An e-mail to me prompted this reply, only because I regard the subject as so important: What is money and how should it be produced? The e-mail writer had a number of agreeable thoughts but ended up saying something I think is hopeless: “My thought is that a quantity of currency ought to be increased (or decreased) periodically only according to an increase (or decrease) in the GDP denominated in that currency”.

My reply with some editing and extension now follows. We can arrive at solutions within human limitations. Money is produced. It goes through a production process with intermediate goods involved before it becomes useful to consumers. The production can be either managed centrally by one monopolistic outfit or it can be managed by a number of outfits. I prefer the latter, with entrepreneurs doing the production.

Must a society establish ground rules in the case of the latter? Probably yes, some. Their nature and content? Certainly, producing an imitation of some guy’s money, a counterfeit, and attempting to pass it off as the other guy’s, should not be allowed. This includes shaving a coin that’s supposed to be a certain weight of something. It includes using up an inventory that’s supposed to be there and paying off an accountant to lie about it.

The key is not these subsidiary counter-crime rules. The key is one producer vs. many, with the many choosing to produce what they will as money and offering it to potential customers.

Behind that is the main key: that money is a produced good with a worth. Many producers means that the entreprenurial process is the way to get it produced and priced.

Money could turn out to be a variety of things, as it historically has been. A few might dominate in today’s global economy. We do not know.

Turning to or allowing entrepreneurs for its production is the only way to avoid the case of a money being imposed by a single issuer or being imposed by a handful of issuers. This non-entreprenurial or centrally-imposed or one-size-fits-all method doesn’t solve, that is alleviate, the problem of shifts in demand for money arising from many sources, including consumer demand, uncertainty, new goods, new techniques, changes in ways of doing things, and so on. It doesn’t solve the problem of shifting supplies and changes in costs.

The so-called Austrian gold answer to all of this could not be more non-Austrian by fixing on one thing to be used as money. Why the adherents of Austrian economics do not conclude that, as with other goods, entrepreneurs and the profit incentive can deal effectively with the production of money and central management cannot, is beyond my understanding. They criticize the central bank’s central management, but they then proceed to recommend a single system themselves.

Thanks for your thoughts, many of which make sense to me. The main one that does not and I urge you to go beyond is the notion of linking money to GDP. That will bring back in a central authority that claims to know what money is and it brings in measurement problems. It arbitrarily imposes some sort of goal for how much is to be produced, etc., etc. In my opinion, that’s no good at all.

We do not know what money is specifically or how to produce it or how much of it to produce beforehand. This is a job for entrepreneurs. That’s my position.

It takes a theory to beat a theory. The ruling theory at present is state-produced money in league with a banking system. The theory is that the state’s wise heads or its agents are best situated to use professional expertise to produce base money, and that the banks acting under profit incentives then produce currency based on viable loans, with liquidity produced by a central bank when needed. In theory and practice, this meets with extremely severe difficulties. The Austrian school has been in the forefront of pointing these out. The state and its agents continue to play dumb and deny that their system is fundamentally in any way responsible for the repeated financial crises.

The Austrian school needs a theory to beat the theory of state-controlled money. It’s divided on this score. The proponents of gold and 100%-reserve banking are relying on the theory that gold and silver used to be market-determined money and that the system didn’t produce either excessive price-level changes or business cycles. The other school of thought is that entrepreneurs acting under the incentive of profit can produce money, just as they produce the vast panoply of goods that stock our shelves, homes and businesses. The support for this theory is before our eyes in the form of this massive production of wealth, undirected by central authorities and responsive to consumer wants and needs. Government doesn’t do this. Why should government alone produce money? By the same token, why should the government alone produce postal services? If that monopoly can be eroded, which it has, why can’t the same happen with the government monopoly on money?

Scores of non-Austrian economists have a tendency to look back in history to the so-called free banking era in order to issue a judgment on the viability of competitively-produced monies. They are substituting a few trees that were subject to particular institutional and state forces at that time for the more general forest. The forest is the capacity of entrepreneurs to produce a vast range of goods. Money can today again be one of those goods. Historically there are plenty of periods where money has been one of those market-produced goods, here and in other countries. There is actually a great deal of evidence of the viability of privately-produced money.

The Best of Michael S. Rozeff