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 stone 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.
Fractional 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!
In 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 box 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.
May 10, 2006