Counterfeiting Money Is Legal
The insightful Global Economic Analysis blog has a concise write-up on "Helicopter Ben" and the Twelve Bankers and the reality of our current Federal Reserve system.
Did you ever think that a counterfeiting money could be good for the economy and that the counterfeiter could be considered an economic genius or even a national hero?
Comments (46)
My question is that I can't believe that this has gone unchallenged. Aren't there court cases on this?
Article 1, Section 10 of the constitution clearly says ... "No state shall ... coin money; emit bills of credit; make anything but gold and silver coin a tender in payment of debts; . Also the Ninth Amendment .... "The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people." .... So where does it say the government can force paper money down my throat? Also the Tenth Amendment ... "The powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or to the people." ... so where does the constitution say anything about national monetary policy or the Federal Reserve?
Seriously, INAL, but it seems pretty clear to me. Surely this has been in the courts somewhere? What did they say on this?
Published: February 11, 2007 10:11 PM
That's not counterfeiting. Fractional reserve banking does not involve selling something that is an intentionally misleading fake copy of another person's property.
In contrast, fractional reserve banking is a wonderful invention of the free market and I can't understand why any statist would want to trample on the free-market by creating a prohibition against banking.
Privatise money and let fractional reserve banking flourish.
Published: February 11, 2007 10:14 PM
Sounds like someone hasn't read Rothbard's What Has Government Done to Our Money?. Fractional reserve banking is counterfeiting precisely because it gives two people claims to the same money and makes any bank that practices it inherently bankrupt. Rothbard also showed in there how fractional reserve banking can't exist on a market, at least not as an institution. Other banks will simply redeem their clients' notes in order to be able to bust fractional reserve banks and to keep the confidence of depositors.
Published: February 11, 2007 11:10 PM
Fractional reserve banking does not involve selling something that is an intentionally misleading fake copy of another person's property.
Most people do not understand that fractional banking creates bank notes which are not money.
In fact, most people are convinced that US dollars are real money, representing some real goods.
The only way to achieve this state of commonly shared delusion is not to merely mislead people; it requires actively brainwashing them.
Published: February 11, 2007 11:39 PM
Angelo is right, of course. Also, De Soto very carefully traces the legal, moral and logical issues of fractional reserve banking in his Money, Bank Credit, and Economic Cycles. Hans Hermann Hoppe also offers a terrific refutation of fractional reserve banking in his "Against Fiduciary Media" article which was published in The Economics and Ethics of Private Property.
Published: February 12, 2007 7:58 AM
Just to set the record straight, the surname of the author of Money, Bank Credit, and Economic Cycles is "Huerta de Soto", and is different from the surname of Peruvian economist Hernando de Soto (de Soto).
Published: February 12, 2007 8:30 AM
The free market might support some small level of fractional-reserve banking. It sort of did in the past, although we never had a completely free market to be able to tell. I think of this like shoplifting, mail order fraud where customers receive the merchandise but report it as unreceived, etc.: the free market tolerates a small amount of this theft because it would be too costly to eliminate it 100%.
However, the significant insight is this: it is the GOVERNMENT that props up fractional reserve banking, currently by allowing the banks to collude and maintain a much lower minimum reserve than they did before the establishment of the Federal Reserve. (Though they told me in school the Federal Reserve was established to prevent the banks from having a 0% reserve. Fact is they lowered it from a semi-market-chosen 20% to 11%, or something like that.)
For those of you who haven't, definitely go read Rothbard's Money book. ASAP. Then read Whatever Happened to Penny Candy? by Richard Maybury, then go read the first section of Rothbard's Great Depression book, which will explain how banking causes the business cycle. You NEED to understand these things in order to understand what the problem is with fractional-reserve banking.
Of course, this is not saying that the state should be used to prevent fractional-reserve banking. In at least one of Rothbard's works, he regarded it as a crime that could and would be punished and prosecuted on the free market, just as the market would provide for other forms of security. I see it more as an amount of economic waste that would be minimized if the market were truly free.
Published: February 12, 2007 9:13 AM
Fractional-reserve banking immoral, because it allows two or more people to claim the same assets. It's no different than if I took out loans on my house for the full value from two different banks; two banks have claim to my property and I would go to jail.
