When Do People Not Want Money?

When do people not want money? The question arises from a passage of Basic Economics found in chapter 17, pages 365-366, that reads, “Usually everyone seems to want money, but there have been particular times in particular countries when no one wanted money because they considered it worthless. In reality, it was the fact that no one would accept money that made it worthless […]”

If we are referring to natural and unmolested money that hasn’t been debased, the answer is never. However, there is another kind of money we haven’t covered yet: What about fiat money?

Fiat money isn’t the sort of money that develops naturally and spontaneously between market participants like anything Tom Sawyer and his cohorts might have considered money amongst themselves.

Fiat money is, and can only ever be, backed by law. Our money, which started out as bits of gold with inherent value, is nothing today but government issued paper.*

Just suppose gold was money and people decided they didn’t want to use gold anymore. They could still melt down their gold and reform it into jewelry. Your options with dollar bills, should they become unwanted on the market, is limited to either birdcage lining or tiny pieces of origami. Fiat currencies are pretty good at being divisible and fungible, but scarcity is another matter.

With something along the lines of gold (or silver, salt, cattle, et cetera) as money, anyone may enter into the “production of money”. The idea is, if you can bring in more precious metal (or salt or meat) for society, then you’ve earned your reward and good for you. Of course, there are some risks in this. Cattle can catch plague and be wiped out, and the expenses of mining might exceed the amount of gold or salt that you can obtain. When we have a fiat currency, not just anyone can produce money. Because it is far too easy a production, there are no risks and with virtually no costs or limits of paper and ink, one could invest a miniscule amount in paper and ink, and print out a million fiat dollars.

Thus, it becomes necessary for one entity to have the power to produce money, and thereby control the supply. They can print out new notes faster than old notes wear out and flood the money supply with them. This is the essence of inflation. Alternatively, they can stop printing notes altogether. As notes wear out, and they fail to replace them, this will cause the money supply to deflate. It is no longer a market operation, but a command and control operation. This is the same sort of thing the Kremlin did with bread and coats. Sowell seems to be critical of this inefficiency, yet the Central Banks continue to do the same thing with money today and all we seem to get are a few protests from Sowell saying  that the power they hold isn’t the problem – it’s their failure to wield this power wisely.

Sometimes the entity in control of the money makes really poor decisions, doubling and tripling the money supply by the day. As this new money enters into circulation, the value of the money plunges (i.e., inflation at work). There has never been a time in history when the economy was fine and the money was stable, and the next day the money is worthless. There is always some lead time where the money is still accepted, but at a discount. The value of money will always follow the laws of supply and demand. When money is first discounted, and then later not accepted at all, it is because the quantity of money has been drastically increased and is expected to increase significantly more in the near future.

In summation:

  1. Sowell is saying people not accepting money is what causes it to be worthless.
  2.  We of the Austrian school say that the money is being made worthless by inflation, followed by hyperinflation, and this is what causes people to not accept it.
  3. It isn’t a disastrous error in and of itself, but this is a proposition that rests on fundamentals and it’s important to have clarity as we move forward.

We’ll continue exploring inflation and deflation in the next few pages of Basic Economics. For more on this topic, help yourself to a free download of  The Ethics of Money Production by Hulsman head over to amazon.com for a hardcopy.

*5/1/16 ETA: In the comments, Dan Bonin brought up a good point that neither gold, nor anything else for that matter, has inherent value. Though gold does have inherent qualities which are almost universally considered valuable.

The Truth about Taxes

Bernie’s tax returns are out. He just lost NY so maybe it’s irrelevant now, but there’s still a point to be made and a lesson to learn. I listened to Jason Stapleton’s Show, I guess on Monday, where he really lays into Sanders for wanting to give the shirt off of everybody else’s back but then only gave 8% of his earnings to charity. It was also mentioned, and it’s been mentioned by others as well, that Bernie only paid 13% in taxes. But, guess what? And, here’s the bombshell.

He didn’t pay ANY taxes! This is a difficult concept for a lot of people to grasp when they can see, with their own eyes, a check made out by Bernie and sent to the IRS. How can I say that he doesn’t pay any taxes?

I guess we should start with asking, where do taxes come from? They come out of the produce of the economy; people and businesses produce wealth and the government takes part of that wealth in taxes.

The second question is, where does Bernie’s income come from? Taxes of course. Not quite all of his income but most of it comes from his salary from being a Senator from Vermont.

Consider these two points for a moment and you’ll realize that Bernie Sanders contributes very little in the way of producing wealth and the majority of his income is derived from taking the wealth of others.

So then, he contributes nothing to the U.S. treasury.

Let’s think of it another way. If you give me $100 and I turn around and give you $10, it is only an accounting statement to say that I gave you $10. In reality, I gave you nothing. On balance, you only gave me $90.

The majority of Sanders’ income is a drag on the economy. He isn’t a producer and he isn’t a contributor; he lives like a leech at the expense of others.

Now that we’re done picking on Sanders, we can expand on the principles.  If the majority, or if all, of a person’s income comes from the state, they are tax recipients and not taxpayers.

This would apply to EPA agents and OSHA regulators, the guys who work for the Anti-Trust Division of the Department of Justice, and the people who fill all the government agencies from the FCC to the DoD.

Yes, I went there. A full time soldier whose sole income comes from the Military is not a taxpayer, but a tax recipient. It is just a gimmick to have federal employees and soldiers pay taxes, it is not much more than propaganda. For the sake of efficiency, they should only be required to file if they have some other source of income, and most do not.

