Monetary "policy" is unnecessary when the medium of exchange has significant intrinsic value. by Paul Benedict
(libertarian)
Wednesday, February 1, 2012
Money is common sense. Anyone who tells you differently is a huckster or has been fooled by a huckster. Nevertheless, it takes a little consideration. For starters it might be good to begin with a few questions such as:
What is money?
Does the value of money exist in its utilitarian economic benefits, or must money have intrinsic value?
There is an abyss quite close to my home. It best viewed, like the Grand Canyon, by a slow walk along its edges. Those of you that know this discussion extremely well, please dont spoil the view by asking us to sprint from thought to thought. Instead please walk with us, enjoying the relaxed pace of this peripatetic exercise with its gradual increments. Today well see but the distant ridges of the abyss near my home, but we should be able to see them quite clearly.
The Primary Value of Money
Perhaps the freest economic form of exchange is the barter system. Imagine trading three lambs for a years supply of seed corn, or a pig for a measure of firewood for the winter. No money is used. The exchange requires no government agency or regulation, and the price was determined by the purest movement of supply and demand. Moreover, such an exchange is beyond taxation since the government is excluded entirely (That is not to say that some ancient publican would not have found a way to assess a tax on the land or livestock before the exchange).
Likewise, consider a primeval farmer's market in which all the goods and produce were on display. Such a place might easily attract tradesmen with their wares. Garments of woven wool are bartered for the fleece of that years sheep. Primitive iron works are traded for bushels of grain. Money would be not necessarily be required at all. Instead, every good, service or product could be exchanged with the immediacy of supply and demand as the day began and ended. Or would they? Finding the precise deal would take effort. It is reasonable to assume that every deal for a desired commodity would include and exchange for other unwanted items. Suppose you wanted to trade a mule, but the best buyer had only asparagus with which to barter?
Enter the gold coin: easy to measure, easy to carry and desired by all for use in making their glistening gods to adorn their homes and gardens. This universally accepted medium of exchange adds efficiency to the market. The laws of supply and demand work much more exactly. Specialization increases and with it quality and abundance. There are no more odd combinations of one merchants carrots and anothers ducks to hit on the correct exchange rate for the man trading in saddles.
From this model comes an example of the primary value of moneyeconomy and efficiency in exchange. In an agrarian society this efficiency might be measured in man hours; in an industrial society the utilitarian value of money to the economy is inestimable. It is a function of its value in the agrarian model, but the utilitarian value of money becomes exponentially more valuable as societies specialize and develop industry.
The Intrinsic Value of Money and the Money Supply
Of old, gold, silver, and copper each had an intrinsic value that assured their utilitarian value in facilitating the exchange of goods. This intrinsic value was based on supply and demand. If gold was scarce, then it would purchase more bushels of wheat. If silver was in great supply, it might purchase fewer chickens. In either case the intrinsic value of money was determined by supply and demand relative to the supply and demand of the goods for which it facilitated exchange. The intrinsic value of the medium of exchange, the money itself, is never absolute. It also is subject to supply and demand.
Notice that when money has intrinsic value the money supply expands and contracts organically. No monetary policy is necessary.
Biblical Money
Work is as much a part of living as is breathing, and human labor is naturally most profitable under conditions of specialization and market efficiency. Debt, lending and living by usury are not. Debt, lending, and living by usury are kinks in the hose, donkeys in the well, and cracks in the cistern of a society's prosperity.
The practice of usury is frowned on in the Bible. All debts were forgiven, or should have been forgiven, every seven years. Every seven years the land, or the essential means of production, reverted even to the most failed capitalist inIsrael. These ethical premises also allowed for national prosperity to be renewed and financial blessings to flow freely. Even today, a bankruptcy is scrubbed from ones credit rating after seven years.
There is then only a one record of successful creditors in the Bible. This is the Matthew 25 Parable of the Talents. The unfaithful steward hides his talent while the faithful stewards lend or invest their talents and repay their master with interest. What is important is that the faithful stewards put the actual weight of their money to work. They did not write promissory notes using the talent as a fractional reserve.
Once the discussion of money enters into the calculus of usury and debt, the subject does become a house of cards. Monetary Policy and related definitions increasingly become a shell game more vicious than anything on the streets of the South Bronx. For the immediate future though, you need only watch you toes. Well only be playing with the sand sharks.