In addition, fractional reserve banking, even under a full gold standard, causes the business cycles described by all Austrians. These business cycles cause the destruction of huge amounts of capital and make everyone poorer. Fractional-reserve banking should be outlawed for the massive destruction of capital that it causes.
Finally, the bank failures due to aggressive lending cause the public to demand relief from the govenment and causes the government to intrude more into the market.
Published: February 12, 2007 11:43 AM
Is there anyone on this list whose parents didn't have an easier life than his grandparents? Anyone who isn't doing better than his parents did? If you are not doing better than your parents and are over 50 years old, please explain the reason.
Anyone who thinks they would be doing better right now if only gold was being circulated as money for the last 100 years? Why?
"Doing better," of course, has two meanings: living higher on the hog than your neighbors and living higher on the hog than your grandparents. These days in the USofA the average person on welfare is living better than the average working class person did 100 years ago.
It boggles my mind that Libertarians think they would be better off with respect to the general population if used gold for money . . . or if we had a different form or government . . . or if . . . .
This is simply making excuses for one's short commings. If we were living 100 or 200 years ago, half of all the Libertarians I know would be living in poverty like everyone else.
I know for a fact that The Wife and I have always lived a lower middle class life because we are both lazy. We quit working 11 years ago at age 55 and our lifestyle made a lovely jump when the kids moved out. (Life begins when the kids move out and the dog dies.)
Published: February 12, 2007 11:51 AM
billwald: "Is there anyone on this list whose parents didn't have an easier life than his grandparents?"
Would you argue that gravity causes an airplane to fly? Airplanes fly, yet gravity exists. Obviously, my analogy is silly, but the same can be said for your argument. The main question is whether fiat money has made our lives easier, or has been a drag on what could have been. Without gravity, planes could fly without much fuel; without the destructive force of fiat money, we should all be richer. If common sense tells us that fiat money destroys wealth, then the fact that we are richer doesn't prove common sense to be wrong. The logical conclusion is that other forces overcome the destructiveness of fiat money, just as thrust and lift empower an airplane to overcome gravity and drag. If we could eliminate the gravity and drag of fiat money, how much wealthier might we be?
Published: February 12, 2007 1:43 PM
billwald, I'd be doing extremely better if gold was circulating as money right now, and the reason is because government would be unable to steal portions of my money at whim by inflating.
Until you read Rothbard's Money and Maybury's Penny Candy, I'm going to have trouble thinking you have an informed opinion on the subject.
Published: February 12, 2007 2:11 PM
We have a better standard of living in SPITE of government and its recklessly inflating Federal Reserve. Entreprenuers and technology has given us the things that has made our lives easier.
Think of it this way. If we were on a gold commodity money and there was no federal reserve and no fractional reserve banking. We might have all the wonderful things without being $50,000 in debt for them.
We DO know one fact for certain. Government would not be the massive intrusive mess it is today. Government could not reach such a large size without being able to steal money via inflation. Individuals would be keeping more of their money with gold. I will take a gold economy any day.
I concur that there needs to be a lot more reading of Rothbard's works in this society.
Published: February 12, 2007 2:30 PM
billwald's argument reminds me of why it's so crucial to grasp Henry Hazlitt's basic thesis of 'Economics in One Lesson':
"In this lies the whole difference between good economics and bad. The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences."
http://jim.com/econ/chap01p1.html
Published: February 12, 2007 2:34 PM
Another point, directly applicable to anyone with (free) ancestors in the U.S. as of 200 years ago: are your ancestors who were alive 100 years ago better off than your ancestors who were alive 200 years ago were? The gold standard and minimal government prevailed at both times, for free people.
Published: February 12, 2007 6:30 PM
Daniel M. Ryan:
Without comment on any specific sense of your post, I'd simply point out that 200 years ago, the gold standard did not exist (despite the fact that gold was widely considered money and used as currency) and, after coming into existence gradually, country-by-country, did not become law in the U.S. until 1900.
Those who put hope for relative monetary stability in the future on the possibility of reinstitution of the gold standard are simply dreamers: there's not even the slightest chance it would work in the future much differently than in the past--for the simple reason that it would be as easily abrogated as ever.
