiat money as a means to
prosperity. We have been sold the idea that there really is a money
tree that will shade us from the effects of the business cycle and
provide us with eternal affluence and greater material equality.
We have been paying for these delusions ever since, and we will
keep paying. But the final price for this transaction has yet to
be reckoned. At some point we will be forced to realize that we
have not been sold the thing we had hoped for, but in the words
of Emerson, "something else is obtained." If left unchecked,
the price for that something else may well be the very civilization
that generations have strived so hard to build.

The most powerful
form of theft and slavery ever devised has been placed in the hands
of villains and demagogues. With it they vastly redistribute income,
wage destructive wars all over the globe and wreak havoc on social
relations. They do all this from behind a shroud of Keynesian legitimacy
and this is where we must strike them. Mises taught that, "In
the long run even the most despotic governments with all their brutality
and cruelty are no match for ideas." Neither is all the paper
money they are capable of printing. If the ideas of liberty and
sound money were to flourish as they once did, the state and its
printing presses could be rendered impotent. And that is something
worth working towards.

10, 2006

Singleton [send him mail]
is a Brigham Young University student studying economics and Mandarin
Chinese. Visit his

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