• 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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