The problem lies not with gold but with men and their prevailing conviction that government should have any other function than to suppress aggression. And, putting it in a nutshell for all those who think about such things to ponder, THE VERY IDEA OF A GOLD STANDARD, IN AND OF ITSELF,
IS AN EXAMPLE OF THE KIND OF COLLECTIVIST THINKING THAT LEADS TO ITS MISUSE AND ULTIMATE FAILURES.
Published: February 13, 2007 7:59 AM
If you mean that the drive to reinstitute gold as legal tender through the legal system is a pipe dream, then you are on to something. The point that gold was widely used as money in the U.S. 200 years ago, without it being instituted as legal tender, does drop a hint for the remonetization-of-gold crew.
Published: February 13, 2007 8:23 AM
Some years back, while in Hong Kong, the morning newspaper contained an article about the upper management of a HK bank that were being sentenced to prison for lending out more than 1/2
of the money on deposit in their bank. So in contrast to lending out that which does not exist (fractional reserve lending) this bank's management had achieved the level of a crime by lending out more than 1/2 of that which did exist. Hong Kong remains a great place to do business.
Published: February 13, 2007 9:51 AM
Scott M, while Hong Kong's banking system sounds a bit more sound than our own system, I don't see how your example is a case of sound banking.
If that banker in Hong Kong lent money from demand deposits as credit, then he was committing fraud. A demand deposit is a contractual arrangement whereby the bank will hold on to your cash until you have need of it and withdraw it.
If every client of that bank went to withdraw their money from demand deposits, the bank would have to declare its own bankruptcy. In other words, it will have been bankrupt all along and only discovered to be so when everyone requests his or her funds.
Unless I'm mistaken, the example that you've cited is still fractional reserve banking, although at a much less damaging rate (instead of 600% of reserves being lent out, only 50% are).
Published: February 13, 2007 10:12 AM
gene berman and Daniel M. Ryan:
Actually what I support is a total divorce of the state and the monetary system. There would be no legal tender laws permitted at all and money would be coined privately. If people wanted to trade using cigarettes, pot, cows, pigs or whatever, they would be free to do that. I share Rothbard's view that a medium of exchange can only arise upon the free market, it CANNOT be forced by government. When the Federal Reserve collapses, the government needs to be kept out so that the free market can pick up the pieces and develop its own preferred medium of exchange.
Published: February 13, 2007 10:53 AM
I'd like to throw something out and see what you guys think. I'm not certain about it, but I think it's interesting:
Nations abandoned the gold standard for their paper currency during WWI because they wanted to inflate the currency without devaluing the paper in terms of gold. Part of the cause of the Great Depression was the refusal of Britain and the US to devalue their currencies in terms of Gold after serious inflation in the 1920's, which resulted in a shrinking of the money supplies. Then, in 1971, Nixon removed the Dollar from the gold standard because he didn't want to devalue the dollar in terms of gold.
You see the pattern. Governments went to paper money partly for the convenience. But the temptation to inflate was too great for them to handle. Their refusal to devalue the currency to the appropriate gold value caused huge problems.
Today, we don't even use much paper as currency; we use electronic digits that represent dollars. We can easily convert dollars into gold any time we want in the market. With floating exchange rates, the market automatically devalues the currency as the Fed inflates, so we don't have to wait for the government to devalue it as we did under fixed exchanged rates.
If people want protection against inflation, they can specify payment in ounces of gold, or they can simply hedge with gold in the futures/options market.
So considering all the above, could you say that we currently have a gold standard for the dollar with the market continually adjusting its value?
Published: February 13, 2007 11:40 AM
Someone please list the nations in history that used gold or silver as money AND half the population didn't live in poverty.
Second, an IOU is an asset. An IOU with real estate as collateral is as much an asset as a gold coin.
Published: February 13, 2007 11:50 AM
Roger:
Your thinking is correct as far as it goes; in their monetary policies, the central bankers of all nations must not only watch each others' actions closely but must always keep at least one eye on the gold market.
This attention merely serves, however (and only for some indeterminate number of years) to keep the rate of (negative) change in value of the monetary unit below some psychic threshhold of public awareness. The fact that it endures for a fair length of time again and again before finally failing still puts it in the category of "certain failure" policies.
