EXPOSED: The Great Money Fiction
Men spin myths as spiders spin webs…
Adam and Eve munched the apple, Zeus kinged the Earth, Washington axed the cherry tree.
To these fabulous fictions we must add another:
Money and wealth are synonyms.
It is this last myth — this devilish myth — that commands our attention today.
Murdered and buried 1,000 times, 1,001 times it has risen from its grave.
The very gods envy its eternal appeal.
Man chased the gods down from Olympus aeons ago. Yet the money myth lives, breathes, prospers in A.D. 2019.
Inflation: The Birth of a Thousand Illusions
Explains Henry Hazlitt in his masterly Economics in One Lesson (1946):
The most obvious and yet the oldest and most stubborn error on which the appeal of inflation rests is that of confusing “money” with wealth… So powerful is the verbal ambiguity that confuses money with wealth, that even those who at times recognize the confusion will slide back into it in the course of their reasoning…
Yet the ardor for inflation never dies. It would almost seem as if no country is capable of profiting from the experience of another and no generation of learning from the sufferings of its forebears. Each generation and country follows the same mirage. Each grasps for the same Dead Sea fruit that turns to dust and ashes in its mouth. For it is the nature of inflation to give birth to a thousand illusions.
China first went chasing after this false fruit in the ninth century CE.
The results were… predictable.
By 1448 CE notes — face-valued at 1,000 — were trading for 3.
To jam inflation back in its cage, China turned to silver by 1455.
It did not revisit paper until the late 19th century.
Meantime, Rome famously clipped coins.
Kings, princes, prime ministers and presidents throughout history have pursued the same water-into-wine illusion… or the related miracle of the printing press.
In each instance they came to grief.
A Thought Experiment
As we have stated before, money measures wealth — it does not create it.
Money no more creates wealth than yardsticks create yards.
Consider the thought experiment of 18th-century philosopher David Hume…
A benevolent fairy slips money into all the nation’s pockets overnight. Instantly the money supply doubles.
Is this nation doubly rich?
Alas, it is not.
The money supply has doubled, yes. But no additional goods have entered existence.
The new money will simply chase existing goods. We can thus expect prices to roughly double as it runs them down.
The late economist Murray Rothbard:
What makes us rich is an abundance of goods, and what limits that abundance is a scarcity of resources: namely land, labor and capital. Multiplying coin will not whisk these resources into being. We may feel twice as rich for the moment, but clearly all we are doing is diluting the money supply. As the public rushes out to spend its newfound wealth, prices will, very roughly, double — or at least rise until the demand is satisfied, and money no longer bids against itself for the existing goods.
And so we come to this question:
What then is the proper money supply?
Money and “Price Stability”
Should the money supply increase each year to match that year’s increase of goods?
That is, if the stock of goods increases 2%, should the money supply increase 2% to keep pace?
Most would argue yes. Here is the way to “price stability.”
They concede an overproduction of money relative to goods will yield inflation. But they will tell you a mild inflation is bearable — healthy, even.
Consumers will purchase goods today because they know their dollar will fetch them less tomorrow.
A little inflation can therefore keep an economy on the jump… and business in funds.
Conversely, an undersupply of money relative to goods works the opposite effect.
Deflation means people will delay today’s purchases. That is because they expect prices will be lower tomorrow.
Goods will languish upon shelves, stockrooms will overflow… and the wheels of commerce will slow to a standstill.
Thus is deflation the great bugaboo, the great fee-fi-fo-fum of monetary economics.
It must be routed at all possible hazard. The money supply must therefore increase, continually.
But let us dynamite a hole in this lovely theory…
Why Do People Keep Buying Computers and Large-Screen Televisions?
Consider, if you will, computer prices… or large-screen television prices.
They slide lower year upon year.
Yet where is Armageddon?
Computers and large-screen televisions drive a very brisk trade — despite consumer expectations of falling prices to come.
So we revisit this question:
What is the proper money supply?
And if you can imagine it… could the economy rub along without any increase in the money supply whatsoever?
That is, if the money supply were eternally set to fixed levels?
Paul Krugman would sweat, shake and stagger at the mere suggestion of it.
The Mystery of Prices
In an economy of fixed money, all goods and services must bid against the existing money stock.
Some prices will rise on supply and demand. Others will fall on that same supply and demand.
Consumers may prefer X to Y this year — for example.
The price of X will rise. And the price of Y will fall… all else being equal.
The maker of X will therefore profit, even in a world of fixed money.
What about the maker of Y?
He must lower his prices. But the consumer is the beneficiary. He can purchase Y at a reduced price.
His purchasing power has therefore increased.
And so it goes, back and forth, forth and back.
We are led then to this throttling conclusion:
The argument that the money supply must constantly expand finds little excuse in the facts.
If prices are free to find their own equilibrium, changes to the money stock are unnecessary.
And any amount of money will do the duty of any other.
“We Come to the Startling Truth That It Doesn’t Matter What the Supply of Money Is”
Explains the grandee of “Austrian” economics, Ludwig von Mises:
As the operation of the market tends to determine the final state of money’s purchasing power at a height at which the supply of and the demand for money coincide, there can never be an excess or deficiency of money. Each individual and all individuals together always enjoy fully the advantages which they can derive from… the use of money, no matter whether the total quantity of money is great or small… The services which money renders can be neither improved nor repaired by changing the supply of money… The quantity of money available in the whole economy is always sufficient to secure for everybody all that money does and can do.
Here the aforesaid Murray Rothbard — who learned at Mises’ elbow — affirms:
We come to the startling truth that it doesn’t matter what the supply of money is. Any supply will do as well as any other supply. The free market will simply adjust by changing the purchasing power, or effectiveness of [money]. There is no need to tamper with the market in order to alter the money supply that it determines.
To repeat — for emphasis:
Any amount of money is as good as any other. And there is no screaming need to add more.
Thus we declare ourself heretic, raise our infidel flag… and train our cannons on the castle walls of the economics profession.
In conclusion, we petition the government to shutter the Federal Reserve… and point its members toward productive employment in private industry.
Their services are no longer required…
Managing editor, The Daily Reckoning