If they do, it could get tricky. There are Senators who do contribute to the economy, and there are those who take tax money who are mostly private individuals or companies. Privates in the national guard who make $150 a month for drill, but earn $2,500 a week in the market are still tax payers, though that changes when they get deployed, and their sole income comes from being a soldier.

The question to ask is whether or not an individual on net takes out of the Treasury, pays into it, or breaks even.  I try my best to break even; I don’t want the state to get my money, and I don’t want to end up with someone else’s hard earned money either.

Meet in the Middle: Abolish Taxes on Overtime & Second Jobs!

So here is a novel idea. I believe it is an idea that should be nearly unanimously supported by both parties, though perhaps for different reasons. Still, I do not think it will be supported by either side because the political class often does not really mean what they say. They only say the things they say because they believe that is what they need to parrot to get votes and win elections.

I will first lay out my idea, and then I will go over the rationale behind it.

First, a disclaimer: I do not support the income tax. It is a vicious and destructive, as well as immoral, tax. The fact that the state is able to determine how much of a man’s earnings he should be able to keep is abhorrent. If I had things my way, the income tax would be abolished immediately.

Clearly, the majority do not agree with me on this point, so I propose the following counteroffer:

  1. The government should only tax an individual on one job—naturally, whichever job grosses the most would be the one to be taxed.
  2. Taxes should not be levied on overtime pay.

It is really that simple. Those on the Right, everyone from Rand Paul to Jeb Bush to Donald Trump, all advocate for cutting taxes. Obviously, this proposal constitutes a significant tax cut. Though it would arguably be but a minor dent in the overall revenues collected by the government, the proposal would nonetheless lift a huge burden off the shoulders of the poor, single mother with 3 kids who is working 2 jobs. For our hypothetical taxpayer, she would actually get to keep all of her overtime pay, and all of the money she makes from her lower paying job.

Now for those on the Left, this idea appeals to many of their stated objectives (e.g. empowering of the poor), but it carries with it some challenges. For one, there is no vilifying and soaking of the rich. Additionally, even though it will greatly help minorities and women, the proposal is not expressly geared towards them, and so the Left may fear that they will not be able to pander to and receive credit from the constituents whom they are seeking to save.

But here is the thing: top income earners more often than not do not get paid hourly wages, and they very rarely have multiple jobs that they hold at the same time. Poor people do work multiple jobs, and they do work overtime. Generally, physicians do not receive overtime pay, nor do they work second jobs. The same is true of lawyers, executives, top level bankers, and CEOs.  In other words, this is a proposal for the little guy, and one that middle class workers will also benefit from when they work overtime.

Keep everything I have noted about income taxes in mind, and recognize that there is a big difference between making $50,000 a year as an office professional working 40 hours a week, and making that same amount by working in a warehouse 60+ hours each week. Alternatively, we could compare the mid-level manager who makes $100,000 a year working 40 hours a week with the factory worker who works 70+ hours a week to hit that 6-figure mark.

Insofar as our system continues with a progressive income tax, we should consider the manner in which the the money is being earned. There are compelling distinctions- human reasons-that support the notion that overtime money and income from 2nd jobs should not be taxed. In short, the taxes from one job- the taxes from 40 hours- should be enough for any working man (or the poor, single mother with 3 kids) to be deprived of by the government.

I am not rich, so I cannot speak to whether or not the rich are paying their fair share or not, but I do know that the poor and the middle class are paying more than their fair share. This needs to stop, and this proposal is the perfect opportunity for both sides- Right and Left- to meet in the middle and achieve the objectives of their respective ideologies. Can you hear it now? The sweet Kumbaya of the Democratic Socialist (whatever that means) and the Tea Party Republican, at once united in a common cause for the little man and economic freedom: “Abolish taxation on overtime wages and second jobs!”

Gresham’s Law

On page 364 of Basic Economics, Thomas Sowell makes a few remarks about cigarettes circulating as money in P.O.W. camps. He writes, ” […] cigarettes from Red Cross care packages were used as money among prisoners, producing economic phenomena long associated with money, such as interest rates and Gresham’s Law.”

A footnote reads, “Gresham’s Law is that bad money drives good money out of circulation. In the P.O.W. camp, the least popular brands of cigarettes circulated as money, while the most popular brands were smoked.” This isn’t exactly right.

For Gresham’s Law to be in force, legal tender laws need to be in place, which fix an exchange rate between two monies. If the law designates 1 ounce of silver to exchange for 1 ounce of gold, but the market exchange rate is 20 ounces of silver for 1 ounce of gold, a man will hold his gold—which is undervalued by the law—and spend only silver, which is overvalued by the law. Gold will be pushed out of the market, not because silver is a bad money, but because of laws that overvalue silver and undervalue gold.

As far as the P.O.W. camp goes, we’re talking about 2 different goods when comparing the high-quality cigarettes with the low-quality cigarettes. Remembering from yesterday’s post that a desirable money is fungible (i.e., mutually interchangeable), one unpopular brand of cigarette is just as good as another is, but is not as good as a popular cigarette. While either a high-end or a low-end cigarette may circulate separately as money under P.O.W. conditions, they may also circulate simultaneously such as gold and silver have done on the global market in the past.

I speculate the reason the market chose one grade of cigarettes over another to circulate had more to do with the ease of divisibility. For example, a pair of socks might exchange for 3 low-grade cigarettes or 1.5 high-end cigarettes as a matter of pure convenience. At the end of the day, it’s just plain easier to pass around 3 cigarettes than 1.5 cigarettes.

If you want to delve into this more, see Hulsmann’s  “The Ethics of Money Production”.