Published: February 13, 2007 12:02 PM
Agree with RogerM that we should go to 100% electronic money. The elimination of cash would make bribery, tax evasion, and black marketing more difficult.
I propose an electronic unit of exchange, the wh. One (almost) universal standard is the amount of work one healthy adult can produce in one hour with one shovel. Prices and wages would be a multiple or fraction of a wh. Instead of exchange rates, countries and counties would have differing wage and price scales set by the local market.
Published: February 13, 2007 12:04 PM
Regardless of arm strength and endurance? Incidentally, what do you mean by "poverty" - enough food to eat and a sheltered place to live?
Published: February 13, 2007 12:25 PM
billwald
"Someone please list the nations in history that used gold or silver as money AND half the population didn't live in poverty."
Irrelevant. You have not proved any causality. The rate of poverty is most likely the result of a lack of property rights, or many other factors, not the use of gold or silver.
Published: February 13, 2007 12:34 PM
billwald,
"The elimination of cash would make bribery, tax evasion, and black marketing more difficult."
Always enjoy seeing pro-tax posts here on the Mises site. Which arm of the government do you work for?
Published: February 13, 2007 12:40 PM
To clarify my previous post a little, the real problem with the old gold standard was the fixed exchange rates and the refusal of states to be honest about their inflation of the paper money. With floating exchange rates, and the dollar floating against gold, that problem has disappeared. The only thing we need to do now is for more companies to specify contracts in ounces of gold, or to hedge against inflation or exchange rates with gold futures/options. In other words, I think we're pretty close to where we need to be with regard to gold as money.
One reason I say that is because we know that we can't go back to gold/silver coins; they're too cumbersome. And most exchange is done electronically, anyway. And even if the State fixed the dollar at a specific number of gold ounces, the dollar could never maintain its value because the Fed would always inflate. With the dollar fixed at a certain number of gold ounces, the Fed would have to devalue the dollar at least once a year due to inflation. With the current system, the market does the devaluing for us.
Published: February 13, 2007 12:45 PM
Mark Brabson:
Your thinking is leading you along the path I believe to be correct.
Of what I am about to write, I will state at the outset that I cannot prove it workable--only that, so far, it seems to me to be the only solution of which I am (or ever have been) aware that can offer an actual improvement on any sytem of the past or present.
1. The production of actual commodity money must
cease to be a government function. Once the
bulk of money commodity(ies) are in private
hands (by purchase), the government may be
permitted to produce whatever quantity it may
choose of money-substitutes or fiduciary media
limited only, in the case of the first, by an
obligation to redeem and, in the second, to an
obligation to publish, each day, an account of
such activities for the previous 30 days and
its plans for the following month.
2. No law may be made (constitutional amendment
probably required) of the type known as a
"legal tender" law except one denoting only
fiduciary media (fiat money) as legal tender.
3. The definition of "legal tender" is modified
(or other words adopted) to mean a money or
means of payment which all governments under
all circumstances and for all purposes are
obliged to accept BUT PROHIBITED FROM
REQUIRING anyone else to so accept.
Further, gov't. employees at all levels must
be paid in "legal tender" (or other, more
suitable term).
4. Governments shall be permitted to buy and
sell commodity money on the market as need
might arise and even to hedge their position
via futures contracts, provided they furnish
3 days published notification of such plans.
There's much more to the system I have in mind, including precise physical specifications for the commodity money, appearance features, etc., but I think you see where I'm going. The government can manipulate ad libitum presently because they've got hold of both ends of the see-saw (or their thumbs on both pans of the balance-scale). Or, I could express it another way: they'll be more trustworthy when they have to eat their own cooking.
Published: February 13, 2007 1:34 PM
Roger:
You've forgotten something! That "something" is the inevitable compounding of the inflation rate.
No matter how slight the rate of inflation, it means only a somewhat longer time before its effects are felt. Governments inflate deliberately--they have reasons to do so. And the reasons don't disappear but the effects of a particular rate do disappear and require a greater rate to produce the former effect. They are caught in the process, themselves and have only two choices: to put up with engineered, cyclic "boom and bust" phases only controllable to slight degree OR a steady, progressive decline in value ending in collapse.
