How Much Money Do We Need?

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With government
largess rapidly approaching infinity, it may seem naïve to
raise the question of how much money an economy needs. But we need
to ask, if only to assure ourselves that reasonable questions are
still legal. In fact, the question itself serves as the title of
a 2007 book by Hunter Lewis, How
Much Money Does an Economy Need?
, which followed an earlier
book of his, Are
the Rich Necessary?
Though both are brief, their wisdom-to-word
ratio is quite high.

The question
of how much money an economy needs assumes we know what money is
and whether we need any at all.

If I had never
heard of Mises, Rothbard, and other Austrian economists, I might
say money is the Ben Bernanke–issued paper I would like to
have in my wallet. I want absolutely no limit on the amount. When
I decide to spend, I want the money to be there so I can spend it.
Don't make me think about the supply; it should be inexhaustible.
You want hard times? Make money hard to get. When I don't have enough
money, I can't spend, and that hurts me and everyone who's dependent
on me, which is ultimately the whole world. As a general rule, we
can never have too much money in the economy — the more, the better.
Therefore, when we read about Bernanke shifting the printing press
into high gear, we should ignore the babble accusing him of destroying
the dollar, the economy, and what's left of peace, liberty, and
prosperity. We should feel comforted he's doing the right thing.
Or if he's not doing the right thing, it's only because he's not
creating enough money. But in fact he is — look at the Dow.
Look at the staggering profits
of Goldman Sachs. As the big guys go, so goes the country. Wasn't
that
the rationale
for Paulson's handouts? Even the unemployment
rate
is slowing. We'll soon be back in Fat City — get ready
to uncork the champagne and toast the Fed.

Money in the
sense used above has never been accepted by people voluntarily.
It has to be forced on us through monopoly privilege and legal tender
laws, along with the outlawing or restriction of alternative monies.
Government money comes into existence after a market money is well-established,
with government's notes redeemable in the commodity money. Then
government eliminates the commodity backing and forces people to
use its fiat paper money exclusively. As Mises argued in his regression
theorem
, there is no way government can impose its paper money
on an economy from scratch. Money arises first in a barter economy
as a commodity that is commonly accepted in trade.

But why did
people even use a commodity money? Was that itself a corruption
of barter?

Money makes
prosperity possible

Commodity money
arose voluntarily as a logical extension of the direct exchange
of useful goods. In a barter world, the volume of exchanges is limited
to the double-coincidence of wants. Furthermore, the producer of
an indivisible good, such as a chair, might find he wanted five
other goods of lesser value, each from different producers. Without
money, he would either have to do without or trade at a perceived
loss.

Eventually
people discovered they could get around the limitations of direct
exchange by trading their products for goods they could trade later.
Certain goods eventually proved themselves more widely accepted
in trade than others, and people started acquiring them primarily
to make future trades. A good widely used for such indirect exchanges
became known as money. Among its various physical qualities, the
money chosen was divisible into smaller homogeneous units so that
the chair-maker, say, with money at his command from a previous
exchange, could acquire a dozen ears of corn, for instance, without
giving up a whole chair.

Commodity money,
then, arises through the voluntary cooperation of market participants,
meaning there is widespread support for the money without violation
of anyone's property. Over time, gold, and to a lesser extent silver
and copper, became the market's choice of monies.

As Rothbard
tells us, money makes it
possible for

. . . an
elaborate "structure of production" [to] be formed,
with land, labor services, and capital goods cooperating to advance
production at each stage and receiving payment in money. [pp.
20–21]

The round-about
way of trading a good for money, then trading money for some other
goods, is the basis of an expanding economy and the division of
labor. With commodity monies, or what Guido Hlsmann terms "natural
monies,"
civilization developed, with people living in
houses instead of caves.

In sum, money
originated as a highly-marketable commodity through voluntary exchanges.
It is needed for human life to flourish. But how much do we need?

Following Rothbard,
we learn that the total supply of commodity money in society is
equal to the total weight of the existing money-stuff. If the market
has selected gold as money, then the supply will consist of the
total weight of gold in society, regardless of its shape. Since
the money is a commodity, its supply will be governed by market
forces, such as the profitability of mining or its demand for nonmonetary
uses. Because money is not used up like other commodities and its
potential supply is thought to be small, changes in its supply will
tend to occur slowly.

Since money
as such is neither a consumer nor a capital good, increases in its
supply confer no social benefits. If the supply of hammers increases,
it boosts the availability of hammers to the public; if the supply
of money increases, it makes the hammers more expensive and lowers
their availability. More money, therefore, does not make the general
public richer; it merely dilutes the purchasing power of the money
unit. On the other hand, if the supply of money should decrease,
each remaining monetary unit will buy more. The supply of money,
therefore, does not affect the total wealth of society; it only
affects the price of that wealth.

Conclusion:
Any money supply will do, above a minimum threshold.

How did
we wind up with Bernanke?

There will
always be people who wish to live at the expense of others. Government
does this through taxes and inflation — which is here used as an
increase in the money supply — and in modern times, inflation, because
it is generally misunderstood by the public, is a politically safer
method of confiscation than taxes.

Banks generate
inflation through the practice of fractional-reserve banking. Banks
profit from inflation. The gold redemption requirement limited the
amount of inflation banks could create.

Inflation also
creates crises. In the old days when people lost confidence in their
banks they made a run on their banks to get their money back. No
fractional-reserve bank could meet its obligations. The government
protected the banks by allowing them to default on their obligations
but still keep their doors open. They were allowed to collect loan
payments from debtors.

In 1913, after
over a decade of promoting the idea of banking "reform,"
the biggest bankers got together with key politicians and got a
law passed creating a central bank — the Fed. The Fed would be in
charge of the money supply. The government granted its notes a monopoly
privilege and legal tender status; in return, the Fed provided the
government a new revenue source without the hassle of the legislative
process. The year 1913 is frequently cited as the end of the American
republic and the beginning of the American empire.

For the first
two decades of the Fed's existence, gold was still money, though
its everyday use had been discouraged. As long as gold was still
the heart of the monetary system, it could disrupt Fed plans.

Fed inflation
during the 1920s brought on the depression of the 1930s. This is
not the accepted explanation. The accepted explanation is there
was no inflation during the 1920s because prices remained stable
— and in most quarters stable prices mean no inflation. Prices remained
stable because real economic growth offset Fed increases in the
money supply.

The Fed's monetary
inflation caused malinvestments that had to be corrected. Unlike
all previous recessions in American history, including the recession
of 1920–1921, the government refused to let the correction
happen, first under President Hoover, then under FDR. One of the
first things President Roosevelt did was to confiscate the people's
gold. He took the country off the gold standard, announcing that
Americans could no longer get Fed notes and deposits redeemed in
gold coins. President Nixon did the same for the rest of the world
in 1971.

The American
dollar is no longer tethered to gold. Whereas money was once difficult
to create, thus keeping its supply limited and protecting its value,
the Fed can create fiat paper money in any amounts at the push of
a button. Because of the benefits that accrue to the early users
of the new money, there is pressure throughout the political system
to keep the money machine printing.

Ben Bernanke
is committed to monetary inflation. He claims it is healthy in boom
times and will pull us out of any recession. He blames the Fed for
not inflating enough once the Great Depression began. He's determined
not to make the same mistake today.

Fiat paper
money regimes are not designed to promote a healthy economy. They
are designed as a means of wealth distribution for the benefit of
a few.

That probably
doesn't include you, and it definitely doesn't include me.

George
F. Smith [send him mail]
is the author of The
Flight of the Barbarous Relic
, a novel about a renegade Fed
chairman. Visit his website.
Visit his blog.

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