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.

Chapter 17- Introduction to Money

We are finally getting to the area of economics where Sowell is actually very weak; famously weak. I’d read Sowell long before being introduced to the Austrian School and I remember when I did start talking to other Austrians and I told them I read Sowell, they would respond sadly and reluctantly, “Yeah, Sowell is alright, but he is kinda weak on monetary policy.” Back then I didn’t think that was such a big deal, but it is actually critical to having a sound view of economics in other areas. The fact that Sowell is so good in other areas despite being so bad on monetary theory is remarkable. So, I’m glad we’ve finally made it to monetary theory, and my guess is that we are going to be here a while.

Sowell doesn’t even get out of the first paragraph without running into problems. He writes, “While money is not wealth—otherwise the government could make us all twice as rich by simply printing twice as much money—a well-designed and well maintained monetary system facilitates the production and distribution of wealth.” The book would be better had that whole line been cut. What do you mean money isn’t wealth? And, a monetary system designed by who? And, maintained by who? He doesn’t even define money, taking for granted that someone who has never before picked up a book on economics knows what money is.

If you think I’m being too harsh, scroll down to the comment section and list 3 of the 5 qualities of money. I would also point out that Sowell doesn’t address the development of money. He does discuss, or mention rather, barter exchange, but how did we go from barter to indirect exchange? That is with money, where I don’t trade my labor directly for the things I want, but I trade my labor for money, and then trade the money for all the things I want and need.

Let’s start first with how money comes into existence and then define it. The theory goes, as men produced and engaged in direct exchange-barter their aims were often frustrated, and a man making shoes would want fish, but wouldn’t be able to acquire fish because the fishermen already had shoes. Therefore, the cobbler would go to the fishermen and ask what they want for their fish, and then what they would take.  It so happens they may need more hooks, but the hook maker has had his fill of fish, so the fishermen ask for buckskins. Thus the cobbler who uses buckskins himself in his profession, trades some of his buckskins to the fishermen for fish, and the fishermen take the buckskins to the hook makers to get hooks.

Here you can see the gradual transition between barter and indirect exchange. In this example, we haven’t quite made it into a money system necessarily, but you can begin to see how thinking men stop thinking so much about what they themselves want, and begin to consider what others want. Some, myself included, consider this to be the very bedrock of society extending beyond blood relations.

The idea goes that as more and more people begin to trade their goods in terms of buckskins, the buckskins slowly move from being just another commodity among many to being a commodity currency. When the butcher, the baker, and the candlestick maker are all satisfied in taking buckskins as payment, the buckskins are monetized. They become money. In fact, buckskins were more or less used as a currency in the early days of the Indian trade with tribes in North America.

First, it might be worth mentioning that there is no intelligent design when it comes to the formation of money, and furthermore, money is wealth. The buckskins were sought before they became money, and had a value in themselves as much as any other commodity.

Sowell, as well as others, are tempted to look at the “money” we have today, which is only paper. It is now “fiat” currency.  Fiat being the Latin word for decreed.  However, it is important to note that it didn’t start out that way. In the beginning, money was directly tied to gold with a hard and fast exchange rate of 1 dollar for 1/20th of an ounce of gold. That is a $20 bill was as good as one gold ounce.  Over time, through government intervention, and debasement by the central bank, the dollar has had its tie to gold cut, and gold is now trading for around $1,150 an ounce; a far cry from the original $20/oz.

This, notwithstanding, the qualities of real money and its origin are still worth understanding, and are critical to going further in economic understanding. This is why  Rothbard deals with money and its formation very early on in “Man Economy and State.”

Time runs short and I’ve got to be moving on, so we’ll have to cover the attributes of money tomorrow.  Until then, take care, and leave comments in the Facebook group; don’t be shy.