The ONLY possible route to what most of us hope for on any basis with some expectation of longevity MUST incorporate something like I've out lined for Mark (above). As long as the government didn't own much of the actual money commodity and had to take its own fiat in payment of taxes and had to pay its employees (including military) in the stuff, they'd be in exactly the srait-jacket we'd like to see. Every move off the "straight and narrow" would be reflected, nearly immediately (and likely to their immediate disfavor) in the market.
NOTE: The wrinkle about paying their employees isn't actually necessary to the system itself. It's just a gadget I thought of to have that vociferous class of parasites have to make sure everybody wasn't getting hosed to avoid the same hosing themselves. As things stand, they get theirs first, before others appreciate the full effect. Under the plan advanced, they'd be first in line to lose part of their purchasing power.
Published: February 13, 2007 2:07 PM
"Someone please list the nations in history that used gold or silver as money AND half the population didn't live in poverty."
billwald, have you ever read about the church of the Flying Spaghetti Monster? They show that global warming is caused by a lack of pirates in the world today. Their reasoning is the same as yours. (Of course, they mean it as a joke...)
Published: February 13, 2007 9:31 PM
"The elimination of cash would make bribery, tax evasion, and black marketing more difficult."
Why would you want to make payment, theft-prevention and markets more difficult?
(Anyway, the elimination of cash would do no such thing. Properly implemented, digital money-substitutes would make bribery, tax evasion and black marketing perfectly undetectable and ubiquitous)
Published: February 13, 2007 9:35 PM
"One reason I say that is because we know that we can't go back to gold/silver coins; they're too cumbersome."
How are they "too cumbersome"? You use worthless coins today, and they're not too cumbersome, are they? A gold coin the size and shape of a modern nickel would be worth, say, $150 - that's 3000 times LESS cumbersome than what you use as money today!
Published: February 13, 2007 9:39 PM
Peter:
You're wrong on the cumbersome argument. Any way you slice it, the difficulties in using the actual commodities in everyday exchange have been a significant factor in influencing people away from such use and toward paper (and electronic) notations. These difficulties are related to popular assent to government interference and authority in matters monetary. (Take my word for it on this--I can describe difficulties existing even before recorded history--pushing people in the direction they've willingly gone.)
Try to pay a bridge toll, leave a tip at lunch, fill your gas tank, buy a loaf of bread and a quart of milk, etc., etc.--with that $150 "nickel"
in your pocket--and you start to appreciate some difficulty. Put yourself on the other side of the transaction: a 1% adulteration cheats you out of the entirety of the price of the candy-bar you just sold; it's worthwhile to verify fineness of a bar--but a small coin? You've got problems--and onerous, time-consuming ones, at that.
So--where are we? In my view, we need a system in
which GOLD is the basis of money and one in which gold actually circulates without such vexing problems. But one in which paper also circulates because of its flexibility in (printed) value but is protected against counterfeiting (as now) but primarily against surreptitious expansion of its supply by authority.
I've already got what I believe is the most adequate solution to the physical problems but am not prepared to share them at present. It's a moot point, however, because, even if my system were to solve these physical problems perfectly, it would'nt automatically prevent governments' manipulation of money supplies. It's obvious that a gold "standard" cannot be the solution--it has failed in the past and cannot be constructed in any fashion to prevent its failure in the future along the very same route.
Published: February 14, 2007 8:40 AM
There can be no doubt as to the fundamentally fraudulent intent of fractional-reserve lending in all cases where the "overage" exceeds the reasonably liquid assets of the banker.
It only seems "wonderful" that it is possible because most of the depositors believe their deposits to be safe and thus, do not require them frequently.
Rothbard wanted such lending to be criminalized while Mises judged that, under free banking, it would be minimized through self-protective prudence.
My own take: stay out of no-limit "Texas Hold-em"
games when a banker's sitting in. And watch out for the ol' four-flush! And anyone named "Ah Sin"
wearing long sleeves, especially in August.