When Money has no Intrinsic Value
Such a thing is almost unimaginable at first blush. However, consider this model. The state, by taxation, and lets say, as in ancient Egypt under Joseph, by way of a miraculous windfall, owns tremendous amounts of goods and, by fiat or command, provides tremendous quantities of labor. Now, if the government issues an intrinsically valueless currency, it has the economic wherewithal to guarantee delivery of goods and services according to the contract the valueless currency has promised. All legal tender becomes a note of promise based on the financial wherewithal of the government to make good. This, of course, is where the United States currency must currently be categorized.
Historically, it has been the case that certain lending practices have also produced a variety of intrinsically valueless currencies. The bank offers a promise for the delivery of goods and services, and the promise itself becomes the basis of exchange. As long as the promise remains in circulation as a means of exchange, the goods promised by the bank (often a hard currency of intrinsic value) never gets delivered. It never gets delivered because the utilitarian value of the promise is greater than the intrinsic value of the promised goods or currency. When this balance of value changes, bank runs happened. Banks go belly up and people lose all their money. Historically, when this happens, there is a negative impact on the economy beyond the immediate inability to exchange goods and services. Some economists euphemistically describe this negative impact as a contracting money supply.
This contraction of the money supply is the bust portion of the boom and bust cycle. While the boom and bust cycle often is laid at the feet of capitalism, the cycle is not the product of free markets, or property, or property rights. The boom and bust cycles, at least in United Stateshistory, have all been, primarily, the consequence of runaway usury and the practice of fractional lending1. If banks were permitted to loan only the actual gold in their vaults, rather than to promise gold on a fractional basis, the boom and bust cycles would not have occurred with such violence.
When money has no value
When money cannot be exchanged for any good or services it is no longer money. Hence, from a strictly tautological standpoint all money has value, however infinitesimal.
Consider the inflation in the Weimar Republic between WWI and WWII. Although, certainly the Treaty of Versailles exacerbated the disaster, the root of the problem was the 1914 decision to go to an intrinsically valueless currency. Money not only lost its value so that it could not be used in place of barter, its small positive value was accompanied by a secondary negative economic value. Its failure to work as a medium exchange destabilized the state disrupting, to some extent, even the opportunity for barter. At a certain point, money without intrinsic value will have both an infinitesimal microeconomic utilitarian value while having an inestimably large negative macroeconomic value.
This is enough for immediate consideration. Can you see that distant ridge on the far side of the abyss? It's beautiful in its symmetry, is it not?
Reader comments are more than welcome. Money is a community thing. Talking about it is probably best as a community effort.
Corollary questions arise:
How like our fictional example of Josephs Egyptis the U.S.economy?2
What of a government able to procure goods and services enough to insure most of the promises of its valueless currency based on international debt?
Who should abhor an intrinsically valueless currency more, the political elites or the common man?
Can a debtor nation that owes it debt in an intrinsically valueless currency transition to an intrinsically valuable currency?
What would be the effects?
If it can, how should that value be chosen?
How can a bank lend me money it does not have, that I repay by the sweat of my brow? (Indeed, if I repay only two or three times the amount the bank didnt have to lend me, then I count myself fortunate and prosperous!) What is the name of this miracle of human stupidity? Answer: trolianfc nelngid
1. From Random Historys fairly standard A History of the U.S. Economy: Depressions (or Panics) of 1873 and 1893 were actually caused in large part by unrestrained development and financial over-speculation, ... The Panics devastated small businesses.
... While the precise causes of the Great Depression are both numerous and challenging to pinpoint, the economic effects were disastrous. At its peak, unemployment was nearly 25 percent of the workforce as hundreds of banks failed (about 40 percent) and hundreds of millions of deposits were lost (Ferguson 2008).
And from Real Clear Markets on the panic of 1921: The storm broke in May of 1920 and arrived as these things usually do - almost everyone at the opera was caught napping when the lights suddenly came on. Bank failures, which numbered 63 in 1919, spiked to 506 by 1921. By June of the latter year, the money supply had dropped 9%, GNP 17%, and the index of wholesale prices collapsed from 247 in May of 1920 to 141 by July of 1921
2. Again from Random History: The 1917 War Revenue Act raised taxes while the government sold bonds to the general public and the newly founded Federal Reserve. ... Taxes were lowered after the war, but remained higher than before it. The Federal Reserve assumed a more dominant role asNew York became the financial center of the world. The federal government, in short, showed it could be a dominant force in the American economy. Notice the increased monetary power of the federal government after the institution of the Federal Reserve Banking system and the income tax.
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