Published: February 14, 2007 9:19 AM
You guys need to check out this article from the IMF's Finance and Development magazine on trade deficits: http://www.imf.org/external/pubs/ft/fandd/2006/12/basics.htm
It's the best article I've read in a while on the issue. It's relevant to this discussion because one cause of deficits can be investment exceeding savings. But what happens if foreign investors lose interest in investing in the US? Interest rates will rise and the economy will slow. At that point, helicopter Ben will fly to the rescue and shower the country with dollars like confetti. In other words, he will try to inflate his way out of the problem.
Published: February 14, 2007 11:30 AM
gene berman,
I think there's a small problem with your proposal: namely, government -- i.e., the state -- still exists.
And besides, Peter is right about digital money -- http://www.cipe.org/publications/ert/e32/e32_2.pdf -- so forget both paper and coins.
Published: February 14, 2007 2:31 PM
Peter: "A gold coin the size and shape of a modern nickel would be worth, say, $150 - that's 3000 times LESS cumbersome than what you use as money today!"
I get my bi-weekly pay by direct deposit, which is much easier than taking home a bag o' gold. My ATM debit card is much more user friendly than gold coins. And I certainly don't want to pay my credit card bill by shipping a box of gold coins to New Jersey. Most of our money exists as digits in a database, not paper. As such, it's backed by gold in the sense that we can convert it to gold anytime we want in the market. The value of those digits changes daily in accordance with what banks do to our money.
The real question, as Huerta de Soto explains, is what to do about credit expansion, which creates havoc even under a gold standard. I highly recommend Huerta de Soto's book, by the way. It's an easy read and chock full of insights, such as the one which explains that bank mergers expand credit (and thus inflate the money supply) as much as fraction reserves do because, with large banks, it's more likely that the borrower of new credit will spend the new money with another customer of the same bank and thereby reduce the size of the reserves needed.
Published: February 14, 2007 2:52 PM
The only reason gold was used as money is because it was convenient. It is no longer convenient.
Some people think gold money is "godly" because gold money is mentioned in the Bible. If Abraham had used sheep for money, then sheep money would be godly to them.
Electronic money could be an honest medium of exchange because it is (only) data, information. Information only has economic value when it is restricted. Data can be posted on the web. I propose that starting with Congress, the IRS post every completed form they receive on the web.
Published: February 14, 2007 4:56 PM
billwald:
Your first comment demonstrates, at the very least, a profound ignorance of the basic nature of economics. Gold was chosen due to its scarcity, high value in the eyes of men, divisibility, portability, durability and all the other reasons that Rothbard so well described.
A medium of value, must come from the market itself. It cannot be arbitrary. Evidently, you idolize something on the line of Federation or Galactic Republic "Credits". It will not work, because the "credits" have no inherent value.
Gold is highly convenient. It can be exchanged and traded electronically with no need to ever physically move the stores of gold. Your objection on the grounds of convenience is totally non sequitar. I can trade 5 oz of gold for a commodity of my choice with a simple swipe of a card. Money exchanged electronically is perfectly fine, since the title to the medium of exchange is essentially what is being transferred.
An as I inferred above, the market must choose its own commodity. It would most likely be gold or silver, but local markets might trade in most anything.
Published: February 14, 2007 7:05 PM
Mark (and others may note):
You're just wasting your breath trying to answer BillWald's posts. He's simply a troll whose "technique" is to say either of two kinds of things: either totally nonsensical or merely
stupid. He's not interested in any of the subject matters of economic discussion except as traps for those unwise to his ways; in answering him, you'll quickly find yourself in the role of "Br'er
Rabbit" in the old "Tar Baby" story. It's even extremely doubtful that he's ever read anything by any of the Austrians or, quite possibly, by anyone else, for that matter.
Published: February 14, 2007 8:34 PM
I have just finished Rothbards 'Mystery of Banking'.I highly recommend it to anyone.It cleared up some mistaken ideas I 'learned' from
a well respected libertarian investment writer.
Published: February 15, 2007 12:04 PM
If someone could address my question, I would greatly appreciate it:
Aside from the moral issues involved, and possible future consequences that may or may not come about, what is the TANGIBLE damage ALREADY done to the economy by our fiat system? Or asked another way, how does the fiat system make the average person poorer?
(Note: Again, I'm not asking why is confiscation via debasement immoral, or what catastrophe could come about--I'm asking what has the toll been--can the cost be quantified?)
Thank you.
Published: February 19, 2007 4:03 AM
Josh, even though I will answer your question I have to at least *note* that the libertarian's primary concern is a moral and ethical issue rather than a "well how much does it cost versus benefits?" There is no argument more effective, in my eyes anyway, than pointing out that government-issued fiat money is necessarily theft and counter fitting put in the hands of the government.
At any rate, you asked: "What is the TANGIBLE damage ALREADY done to the economy by our fiat system? Or asked another way, how does the fiat system make the average person poorer?"
This answer can be given on several different levels. On the one hand, inflation is particularly vicious in its effects on the poorest in our country: those making the lowest salaries per year; those on fixed incomes such as pension, retirement, etc.; and those who have little by way of capital goods (i.e. goods for investment rather than consumption). Why do the effects of inflation hit these groups harder than others?
It is important to remember that inflation, as Mises pointed out, does not happen uniformly to an economy. Inflation is an increase in the money supply that dilutes the purchasing power of any given unit of money. If the effects of inflation (rising prices, for example) happened all at once everywhere, then it is possible that it would not be too damaging to the economy. After all, Rothbard has shown that the supply of money for an economy doesn't really matter; the relative purchasing power of money will adjust whatever the supply of money is.
However, the reality is that the new money created by the Fed does not spread about the economy evenly and instantaneously. Those closest to the federal government and federal reserve (federal contractors, defense contractors, those in the financial district - especially in NY city - and others) benefit from the new money first, before prices begin to rise. As they spend their money, prices begin to rise, and the new money works its way into the economy in waves.
Here we see that the last group of people to "benefit" from the new money are those in the situations I described above -- fixed income, retired, etc. In fact, those in this position tend to see prices *rise* BEFORE their wages or salaries do. And imagine the plight of those who are retired and living off of a fixed income: what sufficed in 1990 as an annual pension could no longer support an older person still in retirement.
If I may switch gears for a moment, let's consider the economy as a whole. What damage does inflation do to the economy every day? Well, it is clear that money is being pumped into certain sectors of the economy -- after all, the origin of the new money is the government, and so *it* must decide where to spend the money. What is the result?
Like all government action, its inflation policies distort the economy. New money created quickly gives the appearance of wealth being generated. Businessmen and entrepreneurs flock to certain sectors of the economy, only to spend money that is malinvested.
In short, inflation is what creates the boom and bust business cycle (the 'Austrian business cycle') as we know it. It would be difficult to estimate the true 'cost' of such distortions. We can see clearly that the efforts and resources of thousands upon thousands (perhaps millions) of people have been diverted to unproductive uses in a boom and bust cycle. What would it be like if each of those individuals was supplying a good or service that someone was purchasing voluntarily *without* any government interference?
There are two ways of thinking about the costs of inflation when we seek to calculate the damage done. There is the "seen" cost -- mostly noticeable in the poor, elderly, etc. -- and measured by how much the purchasing power of the dollar has decreased over time. But then there is the "unseen" cost of inflation: countless resources diverted from productive use thanks to the distortions of the government and federal reserve. How many of us would have more structurally sound houses, better cars, better quality food, more books in our libraries(!), a sounder retirement portfolio, savings that didn't depreciate over time(!), better computers and entertainment goods, etc. The list is nearly endless, and unfortunately incalculable.
But we can assure ourselves of how real the damage is simply by asking this question: In terms of wealth and standards of living, was America better off or worse off for having gone through the Great Depression?
Published: February 19, 2007 8:36 AM
Josh:
Dan Coleman has jumped up and taken my usual function: providing a long, drawn-out, less-than-satisfactory explanation.
So, I'll give you one that's shorter and sweeter, though it's essentially the same.
Without money-induced change in money relation, people get exactly what they decide they want. Malinvestment occurs and in the same manner: the result of error in thinking and forecating future conditions. But those most correct succeed (with improvement in entrepreneurial "gene pool"--figuratively speaking). That is, in any case, an irreducible loss quantity to overall welfare and what can't be reduced, anyway, doesn't count negatively--its merely a datum, a "fact" of life.
In systems "managing" money supply, underlying effort is to CAUSE differences in the allocation of money within the economy; i.e, a general shift in valuations AWAY from shape and direction under a "hands-off" policy. Of course, managers have ideas of specific changes they intend but no method for such direction beyond the crude one of recognizing an order of groups to whom the benefit (of being first in line) will flow. We can presume that such effects may be coordinated with others embodied in legislation (subsidy,
tarrifs, regulations, spending, etc.) but mainly, a different paradigm of valuations is created which cannot but cause more mistakes to be made precisely by important entrepreneurial entities, including many from among the first-tier receivers. Unnecessary extra losses are, indeed, unquantifiable--but cannot possibly be less than those under a free system. Losses suffered do not consist wholly or necessarily greater magnitude to those at the lower end suffering loss of purchasing power but in entire rearrangement of what and how much is produced. Businesses boom which shouldn't, some which are more desired are curtailed, perhaps even prevented from coming into being.
In other words, the effect of the management of money supply is to create a world different (and unquantifiably poorer and less satisfactory) than otherwise. It substitutes the best judgement of everybody (manifested continuously on the market) with a different set of opinions (primarily economic but frequently sociopolitical) of an elite who are unproven entrepreneurially and unaccountable on the market, and barely accountable politically.
If, as I suspect, I've been longer than Dan, my apologies. Good intentions and all that.
Published: February 19, 2007 1:36 PM
Josh:
Current furor over energy efficiency is an ideal case study.
In an environment in which ethanol production is being subsidized, of what use would the development of more efficient gasoline and deisel engines be? Anyone inclined to work on such would need to tailor it to ethanol just to insure he wouldn't be "out in the cold" in the near future of regulation. Gov't. support for some types of innovation amounts to a suppression of other types, ceteris paribus. Venture capital is less inclined toward innovations which may be contrary to gov't. policy present and likely policy in the future.
While we're on the subject, let's broach the unaskable question: If there could be such a thing as a perfectly sound money, with all the social requirements desired of money and the ease of use desired in everyday purchase and banking transactions combined with perfect immunity to money-side changes in its supply, WHO would dare to attempt production of such--in the face of its exposure of the money of EVERY government on earth as declining toward worthlessness with each passing day?
Published: February 19, 2007 1:56 PM
THANK YOU, DAN AND GENE!!!
Dan: “I have to at least *note* that the libertarian's primary concern is a moral and ethical issue rather than a "well how much does it cost versus benefits?"”
Actually, I am 100% in agreement with you here. Actually, my personal view is that even if liberty resulted in a less utilitarian outcome than statism, you’d still have to support liberty.
Nevertheless, for now, I wanted to examine the bare physical economic costs to society— entirely apart from the costs in terms of loss of liberty. My reason is because I was not able to find any articles that separated out just this aspect of the harm of fiat systems, and I wanted to strengthen my arguments vis-à-vis this perspective. Currently, I have no problem understanding the moral arguments or relating them to others.
And thank you for staying on topic and addressing my inquiry.
You wrote:
”But then there is the "unseen" cost of inflation: countless resources diverted from productive use thanks to the distortions of the government and federal reserve. How many of us would have more structurally sound houses, better cars, better quality food, more books in our libraries(!), a sounder retirement portfolio, savings that didn't depreciate over time(!), better computers and entertainment goods, etc. The list is nearly endless, and unfortunately incalculable.”
Yes! It was precisely these “unseen” costs that I was trying to formulate my thoughts about, and you hit the nail on the head.
I wrote two paragraphs expanding on these “unseen” costs. If you could you take a look and double check if my economics is sound, I appreciate it.
Here goes:
Monetary debasement is basically like a tax, and taxes destroy wealth. Just how much purchasing power has been funneled into government via this process over the years is impossible to determine, but whatever the figure, it is so large it would be difficult to fathom. An actual number cannot be calculated, but if it could, this would be part of the amount by which society would be wealthier had debasement not taken place.
Moreover, if such a number were arrived at, it still wouldn’t account for the loss of production of goods and services that would have been created via the process of capital investment—contributing to the wealth of society—had the large base of accumulated capital (savings) not been pissed away via debasement. It is impossible to put an actual figure on that either—since you are talking about goods that never got created—but the loss to society due to production that was never allowed to take place would also be so large and as difficult to fathom.
Published: February 19, 2007 7:25 PM